The Drive to Localize

O’Reilly Auto Parts is indisputably a national chain: its nearly 3,600 stores give it a presence in 38 states, including Alaska and Hawaii. But each O’Reilly store is also a local store, carrying the tools, equipment and accessories that match the specific auto aftermarket needs of the store’s customer base as well as the vehicles they own. Fashion and department store retailers may have just recently “discovered” the benefits of localized product assortments, but for O’Reilly localization has been a business necessity for decades.

“The mix of vehicles in each marketplace differs so much from region to region, and even store to store, due to many different factors,” explains Greg Beck, vice president of purchasing at O’Reilly Auto Parts. “There are geographic differences, such as places with a longer winter versus hot, arid regions like Arizona, and there are stores serving urban areas versus those serving rural areas. In addition, different stores’ customer bases have different preferences for imports versus domestic vehicles. There are all these types of factors that other retailers don’t have to face, at least to this degree.”

In addition, automotive aftermarket retailers have had to deal with the ongoing phenomenon of parts proliferation. Even with recent contractions in the auto industry, the number of car companies, and the number of models they produce, has continually expanded, with companies from India and China now competing with domestic, European, Japanese and Korean car manufacturers.
While each O’Reilly store carries a common base inventory of items such as windshield wipers, motor oil, filters and brake pads, “we do vary our store selections greatly from market to market and from store to store,” says Randy Johnson, senior vice president of inventory management at O’Reilly. “We have to tailor individual stores in a market by the cars that people are driving, and according to the needs of the professionals that are servicing those vehicles.”

Keeping Customers on the Road
The benefits of these highly localized assortments are both simple and powerful. “By having the right product mix in our stores for our customers, they don’t have to wait a long time to get parts to fix their vehicles,” says Beck. “That car that broke down might be this person’s only means of transportation to get to their job. That applies to both the do-it-yourself customer fixing his own vehicle and to the do-it-for-me professional fixing someone else’s car. We feel it’s important that we have the right product there when they need it.”
Just as O’Reilly is simultaneously a national chain and a local store, its highly localized inventories are both a “business basic” and a competitive differentiator. “We strive to develop our understanding of vehicle differences better than our competition does,” says Beck.

O’Reilly has long recognized the value and importance of localization, and the retailer has made extensive use of inventory management solutions to achieve it. But when O’Reilly was founded in 1957, and for several years after that, such solutions simply weren’t available.

At that time, managing store inventories to match a market’s vehicle “population” meant primarily using data supplied by auto companies about the number and kinds of vehicles sold in a given area. “To understand what to stock in our distribution centers and stores, we relied heavily on the information the vendors ‘fed’ us about the popularity and rankings of different models,” says Johnson. “That just wasn’t information that you could get your hands on at that time. Then you also collected your own data, based on the demand history from your store locations, to see if a product should be added to a particular store or removed from it.”


Card-Based Inventory Management

This was literally paper-and-pencil inventory management, according to Johnson: “For each part you stocked, there would be a card with information hand-written on it. We did all that manually.”

As technology advanced and O’Reilly began computerizing its stores, “we developed a home-grown system to review the demand history and the needs of each store, which we ran in conjunction with the vendor-supplied information,” explains Johnson. While this solution was a big advance on the manual processes it replaced, it still made inventory management a laborious process. “We couldn’t do updates to individual stores and distribution centers simply because of the manpower needed for maintenance of all the cards,” says Johnson. “It was a tedious and slow process.”

The 1998 acquisition of the Hi-Lo Automotive chain, which added nearly 200 units to O’Reilly’s store count at the time, made the home-grown solution’s limitations a liability. “We basically doubled in size overnight, and our home-grown system couldn’t support the expanded store count,” says Johnson. “We needed a better, more productive solution that would allow us to manage the number of SKUs times the number of stores, and ensure our inventory was refreshed and up-to-date for the new makes and vehicle models.”

O’Reilly had begun using the Replenishment inventory management solution from Manhattan Associates in its distribution centers in 1995, and the retailer expanded its use into its retail stores in 1999. Today, the Replenishment solution is used in all O’Reilly stores as well as its 23 distribution centers. The retailer has also taken advantage of several upgrades over the past dozen years or so, and O’Reilly’s Beck now serves on the Replenishment product council, working with other Manhattan Associates customers to continue improving the technology solution.

Efficiency of Managing by Exception
One of the key benefits of the Manhattan Associates Replenishment solution is that it allows O’Reilly to manage inventory on an exception reporting basis. The system issues reports on items that are “outperforming or underperforming, but the things that are going along ‘status quo’ don’t require any review,” says Johnson.

The Replenishment solution makes manageable the enormous volumes of data required to make localized assortments a reality. “On the DC side, we would not be able to digest as much data as we have to for all the store/SKU combinations,” says Beck. The solution addresses not just the store-by-store mix of SKUs but the variety of product types the retailer must manage.
“We have SKUs that are fast-flow commodity-type items, with product lifecycles that are easy to manage,” says Beck. “But we also have a large number of SKUs that are application-driven, with very long lifecycles – some as long as 20 to 30 years. The Replenishment solution provides us with the algorithms to manage both types.”

The Replenishment solution also helps O’Reilly gain a greater understanding of how customer preferences are changing in different markets – an important benefit given ongoing population shifts and demographic changes. “The solution helps us identify trends a lot more quickly than we would have been able to in the past, and it also helps us account for seasonality, which for us is ‘winter season’ and ‘air conditioning season,’” says Beck. “It helps ensure we get the seasonal products out before the season starts in a given area, rather than being reactive.”

Localization Contributes to Growth
Just as there are many parts that must operate at peak efficiency to make a car’s engine purr, O’Reilly’s localization capabilities contribute to the overall success of the company. “By getting the right inventory mix, and being able to react to demands more quickly, it has helped us increase our comp store sales very well over the last several years,” says Beck.

O’Reilly achieved record revenues and earnings in 2010 and noted its 18 consecutive years of comp store sales growth since the company went public in April 1993. Comp store sales increased 8.8% during the year, during which time the retailer added 130 stores. O’Reilly is projecting continued growth in 2011 with the planned opening of 170 stores. O’Reilly significantly boosted its store count in July 2008 when it purchased CSK Auto, which at the time operated 1,345 stores.

Even though each additional store throws a new store/SKU combination into the mix, the efficiency of O’Reilly’s inventory management system provides Beck, Johnson and their team with the resources they need. According to Johnson, simply moving to exception-based reporting effectively doubled the number of O’Reilly stores each inventory analyst could handle, and there have been additional efficiency advances since then on both the store and the distribution center levels.

“Using this solution allowed us to grow along with the company,” says Johnson. “It’s allowed us to reduce our inventory level at the distribution centers while increasing our shipping performance from the DCs to the stores. Without a product like this, there’s no way we could have accomplished that.”