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Sainsbury's, the UK's number two supermarket, last week admitted defeat in the race to beat leader Tesco in the lucrative grocery retailing market. Instead Sainsbury's said it is focusing on increasing margins by cutting operating costs from its IT and supply chain systems.
Andy Banks, director of supply chain development at Sainsbury's, said chasing Tesco in terms of pure sales has become a futile exercise.
"It has taken us a long time to realise this, but we are never going to be bigger than Tesco," he said. "As a result, we are changing rapidly as a business, focusing on the quality of goods and services and cutting operational costs so we can achieve industry leading margins."
According to Martin Atherton, lead analyst at research firm Datamonitor, "It's no longer business versus business, but supply chain versus supply chain.
"After what seems like an aeon of mini and major price wars between supermarkets because of the desire to gain market- and mind-share, they have probably realised as much 'new business' from cutting costs as they dare to, whilst reducing margins and, therefore, profitability," Atherton said.
"The next logical step to consider is to make sure that the behind-the-scenes operations that deliver goods into the stores are as slick as possible, thereby maximising the margins they had to erode to win market share in the first place."
Sainsbury's, which has 453 stores in the UK, has identified a number of areas within its IT and supply chain systems where savings can be achieved, as part of its "programme of re-platforming".
The first step in the programme was the retailer's decision, in October 2000, to outsource the running of its IT to consultancy Accenture.
The main driver behind this move was to address the technical constraints that were holding Sainsbury's back, Banks said.
"Three years ago our supply chain was in a bit of a mess," he said. "Although our bespoke systems, with different applications for different functions, were generally fine they limited flexibility. On one occasion all our depot systems went down when we tried to order goods in a different manner."
To overcome these difficulties Sainsbury's, in conjunction with Accenture, is implementing a new warehouse and distribution management system, following a 15-month trial.
The package, from software firm Manhattan Associates, is being rolled out to 4,500 users at 34 distribution sites. Sainsbury's hopes it will release many of the 9,000 staff working in warehousing and distribution from data input for front-line tasks.
In addition, Banks said the software would allow Sainsbury's to save on the cost of linking different user applications, such as order picking, load planning and labour management, together.
In another move aimed at improving distribution, the retailer recently outsourced its logistics operations to supply chain management software firm Manugistics.
The supplier's logistics management applications are designed to automate the execution of a company's shipping process; track shipping results in both real time and historically; create exception-based alerting; and receive, match and pay freight bills.
By outsourcing the management of its fleet, Sainsbury's hopes to overcome the pressure of reducing fleet operating costs and maximising the use of its assets, Banks said.
Smooth distribution is key to any supply chain, particularly with fast-moving consumer goods, such as toothpaste and soap. This is why Sainsbury's has built a distribution centre for goods that will be moved on within a day. "Our store facing fulfilment factory is very important to us moving forward," Banks said. "Created specifically for one-day deliveries, it forms part of our aim to 'eliminate the day' from the supply chain."
The centre, which is largely automated, links in to the Manhattan warehousing management system. It will also link in new forecasting software that Sainsbury's is planning to roll out over the next few months.
The demand forecasting application, from software provider Retek, is due to be implemented by October. The software uses statistical time forecasting algorithms and modelling techniques to produce accurate forecasts with little human intervention, according to Retek.
However, this out-of-the-box functionality does not suit all of Sainsbury's needs so Retek, the retailer and Accenture are working to develop the product.
This is a problem faced by many firms in food retailing, according to Banks. "The food industry is not well serviced by software," he said. "The products have not been there, which means demand has not been created. It has been a vicious circle.
"However, software in general is becoming more adaptable and working in partnership with Retek and Accenture, we expect this application to improve availability and cut overall stock costs," Banks added.
The implementation forms part of the retailer's time-phased replenishment strategy, which aims to ensure as near as possible maximum availability. "This involves improving planning and forecasting as well as sourcing," Banks said. "We are aiming for two distinct routes for products into stores: replenishment using customer forecasts to continually replenish the supply chain; and allocation which is pro-active, for promotional goods."
Inventory management is key to ensuring availability and is this is another area where Sainsbury's is planning to use Retek software.
It may seem an obvious point but keeping an accurate record of inventory is a vital issue for retailers because it is easier said than done, according to Banks.
"At one level it is straightforward - what goes in and goes out," he said. "But there are a number of other ways for products to leave the store. They can be stolen, disposed of, discounted or sold as something else. You need processes to deal with this, but also access to information - and this is where the technology comes in."
Using technology such as this should allow Sainsbury's to improve its margins, but the highly competitive market will test the technology to its limits, warned Atherton.
"Behind-the-scenes technology such as warehouse management, inventory management and logistics solutions will naturally make cost savings to improve margins. But the emphasis will need to be on fast deployment, proven solutions and fast return on investment. Otherwise there will be no point in the cut-throat supermarket arena," Atherton said.
Although a number of IT projects are in place, there are still battles ahead for Sainsbury's. The introduction of two store formats - Local and Central - raises supply chain challenges in itself, admitted Banks. "Each store needs different pack sizes and different times of delivery," he said. "The challenge for us is to implement technology that will allow us to slice and dice across formats - no one-size-fits-all."
Although the retail sector has performed steadily in a weakening economy, consumers have not been willing to increase their spending by any great amount. Cutting IT and supply chain costs may be the only way that retailers can increase margins and they will be watching Sainsbury's with interest.
- Outsourced its IT operations to Accenture in October 2000
- Implemented warehouse and distribution management system
- Outsourced its logistics operation to Manugistics
- Built a store facing fulfilment distribution centre
- Adapting Retek's demand forecasting software with Accenture.