Carrefour SA is fighting for dominance all over the world. And one of its biggest battlefields is Brazil, where the French retailing giant is slugging it out with a homegrown leader as well as its global archrival, Wal-Mart Stores Inc.

Carrefour is no newcomer to Brazil; its first store there opened in 1973. But the nation of 175 million offers both huge opportunities and tough challenges for retailers. On one hand, it represents a massive market with substantial buying power. On the other, it's crippled by poverty, a never-ending series of economic crises and poor infrastructure.

Yet Carrefour continues to hang on. Currently it is Brazil's second-largest retailer, behind local power Companhia Brasilia de Distribuicao (CBD), owner of the supermarket chain Pao de Acucar. And Wal-Mart is gaining.

When it comes to aggressive business strategy, however, Carrefour is second to none. Forty years ago, it introduced the hypermarket - a sprawling combination of department store and supermarket, selling everything from eggs to electronics. Others, Wal-Mart among them, have since replicated the model globally.

More recently, Carrefour has embarked on a project to standardize business systems and processes worldwide. With the help of consultant and systems integrator Accenture, it adopted a single finance and accounting platform, drawing on enterprise resource planning (ERP) modules of PeopleSoft Inc. Aiding in the $170m global streamlining effort was the data management leader EDS.

Part of the project involved the creation of shared service centers (SSCs) within each country to centralize purchasing and supplier management. In Brazil, that triggered a similar approach to individual store ordering and delivery.

The SSCs were already grouping requisitions from various stores, and passing them on to vendors. But Brazilian store managers were still responsible for determining order quantities and product mix. And that, Carrefour executives say, was leading to stockouts, excessive in-store inventories and inconsistent levels of customer service.

At Carrefour, any stab at standardization is bound to be a challenge. The company operates more than 9,200 stores throughout Europe, Asia and Latin America. (An attempt to crack the U.S. market in the 1980s fizzled out.) With the 1999 acquisition of French rival Promodes Group, Carrefour became the world's second-largest merchandise retailer, and first in Europe.

In Brazil alone, Carrefour has 96 hypermarkets, 122 supermarkets and seven distribution centers, as well as a separate chain of 100 discount stores that operate under the name of Dia. In 1999, the company sought to overlay a centralized procurement model, first implemented in France, on a portion of its Brazilian supply chain.

The long-time innovator was playing catch-up in Brazil. Pao de Acucar was already doing centralized purchasing, says Felipe Figliolini, president of Cotia Penske Logistics Ltda. (While Pao de Acucar continues to lead Carrefour in the Brazilian retail market, the difference in annual turnover is only 2 to 3 percent, he says.) Pao de Acucar also has an integrated data center to link suppliers and customers at its 500-plus stores. Wal-Mart, too, has a near mania for standardization and cost cutting.

Centralized Distribution
There was a clear need for some kind of central distribution center in the urban region of Sao Paolo. But when it came to selecting a skilled operator of the facility, Carrefour didn't have a lot of choices. For one thing, there wasn't much of a market for the service. Carrefour is the only retail company in Brazil to use a lead logistics provider, claims Marco Aurelio Ferrari, logistics executive director. (He uses the term "4PL," or fourth-party logistics company.) So, few if any major logistics vendors have acquired significant retail experience in that country.

As it turned out, direct experience in Brazilian retailing wasn't the winning ticket. Carrefour selected Cotia Penske Logistics, a relative newcomer to the sector, to run its new Sao Paolo distribution center.

In a larger sense, Cotia Penske was anything but green. It was the product of a 1998 joint venture between Penske Logistics, the U.S.-based logistics provider, and Cotia Trading, a Brazilian wholesaler, distributor and trading company. Penske Logistics is itself a subsidiary of Penske Truck Leasing, a joint venture between global powerhouse General Electric and Penske Corp. And Cotia Trading has more than 25 years' experience in Brazilian importing and exporting.

Cotia Penske's first client in Brazil was Ford Motor Co., for which it runs a distribution center for auto parts and accessories serving 340 dealerships, according to Jim Erdman, vice president of operations with Reading, Pa.-based Penske Logistics. The first invoice from that operation was issued in January of 1999. Five months later, Carrefour began negotiations with Cotia Penske; its distribution facility opened in September of that year.

Taking control from store managers was no easy task. Each had been responsible for his own inventory, a system that had become increasingly unwieldy with the rapid expansion of Carrefour's network in Brazil. The newly appointed logistics provider tackled the problem through a combination of Penske's retail and consumer-goods expertise in other parts of the world, and Cotia's intimate knowledge of the Brazilian market. Erdman says the provider held multiple meetings with executives and store managers to smooth the transition.

The contract started with just 23 stores and a limited number of items stocked by the hypermarkets and supermarkets, according to Mohamed Nassif, IT and project director with Cotia Penske. It grew rapidly from there. Fifty stores were added in the first year, and Cotia Penske now distributes to all 96 hypermarkets, 23 supermarkets and six smaller distribution centers.

Located in Osasco, Sao Paolo, the main distribution facility was built in two phases. Initially it covered 450,000 square feet, growing to 800,000 square feet in later years. According to Erdman, it now handles some 36,000 items, including dry food products, major appliances and electronics. (Refrigerated and frozen goods remain part of a separate supply chain, with most volumes still flowing directly from suppliers to individual stores. The same goes for items bound for Carrefour's Dia discount stores.) The Sao Paolo center currently has a staff of 600, down from a high of around 800, the decrease due to gains in productivity as the facility matured.

The Sao Paolo operation covers stores within a radius of between 700 and 800 kilometers. Roughly half of Carrefour's hypermarkets are located around heavily populated Sao Paolo, while the rest are in nearby states in southeastern Brazil, says Gilberto Magalhaes Dantas, general manager of the distribution center.

Cotia Penske operates a second distribution center for Carrefour in Vitoria, about 500 miles to the northeast of Sao Paolo in the state of Espirito Santo. With a staff of 30 and around 12,000 square meters of space, it supports two hypermarkets, 15 supermarkets and one distribution center.

For all its size, Carrefour needed more than a basic warehouse able to store full pallets. Servicing the stores requires the constant picking of small quantities of multiple SKUs, says Erdman. And that calls for a sophisticated warehouse management system. Rather than buy software off the shelf, Cotia Penske developed its own WMS in conjunction with a local vendor.

It was a matter of both time and money, Erdman explains. Cotia Penske was given between 90 and 120 days to get the facility up and running, with new stores to be added to the system every three months. In-house software could better conform to Carrefour's specific requirements in the time allotted, he says.

Integrating closely with Carrefour's systems, the WMS receives orders, plans outbound shipments and coordinates transportation with the client. The operation is totally paperless, with all products barcoded and scanned by radio-frequency equipment in order to validate and reconcile inventory. The Sao Paolo facility includes 170 electrical forklifts and 220 RF scanners.

Hypermarkets have an insatiable hunger for product, so Cotia Penske had to prepare for big volumes. The Sao Paolo D.C. can handle between 35 million and 48 million cases a year, depending on seasonal needs, says Oscar Spessoto, director of operations with Cotia Penske. On average, that's around 5,500 pallets of product a day at Sao Paolo alone.

Cotia Penske also performs load planning, maximizing trailer cube utilization and consolidating store shipments wherever possible.

Staying in the Loop
Carrefour may have handed over the keys to the two distribution facilities, but it didn't walk away. The retailer still owns both centers. And it keeps close tabs on the operations within. Once a month, Carrefour and Cotia Penske managers get together to grade the vendor's performance, based on 13 key measurements. They are:

• Picking quality. For white and brown goods (major appliances and smaller household electrical items, respectively), Carrefour checks 100 percent of shipments to the stores, against a 99.99-percent target for accuracy. For textiles, toys and fast-moving dry goods, it checks 20 percent of transfers with an accuracy requirement of 99.9 percent;

• Picking productivity, expressed in cases per man/hour;

• Comparison of the time window for distribution with the actual departure of all trucks scheduled for the day;

• Percentage of cases prepared to be transferred with 24 hours, 48 hours or more for each order, with an objective of 100 percent up to 48 hours;

• The daily comparison between data generated by Carrefour's ERP system and inventories within Cotia Penske's WMS, with no more than .05 percent of items needed to be reconciled;

• Average number of cases per truck, to maximize cubic truck utilization;

• Percentage of trucks received daily, and those scheduled to receive goods;

• Quantity of SKUs, pallets and cases received from the suppliers, along with resources required;

• Quantity of SKUs, pallets and cases transferred to stores, and the resources required;

• Truck loading time, by type of truck and product to be loaded;

• Percentage and quantity of full pallets (holding a single product) and mixed pallets (with more than one product) received from suppliers;


• Percentage and quantity of full and mixed pallets transferred to the stores; and

• Percentage of total cases canceled (either by Carrefour or Cotia Penske) related to the total number of cases ordered by the stores.

Inventory Accuracy
Results so far have been encouraging, the principals say. Thanks to barcode scanning, inventory accuracy stands at 99.97 percent, and outbound order accuracy is at 99.89 percent, says Dantas. In addition, both inventories and stockouts are lower, although managers say they aren't sure of the exact number. The important things, they insist, are improved inventory visibility and control, more sales opportunities due to better product availability, and better customer service.

Through centralized distribution, Carrefour can keep less inventory on hand, yet increase the assortment of items in stock. That's especially crucial in the age of the "big-box" store, where a single product family might consist of dozens of SKUs occupying an aisle's worth of shelves.

While Cotia Penske doesn't handle most perishable food items at the distribution centers, it does distribute a number of dry products with expiration dates. Information captured by the barcode scanners allows the retailer to keep fresh product on hand, and quickly remove goods according to their allotted shelf lives.

Carrefour has also retained direct control of transportation from the distribution centers to its stores. (Inbound shipments are mostly booked and controlled by suppliers. In that area, Cotia Penske's job is restricted to making dock appointments.) Dantas says the retailer works directly with five transportation companies, and will continue to do so for the time being.

There are several reasons why. Ferrari says Brazilian tax law can make it disadvantageous for one vendor to purchase services from another on behalf of a common client. In addition, he fears that Carrefour would lose the negotiating clout it has carefully built up by controlling large amounts of freight throughout Brazil.

"I think I have a good advantage," he says. "In my opinion, we have competitive prices and good services. Until now, it has worked well." Finally, Carrefour may have been reluctant to hand over its entire logistics operation to an untested partner in the early years of the relationship.

Ferrari says he would nevertheless consider making a change in the future, assuming Cotia Penske can wrest similar concessions from carriers. Adds Erdman: "We've talked to them from day one about eventually doing that."

Cross-docking Coming
Carrefour also plans to add cross-docking to the mix of services performed by Cotia Penske at the Sao Paolo distribution center. Here, the retailer will be drawing on the example of Wal-Mart, which only has 10 hypermarkets in Brazil yet manages between 70 and 80 percent of its shipments through cross-docking, Ferrari says.

The operation, involving the receiving and re-shipping of goods without long-term storage, cuts down on the cost of warehousing while speeding up the retailer's responsiveness to customer buying patterns. "In the past, our information systems couldn't do cross-docking," says Ferrari. "In 2004, we will change the system."

What Cotia Penske won't get any time soon is the contract for managing a new Carrefour distribution center in Brasilia, the nation's capital. That facility, handling groceries for six hypermarkets and 33 supermarkets, is operated by Exel, the U.K.-based third-party logistics provider with roots in warehousing. Carrefour also plans to open a distribution center devoted to perishables by the end of the year, Dantas says, although it hadn't decided on an operator as of late October.

Everything ties in with an overriding corporate strategy that Ferrari terms the "supply-chain vision" for 2004. It begins with a determination to craft an integrated approach to supply-chain management among the company, its logistics providers and transportation vendors in Brazil. In the past, he says, Carrefour's third-party providers didn't speak regularly with its carriers. Six months ago, Ferrari helped launch a program to put those partners together in the same room for the first time.

Carrefour is still in the midst of its supply-chain integration project, Ferrari says. In the coming year, he expects to gain tighter control over the flow of product to store shelves. Additional technology is in the cards as well, including voice-activated warehousing systems and radio frequency identification. Application of RFID "is only a matter of time," says Figliolini, governed by the cost of tags and the speed of adoption within Brazil.

Obstacles to Growth
Other factors, especially Brazil's poor infrastructure and wobbly economy, could act as brakes on Carrefour's plans. Up to 75 percent of the nation's freight moves by highway, but there are only about 20,000 commercial trucks in all of Brazil, Ferrari says, and their average age is 18 years. What's more, multinational transportation companies are loath to invest in Brazil because smaller entities have the advantage of not paying taxes. So, even though the Brazilian government has begun outsourcing the development and maintenance of its highway system, few private companies with sufficient funds have stepped to the fore. As much as 85 percent of Brazil's transportation market still belongs to national companies, Ferrari says.

Big retailers like Carrefour face an even more fundamental problem: Brazilians' limited purchasing power. Much of the nation remains mired in relative poverty, with 90 percent able to purchase only the most basic items. That dilemma will lessen if the economy stabilizes and Brazil's middle class continues to grow. In the meantime, Carrefour hopes to make their lot easier by launching its own credit card operation next year. In theory, the program will allow Carrefour customers to spread out their payments, while lowering interest rates.

None of this has put a damper on Carrefour's hopes for expansion in Brazil. Earlier this year, it announced plans to open additional stores, backed by a promised investment of around $176m, or three times that of previous levels. Along with CBD and Wal-Mart, Carrefour is also vying for the chain of supermarkets operated in the northeast of Brazil by troubled Dutch retailer Ahold NV. Buffeted by an accounting scandal at home, Ahold is selling off its South America assets.

Brazil continues to be plagued by high inflation, hovering at 18 percent in 2002, interest rates in excess of 15 percent, and a sluggish economy. "We had a terrible last year," admits Figliolini. But there are hopes for a better year in 2004, especially if Carrefour continues to control costs and make the most of tight margins. Economic growth for the coming year is projected at around 3 percent.

Cotia Penske expects to play a key role in Carrefour's push for higher profits in Brazil. And, as Carrefour raises the performance bar for logistics vendors, it's hoping that success with that customer will open the door to additional opportunities in the region.

Says Joe Gallick, senior vice president of sales with Penske Logistics: "We want to be Carrefour's best provider of warehouse management and related logistics services." To which Erdman adds: "This is not a business for the faint of heart."