Obsolescence Mitigation at Longo Brothers Fruit Markets Inc.
description
Transcript of Obsolescence Mitigation at Longo Brothers Fruit Markets Inc.
JULIANTO HALIMOLUROTIMI OLAOGUNGANESH RAMKUMAR
PATRICK TRAINMATTHEW VIDOTTO
CHRISTOPHER WATSON
TABLE OF CONTENTS
FINAL REPORT
MINIMIZING OBSOLESCENCE OR STOCK-OUTS OF PERISHABLES VIA EFFECTIVE FORECASTING &
INVENTORY MANAGEMENT PRACTICES
WORD COUNT
EXECUTIVE SUMMARY : 280BODY OF REPORT : 1372
EXECUTIVE SUMMARYOverview of Mission & Strategy
The Longo’s Way
ACCURATE FORECASTING OF PERISHABLESTomax Retail.Net® ERP & SKU-Level Forecasting
Agrometeorological Crop Yield ForecastingSupplier Relationship Management
SUPERIOR DRP & REPLENISHMENT98% Fill Rate with Minimal Safety Stock
Computer Assisted OrderingLocal Procurement & Short Lead Times
Direct Sourcing & Effective Communication
OTHER RELEVANT STRATEGIESPrice Elasticity & Demand Stimulation
A Little Obsolescence Goes a Long Way…
APPENDIX | 5A – 5G
BIBLIOGRAPHY
DISCUSSION GUIDE
THANK YOU LETTER
3 3 3
5 5 5 6
7 7 8 8 9
10 10 11
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EXECUTIVE SUMMARY
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Longo Brothers Fruit Markets Inc. (referred to hereafter as Longo’s) is a family-owned
grocery supermarket chain with distribution centre operations in Vaughan, 26 retail
locations across the Greater Toronto Area, and a significant online presence as
GroceryGateway.com, a consumer-direct grocery delivery service. Their primary
revenue stream includes a large variety of delicate and highly perishable food items
ranging from dairy and fresh produce to bakery, deli and seafood products.
Overview of Mission & Strategy
Longo’s primary focus is on “exceeding customer expectations by offering the
best food experience to every Customer, every time.”1 The executive and management
teams believe wholeheartedly in a quality-over-price approach to product selection, and
this mentality is widespread throughout their workforce. (Produce Perfection, 1996) Cost
Differentiation is not a part of their game. Instead, Longo competes with high-end
supermarket competitors like Sobeys, Metro, Fortinos, etc. by offering the highest quality
fresh foods and grocery products while delivering an outstanding shopping experience.
The Longo’s Way
Longo’s employs many noteworthy techniques to effectively manage their supply
chain and bridge the potentially large gap between supply and demand. Their highly
accurate forecasts are the result of past sales records, seasonal patterns, growth
projections & sound judgment. Their focus on strategic Supplier Relationship
Management (SRM) allows them to benefit from the expertise of their vendors, resulting
in better quality products at better prices, less risk and better cost management.
1 As stated on “Vision & Values”. http://www.longos.com/Careers/Vision%20and%20Values.aspx
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A sophisticated technology infrastructure allows for superior inventory control and
an efficient Distribution Requirements Planning (DRP) process. These strategies and
their impact on business operations and bottom-line profit margins are explored in the
sections that follow. Emphasis is given to the forecasting, replenishment and inventory
management techniques applied to Longo’s produce category.
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" We are always looking for great growers to build a
long-lasting relationship with. This takes time, but as
we develop these relationships we are able to work
closely with the grower to help us differentiate with
new and unique products. "Mike Longo
VP of Fresh Merchandising
(Kwon, 2009)
ACCURATE FORECASTING OF PERISHABLES
Longo’s employs a bottom-up system to forecasting product demand, using category-
specific algorithms. This section provides insight on their automated perpetual inventory
and forecasting system that drives the replenishment process.
Tomax Retail.Net® ERP & SKU-Level Forecasting
In 2008, Longo’s upgraded their Enterprise Resources Planning (ERP) system to
Retail.Net, an SaaS (software as a service) solution that integrates their various backend
systems and allows them to efficiently manage the retail continuum. Developed by
Tomax Corporation, one of the main functions of Retail.Net is to generate a 52-week
demand forecast for each of Longo’s 20,000 different SKUs, including perishables. The
Retail Resource Planning system (RRPTM) tracks in-store and warehouse stock levels
in real time, and analyzes two to five years of perpetual inventory data to forecast
demand (Garry, 2007). Other drivers such as historical trends, seasonal fluctuations,
price elasticity of demand, and various promotional influencers allow Retail.Net to
generate highly accurate forecasts. Tomax’s centralized RRP capabilities also include
an automated replenishment process; this is discussed further in Subsection 3.2.
(Jameson Publishing, 2007)
Agrometeorological Crop Yield Forecasting (ACYF)
For fresh produce, consumer demand is not the only element that requires
accurate forecasting. Most growers make use of sophisticated ACYF systems that
analyze weather conditions, climate patterns and other physiological factors to forecast
future crop availability in advance of the harvest period.
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2.2
ACYF encompasses three distinct methods: descriptive, regression and crop
simulation. While descriptive forecast models classify weather conditions and assign
thresholds to their effects on key variables, regression models use historical data to
compute optimal forecast equations using key weather variables. Crop Simulation
Models (CSMs) are more complex – they forecast crop yield by extrapolating patterns in
meteorological, physiological and the quantified impact of managerial conditions.
(Basso, 2013)
Supplier Relationship Management (SRM)
Experience and expertise are vital when it comes to choosing which method(s) to
employ and which variables to include, and when it comes down to accurately estimating
future crop availability. Appendix 5B contains an example of region-specific crop
availability calendars that growers create via ACYF. These calendars can be region- or
farm-specific, and they allow retailers like Longo’s to plan replenishment schedules in
advance, against forecasted demand for each crop. Hence, SRM plays a vital role in
minimizing (special cause) variation in supply, which in turn allows for a more effective
DRP process, as discussed in Section 3.0. (Kwon, 2009)
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" Last Christmas there were no artichokes at the
terminal, but we had good relations with the artichoke
supplier, so while no one else had any, we did. "Joe Andolina
Quality Control Manager
(Kwon, 2009)
SUPERIOR DRP & REPLENISHMENT
Using SKU-level demand forecasts and real-time stock levels as inputs, Longo’s
Retail.Net demand management platform is able to effectively automate DRP functions
and create store replenishment orders for both DC-supplied and Direct Store Delivery
(DSD) products (Garry, 2007). It does this via effective information exchange between all
the systems within Longo’s supply chain, as depicted in Appendix 5C.
98% Fill Rate with Minimal Safety Stock
In 2008, Longo’s implemented a Service-Oriented Architecture with the installation
of Microsoft BizTalk 2006 Server. BizTalk has improved their IT infrastructure by
providing real-time inventory and supply chain visibility,
exchanging information between POS, qdata WMS and Retail.Net ERP,
delivering BAM2 and BI3 functionalities that aid in strategic development,
transmitting Grocery Gateway orders to the picking system,
streamlining distribution and inventory management operations,
eliminating expedited shipments and freeing up their private fleet, and
reducing support time and boosting IT staff productivity by 30%4.
These improvements and added capabilities have resulted in lower staffing costs,
more efficient distribution, greater accuracy in order fulfillment, and a 1.5% increase (to
98%) in their distribution centre fill rate (Mark, 2008).
2 Business Activity Monitoring functionality “provides near-real-time exception reporting” and helps “automate the planning process” (Mark, 2008)3 Business Intelligence functionality allows Longo’s to spot “trends and patterns that help planners develop corporate strategy” (Mark, 2008)4 Before BizTalk, IT staff would spend 40% of their time to support and maintain the system. Now down to about 10%, they can “focus on more value-added activities” (Ken, 2008)
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Computer Assisted Ordering (CAO)
As mentioned earlier, Longo’s has a highly automated store replenishment
process. Real-time perpetual inventory has been implemented in all their stores.
Customer purchases are updated against store stock levels in real time through the POS
system. Retail.Net uses this perpetual inventory data and pre-computed SKU-level
demand forecasts to drive the CAO process. The system creates replenishment orders
at optimal times and for optimal quantities, but allows store managers the flexibility of
making changes to these orders (Garry, 2007).
Once finalized, warehouse-supplied orders are transferred to their qdata™ WMS
at the DC to be picked, packed and shipped. From there, DSD orders comprising high-
volume perishable ‘A’ items are sent to the appropriate vendors for fulfillment (Process
flow is approximated in Appendix 5C).
Local Procurement & Short Lead Times
Retail.Net’s warehouse-level demand forecasts and qdata’s real-time inventory
information are key drivers of the purchasing process at Longo’s. Category managers
Joe Andolina and Mimmo Franzone are at the Ontario Food Terminal six days a week,
where they select the best quality produce, negotiate the best prices and finalize
purchase orders (POs), all while developing vital relationships with vendors (Kwon,
2009). PO details are instantly sent to their warehouse and retail stores via BizTalk. On
the same day, vendors ship orders to the DC where all produce undergoes quality
control. Store orders are then consolidated and shipped out; they arrive within 12 hours
and are stocked on displays in time for store opening (See Appendix 5D).
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3.2
Longo’s maintains a 24-hour lead time for the majority of their produce by
sourcing it from the Terminal5. They aim to source perishables locally since it keeps
transit times low. During the summer months when crop yields are at its peak in Ontario,
locally sourced produce accounts for up to 40% of Longo’s stock (Kwon, 2009).
Direct Sourcing & Effective Communication
SRM strategies allow Longo’s to establish and maintain direct-buy relationships
with leading local and international produce vendors. Direct sourcing ensures consistent
supply and allows them to offer unique items that aid in differentiation. For the 40% of
produce SKUs that are currently sourced directly, buyers work closely with vendors to
plan procurement and place timely orders. Demand forecasts and POs are shared with
vendors via Electronic Data Interchange (EDI); they respond with crop forecasts and
advanced shipping notices (ASNs) (Mark, 2008).
5 60% of Longo’s produce SKUs are sourced from the Ontario Food Terminal; the remaining 40% are sourced directly from local and international (California and Florida) growers. (Kwon, 2009)
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“ Before, (buyers) used pieces of paper to keep track of their purchases. The
warehouse did not know what they had bought until it showed up on the
loading dock. But now the system is paperless since the buyers create POs on
their handhelds. And with visibility into store inventories, they focus on their
actual needs. Once the POs are complete, the system transmits the information
to the WMS so people in the warehouse can start planning loads for individual
stores. Since produce is perishable, it is simply repacked and re-routed for
immediate delivery to the stores. “
John Charleson
Director of Information Technology
(Mark, 2008)
3.4
OTHER RELEVANT STRATEGIES
Although sophisticated SCM systems mitigate obsolescence (or stock-outs), they do not
guarantee zero wastage. Secondary strategies are used to deal with contingencies like
unexpected volume discounts, overestimated demand and ultimately, obsolescence.
Price Elasticity & Demand Stimulation
Buyers use the price elasticity to quantify the effects of a price drop on a certain
SKU.6 This allows them to make more profitable procurement decisions. Using
promotional strategies, buyers and department managers can drive demand for produce
SKUs if excess inventory needs to be sold before it drops below its quality threshold.7
For example, if a buyer is offered a volume discount that is deemed to be
profitable, they would place a PO for that volume. Buyers and stores can make pricing
changes directly on Retail.Net; BizTalk automatically coordinates POS, register and
Grocery Gateway pricing while department managers change shelve prices, set up
product sampling kiosks or free up end displays accordingly. (Britt, 2009)
6 Products with higher elasticity are more open to sales promotions because their demand is more responsive to a price drop; Pat emphasized that the use of Price Elasticity is a key factor in Longo’s promotional strategy.7 According to Pat, Produce Managers check the quality of their stock throughout the day to ensure only the freshest produce is available to their customers.
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“ The buyers purchase what they're ordering, but they aren't necessarily just order takers; they're looking for opportunities. ”
Mike Longo, VP of Fresh Merchandising(Kwon, 2009)
A Little Obsolescence Goes a Long Way…
Longo’s recognizes the fine line between obsolescence and spoilage; they have
adopted a socially responsible means of dealing with “not so fresh” perishable stock well
before it goes to waste. As part of their multifaceted Corporate Social Responsibility
(CSR) strategy, they have teamed up with Second Harvest and ReFresh Foods, two
local charitable organizations that pick up perishable foods and redistribute them to
social service agencies such as food banks, homeless shelters, soup kitchens,
community centres and after-school programs.8 This small contribution makes a big
difference in the lives of many.
Longo’s also reaps the indirect yet substantial rewards of an extensive CSR
program. Social responsibility initiatives have been proven to positively impact an
organization by improving public image, increasing goodwill and promoting brand loyalty.
The end result is a loyal customer base, increased acceptance within the community and
better competitive positioning. (Du, Bhattacharya, & Sen, 2007)
8 As mentioned on Longo’s Corporate Social Responsibility page: http://www.longos.com/Corporate%20Social%20Responsibility/Home.aspx
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APPENDIX | 5A – 5G
The Retail.Net Demand-Driven Continuum
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5A
Appendix 5A: The Retail.Net suite integrated modules based on “Demand Driven Retail Continuum”Source: As advertised in the February 2006 issue of NRF Stores ® Magazine
5B
Sample Growing Season for Perishable Items
Appendix 5B: Crop Availability Calendar for Southern California Source: (Doncaster, 2006)
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5C
Flowchart: Software Infrastructure at Longo’s
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Appendix 5C: Flowchart approximation is based on information gathered from the following sources: (Garry, 2007) ; (Kwon, 2009) ; (Mark, 2008) ; (qdata Inc., 2002)
Timeline: Sourcing from the Ontario Food Terminal
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5D
Appendix 5D: Timeline approximation is based on information gathered from the following sources: (Kwon, 2009) ; (Britt, 2009)
Crop Growth Monitoring & Forecasting Process
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5E
Appendix 5E: Example of a Crop Growth Monitoring System (CGMS) that uses meteorological data, World Food Studies (WOFOST) growth models, and harvest stats to drive the ACYF process.
[ Source: Chart can be found at http://www.e-agri.info/activity_01.html ]
Longo’s on the Map
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5F
Appendix 5F: Map of Longo's Locations
Longo’s Corporate Social Responsibility Partners
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Appendix 5G: Longo's current partners for its CSR program [ Source: http://www.longos.com/Careers/Corporate%20Social%20Responsibility.aspx ]
5G
BIBLIOGRAPHY
Agrawal, R. (2005). Forecasting Techniques in Crops. New Delhi: I.A.S.R.I.
Basso, B. (2013). Review of Crop Yield Forecasting Methods and Early Warning Systems. Michigan State University, Department of Geological Sciences. Food and Agriculture Organization of the United Nations. Retrieved from http://www.fao.org/fileadmin/templates/ess/documents/meetings_and_workshops/GS_SAC_2013/Improving_methods_for_crops_estimates/Crop_Yield_Forecasting_Methods_and_Early_Warning_Systems_Lit_review.pdf
Britt, P. (2009, January). Retailers look to KM to DRIVE BUSINESS. KM World, 18(1), 14-15. Retrieved from http://search.proquest.com/docview/197282040?accountid=11530
Business Wire. (2005, October 19). Longo's Takes Descartes Challenge and Improves Delivery Productivity and Customer Service. Retrieved November 12, 2013, from The Free Library: http://www.thefreelibrary.com/Longo's Takes Descartes Challenge and Improves Delivery Productivity...-a0137701781
Doncaster, L. (2006). Cooksmart. London: Anness Publishing Ltd.
Du, S., Bhattacharya, C., & Sen, S. (2007). Reaping Relational Rewards from Corporate Social Responsibility: The Role of Competitive Positioning. International Journal of Research in Marketing, 24, 224–241. Retrieved from http://ssrn.com/aabstract=2333555
Enis, M. (2005). BEARING FRUIT. Supermarket News, 57(17), 31-36.
Garry, M. (2007). INITIATIVE 5: Computer-Assisted Ordering. Supermarket News, 55(51), 45. Retrieved from http://web.ebscohost.com.rap.ocls.ca/ehost/delivery?sid=272b3a06-b23c-4044-96fd-7c85cb09941b%40sessionmgr114&vid=5&hid=126
Jameson Publishing. (2007, October 4). Retail Solutions: Retail 2.0 Solutions Focused On Business Value Unveiled At Visibility 2007. Retrieved from Integrated Solutions for Retailers: http://www.retailsolutionsonline.com/doc/retail-solutions-retail-20-solutions-focused-0001
Kwon, N. (2009, April). Longo's... A Day in the Life. Canadian Grocer, 123(3), 19,21-24. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/222862532?accountid=11530
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Mark, K. (2008, May). Bearing fruit. Canadian Transportation Logistics, 111(5), 14-15. Retrieved from http://search.proquest.com/docview/203024811?accountid=11530
Produce perfection: how you can turn your produce department into a destination customers want to shop. (1996, December). Canadian Grocer, 110(10), 3-5+. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/222849003?accountid=11530
qdata Inc. (2002, 11 09). Longo's Customer Snapshot - qdata Inc. Retrieved from qdata.com: http://www.qdata.com/PDFs/Longos%20Customer%20Snapshot%2002-11-09.pdf
Longo Brothers Fruit Markets Inc. (2013). About us. Retrieved from http://longos.com/SiteMap/AboutUs.aspx
Parks, L. (2004). Predicting perishables; fresh-item management systems are helping retailers to cut perishables waste by forecasting demand and managing production. Supermarket News, 52(2), 67. Retrieved from http://go.galegroup.com/ps/i.do?id=GALE|A112206050&v=2.1&u=humber&it=r&p=GRGM&sw=w&asid=b5186ced252c463cb1098b62d10d25d3
Duff, M. (2008). Longo's sets model on moving from 'burbs to city streets. Retailing Today, 47(1), 4,26. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/228542818?accountid=11530
Li, Y., Cheang, B., & Lim, A. (2012). Grocery perishables management. Production and Operations Management, 21(3), 504-VIII. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/1021424349?accountid=11530
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DISCUSSION GUIDE & ASSIGNED PARTS
1) Quantitative/Qualitative models used to forecast demand - Ganesh Mentioned the use of a Tomax system For fresh foods must look at local weather patterns, and work with farmer, to let
you know the amount you want- Although for forecasting usually based off of previous seasons numbers, in
conjunction with predicted outputs from the farmers For more seasonal items a similar method of using previous years sales data s
used Gave no info on competitors other than that Longo’s solely provides fresh food
for Longo’s chain while other companies like Sobeys do not Advantages of this are that t falls into the philosophy of Longo’s to concentrate
on the fresh food aspect
2) Inventory management at DC and stores - Matt Mentioned qdata WMS; real-time inventory levels Tomax for perpetual inventory, system in place for cross-platform communication
in real time. When customer places order, store stock is updated immediately Automated orders for store replenishment using SKU level forecasts and stock
levels to determine order quantities- This was done manually by department managers in the past
3) Fill Rates & replenishment process - Patrick They prefer direct store delivery for highly perishable A items. Fill rate used as a primary KPI (no number given); minimize safety stock Uses real-time systems to improve fill-rates
4) Promotions & Stimulating demand - Timi Must know which items are very elastic vs in elastic in terms of price and demand
and organize them from there generating demand for these items that are elastic by creating promotions for
bundling to reduce stock and obsolescence As well as must plan for this future promotion well in advance, for example when
buying large quantities (volume discounts)
5) Food written off as obsolete - Julianto No numbers were given; CSR and charitable giving to help those in need Referred to website for more details on CSR partners To reduce on the amount of obsolescence though a very much communicative
support center and DC - ensures the right quantity is delivered and in a timely manner
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6) Reducing lead time - Julianto Communication with producer key to make sure they know when the food will be
picked and ready As well as reducing lead times by sourcing from Ontario Food Terminal and
direct sourcing from local vendors whenever possible
7) Sourcing from local & international vendors - Chris For fresh foods must look at local weather patterns, and work with supplier, to
determine, availability of product, order times and quantities Suppliers are mostly growers; different harvest times and peak seasons for all
produce items. Vendors also forecast crop yield; important in determining sku availability and
pricing.- Lower prices during produce’s peak- Although for forecasting usually based off of previous seasons numbers, in
conjunction with predicted outputs from the farmers- Transmit info to vendors and receive notices via EDI
Tomax forecast data used to determine needs
8) Grocery Gateway replenishment, etc. - Ganesh Use demand patterns of weather, snowstorm the next day means a spike up in
demand Fill rates are different due to very much elastic demand Challenge as well is next deliver Warehousing for the items is similar just done a smaller scale as the quantities
requested are smaller
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THANK-YOU LETTER
October 8, 2013
Pat PesottoVP of Merchandising / ProcurementLongo’s8800 Huntington RoadVaughan, ON, L4H 3M6
Dear Pat Pessotto and Mignon Malik, On behalf of the group, I would like to thank you for taking time out of your busy schedule on Monday to meet with me and provide information for the group project. The information you provided was very useful for the group project that I have. As well, thank you for being open to answering any further questions about the project we had. AS well, thank you for the tour of the facilities of the Longo’s building, it helped with the perspective of what Longo’s looks to achieve. Sincerely,
Matthew VidottoHumber SCM
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