Two years ago, at the height of the recession, Ric Jurgens, Hy-Vee's president and chief executive officer, talked to SN about the West Des Moines, Iowa-based chain's robust expansion, including plans to invest about $200 million in new stores and remodels in the current fiscal year.
“We have a five-year plan that we are trying to stick to as closely as possible,” he said. “We don't believe we should stop investing in our stores, facilities or employees just because the economy is challenging to say the least.”
While Jurgens did not specifically refer to it, a critical part of the investment plan for the employee-owned chain is technology, applied at its 232 stores, corporate office and warehouses.
A major piece of that technology is Hy-Vee's internally developed computer assisted reordering system (CARS), used for store replenishment of 40% of its warehouse volume. CARS is part of a consumer-driven replenishment system inspired by Hy-Vee's former CEO, Ron Pearson, who in the late 1990s laid out a vision “to build a supply chain that connected Hy-Vee's customers with our suppliers in order to improve stock status at the store level,” said Darren Baty, the chain's vice president - MIS.
Rolled out chainwide in 2005, CARS is now used by stores to order warehoused product from 16 major suppliers across grocery, frozen, dairy, general merchandise and health and beauty categories. The system has enabled Hy-Vee to realize a 40% reduction in inventory dollars while increasing fill rates at stores from 95% to 98.5%. Moreover, the chain has reduced retail out-of-stocks by 0.5% across each of these categories. “That's quite a bit for a $7 billion company,” Baty noted.
Another major in-store achievement has been the development two years ago of an accounts receivable (AR) card for business customers and employees that is processed through Hy-Vee's own switch. For these shoppers, the chain is able to completely circumvent the onerous credit- and debit-card processing fees generated in conventional transactions, as well as gain accounting efficiencies. With those changes, Hy-Vee expects to save $1.5 million annually.
Hy-Vee is also reaping considerable savings from a server virtualization project started last year that will consolidate servers at the company's stores and corporate office. As many as five servers at each store are being replaced by two virtual servers that run the same software, applications and processes. As a result, fewer company resources are spent replacing and upgrading servers while yearly maintenance fees are slashed.
At its pharmacy distribution center, Hy-Vee recently installed an A-frame autopicker from Knapp AG, an Austrian warehouse systems provider. The system provides higher reliability in supplying Hy-Vee's pharmacies, reducing the opportunity for mispicks and improving overall order processing.
For its successful investments in computer-assisted reordering, card processing, computer virtualization and pharmacy automation, Hy-Vee has been selected to receive SN's 2011 Technology Excellence Award in the chain category.
Impacting the Supply Chain
Computer-generated ordering is an application that U.S. food retailers are slowly beginning to adopt for product replenishment at stores. And while CARS is employed to restock Hy-Vee's stores, its impact is felt all the way up the supply chain in what has become a consumer-driven replenishment system linking stores to warehouses to suppliers.
CARS' forecasting engine looks at a store's sales numbers, including more than three years of history, and its on-hand inventory “to predict what it is going to sell and what it should order,” said Baty. Stores are able to accurately order product as much as seven days prior to delivery.
Using these orders, Hy-Vee has also developed an automated system to optimize replenishment at DCs. On a daily basis, the system compares current DC inventory levels with actual and forecasted store orders to optimize replenishment from suppliers. Suppliers select and ship these loads to Hy-Vee's DCs, which in turn select and ship to stores within the allotted lead time.
Hy-Vee has also increased the amount of data it shares with key manufacturers to expedite the delivery of products from the manufacturer to the warehouse and to the store, Baty said. “The system is only as good as the last item shipped to the store.”
Baty added that Hy-Vee's store managers, who share in the profits of their stores and have the latitude to make autonomous decisions, can override the CARS system, especially for promotions that have no prior history. “We fall back on human instincts,” he said.
At a time when the industry is fighting with banks over bringing down debit-card fees, Hy-Vee's AR cards enable the chain to avoid debit- and credit-card fees altogether — at least for employees and businesses such as restaurants and organizations such as nursing homes and schools. “It's definitely an advantage to create your own payment network,” said Baty.
The AR cards are also an improvement over the previous charge-account system for businesses and other organizations, whose employees would fill out paper charges that had to be routed into the system. “We would have trouble reading the paper and parts of the paperwork would get lost,” said Baty.
Now multiple AR cards under one company are rolled into a single monthly bill sent in the mail, from which all Hy-Vee purchases can be reconciled. Organizations with cars can use the AR cards at Hy-Vee fuel stations to take advantage of payment at the pump as opposed to signing a paper charge inside.
Stores benefit from the AR cards by having online ability to establish and modify accounts and inquire about account history. In addition, the AR card system “frees up time accounting personnel previously spent posting daily charges, generating statements, and receiving payments,” said Baty. It also reduces the time a cardholder previously spent at the checkout and eliminates “awkward questions of eligibility.”
Stores can elect to allow employees to use the AR cards, while corporately the cards are used by operational staff who travel throughout Hy-Vee's territory. Store employees can have their charges deducted automatically from their paycheck.
Replacing POS Servers
Server virtualization is proving to be a valuable way for retailers to reduce computing costs. Hy-Vee is finding that to be the case as it implements Microsoft's Hyper-V virtualization technology to replace five servers at each store with two virtual servers.
Last year Hy-Vee focused on replacing operational store servers, while in 2011 the chain is virtualizing its POS servers. If the chain had to replace all of its POS servers with new ones, the cost would be $1.1 million, whereas the cost of virtualization is $86,000, Baty said.
In addition to cutting server and maintenance costs, virtualization provide stores with timely updates, quick boot and faster recovery from hardware or software failures. IT personnel spend less time troubleshooting and repairing hardware and more time on applications and supporting stores in other areas. And fewer servers mean a reduction of power consumption, which contributes to Hy-Vee's commitment to actively reducing its environmental footprint.
“It's a great way for IT departments to save money,” said Baty. “A lot of companies are looking at it; if they haven't, they probably should be.”
Baty pointed out a case in which a store in Lincoln, Neb., was experiencing server problems. Hy-Vee had to send technicians from Wes Des Moines, Iowa, to the store and it took six to eight hours to fix the problem. But with virtualization, the problem could be corrected remotely from headquarters in 20 minutes, he said.
Virtual servers are also more reliable than physical servers, Baty said, adding, “We can't have the POS down.” Moreover, without functional servers, the CARS system won't work “and we can't replenish our stores.”
To support its pharmacists with accurate and on-time fulfillment of their pharmacy orders, Hy-Vee decided to invest $1 million in the A-frame autopicker — a 90-foot vending machine for pharmaceuticals — at its pharmacy warehouse in Chariton, Iowa.
The autopicker houses the company's top 500 pharmacy items, which are ejected in containers onto a conveyor belt, loaded into bar-coded bins and automatically error-checked before being delivered to Hy-Vee pharmacies. Previously those items were hand-picked — as other pharmacy items still are.
“Perhaps in no other area of a warehouse is accuracy more important than pharmacy,” said Baty. “If you mispick a pharmacy order, it may take seven days to refill the order. This helps us not to that. Like CARS, it makes sure pharmacists have what they want sitting on their shelves.”
In addition to fewer mispicks, the autopicker reduces the amount of damaged stock and smooths out the spike in seasonal labor requirements, contributing to cost-savings on both fronts. “As the number of pharmaceuticals continues to increase, stores are assured that the A-frame autopicking process will keep up with orders for those items,” said Baty.
Sales in $ Billions: 6.9
Key Tech Initiatives: Computer-Assisted Reordering, Accounts Receivable Card, Server Virtualization, Pharmacy DC Automation