KENTUCKY WHOLESALE GROCERY

Kentucky Grocery is a regional wholesaler of groceries based in Kentucky.

The president of KG responded in 1994 to a mailing about customer profitability.  We met him at an industry meeting and subsequently reached an agreement to make a paid visit to investigate opportunities for them to improve their operations and customer profitability, which happened early in 1995.

The opportunity for improving customer profitability was real enough.  They have customers ranging from convenience store owners to small supermarkets and a few medium supermarkets.  Order size varied greatly as did the product mix taken by the customer.  Delivery costs also varied greatly.  And pricing to a given customer was not reflective of the costs to serve that customer.

But really struck us was that this company had a very crude system of reordering and inventory management.  Essentially the buyers were deciding what to order manually based on simple averages kept by the computer.  For people that are in the grocery industry, you will understand that there may be 400 suppliers and 15000 packaged items not including fresh meat and produce.  A truckload of incoming merchandise may have 10 to 200 items and which items you order is all important.  And then there is the issue that there are certain items that you must have and other items you order to fill up the truck.  Because of  KG being a medium sized wholesaler, it has opportunities to sharply reduce the purchase cost and holding costs of the product that it sells by carefully selecting the minimum purchase quantity for the vendor and carefully building up an order based on the need date of each successive pallet taken.  If you do this with a computer and the correct data, costs will be lower than with a manual process.

We mentioned this to the President, who also was struck by the point; we mentioned our own developments in this area with our clients in the US and Europe, and he told us to proceed with a buying system installation.

There was a major obstacle, however.  The Head Buyer was a reasonably savvy woman with experience with another system at another wholesaler, and had made a retrenchment to a simpler system at KG.  She could accept intellectually that a computer could calculate a better order, but she really did not want to change from her present, simple system.

The President told her to go ahead anyway.  She agreed, subject to examining our system and having changes made to suit her.  So we started making changes and installed the system in six months.  Initially most of the changes involved screens and buyer functionality to create orders manually from last minute data or to modify a computer generated order in the easiest possible way.

Once the system started to produce recommended orders she took a stance that the orders were to be perfect if the system were to be used so we embarked on a set of detailed investigations and changes to the order generation logic,  while all the time she was refusing to manually adjust and place the generated orders.  Our prior client experience was that the clients were happy with a 90-95% correct order and would take care of the adjustment themselves, not wanting to complicate the system.

This process went on for a year at least.  Finally the President threw up his hands and said that we and the Head Buyer should come up with a list of issues and that we should deal with that list gratis except for expenses.  And we did in about 8 months.

 

About this time the Head Buyer resigned, citing the pending system as unworkable and ruining her life.  The Assistant Head Buyer now promoted, had less experience but was interested in making the system work.  So in 1997 and 1998 we dealt with one vendor at a time and cut over to using the system's recommendations for that vendor.  We reached the level that 95+% of the vendors worked well.  And with the new head buyer’s vision we actually solved their seasonal forecasting problem in a clever way

 

At this point the former President, now Chairman, really wanted to deal with customer profitability.  We installed a system, developed with another wholesaler, that measured customer profit on each delivery and kept a data base so that it could be looked at long term.  It produced reasonable initial output.

 

However, there were small problems with the output that would have required them to debug the data.  They did not have the patience to either to do this or complete the required data collection.  So it languished after initially illustrating that KG had the usual problems of small deliveries, products being sold below cost and customer cherry picking between the offerings of two wholesalers.

 

The buying system was going reasonably well.  We had really accomplished a lot.  A very practical seasonal forecasting system, a sophisticated purchase lot tracking system, logic that helped them meet vendor ordering rules for much bigger discounts and more.  But this time the new President was under a lot of self-imposed pressure to increase profits.  He chose to do this by traditional means of customer service, buying out of channel 'diverted' product, greater customer service and reduced expenses.

 

Reduced expenses meant, among other things, less buyers, less training and less consulting.  The system chugged on without a push for data accuracy and 100% acceptance of recommendations.  Also the new head buyer, the system champion, left the company and was not replaced.

 

So the system became more of an order entry system and less of an order recommendation system.

 

At the same time KG was installing an integrated system of warehouse and sales management.  It included an integrated reordering system with less capabilities than our and which was less demanding of the buyers.

 

The assignment ended amicably enough in 2003 when the Chairman told us that the president and his operations team had decided that they didn't want to put any more time or energy into the buying system that we had installed and that they would proceed with implementing the less demanding integrated system.

 

It is our sense that what happened at KG was almost inevitable.

 

At a most basic level, once a system loses its owner or if it never had one, it is only a matter of time until it is doomed.

 

Companies like KG are squeezed on costs and cannot afford highly educated professionals.

 

At the same time the buying problem is getting simpler to do a so-so job:

 

The assortment being offered at retail is shrinking so that some of the hard to buy items are no longer sold.

 

The suppliers are taking a more active role in monitoring their inventory in sales outlets. 

 

The retail game is increasingly shifting to promotions and rebates, which a retailer or distributor must get to stay alive; which is a very different emphasis than the earlier one of an orderly flow of goods, high service levels and a big assortment for the customer.

 

Wholesalers are an endangered species in most industries and especially in retail food.  At this writing there is only one national wholesaler, Super Valu, and 20 – 30 regional wholesalers.  Independent retailers do not have much of a choice any more.  Yet the marginal chain stores are closing or becoming independent stores.  So there are now independents with less choices who are taking what they can get in wholesale service and even evolving to limited assortment and food service.

 

Not a good environment for a small to medium sized wholesaler to take a sophisticated, analytical approach to operations, perhaps.  And KG is staying alive in this environment!