Taking Stock

Americans are keeping and driving their cars longer than they ever have, with the median age of vehicles on the road reaching nearly 10 years. That trend may benefit budget-conscious consumers, but it presents a challenge for auto parts retailers that deal with an average of several thousand new SKUs each year, both for new vehicles and older models.

O’Reilly Automotive juggles 25,000 SKUs in smaller stores and as many as 65,000 in larger locations, says vice president of purchasing Gregory Beck. To reduce inventory and streamline the flow of goods, O’Reilly draws on its 14-year relationship with Manhattan Associates. Based in Atlanta, Manhattan Associates continually refines the underlying science of inventory control, staying in touch with customers’ changing needs.

In O’Reilly’s case, those changing needs include the acquisition of Phoenix-based CSK Auto two years ago. In a single transaction, O’Reilly nearly doubled in size: it now employs 45,000 workers in 38 states, operating 3,469 stores and 22 distribution centers.

O’Reilly doesn’t want to disappoint potential customers by failing to have requested items in stock, says Rod Daugherty, Manhattan Associates’ senior director of product strategy for inventory optimization and demand forecasting. At the same time, though, they want to hold down inventory costs.

Because its distribution network includes a slow-mover DC, O’Reilly uses multi-echelon replenishment at the DC level.

“The trick is to do your demand forecast for the replenishment plan at the point of sale,” Daugherty says. “You’re calculating in all of the components that affect a suggested order quantity.”

That requires allowance for dynamic safety stock to back up the merchandise on the sales floor and lead-time from order to delivery. “You have to always be looking out past the next order and projecting your inventory position,” he says.

Manhattan Associates’ software determines optimum inventory counts, but retailers create business rules and planograms that add more stock — extras for display purposes, for example. O’Reilly can change such rules “virtually automatically,” says Daugherty. “They’re a very big user of that feature, and it’s something we’ve repeatedly enhanced.”

Manhattan Associates recently began aggregating sales of items at regional stores to interpret seasonal trends. For instance, O’Reilly had always assumed headlights were not seasonal. The software indicated otherwise, however, demonstrating that sales increased when daylight-savings time ended and customers drove more after dark. Having that knowledge gives rise to better forecasts, enabling O’Reilly to carry less safety stock and cut inventory costs.

Beginning-to-end communication
Manhattan Associates releases a new iteration of the software once or twice each year. “Every time, we’ve added significant features and functionality to help them squeeze more blood out of the rock,” Daugherty says. “We’re trying to make that optimization engine better.”

These enhancements are covered by retailers’ annual client support maintenance fees, and O’Reilly performs the upgrades in-house. The retailer tests the new software for three or four months and then installs it in a single weekend, Beck says.

In generating the updates, Manhattan Associates relies on “wish lists” from a product council made up of end users. The best user ideas go directly into the software, and others with merit come up for a vote in an annual poll of customers.

O’Reilly shares its wealth of inventory information with suppliers in regularly scheduled meetings and through a vendor portal. Discussion with suppliers often centers on upcoming promotions, Beck says, which keeps the players from operating in “reaction mode.”

Before signing on with Manhattan Associates, O’Reilly relied on a paper-based system of purchase orders with eight buyers and four DCs. Now, 19 “replenishment analysts” handle the 22 DCs. Each analyst tracks from 90,000 to 120,000 SKUs, depending upon volatility and seasonality, Beck says.

The CSK acquisition provides an anecdotal example of the savings possible in the early days of using the software, he says. When O’Reilly took over the 1,300 CSK stores, it established a new DC and converted the stores from weekly or biweekly replenishment to daily replenishment. “We reduced inventory 6-7 percent per store in the new stores,” Beck says.

That, in a nutshell, “is my life,” Daugherty says. “Figuring out that minutiae that might seem like a small thing. But when you apply big numbers to it … it might mean millions of dollars in savings.”