ORLANDO, Fla. — In a demonstration of the power of collaboration, Price Chopper Supermarkets and Nestlé Purina PetCare over the past year have been able to significantly increase the annual turnover of some of Nestlé's products on store shelves by creatively adjusting the ordering and delivery of those products.
By increasing the number of turns, the trading partners were able to reduce Price Chopper's investment in Nestlé's inventory on an ongoing basis, the companies said. But the chain did not suffer from accompanying out-of-stocks on shelves because Nestlé was also able to boost its service levels — ensuring that orders were delivered as specified, on time.
The companies outlined how they orchestrated this logistical sleight-of-hand last week here at the Supply Chain Conference hosted by the Food Marketing Institute and Grocery Manufacturers Association Trading Partner Alliance.
In raw numbers, during the last three quarters of 2010 Nestlé increased the number of annual turns of its wet pet food products at Price Chopper to 50 from about 40 while boosting service levels from 97% to more than 99%, said Mark Chandler, vice president, supply chain for Price Chopper, Schenectady, N.Y. Nestlé controls the flow of products into Price Chopper's DC through a vendor-managed inventory (VMI) arrangement.
“Compared with their competitors and other VMI trading partners, [Nestlé] far and away moved to best in class during the last three quarters,” Chandler said. “They set a new bar.”
“We saw a tremendous increase in turns,” added Barry Henderson, director of supply chain, Nestlé Purina PetCare.
The program began a year ago when Nestlé decided to stem the rising amount of “case-picking” of slow-moving products, which were sold by cases rather than by pallet quantities. “We were seeing an increase in the handling costs from case-pick activity,” Henderson said. The added costs were caused by “extra put-aways of cases in the warehouse, suboptimized warehousing and more damages and unsaleables.”
Nestlé decided to use an “Economic Order Quantity” model to determine the order size that would minimize the total inventory holding costs and ordering costs. Nestlé created orders that included full pallets of slow-moving items — which reduced the handling of cases — along with pallets of faster-moving products. But the key change was that Nestlé started spreading out orders more evenly across the week rather than “clogging the system” with larger individual shipments, Henderson said.
As Chandler explained it, “Maybe before they were putting 10 pallets on Monday's delivery and three pallets on Tuesday. Then they said, ‘Why don't we spread that out more? Why don't we feather that across the week so that we don't front-load it? We get it in when you need it.’”
The upshot is that Nestlé “reduces our inventory on some faster-moving items,” Chandler said. “They increase our inventory on some slower-moving items, but when you look at it as a whole, we're actually working with less total inventory.” With less inventory, and the same amount of sales, turnover shot up. He added that the number of deliveries per week, about six or seven, did not increase.
Nestlé has been working with other retailers on a similar distribution strategy and plans to apply it to dry pet food and litter products, Henderson said.
Chandler noted that Price Chopper's collaboration with Nestlé and other vendors was facilitated by a centralization of the chain's supply chain organization last year. “The supply chain umbrella controls all movement and ordering of product,” he said. “One group controls inventory rather than different groups like merchandising, stores, distribution.”
In addition to changing its delivery pattern, Price Chopper also started paying Nestlé's invoices through an electronic funds transfer (EFT) system last year.