MINIMIZING OBSOLESCENCE OR STOCK-OUTS OF PERISHABLES VIA EFFECTIVE FORECASTING & INVENTORY MANAGEMENT PRACTICES

FINAL REPORT

JULIANTO HALIM OLUROTIMI OLAOGUN GANESH RAMKUMAR PATRICK TRAIN MATTHEW VIDOTTO CHRISTOPHER WATSON

WORD COUNT EXECUTIVE SUMMARY : 280 BODY OF REPORT : 1372

TABLE OF CONTENTS
EXECUTIVE SUMMARY
Overview of Mission & Strategy The Longos Way

3
3 3

ACCURATE FORECASTING OF PERISHABLES

Tomax Retail.Net ERP & SKU-Level Forecasting Agrometeorological Crop Yield Forecasting Supplier Relationship Management

5
5 5 6

SUPERIOR DRP & REPLENISHMENT

98% Fill Rate with Minimal Safety Stock Computer Assisted Ordering Local Procurement & Short Lead Times Direct Sourcing & Effective Communication

7
7 8 8 9

OTHER RELEVANT STRATEGIES

Price Elasticity & Demand Stimulation A Little Obsolescence Goes a Long Way

10
10 11

APPENDIX | 5A 5G BIBLIOGRAPHY DISCUSSION GUIDE THANK YOU LETTER

12 19 21 23

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1.0 EXECUTIVE SUMMARY

Longo Brothers Fruit Markets Inc. (referred to hereafter as Longos) is a family-owned grocery supermarket chain with distribution centre operations in Vaughan, 26 retail locations across the Greater Toronto Area, and a significant online presence as GroceryGateway.com, a consumer-direct grocery delivery service. Their primary revenue stream includes a large variety of delicate and highly perishable food items ranging from dairy and fresh produce to bakery, deli and seafood products.

1.1 Overview of Mission & Strategy

Longos primary focus is on exceeding customer expectations by offering the best food experience to every Customer, every time.1 The executive and management teams believe wholeheartedly in a quality-over-price approach to product selection, and this mentality is widespread throughout their workforce. (Produce Perfection, 1996) Cost Differentiation is not a part of their game. Instead, Longo competes with high-end supermarket competitors like Sobeys, Metro, Fortinos, etc. by offering the highest quality fresh foods and grocery products while delivering an outstanding shopping experience.

1.2 The Longos Way

Longos employs many noteworthy techniques to effectively manage their supply chain and bridge the potentially large gap between supply and demand. Their highly accurate forecasts are the result of past sales records, seasonal patterns, growth projections & sound judgment. Their focus on strategic Supplier Relationship Management (SRM) allows them to benefit from the expertise of their vendors, resulting in better quality products at better prices, less risk and better cost management.
1

As stated on Vision & Values. http://www.longos.com/Careers/Vision%20and%20Values.aspx

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A sophisticated technology infrastructure allows for superior inventory control and an efficient Distribution Requirements Planning (DRP) process. These strategies and their impact on business operations and bottom-line profit margins are explored in the sections that follow. Emphasis is given to the forecasting, replenishment and inventory management techniques applied to Longos produce category.

" We are always looking for great growers to build a

long-lasting relationship with. This takes time, but as we develop these relationships we are able to work closely with the grower to help us differentiate with new and unique products. "
Mike Longo VP of Fresh Merchandising
(Kwon, 2009)

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2.0 ACCURATE FORECASTING OF PERISHABLES

Longos employs a bottom-up system to forecasting product demand, using categoryspecific algorithms. This section provides insight on their automated perpetual inventory and forecasting system that drives the replenishment process.

2.1 Tomax Retail.Net ERP & SKU-Level Forecasting

In 2008, Longos upgraded their Enterprise Resources Planning (ERP) system to Retail.Net, an SaaS (software as a service) solution that integrates their various backend systems and allows them to efficiently manage the retail continuum. Developed by Tomax Corporation, one of the main functions of Retail.Net is to generate a 52-week demand forecast for each of Longos 20,000 different SKUs, including perishables. The Retail Resource Planning system (RRPTM) tracks in-store and warehouse stock levels in real time, and analyzes two to five years of perpetual inventory data to forecast demand (Garry, 2007). Other drivers such as historical trends, seasonal fluctuations, price elasticity of demand, and various promotional influencers allow Retail.Net to generate highly accurate forecasts. Tomaxs centralized RRP capabilities also include an automated replenishment process; this is discussed further in Subsection 3.2. (Jameson Publishing, 2007)

2.2 Agrometeorological Crop Yield Forecasting (ACYF)

For fresh produce, consumer demand is not the only element that requires accurate forecasting. Most growers make use of sophisticated ACYF systems that analyze weather conditions, climate patterns and other physiological factors to forecast future crop availability in advance of the harvest period.

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ACYF encompasses three distinct methods: descriptive, regression and crop simulation. While descriptive forecast models classify weather conditions and assign thresholds to their effects on key variables, regression models use historical data to compute optimal forecast equations using key weather variables. Crop Simulation Models (CSMs) are more complex they forecast crop yield by extrapolating patterns in meteorological, physiological and the quantified impact of managerial conditions. (Basso, 2013)

2.3 Supplier Relationship Management (SRM)

Experience and expertise are vital when it comes to choosing which method(s) to employ and which variables to include, and when it comes down to accurately estimating future crop availability. Appendix 5B contains an example of region-specific crop availability calendars that growers create via ACYF. These calendars can be region- or farm-specific, and they allow retailers like Longos to plan replenishment schedules in advance, against forecasted demand for each crop. Hence, SRM plays a vital role in minimizing (special cause) variation in supply, which in turn allows for a more effective DRP process, as discussed in Section 3.0. (Kwon, 2009)

" Last Christmas there were no artichokes at the

terminal, but we had good relations with the artichoke supplier, so while no one else had any, we did. "
Joe Andolina Quality Control Manager
(Kwon, 2009)

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3.0 SUPERIOR DRP & REPLENISHMENT

Using SKU-level demand forecasts and real-time stock levels as inputs, Longos Retail.Net demand management platform is able to effectively automate DRP functions and create store replenishment orders for both DC-supplied and Direct Store Delivery (DSD) products (Garry, 2007). It does this via effective information exchange between all the systems within Longos supply chain, as depicted in Appendix 5C.

3.1 98% Fill Rate with Minimal Safety Stock

In 2008, Longos implemented a Service-Oriented Architecture with the installation of Microsoft BizTalk 2006 Server. BizTalk has improved their IT infrastructure by

providing real-time inventory and supply chain visibility, exchanging information between POS, qdata WMS and Retail.Net ERP, delivering BAM2 and BI3 functionalities that aid in strategic development, transmitting Grocery Gateway orders to the picking system, streamlining distribution and inventory management operations, eliminating expedited shipments and freeing up their private fleet, and reducing support time and boosting IT staff productivity by 30%4.

These improvements and added capabilities have resulted in lower staffing costs, more efficient distribution, greater accuracy in order fulfillment, and a 1.5% increase (to 98%) in their distribution centre fill rate (Mark, 2008).
2

Business Activity Monitoring functionality provides near -real-time exception reporting and helps automate the planning process (Mark, 2008) 3 Business Intelligence functionality allows Longos to spot trends and patterns t hat help planners develop corporate strategy (Mark, 2008) 4 Before BizTalk, IT staff would spend 40% of their time to support and maintain the system. Now down to about 10%, they can focus on more value-added activities (Ken, 2008)

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3.2 Computer Assisted Ordering (CAO)

As mentioned earlier, Longos has a highly automated store replenishment process. Real-time perpetual inventory has been implemented in all their stores. Customer purchases are updated against store stock levels in real time through the POS system. Retail.Net uses this perpetual inventory data and pre-computed SKU-level demand forecasts to drive the CAO process. The system creates replenishment orders at optimal times and for optimal quantities, but allows store managers the flexibility of making changes to these orders (Garry, 2007). Once finalized, warehouse-supplied orders are transferred to their qdata WMS at the DC to be picked, packed and shipped. From there, DSD orders comprising highvolume perishable A items are sent to the appropriate vendors for fulfillment (Process flow is approximated in Appendix 5C).

3.3 Local Procurement & Short Lead Times

Retail.Nets warehouse-level demand forecasts and qdatas real-time inventory information are key drivers of the purchasing process at Longos. Category managers Joe Andolina and Mimmo Franzone are at the Ontario Food Terminal six days a week, where they select the best quality produce, negotiate the best prices and finalize purchase orders (POs), all while developing vital relationships with vendors (Kwon, 2009). PO details are instantly sent to their warehouse and retail stores via BizTalk. On the same day, vendors ship orders to the DC where all produce undergoes quality control. Store orders are then consolidated and shipped out; they arrive within 12 hours and are stocked on displays in time for store opening (See Appendix 5D).

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Longos maintains a 24-hour lead time for the majority of their produce by sourcing it from the Terminal5. They aim to source perishables locally since it keeps transit times low. During the summer months when crop yields are at its peak in Ontario, locally sourced produce accounts for up to 40% of Longos stock (Kwon, 2009).

3.4 Direct Sourcing & Effective Communication

SRM strategies allow Longos to establish and maintain direct-buy relationships with leading local and international produce vendors. Direct sourcing ensures consistent supply and allows them to offer unique items that aid in differentiation. For the 40% of produce SKUs that are currently sourced directly, buyers work closely with vendors to plan procurement and place timely orders. Demand forecasts and POs are shared with vendors via Electronic Data Interchange (EDI); they respond with crop forecasts and advanced shipping notices (ASNs) (Mark, 2008).

Before, (buyers) used pieces of paper to keep track of their purchases. The warehouse did not know what they had bought until it showed up on the loading dock. But now the system is paperless since the buyers create POs on their handhelds. And with visibility into store inventories, they focus on their actual needs. Once the POs are complete, the system transmits the information to the WMS so people in the warehouse can start planning loads

for individual stores. Since produce is perishable, it is simply repacked and rerouted for immediate delivery to the stores.

John Charleson Director of Information Technology

(Mark, 2008)

60% of Longos produce SKUs are sourced from the Ontario Food Terminal; the remaining 40% are sourced directly from local and international (California and Florida) growers. (Kwon, 2009)

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4.0 OTHER RELEVANT STRATEGIES

Although sophisticated SCM systems mitigate obsolescence (or stock-outs), they do not guarantee zero wastage. Secondary strategies are used to deal with contingencies like unexpected volume discounts, overestimated demand and ultimately, obsolescence.

4.1 Price Elasticity & Demand Stimulation

Buyers use the price elasticity to quantify the effects of a price drop on a certain SKU.6 This allows them to make more profitable procurement decisions. Using promotional strategies, buyers and department managers can drive demand for produce SKUs if excess inventory needs to be sold before it drops below its quality threshold.7 For example, if a buyer is offered a volume discount that is deemed to be profitable, they would place a PO for that volume. Buyers and stores can make pricing changes directly on Retail.Net; BizTalk automatically coordinates POS, register and Grocery Gateway pricing while department managers change shelve prices, set up product sampling kiosks or free up end displays accordingly. (Britt, 2009)

The buyers purchase what they're ordering, but they aren't necessarily just order takers; they're looking for opportunities.
(Kwon, 2009)

Mike Longo, VP of Fresh Merchandising

Products with higher elasticity are more open to sales promotions because their demand is more responsive to a price drop; Pat emphasized that the use of Price Elasticity is a key factor in Longos promotional strategy. 7 According to Pat, Produce Managers check the quality of their stock throughout the day to ensure only the freshest produce is available to their customers.

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4.2 A Little Obsolescence Goes a Long Way

Longos recognizes the fine line between obsolescence and spoilage; they have adopted a socially responsible means of dealing with not so fresh perishable stock well before it goes to waste. As part of their multifaceted Corporate Social Responsibility (CSR) strategy, they have teamed up with Second Harvest and ReFresh Foods, two local charitable organizations that pick up perishable foods and redistribute them to social service agencies such as food banks, homeless shelters, soup kitchens, community centres and after-school programs.8 This small contribution makes a big difference in the lives of many. Longos also reaps the indirect yet substantial rewards of an extensive CSR program. Social responsibility initiatives have been proven to positively impact an organization by improving public image, increasing goodwill and promoting brand loyalty. The end result is a loyal customer base, increased acceptance within the community and better competitive positioning. (Du, Bhattacharya, & Sen, 2007)

As mentioned on Longos Corporate Social Responsibility page: http://www.longos.com/Corporate%20Social%20Responsibility/Home.aspx

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5.0 APPENDIX | 5A 5G
5A The Retail.Net Demand-Driven Continuum

Appendix 5A: The Retail.Net suite integrated modules based on Demand Driven Retail Continuum Source: As advertised in the February 2006 issue of NRF Stores Magazine

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5B Sample Growing Season for Perishable Items

Appendix 5B: Crop Availability Calendar for Southern California Source: (Doncaster, 2006)

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5C Flowchart: Software Infrastructure at Longos

Appendix 5C: Flowchart approximation is based on information gathered from the following sources: (Garry, 2007) ; (Kwon, 2009) ; (Mark, 2008) ; (qdata Inc., 2002)

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5D Timeline: Sourcing from the Ontario Food Terminal

Appendix 5D: Timeline approximation is based on information gathered from the following sources: (Kwon, 2009) ; (Britt, 2009)

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5E Crop Growth Monitoring & Forecasting Process

Appendix 5E: Example of a Crop Growth Monitoring System (CGMS) that uses meteorological data, World Food Studies (WOFOST) growth models, and harvest stats to drive the ACYF process. [ Source: Chart can be found at http://www.e-agri.info/activity_01.html ]

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5F Longos on the Map

Appendix 5F: Map of Longo's Locations

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5G Longos Corporate Social Responsibility Partners

Appendix 5G: Longo's current partners for its CSR program [ Source: http://www.longos.com/Careers/Corporate%20Social%20Responsibility.aspx ]

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6.0 BIBLIOGRAPHY
Agrawal, R. (2005). Forecasting Techniques in Crops. New Delhi: I.A.S.R.I. Basso, B. (2013). Review of Crop Yield Forecasting Methods and Early Warning Systems. Michigan State University, Department of Geological Sciences. Food and Agriculture Organization of the United Nations. Retrieved from http://www.fao.org/fileadmin/templates/ess/documents/meetings_and_workshops /GS_SAC_2013/Improving_methods_for_crops_estimates/Crop_Yield_Forecasti ng_Methods_and_Early_Warning_Systems_Lit_review.pdf Britt, P. (2009, January). Retailers look to KM to DRIVE BUSINESS. KM World, 18(1), 14-15. Retrieved from http://search.proquest.com/docview/197282040?accountid=11530 Business Wire. (2005, October 19). Longo's Takes Descartes Challenge and Improves Delivery Productivity and Customer Service. Retrieved November 12, 2013, from The Free Library: http://www.thefreelibrary.com/Longo's Takes Descartes Challenge and Improves Delivery Productivity...-a0137701781 Doncaster, L. (2006). Cooksmart. London: Anness Publishing Ltd. Du, S., Bhattacharya, C., & Sen, S. (2007). Reaping Relational Rewards from Corporate Social Responsibility: The Role of Competitive Positioning. International Journal of Research in Marketing, 24, 224241. Retrieved from http://ssrn.com/aabstract=2333555 Enis, M. (2005). BEARING FRUIT. Supermarket News, 57(17), 31-36. Garry, M. (2007). INITIATIVE 5: Computer-Assisted Ordering. Supermarket News, 55(51), 45. Retrieved from http://web.ebscohost.com.rap.ocls.ca/ehost/delivery?sid=272b3a06-b23c-404496fd-7c85cb09941b%40sessionmgr114&vid=5&hid=126 Jameson Publishing. (2007, October 4). Retail Solutions: Retail 2.0 Solutions Focused On Business Value Unveiled At Visibility 2007. Retrieved from Integrated Solutions for Retailers: http://www.retailsolutionsonline.com/doc/retail-solutionsretail-20-solutions-focused-0001 Kwon, N. (2009, April). Longo's... A Day in the Life. Canadian Grocer, 123(3), 19,21-24. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/222862532?accountid=11530

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Mark, K. (2008, May). Bearing fruit. Canadian Transportation Logistics, 111(5), 14-15. Retrieved from http://search.proquest.com/docview/203024811?accountid=11530 Produce perfection: how you can turn your produce department into a destination customers want to shop. (1996, December). Canadian Grocer, 110(10), 3-5+. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/222849003?accountid=11530 qdata Inc. (2002, 11 09). Longo's Customer Snapshot - qdata Inc. Retrieved from qdata.com: http://www.qdata.com/PDFs/Longos%20Customer%20Snapshot%2002-1109.pdf Longo Brothers Fruit Markets Inc. (2013). About us. Retrieved from http://longos.com/SiteMap/AboutUs.aspx Parks, L. (2004). Predicting perishables; fresh-item management systems are helping retailers to cut perishables waste by forecasting demand and managing production. Supermarket News, 52(2), 67. Retrieved from http://go.galegroup.com/ps/i.do?id=GALE|A112206050&v=2.1&u=humber&it=r&p=G RGM&sw=w&asid=b5186ced252c463cb1098b62d10d25d3 Duff, M. (2008). Longo's sets model on moving from 'burbs to city streets. Retailing Today, 47(1), 4,26. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/228542818?accountid=11530 Li, Y., Cheang, B., & Lim, A. (2012). Grocery perishables management. Production and Operations Management, 21(3), 504-VIII. Retrieved from http://search.proquest.com.rap.ocls.ca/docview/1021424349?accountid=11530

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7.0 DISCUSSION GUIDE & ASSIGNED PARTS

1) Quantitative/Qualitative models used to forecast demand - Ganesh Mentioned the use of a Tomax system For fresh foods must look at local weather patterns, and work with farmer, to let you know the amount you want - Although for forecasting usually based off of previous seasons numbers, in conjunction with predicted outputs from the farmers For more seasonal items a similar method of using previous years sales data s used Gave no info on competitors other than that Longos solely provides fresh food for Longos chain while other companies like Sobeys do not Advantages of this are that t falls into the philosophy of Longos to concentrate on the fresh food aspect 2) Inventory management at DC and stores - Matt Mentioned qdata WMS; real-time inventory levels Tomax for perpetual inventory, system in place for cross-platform communication in real time. When customer places order, store stock is updated immediately Automated orders for store replenishment using SKU level forecasts and stock levels to determine order quantities - This was done manually by department managers in the past 3) Fill Rates & replenishment process - Patrick They prefer direct store delivery for highly perishable A items. Fill rate used as a primary KPI (no number given); minimize safety stock Uses real-time systems to improve fill-rates 4) Promotions & Stimulating demand - Timi Must know which items are very elastic vs in elastic in terms of price and demand and organize them from there generating demand for these items that are elastic by creating promotions for bundling to reduce stock and obsolescence As well as must plan for this future promotion well in advance, for example when buying large quantities (volume discounts) 5) Food written off as obsolete - Julianto No numbers were given; CSR and charitable giving to help those in need Referred to website for more details on CSR partners To reduce on the amount of obsolescence though a very much communicative support center and DC - ensures the right quantity is delivered and in a timely manner

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6) Reducing lead time - Julianto Communication with producer key to make sure they know when the food will be picked and ready As well as reducing lead times by sourcing from Ontario Food Terminal and direct sourcing from local vendors whenever possible 7) Sourcing from local & international vendors - Chris For fresh foods must look at local weather patterns, and work with supplier, to determine, availability of product, order times and quantities Suppliers are mostly growers; different harvest times and peak seasons for all produce items. Vendors also forecast crop yield; important in determining sku availability and pricing. - Lower prices during produces peak - Although for forecasting usually based off of previous seasons numbers, in conjunction with predicted outputs from the farmers - Transmit info to vendors and receive notices via EDI Tomax forecast data used to determine needs 8) Grocery Gateway replenishment, etc. - Ganesh Use demand patterns of weather, snowstorm the next day means a spike up in demand Fill rates are different due to very much elastic demand Challenge as well is next deliver Warehousing for the items is similar just done a smaller scale as the quantities requested are smaller

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8.0 THANK-YOU LETTER

Matthew.v44@gmail.com October 8, 2013 Pat Pesotto VP of Merchandising / Procurement Longos 8800 Huntington Road Vaughan, ON, L4H 3M6 Dear Pat Pessotto and Mignon Malik, On behalf of the group, I would like to thank you for taking time out of your busy schedule on Monday to meet with me and provide information for the group project. The information you provided was very useful for the group project that I have. As well, thank you for being open to answering any further questions about the project we had. AS well, thank you for the tour of the facilities of the Longos building, it helped with the perspective of what Longos looks to achieve. Sincerely,

Matthew Vidotto Humber SCM

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