Chopping Out of Stocks

Price Chopper is well-versed at doing what its name implies. But the $3 billion grocery chain wanted a more effective means of dealing with the high turns generated by its value pricing stance, particularly when it ran circular advertised sales.
A category management tool developed by Price Chopper in partnership with vendor Itasca is helping to fulfill this mission. It has brought out of stock rates down to 1.5 to 2.5 percent across all center store categories and about half of the Schenectady, NY-based retailer's perishables. Forecast accuracy now stands at 99 percent, says Ed Viall, computer genereated ordering (CGO) project leader. Owned by Golub Corp., the rapidly growing Price Chopper chain operates 116 stores in six Northeastern states. Averaging 60,000 square feet, stores carry about 35,000 SKUs.
"Everything is done on a micro level," says Viall. "For example, we now know how many packages of a certain item fit into a coffin case and can set the merchandise level accordingly. We don't have to get down to the last two packages and have a customer struggling to reach them because they are way on the bottom."
The category management tool also allows Price Chopper to keep inventory levels in line with promotional activity.
"Similarly, if we're planning a promotion on a certain item and it's going to be featured on the first page of a circular rather than the fourth, we can order in accordance with its position in the circular," he adds.
Price Chopper began its category management journey in mid-2001 with the implementation of a computer-assisted ordering (CAO) system. The aim was to improve its in-stock position and merchandise turnover. "It helped, but it was far from being completely effective," reports Bernie Socha, manager, supply chain.
While CAO helped provide good sales history, orders were still created manually. The CAO information took into account only the previous performance of each SKU. If an item was to be featured in a weekly circular, the system did not (in calculating suggested order quantities) differentiate between the demand for the product that could be sparked by advertising it on the first page of the circular as opposed to a less prominent page. "All we had to go on were averages," says Socha.
In late 2002, Price Chopper decided to migrate to a more comprehensive CGO system. A Price Chopper team, which included Viall, worked with Itasca to configure the tool.
The new product was rolled out to one store on February 1, 2003. Eight additional stores joined the roster in September of that year. Prior to the 2003 holiday season, the system was deployed to dairy departments chain wide. "We saw a 14 percent increase in dairy shipout during that season as a direct result," Socha says.
In 2005, the product was rolled out chain wide to all center store departments. By 2007, the system also had been applied to 50 percent of perimeter fresh food offerings. Price Chopper plans to roll out the product to cover the remaining 50 percent of perishables over the next 12 to 18 months.
The Itasca/Price Chopper system minimizes out of stocks by building individual store orders based on a number of very specific parameters. Those parameters include: pre-defined optimal inventory levels and shelf capacities for every SKU and merchandise sub-category covered; SKU-specific forecasts culled from detailed histories; merchandise movement velocity tracked in the database; and planned promotions and advertising placement. The system also takes into consideration such factors as seasonal variations in demand for particular items.
Forecast accuracy stands at 99 percent because the forecasts generated by the system take so many factors into account. Accuracy, says Viall, is actually measured to within the half-case. "We think that's pretty good, especially since we have thousands of items going on and off sale each week."
Time that was once spent writing orders is now used to conduct cycle counts and review orders. Company executives say this also is very important in helping to reduce out-of-stocks. Without cycle counts, the system would be operating at a datahandicap and the need to change orders would be greater, says Socha. Price Chopper currently revises about three percent of all orders generated by the system.
Generating orders in accordance with existing and optimal inventory levels also prevent excess inventory scenarios. At the same time, it allows the retailer to proactively identify and address overstock situations.
"We can see whether we really need to order, for example, so many of a certain SKU," says Mark Chandler, vice president, supply chain. "We can also see if we have extra laundry detergent from last week's promotion and should do something to move it out of the stores." Similarly, the system can be programmed so that re-order quantities are adjusted as promotions wind down.
Chandler says that avoiding over-buying and compensating for overstocks early in the game have contributed to faster turns in both Price Chopper's stores and warehouses. In the general merchandise and HBC categories combined, the merchant has been able to eliminate $3 million worth of non-performing inventory with CGO in place. In the bakery department alone, accurate forecasting has moved shrink from 30 to 35 percent down to 25 percent.
"As far as that $3 million goes, we would never have been able to achieve such results simply by saying, 'let's watch the inventory," says Chandler. "The more on target we can be with inventory levels, the better we can pass on value to our customers. CGO is one of the most important tools we use in making our inventory turns among the best in the industry."
Over the next decade, Price Chopper will implement an aggressive expansion plan. New stores will be placed on the system immediately. To deploy CGO in new stores, the retailer takes an existing database from a similar store, building into it both store-specific inventory parameters and shelf capacities.
"We have had many positive comments from store management and our specialist team about how much better ordering is using this methodology," says Chandler. RIS
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