Obsolescence Mitigation at Longo Brothers Fruit Markets Inc

JULIANTO HALIMOLUROTIMI OLAOGUNGANESH RAMKUMAR

PATRICK TRAINMATTHEW VIDOTTO

CHRISTOPHER WATSON

TABLE OF CONTENTS

FINAL REPORT

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

INVENTORY MANAGEMENT PRACTICES

WORD COUNT

EXECUTIVE SUMMARY : 280BODY OF REPORT : 1372

EXECUTIVE SUMMARYOverview of Mission & Strategy

The Longo’s Way

ACCURATE FORECASTING OF PERISHABLESTomax Retail.Net® ERP & SKU-Level Forecasting

Agrometeorological Crop Yield ForecastingSupplier Relationship Management

SUPERIOR DRP & REPLENISHMENT98% Fill Rate with Minimal Safety Stock

Computer Assisted OrderingLocal Procurement & Short Lead Times

Direct Sourcing & Effective Communication

OTHER RELEVANT STRATEGIESPrice Elasticity & Demand Stimulation

A Little Obsolescence Goes a Long Way…

APPENDIX | 5A – 5G

BIBLIOGRAPHY

DISCUSSION GUIDE

THANK YOU LETTER

3 3 3

5 5 5 6

7 7 8 8 9

10 10 11

12

19

21

23

EXECUTIVE SUMMARY

SCM504(5001) | November 27, 2013 Page | 2

1.0

Longo Brothers Fruit Markets Inc. (referred to hereafter as Longo’s) 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.

Overview of Mission & Strategy

Longo’s 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.

The Longo’s Way

Longo’s 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


1.1

1.2

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 Longo’s 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)

ACCURATE FORECASTING OF PERISHABLES

Longo’s employs a bottom-up system to forecasting product demand, using category-

specific algorithms. This section provides insight on their automated perpetual inventory

and forecasting system that drives the replenishment process.

Tomax Retail.Net® ERP & SKU-Level Forecasting

In 2008, Longo’s 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 Longo’s 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. Tomax’s centralized RRP capabilities also include

an automated replenishment process; this is discussed further in Subsection 3.2.

(Jameson Publishing, 2007)

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.


2.0

2.1

2.2

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)

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 Longo’s 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)


2.3

" 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)

SUPERIOR DRP & REPLENISHMENT

Using SKU-level demand forecasts and real-time stock levels as inputs, Longo’s

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 Longo’s supply chain, as depicted in Appendix 5C.

98% Fill Rate with Minimal Safety Stock

In 2008, Longo’s 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 Longo’s to spot “trends and patterns that 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)


3.0

3.1

Computer Assisted Ordering (CAO)

As mentioned earlier, Longo’s 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 high-

volume perishable ‘A’ items are sent to the appropriate vendors for fulfillment (Process

flow is approximated in Appendix 5C).

Local Procurement & Short Lead Times

Retail.Net’s warehouse-level demand forecasts and qdata’s real-time inventory

information are key drivers of the purchasing process at Longo’s. 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).


3.3

3.2

Longo’s 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 Longo’s stock (Kwon, 2009).

Direct Sourcing & Effective Communication

SRM strategies allow Longo’s 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).

5 60% of Longo’s 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)


“ 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 re-routed for

immediate delivery to the stores. “

John Charleson

Director of Information Technology

(Mark, 2008)

3.4

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.

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)

6 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 Longo’s 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.


4.0

4.1

“ The buyers purchase what they're ordering, but they aren't necessarily just order takers; they're looking for opportunities. ”

Mike Longo, VP of Fresh Merchandising(Kwon, 2009)

A Little Obsolescence Goes a Long Way…

Longo’s 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.

Longo’s 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)

8 As mentioned on Longo’s Corporate Social Responsibility page: http://www.longos.com/Corporate%20Social%20Responsibility/Home.aspx


4.2

http://www.longos.com/Corporate%20Social%20Responsibility/Home.aspx

http://www.longos.com/Corporate%20Social%20Responsibility/Home.aspx

APPENDIX | 5A – 5G

The Retail.Net Demand-Driven Continuum


5.0

5A

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

5B

Sample Growing Season for Perishable Items

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


5C

Flowchart: Software Infrastructure at Longo’s


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

Timeline: Sourcing from the Ontario Food Terminal


5D

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

Crop Growth Monitoring & Forecasting Process


5E

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 ]

http://www.e-agri.info/activity_01.html

Longo’s on the Map


5F

Appendix 5F: Map of Longo's Locations

Longo’s Corporate Social Responsibility Partners


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

5G

http://www.longos.com/Careers/Corporate%20Social%20Responsibility.aspx

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_Forecasting_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, 224–241. 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-4044-96fd-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-solutions-retail-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


6.0

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%2002-11-09.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=GRGM&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


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 Longo’s solely provides fresh food

for Longo’s chain while other companies like Sobeys do not Advantages of this are that t falls into the philosophy of Longo’s 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


7.0

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 produce’s 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


THANK-YOU LETTER

[email protected]

October 8, 2013

Pat PesottoVP of Merchandising / ProcurementLongo’s8800 Huntington RoadVaughan, 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 Longo’s building, it helped with the perspective of what Longo’s looks to achieve. Sincerely,

Matthew VidottoHumber SCM


8.0

Documents

Obsolescence Mitigation at Longo Brothers Fruit Markets Inc