Lean Replenishment: Reducing costs through inventory optimization

Faced with shifting and bedeviling variables, retailers have long turned to an alchemist's mix of art and science to guess the number of items to order for each outlet. In theory, though, inventory optimization should be a scientific process that determines exactly how many units to stock so that as the last unit leaves the distribution center a new shipment arrives. In practice, retailers have found that it has rarely worked out so neatly.

Recently, however, retailers have begun to discover new and powerful inventory optimization tools that use more science than art and are making major strides toward the goal of precisely matching stock to demand.

Outdoor giant Cabela's is among those companies implementing a new solution. The Sidney, Nebraska, retailer is in the early stages of rolling out Evant Replenishment. The company is following a three-stage deployment strategy, with the first stage focusing on distribution center-to-store replenishment, slated for completion in fall of 2005, according to Angelo Sakis, vice president of inventory planning and purchasing for Cabela's. The next two stages, vendor-to-store and vendor-to-distribution center, are planned for 2006.

Cabela's chose Evant to replace "pretty homegrown systems with lots of Band-Aids" that have been tweaked for more than 40 years to keep up with company growth. "We have a big retail expansion on the drawing board and we knew we had to do something sooner rather than later," says Sakis.

Because Cabela's megastores are considered "destinations," the company believes each store should carry "every item, every season," accounting for more than 100,000 SKUs per store. With the old system, "We would need to hire an army of people every year just to keep up with our planned growth," Sakis says. "By utilizing the new technology, we will be able to open five stores next year without adding staff."

Increased productivity is only one of the potential benefits retailers will realize from an inventory optimization deployment, says Clay Parnell, managing director for Karabus Management, consultant for Cabela's. "Improved efficiencies for business processes are seen virtually across the board."

Spoilage and Inventory Reductions
By implementing a new inventory management system in 2004, Retalix DemandAnalytx (DAX) software, Market Basket has realized better-than-expected results. The company, headquartered in Nederland, Texas, is a privately held regional grocery chain with retail facilities located in Texas and Louisiana.
"Our inventory has been reduced by 10 to 12 percent; dairy spoilage was down 25 percent; and our out-of-stock conditions are now running between one and
two percent," explains Michelle Flocke, corporate scanning supervisor for Market Basket. "The biggest surprise is that the percent of spoilage on milk is now below one percent."

Inventory optimization has paid many dividends for Market Basket. "Less capital is tied up in unnecessary inventory on hand," Flocke says. "Out-of-stock conditions are reduced because optimization software tracks consumer demand daily and creates orders to meet the needs of the customer base. Also, training new associates to order the store is seamless because the software doesn't rely on the associate's intuition; it works off a pre-determined list of minimum product to stock and the forecasted sales determined by customer buying patterns in that store."

The only real hurdle in the deployment was developing a program to transmit daily sales of all items within hours of store closing, Flocke says. "This has been one of the smoothest software implementations I've ever been involved with," adds Skylar Thompson, Market Basket president.

Tying POS to Inventory
For Sheetz, with 300 convenience stores in six states, inventory optimization delivered a different benefit — it allowed the Altoona, Pennsylvania-based company to tie replenishment to POS for gasoline, scannable items and the ingredients for the stores' made-to-order food service. "Now we have real data to tell us what we need to order," reports John Moulton, director of store operations, "and we can get a store-by-store dollar value of the food service inventory." Sheetz is currently "about 80 percent" through a pilot of BlueCube Inventory Manager, with implementations scheduled for new store openings and a plan to convert existing stores to the new software.

"We have true margin information, which is important, because all our food is made to order," Mouton says. "Each sandwich depletes the inventory uniquely and affects cost. This gives us real data to tell not only what we need to order, but the true value of the inventory and specific information on a store-by-store basis. As a result, food service items now behave like scannable items."

Moulton is already calling the inventory optimization project a success. "This has been a dream of ours for seven years," he says. "There are a lot of solutions that work with industry verticals, but we sit on the fence. We think we've now created something unique."