Discount Retailer Doesn’t Skimp On Supply-chain Investments By Robert J. Bowman Fast-growing Dollar General Corp. undercuts Wal-Mart on prices, even as it spends heavily on new systems to enhance transportation, warehousing and supplier links. David Perdue doesn’t especially like the term “supply chain.” To the chairman and chief executive officer of Dollar General Corp., it’s just basic business strategy. Perdue oversees a network of some 6,800 discount merchandise stores in 29 states, growing on average by two a day. In addition to managing aggressive expansion, he has to control costs, add warehousing space, upgrade technology, improve customer service and keep the shareholders happy. And whether he likes the words or not, his solution has rested largely on issues related to the retailer’s supply chain. Perdue’s history reveals his bias. Among his previous jobs was senior vice president of global supply chain with Reebok International Ltd. But, as the first non-family member to serve as chief executive, he has clearly brought a new ethos to Dollar General. Named CEO in April 2003 and chairman of the board two months later, he couldn’t have arrived at a more propitious time. In recent years, the company has grappled with accounting irregularities, as well as the everyday challenge of surviving the cutthroat world of retailing. As a major industry player, Dollar General is more fortunate than many. At the recent Senior Executive Retreat of the Supply-Chain Council in Phoenix, Ariz., Perdue spoke of the hollowing out of the retail space. Over the past decade, high-priced merchandisers such as Saks Fifth Avenue have fared relatively well. So have deep discounters such as Wal- Mart Stores and, on a smaller scale, Dollar General. It’s the big chains in the middle — Federated Department Stores, J.C. Penney Co., Sears, Roebuck and Co. and the like — that have struggled the most. Based in Goodlettsville, Tenn., just outside Nashville, Dollar General benefits from occupying a well-defined niche. It offers basic household goods to low- and fixed-income shoppers, with no item priced above $50. Stores are mostly in the U.S. Midwest and Southeast. Nearly two-thirds can be found in small towns, and the city stores are in lower-income neighborhoods. The strategy has allowed Dollar General to fly under the radar of industry behemoth Wal-Mart. In fact, says Perdue, Dollar General has done what few can manage: undercut Wal-Mart on price. Its stores, averaging 6,700 square feet, stock only around 20,000 SKUs, including 4,500 core items. A small company by today’s big-box retailing standards, Dollar General nevertheless buys more SKUs from Procter & Gamble than anyone else, including Wal-Mart, Perdue points out. “It’s like a Wal-Mart and 7-Eleven put together,” he says. Dollar General’s roots in the “dollar store” business — where, once upon a time, nothing in the store cost more than $1.00 — date back to 1955. In the beginning, the company sold marked-down apparel. Over the last decade or so, it has expanded into a much broader range of household items, including cleaning supplies and health and beauty products. And, in what Perdue calls “a gutsy move,” it has embraced branded merchandise, which today accounts for 80 percent of each store’s product mix. It remains a thriving business, albeit a competitive one. According to Perdue, two of the top three U.S. retailers are dollar stores. Last year, nearly a third of U.S. households shopped at one. Companies vying for a piece of that business include Family Dollar Stores Inc. and Fred’s Inc., both of which chalked up big gains in net income and same-store sales over the past year. Dollar General itself has seen sales increase from $130m in 1977 to $6.87bn in fiscal 2003 (ending Jan. 31, 2004); during that period the number of stores ballooned from 671 to 6,800 and counting. Net income of $301m in 2003 was up 13.6 percent, while same-store sales climbed 4 percent. Still, Dollar General faces some significant challenges, many of them built into the nature of its business. At the store level, it lacks the kind of sales volume that makes for an efficient supply chain. Warehouses ship mostly individual picks, not pallets. Each of its seven distribution centers, with more than a million square feet apiece, supports nearly 1,000 stores, shipping at least one weekly delivery per store. That makes for some complex route-stop sequencing of trucks. Manual to Automated Back in 1993, when Dollar General hit $1bn in revenue, its shipping system was largely manual, says Perdue. As it shifted from apparel to highly consumable products, it saw the need for a more efficient operation. The number of SKUs was skyrocketing, and the distribution arm — over which the company continues to wield direct control — was suddenly a lot more complicated. Dollar General has built its current supply-chain strategy — or corporate strategy, as Perdue insists on calling it — around seven key “sustainable capabilities”: higher in-stocks, accountable vendor partners, increased inventory velocity, flexible capacity to manage the growing variety of SKUs, lower overall cost of getting product to the shelf, increased sourcing through imports, and the flexibility to accommodate constant changes in the supply chain. On each point, Perdue wields strict criteria. In the case of in-stocks, having a handful of a particular SKU on the shelf is equivalent to being out. “It’s the Holy Grail of American retailing,” he says, “yet nobody measures it right.” His ultimate goal is to create a “glass pipeline” through which Dollar General has total visibility of product all the way to the customer’s pantry. Efforts toward that end in 2003, Perdue’s first year with the company, included doubling to nearly 5,000 the number of stores with an automatic replenishment system for core merchandise. (All will be converted by the end of this spring.) Store managers still have a role to play in keeping shelves stocked. They maintain a daily, perpetual inventory for nearly 5,000 core items, ensuring correct stock counts and scanning of merchandise at the register. Bonuses are awarded for accuracy and the availability of product. The system reduces both stockouts at the store and buffer inventory throughout the supply chain. The company is also investing in new cash registers and scanners in the stores. At day’s end, each store manager is expected to ensure that 99 percent of all items sold were scanned to their correct SKU numbers, says Bruce Ash, vice president of information services. The technology will help to rectify what Perdue calls a yawning gap between the sophistication of systems at Dollar General’s distribution centers and those at point of purchase. “We’ve got Buck Rogers technology in the DCs,” he says, “and Roy Rogers technology in the stores.” The company is investing in dual-sortation systems at its DCs in Ardmore, Okla. and South Boston, Va. The technology allows for conveyors running down both sides of the shipping dock, greatly increasing the amount of product that can be funneled through a facility. Transportation Planning Last year, Dollar General invested in an upgrade of the Catalyst WMS for its DCs, which handle around 250,000 cartons per day, according to Stowers. In a characteristic move, it leaned on the vendor for help in the first dozen or so implementations, then took over the job for its remaining facilities. A hallmark of Dollar General’s technology strategy has been its insistence on developing in-house expertise and control, over both software and physical assets. Rather than rely on the services of a third-party warehouser or logistics provider, the company owns three DCs outright, in Kentucky, Florida and Ohio, and leases the others. Receiving an optimized distribution plan from the Manugistics system, the Catalyst WMS runs all loads through a wave- planning routine, figuring in staffing levels and facility workload. Shipments are batched by store, then dropped to the dock in reverse-stop sequence, so that the first to be loaded is the last unloaded. The newest version of the software allows the user to manage multiple case pack configurations. Dollar General continues to roll out the upgraded WMS to its entire network of DCs, Stowers says. Dollar General credits the new logistics systems with lowering overhead. In a statement accompanying the fiscal 2003 earnings report, the company said its increase in gross profit as a percent of net sales, from 28.3 percent to 29.4 percent, was due partly to “a reduction in transportation expenses as a percentage of sales.” (Other factors included higher initial merchandise markups and a reduction in the provision for inventory loss and theft, known as shrink.) Supplier Enablement Dollar General at a Glance Dollar General’s efforts extend even further up the supply The company: A discount retailer of general merchandise, chain. One project involves the elimination of paper-based particularly branded household goods, aimed at low- and fixed- communication with suppliers, through electronic data income consumers. interchange and the internet. Ash says the company now Headquarters: Goodlettsville, Tenn. electronically exchanges key documents, including purchase orders and invoices, with approximately 80 percent of all Top executive: David Perdue, chairman and chief executive officer. suppliers. Joined company in April 2003. Number of stores: More than 6,800 in 29 states, with plans to open The bulk of the supplier base was already using EDI for that another 675 stores this year. purpose. But the older technology, requiring the services of a value-added network (VAN) as intermediary, was costly and Financial results: For fiscal year 2003 (ending Jan. 31, 2004), net slow. To cut down on expense and boost efficiency, the sales of $6.87bn, up 12.6 percent over the previous year, and net income of $301m, up 13.6 percent. company purchased business-to-business software that allows suppliers to communicate via any standard browser or Employees: 55,000 protocol. The vendor was IPNet Solutions Inc., now known as Inovis. Supply chain: Seven U.S. distribution centers, each with around 1 million square feet and serving about 1,000 stores. Together they handle 250,000 cartons per day. An eighth DC will open in 2005. Inovis’s BizLink software links Dollar General to thousands of suppliers, most of whom now rely on the internet instead Supply-chain vendor partners: Manugistics, transportation planning of a traditional VAN to convey EDI-based documents. system; Catalyst International, warehouse management system; Transmissions can be in real time or batch mode, depending Inovis, B2B communications platform for suppliers. on the trading partners’ needs, says Jim Haggard, manager of product marketing with Atlanta-based Inovis. The tool allows information to be transferred much faster than before — within 20 minutes to half an hour, versus six to eight hours through a VAN, he claims. As a result, Dollar General knows what merchandise is on its way to the DC well before the truck arrives, and can plan staffing levels accordingly. The company stays closely involved with Inovis, serving on the vendor’s customer advisory board and offering feedback that can be incorporated into future enhancements to the B2B software. Ultimately, Ash expects 100 percent of suppliers to swap information electronically. “We deal primarily with vendors that are large enough to do this,” he says. Dollar General has received high marks from investors for its supply-chain innovations. Analyst Mark Mandel of Blalock & Partners praises the company for its recent DC upgrades, as well as the geographical spread of its facilities. But it lags rival Family Dollar Stores in terms of technology investment and operating margin, he says. Grocery Business Most ambitious of all, from a long-term perspective, are plans to expand the company’s presence in grocery and perishables. Two stores have already been opened under the brand name of Dollar General Market; each covers some 16,000 square feet and features 40 to 50 cooler doors. (Coolers will also be installed in 80 percent of the retailer’s traditional stores by year’s end.) Plans call for another 20 Dollar General Market stores to open in 2004, further increasing SKUs, pricing pressures and overall supply-chain complexity. Perdue says the retailer must do a better job of planning, which he calls “the weakest link” in the chain. The accurate forecasting of consumer demand is still among the toughest tasks in retailing. Ash says the company is moving from high- level planning by department down to approximately 800 clusters of stores with similar characteristics. The shift allows for the creation of daily plans that can be conveyed to the DCs. Plans can then be recast according to changes in demand, Ash says, “although it’s not always so easy to recast the execution.” Dollar General’s success, of course, depends on whether customers continue to spend money on more than basic consumables. According to Perdue, people with income of $50,000 are the retailer’s fastest-growing customer group. But Mandel says Dollar General must continue to rely on the lower-income demographic for the bulk of its sales. “It’s how the existing ones are positioned,” he says.