H.E. Butt Grocery Company:A Leader in ECR Implementation

Case Analysis Presented by:Yanqing Gu

Dennis KipnisMarzena J Kuhiwczak

Xiangzhong Xu

IS-577 IT Policy and Strategies

Company Background

In 1992 H.E.Butt Grocery was 13th largest grocery retailer in the U.S.

with $3.2 billion in sales;

operated in over 200 supermarkets in central and south Texas.

In 1997 H.E.B. expanded its business across the border into Mexico

Company Background (Cont’d)

H.E.B. is recognized as a leader in retail technology.

Improving efficiency by utilizing technology enables H.E.B. to offer every day low prices while still achieving profits for the value chain.

Key Players

Supermarkets(H.E. Butt Grocery Company)

Vs.

Discount drugstores (e.g. Walgreens)Discount Department stores (e.g. Wal-Mart)

Wholesale-club stores (e.g. Sam’s Club)

Strategies

Use Every Day Low Prices strategy as primary pricing policy

Use information technology to improve efficiency

Implement category management to reduce cost in the distribution process

Use of information technology to support H.E.B.’s strategies POS (point-of-sale) scanning using UNIX-based microcomputers linked to headquarter (HQ) mainframe

Electronic mail to communication

Ordering products by scanning shelf tag on item and transmitting order to HQ using the satellite network

Use of information technology to support H.E.B.’s strategies DSD (direct store delivery) for receiving and invoicing

CRP (continuous replenishment) with vendors that allow them to supply product using warehouse shipment and inventory data rather than receipt of H.E.B. – generated purchase orders

Core Issues: Manual Replenishment Process Pricing Inaccuracy Planning and Forecasting Inefficient Channel Process Scanning Integrity Inventory

Assessment

Assessment (Cont’d)

Manual Replenishment Process Manually inspecting store shelves and entering

orders into a handheld computers terminal Scanning the shelf tags of the items to be

ordered and manually entering the quantity requested

Verifying these items are not in the back room Transmitting the order to the HQ mainframe Routing the order to one of HEB warehouses for

selection, loading, and delivery to the store

Assessment (Cont’d)Pricing Inaccuracy

Scanning system for each store operated independently

Centrally generated price changes were not always updated correctly

Price updates at some stores weren’t performed in the timely fashion due to lack of staff, time, or attention• As a result, customer complaints took place• This issue became of a serious concern for

HEB Management

Assessment (Cont’d)

Planning and Forecasting HEB needed to develop the ability to

forecast store demand more accurately Little historical data has been saved on

the daily item movement by store Preliminary analysis was difficult to

make without history upon which HEB could base initial predictions

Assessment (Cont’d)Inefficient Channel Process

“Forward Buying” concept Retailers would purchase significant quantities of

goods far in advance of demand at discount prices The goods would be offered to the consumers at the

regular prices Promotional allowances and rebates were so complex

that the retailers weren’t able to determine the actual net cost of a product

Alternative approaches to forward buying were sought to dramatically reduce inventory levels across the channel

Assessment (Cont’d)

Scanning Integrity To support CSO (Computerized Store

Ordering) scanning accuracy needed to be improved from 95% to 98%

To improve operating efficiency To improve the capability to forecast store

demand using daily scanner movement To create a more sophisticated planning

and tracking system

Assessment (Cont’d) Inventory– High total channel inventory levels– Low Inventory turnover levels – Limited Storage Space mostly used for• Bulky items sold in large quantities• Promotional items with a temporary

surge in demand– On-shelf inventory• Inventory “buffer” in case a shipment is

missed or warehouse was out of stock

Advice to top management1. Summary of what the organizations

doing right at the present time

2. Major challenges management is facing in the future

3. Action Plan

4. Assessment of risks and benefits

Summary

Category Management (CM)

Continuous Replenishment (CRP)

Change Management Process

Related Information Technology

Introduces the new relationships between retailers and manufactures

Improves the whole channel cooperation Example: not-to-divert commitment

Boosts HEB company’s bottom line significantly

Category Management

Reduces the inventory level Reduces the ordering and logistics costs

in routing supplying the warehouses Reduces the time category managers

required for buying administration Shifting from reactionary mode of

operation to forecasting and planning mode

Continuous Replenishment

Category managers replace buyers Information-based warehouse process

replaces inventory-based processes EDLP strategy replaces promotion-pricing

strategy Store managers need to be more

information-oriented

Change Management Process

Improve the accuracy of POS data

Expand EDI capability from PC-based to mainframe based to eliminate human interaction

Related Information Technology

Conclusion

The combination of the change management process, adopting new information technology, CM and CRP initiatives help HEB company shifting the strategy from promotion-pricing to EDLP, improving the whole channel efficiency, boosting the profit, and staying competitive in the industry.

To stay competitive in the industry and compete with the mass-merchandise chains:

1. Combine CSO(computerized store ordering) with CRP

2. Cross-dock shipments

3. E-shelf Tag

4. Expanding EDI Capacity

Major challenges

Action Plan

Improving accuracy of store POS data to 98% to facilitate CSO development

Combine CSO with CRP to enable the development of fully linked channel

Establish history data Improve the capability of store demand forecast

Enable cross-dock product shipment to lower distribution cost

E-shelf tag to increase price credibility with consumers and improve operation efficiency

Expanding EDI for e-invoicing, e-receiving and e-payment to reduce GA cost

Action Plan (Cont’d)

Assessment of risks and benefitsBenefits Risks

CSO Reduces the inventory level

Reduces the ordering and logistics costs

Shifting from reactionary mode of operation to forecasting and planning mode

Profit might be impacted during the high inflation period

Low-quality POS data may cause stock-out

Cross-dock Reduce distribution cost

Improve efficiency

Low-quality POS data may result wrong shipment

E-shelf Increase price credibility with consumers

Improve operation efficiency

Big initial capital investment (round $40M) may be hard to be justified

E-service Reduce GA cost

Satisfy customer demand

Service could be interrupted if system fails

What have been H.E. Butt’s key system innovations in the past decade? What has been their payoff? What are the keys to their success?

What the technology challenges do the company’s management faced in the future? What advice do you want to give them?

Questions