trimming the fat

You can't turn around in a supermarket these days without bumping up against evidence of America's latest obsession: dieting. Books about the Zone Diet and the South Beach Diet dominate store-front kiosks. The latest diet products, the low-fat, the no-fat and the lowcarb, line the shelves.

Behind the scenes, logisticians within the grocery industry are waging their own war on fat, one that has nothing to do with losing 10 pounds. No, the battle they fight is the one to trim fat from the supply chain and increase productivity at grocery stores, where minuscule margins translate to major challenges.

And the margins are minuscule. The average American household spends about $100 on groceries each week.What most consumers don't realize is that traditional grocery stores typically make only a buck or so from an order of that size—a slim 1 percent profit margin.

That's nothing new, of course. Grocers have survived for years on these margins.What is new is the emergence of the Behemoth of Bentonville on the scene. Dismissed as only a marginal player in the grocery business as recently as the late '90s, Wal-Mart launched its attack on the grocery business a few years back, marshalling its legendary supply chain efficiencies in a bid to dominate the industry. The strike proved both swift and successful. Today, Wal-Mart has taken over the top spot as the nation's leading grocer.

Traditional grocers' attempts to fight back have met with limited success. Their first response was to bulk up: Three of the biggest players—Safeway, Albertson's and Kroger—have all gone the acquisition route, gobbling up other chains in the last few years in order to gain Wal-Mart-like economies of scale. But in the end, it appears that their attempts to stave off Wal-Mart's threat only bought them time. Nor does it appear that price cutting will be the answer. Given Wal-Mart's reputation for squeezing suppliers for the lowest possible prices, it seems clear that efforts to compete head to head with Wal-Mart on pricing would be tantamount to a suicide mission.

But what grocers can do—and are doing—is to get out their cleavers and start trimming the supply chain fat. Leading grocers like Stop & Shop, Meijer and Kroger all announced major undertakings in the last six weeks to boost productivity. "Grocery chains can't compete strictly on price anymore, so that's serving as a driving force for some of these initiatives," confirms Adrian Gonzalez, part of the supply chain consulting team at ARC Advisory Group and an expert in grocery distribution. "With the emergence of Wal-Mart in that sector over the past few years, many grocery retailers have been forced to take a closer look at their processes."

Grocers fight back
In fact, many of those grocers are taking their cues from the enemy. Like Wal-Mart, they're putting pressure on their supplier partners, as well as their own distribution centers, to put an end to stockouts. That means having product on the shelf at all times. (Wal-Mart's RFID mandate—which requires its top 100 suppliers to place RFID tags on selected goods sent to its distribution centers by yearend —is designed in part to reduce stockouts.) In the retail world, stockouts equate to lost sales, which equate to reduced revenue.

It doesn't stop there. Grocers are becoming particular about how and when they receive products. Like retailers in other industries, grocery chains prefer to receive smaller shipments on a more frequent basis. That strategy saves the retailer on warehouse space.

"It's a thin-margin business and people are very energetic about cutting costs and reducing inventory," says Geoff Davis, executive vice president at Keene, N.H.-based ES3, a third-party provider for the grocery industry. "It's a new game, that's for sure."

At least one grocer has chosen to fight back with technology. Stop & Shop is building the largest automated storage and retrieval system in North America—and quite possibly the world—at its 1.3 million-square-foot distribution center in Freetown, Mass. The largest grocery chain in New England and a unit of global grocery giant Ahold, Stop & Shop is employing 77 rotating-fork automated storage and retrieval machines at the DC, which will supply 350 stores and allow Stop & Shop to consolidate several distribution centers on the Atlantic Seaboard. The DC is expected to be fully operational by October.

Stop & Shop realizes that customers will, in fact, stop shopping at its stores if they cannot find the products they want on its shelves. That's a big part of the reason why the company decided on the AS/RS system from HK Systems. The solution allows for high-storage capability for dry goods. The DC, which HK Systems claims is the nation's largest and most advanced in the grocery trade, will store more than 64,000 pallets. The 77 cranes will each have access to more than 11,500 pick slots serviced by 90 pick aisles.

"Stop & Shop was looking to significantly improve throughput productivity for all of [its] operations," says John W. Splude, chairman and chief executive officer of HK Systems. "This is a unique approach that gives [it] a high level of picking with significant storage capabilities."

The new DC allows Stop & Shop to eliminate much of its outside storage and consolidate materials in one location. "By bringing everything together, you control inventory much better and avoid stock outages, which [translate] into lost sales," says Splude. "So you get those kinds of soft gains, and from an efficiencies point of view, this was significant for them."

New moves
Stop & Shop isn't the only large retail chain making waves. Kroger, one of the nation's biggest retail grocery chains with more than 2,500 supermarkets and multi-department stores in 32 states, just implemented a system to achieve tighter supply chain collaboration for electronic commerce transactions with its trading partners—resulting in increased accuracy, timeliness and operating efficiencies.