Canadian Tire Keeps Stores Rolling With Replenishment Program

Mighty-five percent of Canada's 30 million people live within a 15-minute drive of their local Canadian Tire store. Forty percent shop there every week and 9 out of 10 Canadians make a shopping trip to "The Tire" at least twice a year. The name aside, these customers come looking for a lot more than tires.

	"It doesn't matter how polite we are in the store ... if the item is not there. So our key focus when we started all this was to raise service levels.". - Patrick Sinnott of Canadian Tire

And they find it. The company that started as a tire and auto parts store more than 70 years ago, today gives equal emphasis and selling space to two additional product categories: sports and leisure and home products. Together, these distinct sectors create three stores within a store at each of the 430 Canadian Tire locations.

The company also operates 194 gas stations, or gas bars as they are known in Canada, and has a financial division that issues credit and telephone cards, among other services. It recently announced plans to establish 200 stand-alone auto-parts stores to capture more of the do-it-yourself market. The Tire is Canada's largest hard goods retailer and the corporation overall last year generated sales of C$5.25bn (US$3.57bn).

Listing Canadian Tire's businesses and revenue, however, fails to convey the extent to which the company is a part of the Canadian landscape. At least three generations have grown up shopping at The Tire for their first bike or hockey stick, and Canadian Tire Money - the product of a highly successful customer loyalty program begun in the 1950s - is a currency familiar to all consumers. The company's universally recognized trademark, a red inverted triangle topped by a green maple leaf, is a commercial icon.

But deep roots and old age are assets for a retailer only as long as they don't show, and in the early '90s Canadian Tire realized it was time for a face-lift, both of its stores and its systems.

In 1994 CTC began a massive program to expand or replace 300 of the 430 stores, implementing a new format that features higher ceilings, wider aisles, better lighting, new product lines, the "three stores in one" concept, and a generally more pleasant shopping experience.

At the same time, Canadian Tire put its supply chain under the microscope in an effort to improve stock replenishment to the stores, an area where it was performing below industry standards.

All Canadian Tire stores are operated by independent dealers, and while the focus always is on the end consumer, the stores, in effect, are the customers of the parent company - and they were not happy. "We knew that customer service and our in-stock position in the stores was really important and we had to do something to bring that up to a much higher standard," says Patrick R. Sinnott, vice president of logistics.

In-stock position was particularly critical for items advertised in a multi-page flyer mailed every week to 9.2 million Canadian households. Failure to have these heavily promoted products on the shelf when a consumer comes calling is a retailing nightmare.

"It doesn't matter how polite we are in the store or how well we want to serve the customer in the store, if the item is not there," says Sinnott. "So our key focus when we started all this was to raise service levels."

Begin at the Source
Analysis in late 1993 showed that the problem began with delivery from the suppliers. "Inbound service from our supplier base was in the low 70s, at best, in terms of on-time delivery," says Sinnott. "When I say that, I am not blaming our suppliers. We simply weren't providing them information that was good enough, particularly for the number of items we promote every week. We had to get better at providing decent information back through the supply chain, so we could get better service from our suppliers and provide better service to our stores."

The goal, says Sinnott, was to get inbound on-time service levels into the 90s, "so that we then would be delivering in a timely manner to the stores, say 19 out of 20 times."

DC Capacity Canadian Tire operates two huge distribution centers in the Toronto suburb of Brampton. The original facility was opened in 1973 and twice expanded to its current base area of 1.4 million square feet. Its younger, sister facility added 1.25 million square feet and a state-of-the art automated and integrated computer-controlled material handling system. Together these centers handle 60,000 outbound loads annually and have: * 115 million cubic feet of storage space * Daily throughput capacity of 280 trailer loads and 370,000 cartons * 158,000 pallet storage locations * One of the largest automatic storage and retrieval systems in North America Both facilities are operated with the help of a proprietary warehouse management system. The newer DC, which mostly handles conveyable and packaged material, is equipped with 12.5 miles of conveyors, a carousel system with 10,000 pick slots and pick-to-light technology, and full radio-frequency capability.

There were other ramifications as well. "We knew if we didn't solve this problem, then the stores would continue to hoard product," Sinnott explains. "If they can't have faith in the supply chain, then as soon as a stock item becomes available, they take lots of it, and that causes inventory to go up in the stores and causes inventory turns in the organization to be too low. Then the cost of carrying inventory becomes onerous and you become uncompetitive from the cost side. So, our first priority was to make right the forecast and replenishment processes at Canadian Tire."

The second agenda item, he says, was to form a better understanding with suppliers as to what each party needed in other areas to make improvements, whether in physical operations or packaging or processes.

Work on that piece started immediately with a very basic continuous improvement program involving CTC's top 100 suppliers and industrial engineers from corporate staff. "As this work progressed, service levels began to improve," says Sinnott, "but we knew that we still weren't providing good enough information to the suppliers far enough in advance."

It was then that the group working on this project decided to take a page from the manufacturing sector. "We said, 'why don't we apply DRP [distribution resource planning] to retail?" recalls Sinnott. "It really made sense for our operation."

That started a software evaluation process, during which Sinnott took a team to visit Circuit City, "the only other retailer I knew of that was using this same approach." A starting field of eight to 10 vendors quickly was narrowed to two. Then a one-month, conference-room pilot was held, during which each vendor showed what it could do using actual Canadian Tire data.

"Each organization had a month to walk us through and show us how their software would work with our processes," says Sinnott. In the end, "process fit and chemistry were the two biggest parameters for deciding which software we would go with."

The winning vendor was Manugistics of Rockville, Md., which had years of experience working with planning and scheduling issues in the consumer packaged goods and other industries.

The project represented one of the first client/server applications of any size at Canadian Tire and the first use of core applications that were not written in house. By decision-making time, however, corporate executives already were sold on the concept. "At that time we had a senior vice president of supply chain to whom I reported, and he and I spent a lot of time with our CEO and executive vice president," says Sinnott. "They understood the benefits and the change we would have to go through and their sponsorship was excellent all the way through."

At this point Canadian Tire was operating with a legacy enterprise system that it knew would have to be replaced, but the decision to implement supply-chain planning before tackling an enterprise resource planning (ERP) installation was a conscious one. "We opted to do supply-chain planning first because we had an acute need to improve service levels," says Sinnott. "There is a shorter time to benefit with supply-chain planning. If we had waited for the two years it would take to get an ERP system in place before beginning to put in supply-chain systems, we would be delaying service improvements a long time."

Once the decision was made late in 1995 to license the Manugistics software, things moved quickly. Installation occurred during the first quarter of '96, followed by a gap analysis. "This led us to change some processes so the software wouldn't have to be modified," recalls Sinnott. In the third quarter, Canadian Tire went live with a pilot involving three buying teams, one from each division: automotive, sports and leisure, and household products. The results of that pilot "were phenomenal," says Sinnott, and the 42 other buying teams began clamoring for the software.

Nonetheless, the company resisted the temptation to rush the rollout. "It took us a year to get all the teams up and running and that was very deliberate," says Sinnott. "We did not want a hiccup here." An experienced user of the time-phased replenishment program was assigned to each buying team for seven to eight weeks, followed by five weeks during which the team operated on its own before going live. "Keep in mind, we have 1,700 suppliers divided among the buying teams, and we had to bring them in for training as well," says Sinnott. The final team was brought up in the first quarter of 1998, completing the implementation.

The heart of the new system is a rolling 26-week replenishment plan for each of the retailer's approximately 60,000 SKUs. This plan is regenerated and sent out weekly to all suppliers.

Before, the company used an in-house re-order point software to trigger replenishment requests. When inventory of a stock item reached its pre-set re-order point, a purchase order was sent the next day to the supplier. "The supplier would get a PO and then he would not hear from us for a while," says Sinnott. "Then we would send off another purchase order and maybe this PO wouldn't give him enough time to produce the amount we needed, especially when it was a promotion product. Now, we send the 26-week planned order stream for each stock-keeping unit so our suppliers can see off in the horizon, 26 weeks away, when something is going to pop."

The replenishment system initially was populated with data based on Canadian Tire's three-year order history, which was archived in its legacy system and broken down by week and by SKU. Now the numbers are based on actual and projected orders from the stores. The stores receive a "deal book" months in advance of each weekly flyer detailing the items that are to be featured. These orders, and standard replenishment orders, are filed daily via EDI and pulled into the Manugistics system overnight. (Urgent orders are telephoned in.) By 5 a.m. every morning, the most up-to-date demand numbers are available for review.

This forward visibility is crucial not only for promotions but also for seasonal items. "Seasonality is something everybody in North America has to deal with, but it is more pronounced in Canada," says Sinnott. "The 26-week plan gives visibility to the seasonal demand patterns."

Those patterns are sometimes less predictable than one might think. Last year, for example, outdoor icicle lights used to decorate houses at holiday time really caught on in Canada. This year, demand for that product started building as early as June.

The 26-week view greatly facilitates planning, Sinnott says, even though the numbers may bounce around, up or down, quite significantly until about 10 to 11 weeks out, when they start to settle down. The numbers change little within the last five or six weeks, he says.

Sinnott explains how a hypothetical supplier might use the 26-week plan: "What happens is that a vendor with promotional or seasonal demands coming up, like a bicycle supplier, will look at the numbers on the far end of the timeline. At that distance out, what he is interested in is the rolled-up demand of all SKUs - all bikes as opposed to so many blue ones and so many red ones. He will then blow this number down into component parts to start planning what he needs in his pipeline, so this is very helpful for the manufacturer at a global level, looking at his entire product line. When he gets a few weeks closer in, he starts looking at how many are going to be 24-inch frames, how many 22-inch frames, etc. Then when he gets to 14 or 21 days out, he needs to know precisely how many of each color, size and so on, because that is when he starts painting frames and assembling to order."

Once it was able to provide this longer view, Canadian Tire asked suppliers to reduce their purchase-order lead-time to 14 days or, in a very few cases, 21 days. "If for any reason they don't receive a PO from us by that date, they can consider the number on the demand plan a firm order," says Sinnott.

Five business days prior to the ship date, the vendor is required to send an EDI notice confirming that the order is on schedule and detailing what it includes (how many pounds, the number of cartons or skids, etc.). The ship date typically is three to four weeks prior to when the product is due to be on the store shelf. "It takes one or two weeks to ship the chain, including processing at the DC," says Sinnott, "and the stores like to get promotional items in at least a week ahead so they have plenty of time to merchandise the product."

Sinnott divides Canadian Tire's suppliers into three groups when describing their response to the new system. The third that are the most pleased and that make the most use of the information are those where CTC represents a large proportion of their demand and where MRP [materials resource planning] is used to schedule manufacturing. "We are reasonably accurate from about six weeks out, so a significant number of these suppliers will have a quick look at the plan when it comes over as an EDI transaction and, if it makes sense, they drop it right into their MRP. They like that a lot," Sinnott says.

Another third find it useful, but want to review it quite carefully before they put it into their production planning process, he continues. "Even if we are a significant portion of their demand, they may tweak it or change some of the numbers because they don't quite believe what we are saying, or they may know something that is going on among other retailers that they think will affect our figures but that they properly are not able to tell us. But the visibility is very helpful to them."

A final third, "don't find it as useful as we had hoped," says Sinnott. In such cases Canadian Tire may be such a small part of the supplier's total demand that the forward-looking numbers just aren't significant. In other cases, the manufacturer may be too small to have an automatic way of scheduling production. "So we are big for them and they do a good job for us, but without modern production scheduling methods they have difficulty getting full value from this program."

In terms of service improvements, the time-phased replenishment system is delivering as hoped. As of the first quarter of this year, after one year of full operation, supplier lead times had dropped from a 46-day average to 15 days, and on-time service from suppliers was up 20 percent. As a result, on-time delivery to the stores had improved 1.9 percent. "That may seem like a small number, but we were already in the 90s," says Sinnott. "Almost two full percentage points in this measurement is huge."

Sinnott also notes that these improvements came during a period when shipment volume grew significantly: 25 percent over 24 months. This was largely because the new stores that were being opened were enormously successful at increasing business. At each new or renovated store, sales have consistently increased 50 percent, leading the company to accelerate its store renovation program.

After one year with the new system, inventory turns at the DCs had increased by 1.7, and that was without really focusing on the issue. "As the supplier service got better to us, we could have consciously started to work down the inventory in our DCs, but we decided that in the beginning we would take the entire benefit in the form of increased service levels to the store," says Sinnott. "Then the stores wouldn't have to order too much or too early in the season. They could order the right amounts and have it flow in this order-less-more-often fashion. We wanted to make sure we didn't hiccup there, because a hiccup would have wrecked the confidence we were building with the stores."

Leveraging the Data
Once benefits from the forecasting and replenishment piece began to settle in, Sinnott's team turned their attention to other areas of execution where they could leverage the information provided by the Manugistics system. This effort had two major thrusts: to improve transportation efficiency, inbound and outbound, and to increase productivity at the distribution centers.

"We now have this information that tells us what is going to be flowing through the supply chain by SKU, by cube, by number of units, week in and week out," says Sinnott. "We now know what we have to handle each week. So we wanted to leverage that information, and also leverage the EDI transaction data from suppliers associated with inbound product."

Most of 1998, after the rollout was complete, was focused on DC capacity planning and on optimizing outbound distribution to the stores. Outbound was simpler than inbound because it is totally domestic, involves destinations that don't vary, and is wholly under Canadian Tire's control. Outbound load-building and routing were centralized at Canadian Tire's logistics operations center in Toronto, where Manugistics Transportation Planning software was used to optimize these functions.

Real-time Collaboration Still Ahead Chile the time-phased-replenishment system installed at Canadian Tire provides excellent forward visibility, it does not allow for true, real-time collaboration with suppliers. "We provide great information, but there is no automated way for us to interact with suppliers on an exception basis concerning that information right now," says Patrick Sinnott, vice president of logistics. A lot of verbal interaction occurs, he notes, "because when a big jump appears on the radar screen at week 16 or week 11 because of a promotion, the supplier often will pick up the phone to confirm that the higher number is for real." Similarly, he says, his team sometimes will call a supplier to make certain it noticed a big demand increase. "But we have yet to make the kinds of advances we need to make in terms of interacting with the information." One of the reasons is that electronic communications at Canadian Tire currently are dependent on EDI. "EDI is the medium we use and it is not in real time," says Sinnott. "If we were using a medium like the internet, we could get very highly interactive, but at this time we are not on the net with this. "I think a lot of this will eventually be done more interactively, but I also think we don't need to have true collaborative planning and forecasting on every single SKU," he says. "We really need to do it on items that are promoted, items that are very seasonal, or items that are in urgent demand, such as snow shovels or air conditioners, so that we have a clear understanding and agreement about when those items are needed and in what quantities and any difficulties in the supply chain in meeting those requirements. I don't think collaboration will entail every single SKU getting the same degree of attention." Canadian Tire currently has a project team studying the issue of collaborative planning and forecasting.

About 25 percent of volume, mostly high-cube product, is shipped direct to stores from the supplier or is flowed through two satellite DCs in Montreal, Quebec, and Edmonton, Alberta. The remainder is shipped from two giant DCs in Toronto. Every store gets at least one delivery from each Toronto facility each week. Typically, large stores receive six to 10 truck deliveries a week, with smaller stores getting two to four. In addition, stores east of Toronto will get at least one delivery a week from the Montreal facility, and stores west of Toronto will get at least one delivery from Edmonton. Canadian Tire uses a number of domestic common carriers, covering different geographic regions and lanes, as well as a private fleet for these moves.

The next step was to gain better control of inbound transportation. This was a more difficult challenge, says Sinnott, because inbound shipments come from many different places in the U.S., Canada and the Pacific Rim, and origin points vary by season. In addition, suppliers were in some cases controlling the transportation.

That is no longer the case. Except in rare instances, Canadian Tire now arranges for the pickup of all shipments, based on information provided by the supplier in its five-day advance notice. Having control of both the inbound and outbound allows the company to take advantage of backhaul opportunities, again with the help of optimization software. "In Ontario and Quebec a very large proportion of our inbound transportation is picked up as a backhaul after an outbound delivery," says Matt Mucciacito, divisional vice president, transportation.

Transportation planners also have to be aware of how to divide inbound deliveries between the DCs. The two main facilities in Toronto mostly stock different product lines, with one primarily being devoted to conveyable and packaged products and the other handling bulk and non-conveyable items, such as tires, canoes, swimming pools and lawn tractors. "We try as best we can to avoid transfer of goods from one facility to the other by avoiding mixed loads between the two DCs," notes Bruce Johnson, vice president responsible for the distribution centers.

Planning product flow and anticipating bottlenecks at the DCs is the task of Canadian Tire's supply-chain analysts, who also work at the logistics operations center in Toronto.

Using the 26-week demand-plan numbers and the data from suppliers' advance ship notices, analysts work on long-term and short-term capacity management. This activity primarily is driven by the weekly promotions and seasonal spikes in demand, according to planning manager Serge Carestia.

"We take the regenerated plan first thing Monday mornings and we roll it up and look at our total outbound and inbound volume and compare that to our capacity," he says. "We use this information to ramp the DCs up, allocating whatever resources we need in terms of manpower, equipment, or whatever."

The information also is used to make such crucial decisions about the flow of goods as, for instance, which products will move direct from suppliers or move through the satellite DCs. It also drives material handling decisions for high-volume products.

For example, says Carestia, as toy demand peaks prior to the holidays, a decision might be made to route all toys to one DC where they would be collected in a reserved section, then separated by store before building outbound loads. This would allow the stores to get all their toys at one time, instead of having them mixed in with a variety of standard replenishment items.

"Our dealers love this kind of thing, and these analysts are continually thinking about how to make life easier for the guy in the store because there is a huge multiplier in that," says Sinnott. "There are 430 stores but only four DCs."

One indication of the effectiveness of this program is that the existing DCs have been able to easily handle the significant increases in volume fueled by the new store program. "We have experienced huge increases since 1997, but we have managed it all with the same basic facilities," Carestia.

DC Vice President Johnson agrees that the new system has "had a very positive impact" on operations. "The most obvious area is in improvement of inventory turns and a reduction of average inventories," which were down 7 percent through the first quarter of this year, he says. As stores have become more confident of delivery, he notes, their demand profile has changed as anticipated, so that they order lower quantities more frequently. In turn, "we are doing the same with our vendors - ordering less more often."

That change "put some pressure on our material handling systems, but we have learned to adapt," he says. As an example, he notes that the DC's high bays are designed for an average pallet volume of 50 cubic feet, but under the new system a lot of product comes in at less than that. "So we have had to accommodate for smaller lots coming in more frequently."

About 45 percent of cubic volume moving through the DCs (mostly promotional or seasonal items) is handled on a flow-through basis, he says. "We receive product in bulk, not pre-identified by store, then match it up to the outbound demand, process it by store and get it to the shipping dock."

More changes are on the way. An increased ability to cross-dock product and to ship direct to stores will be an important result of Canadian Tire's next software installation, now in process.

CT is replacing its legacy systems with System ESS software from Industri Matematik International. The IMI system will handle all core transactions at Canadian Tire and will interface with Manugistics and the PeopleSoft financial program already in place.

It was IMI's high-volume order-processing capabilities that most impressed Canadian Tire, says Sinnott. "We will use it to do all our order processing, purchase order transactions and order allocation transactions." Limitations in the legacy systems, he notes, make it necessary to go through several manual steps when processing orders as a direct ship or when making last-minute changes in product allocations to orders. "This will work a lot better with the IMI software," he says. "What will happen then is that the ease with which we can cross dock product and direct ship product will be far simpler. That's a big deal."

"We got the win we wanted with respect to increasing service level to the stores," he concludes, "and now we are starting to get the win at the DCs."