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Discount Retailer Doesn't Skimp On Supply-chain Investments

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.)

"We've got Buck Rogers technology in the DCs and Roy Rogers technology in the stores."
- David Perdue of Dollar General Corp.


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."

In the warehouse, the company has adopted a cross-docking program that cuts down on dwell time. For product that does get stored, faster-moving items are placed where they can be easily accessed by pickers. As a result, merchandise inventories in fiscal 2003 rose just 3 percent, while total retail square footage was up 10.1 percent. Average annual inventory turns increased from 3.8 to 4.

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
Dollar General's fulfillment operation is driven by its transportation planning system, acquired from Rockville, Md.-based Manugistics Group Inc. The vendor first sold software to the retailer in 1997, installing an outbound component the following year, according to Greg Innes, director of consulting services with Manugistics. The application was later expanded to include inbound routing.

In its early years, the project was something less than a complete success. With Dollar General relying on an independent systems integrator, Manugistics had little involvement in implementation. By 2002, when the vendor checked up on Dollar General to see how things were going, it discovered that the company was utilizing only about 10 percent of the planning system without having to tweak the results, versus 50 to 75 percent at the outset. Rapid growth, employee turnover and changing business processes had all combined to limit the software's effectiveness, Innes says.

A sweeping reassessment of Dollar General's TMS led to a system that makes more reasonable judgments. Previously, it might create a routing that would look good on paper, but be impractical for the company to execute. Now, planners are accepting up to 98 percent of the system's output, without the need for alterations. "They are using it exactly as it was designed," says Innes.

Manugistics plots all of Dollar General's inbound and outbound activity, running approximately 700,000 orders through the system each year. Weekly shipment volumes are around 3,000 inbound, and 8,000 outbound. Outbound freight is carried mostly on Dollar General's dedicated truck fleet, hauling 53-foot trailers and tandem units. Inbound travels on a variety of carriers, although the lion's share moves under the recipient's control, on a collect basis.

Benefits from the reassessment, according to Innes, include lower costs per load in both directions, higher miles per trip outbound and greater efficiencies due to more reliable planning.

The Manugistics software has helped Dollar General to automate virtually all of its transactions with carriers, including freight tendering, tracking and follow-up via electronic data interchange, says vice president of transportation Tony Davis. The system allows the company to track merchandise in transit, managing only exceptions to normal procedure.

Through a regimen of strict performance metrics and scorecards, Dollar General keeps close tabs on its vendor base. Carriers and suppliers alike can access a special web site, www.dgpartners.com, which lets them gauge their performance against the competition.

Dollar General's warehouse management system (WMS) comes from Milwaukee, Wis.-based Catalyst International, Inc. Its involvement with Dollar General dates back to 1995, when the company first opened the Ardmore DC and was looking for a WMS to manage it. Andy Stowers, vice president of sales with Catalyst, says Dollar General's operation was heavily automated from the start, employing an extensive network of conveyors and pick-to-light system.

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.

Dollar General's warehousing effort is something of a hybrid operation, utilizing both cross-docking and item storage to service its stores. But the trend, notes Ash, has been toward a greater reliance on cross-docking and productivity enhancements such as the dual-sortation systems at Ardmore and South Boston. The company also plans to widen its use of pick-to-light, says Stowers.

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's efforts extend even further up the supply chain. One project involves the elimination of paper-based communication with suppliers, through electronic data interchange and the internet. Ash says the company now electronically exchanges key documents, including purchase orders and invoices, with approximately 80 percent of all suppliers.

The bulk of the supplier base was already using EDI for that purpose. But the older technology, requiring the services of a value-added network (VAN) as intermediary, was costly and slow. To cut down on expense and boost efficiency, the company purchased business-to-business software that allows suppliers to communicate via any standard browser or protocol. The vendor was IPNet Solutions Inc., now known as Inovis.

Inovis's BizLink software links Dollar General to thousands of suppliers, most of whom now rely on the internet instead of a traditional VAN to convey EDI-based documents. Transmissions can be in real time or batch mode, depending 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.

The revelation of accounting improprieties, dating back to 1998 and 1999, has added cost to the company's balance sheet. An investigation and subsequent litigation by the U.S. Securities and Exchange Commission caused Dollar General to restate earnings for the 1998-2000 period, and accrue a $10m civil penalty in the fourth quarter of fiscal 2003. It has also paid out $162m in class-action legal settlements.

But Perdue has no intention of slowing the company's spending on supply-chain improvements, which account for a large portion of the $300m in capital expenditures he has planned for this year. Projects include wrapping up installation of the dual-sortation systems at Ardmore and South Boston, and the beginning of construction on an eighth DC in Union County, S.C., scheduled to open in 2005. (A ninth DC is on the drawing boards, its location has yet to be determined.) Ash says the company also plans to create a data warehouse through which suppliers can monitor the sale of their individual products. And the push to install automatic replenishment in all stores will continue.

In the meantime, the company will keep on growing at the dizzying pace of recent years. Some 675 new Dollar General stores are slated to open in 2004 (with 60 to 80 existing ones due to close), and net income is expected to grow by 10 to 14 percent.

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.

Dollar General at a Glance

The company: A discount retailer of general merchandise, particularly branded household goods, aimed at low- and fixed-income consumers.

Headquarters: Goodlettsville, Tenn.

Top executive: David Perdue, chairman and chief executive officer. Joined company in April 2003.

Number of stores: More than 6,800 in 29 states, with plans to open another 675 stores this year.

Financial results: For fiscal year 2003 (ending Jan. 31, 2004), net sales of $6.87bn, up 12.6 percent over the previous year, and net income of $301m, up 13.6 percent.

Employees: 55,000

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.

Supply-chain vendor partners: Manugistics, transportation planning system; Catalyst International, warehouse management system; Inovis, B2B communications platform for suppliers.

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