Adopting a strategy that is far from mainstream in the supermarket industry, Ahold USA, Brookshire Grocery Co. and Supervalu are making major investments in retail software applications from a single provider that will form the foundation of their business and IT infrastructure.
The applications — which together are known as an enterprise resource planning (ERP) system — are more commonly found in large CPG companies rather than retail organizations, which have preferred to invest in what are called “best-of-breed” applications from a variety of providers or developed in-house.
However, the challenge of integrating and maintaining best-of-breed applications is leading some retailers to consider ERP systems from such providers as Oracle and SAP.
“The calls we're getting indicate that food retailers are still exploring best-of-breed systems,” said Mike Griswold, research director, AMR Research, Boston. “But both SAP and Oracle have done a good job of not only stating they want to get into grocery, but evolving their [ERP] systems to handle the nuances that grocers deal with.”
Last week, Ahold USA, Quincy, Mass., announced that it has purchased a wide array of retail software from Oracle, Redwood Shores, Calif., in an effort to build a new foundation for core merchandising and optimization systems.
Also last week, Duncan Mac Naughton, executive vice president of merchandising and marketing for Supervalu, Minneapolis, said that Supervalu has signed a deal making Oracle's retail software its foundation for merchandising and marketing, and its “toolbox” for category management. Supervalu also launched a pilot of the technology last week.
Ahold USA's Oracle applications will run on computers at its data center in Greenville, S.C., but will be implemented at Ahold USA's two subsidiaries, Giant Food Stores, Carlisle, Pa., and Stop & Shop, Quincy, Mass., which also includes Giant Food, Landover, Md. Ahold USA is the U.S. operating unit of Royal Ahold, based in the Netherlands.
The Oracle applications “will allow us to differentiate ourselves in the marketplace,” said Dave McNally, Ahold's global chief information officer and CIO of Ahold USA. He foresees the technology helping Ahold's U.S. divisions to achieve “better stock conditions in stores, fresher produce, better [sales] forecasts and better assortment based on knowledge of customers in the marketplace.”
The Oracle retail products purchased by Ahold USA include modules for allocation, category management, demand forecasting, item planning, invoice matching, merchandising, merchandise financial planning, price management, sales auditing, trade management and store inventory management. Ahold USA also acquired Oracle's portal, database and active retail intelligence products. These systems will run on a Windows-based user interface.
Implementation of these systems will take three years to complete, McNally said, though some of the initial deployments — of systems like demand forecasting and merchandise financial planning — “will improve our business in 2008,” he added.
In explaining Ahold USA's switch from a traditional best-of-breed to an ERP strategy, McNally noted that the integration required to link aging third-party and custom applications can be “an impediment to adapting to business changes.” By contrast, the ERP solution “will allow us to respond to business changes more quickly and focus on what differentiates us in the marketplace.”
One of those differentiators is Ahold's Value Improvement Program, whereby the company has slashed prices across a range of categories at its Stop & Shop and Giant divisions.
McNally declined to say how much Ahold USA has invested in Oracle technology. But he said the company believes it represents “a compelling business case,” which was demonstrated through “rigorous analysis and planning around benefits realization.” Ahold USA expects to start seeing a payback “very quickly after the complete implementation” in three years.
ERP systems, which are known to be seven-figure investments, have generally been regarded as “a big investment for the grocery industry, with its low margins,” said AMR's Griswold. Installation typically runs 12 to 18 months before they start realizing value, “which can be a lot to absorb, given the price tag,” he added.
But Griswold noted that Oracle and SAP have “dramatically improved the modularity of their retail offerings” in the past 12 to 18 months, making the technology more accessible and affordable to retailers.
McNally acknowledged that in choosing an ERP strategy, Ahold USA has put itself on “the leading edge of where the industry will go.” But he said that the risk of such a move is mitigated by having the ability to “adopt components of the end-to-end solution, so it feels like an incremental change.”
Also pursuing an ERP strategy is Brookshire Grocery Co., Tyler, Texas, which has already adopted financial, human resources and data management applications from SAP, Walldorf, Germany.
Brookshire, which operates 155 stores, implemented SAP's business applications in a stepwise manner. It started with financials (general ledger, accounts receivable and payable, purchase orders) in 2004 and added human resources (including payroll and benefits) in 2005 and 2006, and POS data management in 2006 and 2007. “We were not capable of a big bang approach,” said Tim King, Brookshire's chief financial officer. “We wanted to take bites appropriate for us.”
Brookshire is now implementing the SAP for Retail solutions — including buying, pricing, category management, forecasting, scorecards, replenishment and merchandise assortment planning — and plans to go live with these applications in April 2008.
Like Ahold USA, Brookshire decided to go with an ERP approach to technology as a result of dissatisfaction with its best-of-breed third-party and custom systems.
“We judged our [best-of-breed] technology to be a weak point in our business,” said King. “It was difficult to find enough resources to support best-of-breed.”
In particular, Brookshire executives found themselves struggling with “a web of system interfaces” as well as “a dependency on IT staff to get things done,” King said.
The SAP financial and HR systems have thus far helped to integrate many core processes and to “empower our business users to turn on more functionality across many applications with few resources required from IT,” King said. The common platform “offers a lower cost of ownership long-term.”
With the financial module, Brookshire was able to transition from paper reports to pushing out reports electronically via a portal, as well as vastly reduce the number of complex batch jobs that are subject to crashing. Access to reports dropped to 2.5 days from between five and eight days, while the number of key reports fell to 100 from 500. Invoice approval time fell to six days from 15.
The HR module, added King, “has eliminated a lot of inaccuracies in payroll and benefits” while building discipline into the HR process. The POS data management product has provided “item-level visibility” to sales data for the first time, “allowing us to make better decisions,” he noted.
According to a case study on Brookshire produced by SAP, since implementing financials and HR the retailer has been able to eliminate seven full-time IT positions and seven full-time financial staff positions, and dismantle a 24-hour operations group responsible for batch jobs.
King said Brookshire tracked enough efficiencies and cost savings achieved through the financial and HR systems to “prove out a return on investment,” with many savings coming within the first year after implementing the financial systems. He declined to disclose the investment but said it was “significantly beyond what we did previously.”
King acknowledged that the change management required by the SAP implementations represented a “significant learning curve for us.” In the initial deployment of the financial application, “going from paper to computer reports was a huge change,” he said. But once that change was absorbed, subsequent changes — which were even more challenging — became easier. “Now people are dedicated to change management.”
Training was a vital part of the process. “The only way to achieve ROI with technology is for everyone to utilize the systems,” he said. “But we're very encouraged by the willingness of people to really accept and be excited about the technology changes.”
Brookshire will still employ other third-party systems in concert with the SAP framework, if they can offer functionality not provided by SAP, King said.