Operations and Management: Sophisticated Self-Service

If you’ve ever subscribed to the Book of the Month Club, you’re familiar with auto-replenishment: The customer places one order and then takes delivery of the product at prearranged intervals.

For customers, the major benefit is efficiency. No longer do they have to continually check inventory levels, fill out forms, and remember to reorder. But thanks in part to technological advances, catalogers also benefit greatly from offering auto-replenishment.

Why bother?

On the front end, “it’s nice to have that repeat business,” says Joe Voellinger, spokesperson for pet products cataloger Doctors Foster & Smith. The Rhinelander, WI-based mailer began offering automatic reshipping in January; in less than a month, more than 1,000 customers had signed up. Doctors Foster & Smith also uses the program to upsell. A few days before the automatic shipment is to arrive, the company sends an e-mail to customers asking if they would like to add items to their order.

ATS Industrial Supply, a Salt Lake City-based provider of cutting tools and abrasives, has been offering its customers an auto-replenishment program for about five years, says CEO David Helberg. About 10 of the company’s clients participate.

The users of ATS’s auto-replenishment solution are contractually obligated to buy all their “perishable tooling” from the cataloger, so long as the company is competitive in terms of price and delivery. But apparently the convenience makes up for that restriction: Helberg estimates that the program is responsible for about one-fourth of the 50% growth that his $17 million company has experienced during the past five years.

Another business-to-business marketer, Moorestown, NJ-based Marlac Electronics, works with about a dozen customers on an auto-replenishment basis. “Typically these types of contracts are multiyear and block your competitor from this business for at least the term of the contract,” says sales and marketing manager Jack McCann.

As for the back end, a key benefit of providing auto-replenishment is the ability to deliver products without having to hold excess inventory. By knowing how quickly customers are depleting inventory, you can predict when you will need to reorder from your suppliers.

Making all systems go

To offer a basic auto-replenishment program, like that of Doctors Foster & Smith, minimal operational investment is needed. Customers fill out an online form indicating the products they want to receive and the frequency. The data enter the catalog’s enterprise system and warehouse management system (WMS) like any other order.

With the more sophisticated demand-driven system, also known as a vendor-managed inventory system, the cataloger can be electronically linked with customers’ inventory systems. As inventory levels are depleted, the systems generate the replacement orders. For this to work, your auto-replenishment software has to be connected to your enterprise system and your WMS.

Linking systems isn’t enough to make auto-replenishment work, however. You also must figure out optimal reorder points at which the systems will submit replacement orders. “They’re determined by variables such as safety stock, lead time, and demand forecasting,” says Mark Morgan, director of business development with Greenville, SC-based Mainline Marketing Communications.

For optimal inventory efficiency, Nu Horizons Electronics Corp., a $400 million distributor of electronic equipment, reviews customers’ usage records as well as keeps tabs on the market overall, says Teresa Shatsoff, vice president of asset management for the Melville, NY-based marketer. If a customer’s use is down and the market doesn’t show signs of changing, Nu Horizons will probably hold less in inventory. It may also ask the customer to take ownership of the inventory if it’s not used within a specified time frame.

When implementing an auto-replenishment system, you can work on an ASP basis, in which you pay a hosting company for use of its auto-replenishment program, or you can buy your own application. Under the ASP model, you may be able to get up and running for an initial cost of $7,500-$15,000, Morgan says. After that, the monthly fee ranges from $50 to $100, based on volume. Buying an auto-replenishment module, on the other hand, runs from $50,000 to several million dollars, depending on your size and the complexity of your existing systems.

As for how intertwined your system should be with those of your clients, you have several options. ATS’s clients use vending machines to distribute supplies to their employees. The machines stock tools, which workers obtain by entering their employee number, department, and job or project number. The system tracks the number of tools left in the machines and automatically reorders when levels drop to predetermined figures. “The entire auto-replenishment process can be accomplished with absolutely no involvement from [the clients’] people,” Helberg says.

For its larger customers, $2.5 billion scientific and industrial supplies distributor VWR International will install at their plants outposts linked to VWR’s auto-replenishment system. A compilation of several applications, the system automates the disbursement of products, monitors inventory levels, and sends the replenishment order back to the distribution center, says Stan Haas, vice president of managed services for the West Chester, PA-based marketer.

Smaller customers, though, receive daily or weekly visits from VWR staff. These employees count the inventory, determine what to reorder, and scan the appropriate bar codes into a Palm Pilot before entering the replenishment quantity. This information is then downloaded to VWR’s order entry system, where it’s reviewed and an order is generated.

A caveat: Not all merchandise is suited for auto-replenishment. “It has to be a predictable-consumption product,” says David Bloodsworth, cofounder of Captive Customer, a Chicago-based marketing and technology consulting firm. Typically, products that turn more than five or six times a year are viable candidates for auto-replenishment programs, says Marlac’s McCann.
Additional reporting by Mark Del Franco

Looking Ahead

The market for inventory management systems — including auto-replenishments — is expected to grow from $564 million in 2001 to $1.9 billion in 2006, according to a report from AMR Research. As auto-replenishment systems become increasingly sophisticated, catalogers probably will share more supply-and-demand information with their suppliers, says John Marrah, president of Delray Beach, FL-based solutions provider Ecometry Corp. Manufacturers will then be able to schedule their work flow to minimize rush orders and delays. They will also be better able to determine in what quantities to produce goods, minimizing excess inventory. The result should be lower costs throughout the supply chain.

While catalogers may hesitate to share information with manufacturers, doing so could help them, says Milwaukee-based consultant Vic Hunter. For instance, a manufacturer would be able to let a distributor know how it’s doing compared with its competitors. But these shifts are at least several years away, says Marrah. First, systems need to advance to make it easier to do joint forecasting. In addition, distributors and manufacturers need to become more comfortable sharing information.