M E M O R A N D U M

Date: November 30, 2007

Subject: Supply Chain Management Concepts

To: Matt Ford From: Amber Mason, Jennifer Moore

Organizational Background

The organization we have chosen is The Kroger Company (KR), based in

Cincinnati, OH. KR is a grocery retail industry that was founded in 1883 and
incorporated in 1902. It was founded by Barney Kroger, who invested his life
savings of $372 to open a grocery store at 66 Pearl Street, in downtown
Cincinnati.1 Figure 1 displays a brief timeline that highlights some of the major
accomplishments of KR.

Figure 1: Timeline of KR2

1972: Tested
1901: First co. to 1981: KR introduces
experimental scanner
operate own cost cutter brands
checkout system
bakery

1883: First store 1901: Meat & 1972: Nutritional labels 1999: KR merges w/Fred Meyer, Inc.
opens groceries sold under put on KR private brand in a 13 billion dollar deal, creates
one roof for 1st time products nation’s largest retail grocery company

KR is a mature industry and operates under several store formats including

Supermarkets, Hyper-Markets, Department Stores, Convenience Stores, Mall
Jewelry Stores, and Fuel Centers. This analysis, however, focuses on the
Supermarket store format.

The key competitors of KR are Safeway (SWY), Super Value (SVU), and Wal-
mart (WMT).3 The annual revenues for 2006 were 60.5 million and the gross
profit was 14.9 million.4 Table 1 displays information taken from the balance
sheet as of February 3, 2007.

1
http://thekrogerco.com/corpnews/corpnewsinfo_history.htm
2
http://thekrogerco.com/corpnews/corpnewsinfo_timeline.htm
3
www.hoovers.com
4
http://finance.google.com/finance?q=%22KR%22&hl=en
Supply Chain Management Concepts 1 of 10
 Table 1: KR Balance Sheet Information*
Current Assets 6755
Assets 21215
Current Liabilities 7581
Long Term Debit 6154
Debit 7060
Liabilities 16292
Equity 4923
Liabilities & Shareholders’ Equity 21215
Common Shares Outstanding 705
*All numbers are in millions except for per share items5

Supply Chain Configuration

A Supply Chain is a network of companies, people, activities, information and

resources that are involved in moving a product or service from a supplier to the
customer. Supply Chain Configurations are very helpful to managers. They give
managers a big picture perspective and help them to see what to manage.
Figure 2 is a configuration of KR’s supply chain, with a focus on two products
manufactured by KR and a non-KR product. The configuration only offers a
glimpse of the many products made and bought by KR.

Figure 2: Supply Chain Configuration

Dairy*
- Fluid Milk Manufacturing
- Orange Juice - Inter-American Products*
- Fruit Drinks o Centennial Farms Dairy
- Bottled Water o Southern
Ice Cream Specialties
- Ice Cream Distribution Center Retail
- Ice Cream Cakes - Kroger DC - Kroger
o Ship by Trucks Supermarket
Meat Products Manufacturing**
- Variety of - Total of 3 meat plants
Packaged Meats o Sunland Meat
- Retail Meals o Vernon
Meat

Campbell’s Soup***
- Metal
Fabrication
- Paper Manufacturing
products - Campbell’s Plant
- Packaging o Can of
- Printing Chicken Noodle Soup
- Food
Ingredients
o C

*http://www.interamericanproducts.com/plants/dairy.htm
**http://thekrogerco.com/operations/operations_manufacturing_list.htm
***https://smtapp.suppliergateway.com/campbellsoup/Login.aspx
5
http://finance.google.com/finance?fstype=bi&q=NYSE:KR
Supply Chain Management Concepts 2 of 10
Logistics

The five modes of transportation are: truck, train, plane, boat, and pipeline. Out
of these five modes KR only uses trucks to move its inputs and outputs. KR has
one of the largest privately owned truck fleets in the country. These trucks move
merchandise and supplies among their stores, warehouses, and manufacturing
plants and they log more than 100 million miles annually. 6

In 1998, KR hired Carl R. Swartz as Transportation Analyst to provide support for

a large group of semi-autonomous field transportation and maintenance
operations, balancing their specific needs and operating conditions with overall
corporate strategies.7 The KR, which has 1300 power units and 1600 trailers
serving stores in 33 states, decentralized its transportation functions a few years
ago, giving managers at its 19 regional distribution centers control over their own
equipment.8 The particulars for Swartz’s job description include: coordinate fleet
equipment specs, support equipment purchases for the distribution centers, and
provide new product evaluation for the decentralized fleets. 9

Purchasing

KR makes and buys their products. KR’s Manufacturing Division is one of the
largest manufacturers of exclusive brand products in the United States. They
manufacture more than half of their 10,000 private label items in their 42
manufacturing plants (either directly or through operating agreements) making
thousands of products ranging from bread, cookies and milk to soda pop, ice
cream and peanut butter.10

Michael Heschel, Executive Vice President of information systems and services

of KR described Kroger’s three-tiered distribution system: “One of the tiers is
direct store delivery of certain items. We also have the classical distribution
center tier, where items come in from the manufacturer to a distribution center
relatively local to a region that has 100 to 200+ stores. That distribution center is
responsible for replenishing those stores, and it tends to be higher volume, faster
moving stuff, some of which is cross docked. Then you have another tier which
is the slower moving products as well as our self-manufactured products.” 11

Kroger brand products are produced and sold in three quality tiers, Private
Selection®, Banner Brands and Value™. This is a strategy that KR uses to fill
6
www.logisticstoday.com/displayStory.asp?sNO=5555
7
http://driversmag.com/ar/fleet_top_class/
8
http://driversmag.com/ar/fleet_top_class/
9
http://driversmag.com/ar/fleet_top_class/
10
http://www.thekrogerco.com/operations/operations_manufacturing.htm
11
http://www.logisticstoday.com/showStoryBody.asp?sNO=5555
Supply Chain Management Concepts 3 of 10
the needs of all their customers in various markets where they operate. All of
Kroger’s tiers are priced to offer customers a large amount of savings over
competitor brand items. The Private Selection® is Kroger’s premium quality
brand which is designed to meet or beat “gourmet” or “upscale” national or
regional brands.12 Their Banner Brands, such as Kroger®, Ralphs®, and King
Soopers®, represent the majority of the 10,000 items stocked in their stores,
which are designed to be equal to or better than the national brand. 13 KR’s
Value™ brand is designed to deliver good quality at a very affordable price.
These “corporate brands” today account for 24% of the grocery dollar sales at
Kroger, providing the company with a huge strategic advantage.

There are several advantages and disadvantages that KR has looked into in
regards to insourcing and outsourcing. Table 2 displays advantages and
disadvantages of insourcing.
Table 2: Advantages/Disadvantages of Insourcing14
Advantages Disadvantages
Degree of Control High level of investment
-Cost, Quality, Access required
Increase of Visibility Difficult to change product to
meet market demand
Spread it’s fixed costs

Table 3 displays advantages and disadvantages for outsourcing.

Table 3: Advantages/Disadvantages of Outsourcing15

Advantages Disadvantages
Great degree of flexibility Great risk if wrong supplier is
chosen
Allows company to focus on its’ core Loss of Control
competencies

Another issue that KR has looked at is the advantages and disadvantages of one
supplier to many. Table 4 displays the advantages and disadvantages of one
supplier.

Table 4: Advantages/Disadvantages of One Supplier

Advantages Disadvantages
Volume Discounts Risk if supplier has problems
Less variable and outcome product Higher prices, Innovation Decreases

During the recent pet food recall that occurred this year, KR would have been in
trouble had they chosen to only buy products from one pet food supplier. The

12
http://www.thekrogerco.com/operations/operations_manufacturing.htm
13
http://www.thekrogerco.com/operations/operations_manufacturing.htm
14
R. Monczka, R. Trent, R. Handfield. Purchasing & Supply Chain Management. 2nd ed. 2002. 212.
15
R. Monczka, R. Trent, R. Handfield. Purchasing & Supply Chain Management. 2nd ed. 2002. 212 - 214.

Supply Chain Management Concepts 4 of 10

pet food, made by Ontario based Menu Foods, Inc., were sold to several pet food
suppliers and then onto KR.16

Table 5 displays advantages and disadvantages of having many suppliers.

Table 5: Advantages/Disadvantages of Many Suppliers

Advantages Disadvantages
Competition: Lower prices, Innovation Increases Administrative complexity increases
Spreads risk over suppliers Supplier Loyalty Decreases

After looking at all of these, KR has seen the major advantages to having many
suppliers, as well as, manufacturing their own products. This creates somewhat
of a balance in regards to how many suppliers KR gets their products from and
how many products they make.

Suppliers wanting to do business with KR must go through an extensive supplier

qualification program. The program is known as the Supplier Diversity Program
(SDP). All vendors are required to go through the program, which helps each
prospective vendor learn about KR. The program does take a focus on Minority
Owned Businesses (MBE) and Women Owned Businesses (WBE). KR
recognizes the added value of supplier diversity and has had a minority vendors
program in place for more than 25 years.17 KR’s SDP helps MBE’s and WBE’s
analyze their business capabilities to determine whether their products or
services fit within KR’s corporate strategies and the market as a whole. 18 The
following flow chart contains the procedures a prospective vendor would follow.

Figure 3: Procedure for Prospective Vendor19

Step 1: Complete the Step 2: Review the supplier
SDP registration form. questionnaire and be prepared to answer
these questions.

Step 3: Contact KR’s Director of Step 4: Follow up with key contacts

Corporate Supplier Diversity, who can
answer initial questions and refer provided. Each buyer is responsible for
prospective suppliers to appropriate the final decision on whether to purchase
buyers within organization. a product.

Included in Step 2 above, prospective vendors must review a supplier

questionnaire prepared for the SDP. The following Table provides a few
example questions vendors will encounter when they are being selected.

Table 6: Supplier Qualification Questions 20

General Questions - How many years has the company been

16
http://www.medicinenet.com/script/main/art.asp?articlekey=79873
17
http://www.thekrogerco.com/supplier/supplierdiversity_aboutkroger.htm
18
http://www.thekrogerco.com/supplier/supplierdiversity.htm
19
http://thekrogerco.com/supplier/supplierdiversity_doingbusiness.htm
20
http://thekrogerco.com/supplier/supplierdiversity_questions.htm
Supply Chain Management Concepts 5 of 10

Retail Sales Vendors
Service Vendors
in business?
- What is the company’s geographic
service area and capability: national,
regional, or local?
- Who is the customer for your product?
- Do you have UPC codes and a code dating
system?
- What type of delivery system is used?
- How will your service add speed, accuracy,
and/or quality to KR’s operations?
- How will your service allow KR to reduce its
costs?

Information Systems

Currently, KR is using bar codes for product tracking. The Bar Code System was
developed as a response to the many problems that the “old” Manual Numbering
System had. For example, it created a paperwork nightmare and it was very
easy for errors to be made. The Bar Code System began to dominate in the
early 1990’s and is computer generated. This allows less room for errors to
occur or be made. The only issues that may arise from using a Bar Code
System are the costs a company can incur. These costs include scanning bar
codes and damaged bar code stickers.

Supply Chain Measurement

To correctly evaluate management effectiveness in supply chains, operations

managers must look at measures relating to the use of the company’s assets.
Inventory Turnover (IT) is one calculation that shows how many times a
company’s inventory is sold and replaced over a period of time. 21 IT is calculated
by taking the dollar amount in revenues and dividing by the dollar amount in
inventory. Revenues are taken from the Income Statement and Inventory is
taken from the Balance Sheet. Sometimes, companies will use the COGS rather
than the amount of revenues.

Once turns for a company are calculated, a manager still needs to look further
into that number, because the number does not tell you that much. Managers
must compare the number to the previous quarter of the company or to a
different industry. This will show where the company stands. Higher is usually
better.

DSI is another metric managers must use. DSI is a “ratio that indicates the
possible number of days of sales with the inventory on hand. It is used to
determine whether there is too great an investment in inventory.” 22 DSI is
calculated by taking the dollar amount of inventory divided by the dollar amount
21
http://www.investopedia.com/terms/i/inventoryturnover.asp
22
http://www.bdc.ca/en/business_tools/calculators/dayssalesinventory.htm?cookie%5Ftest=1
Supply Chain Management Concepts 6 of 10
of revenue, multiplied by 365. This calculation is the inverse/reciprocal of IT.
Some managers identify with this concept more over the IT concept. A lower
number is considered better and the industry average is 45 to 60 days.

This data can be used in several ways. First of all, the company can look at how
they are doing over a period of time and clearly see if there are changes that
need to be made. Second, the company can see how they are doing compared
to their competitors. With the laws regarding SEC filings and financial
statements being made public, the task of comparing to your competitors has
become increasingly easier. Third, a company can accurately set goals for
themselves. For example, a company has 7 turns currently and in 2010 they
want to increase their turns to 12.

One last measure managers need to use is the CCC. CCC helps provide a tool
for assessing how well a company is managing their working capital. This is the
essence of SCM, the effectiveness of converting products into cash in order for
your SCM practices to work (if you’re moving products, how well are you getting
cash back). “This cycle is extremely important for retailers and similar
businesses. This measure illustrates how quickly a company can convert its
products into cash through sales. The shorter the cycle, the less time capital is
tied up in the business process, and thus the better for the company’s bottom
line.”23

CCC is made up of 3 components: Days of Sales Outstanding (DSO), Days of

Inventory Outstanding (DIO), and Days Payables Outstanding (DPO).

DSO is the number of days between the sale of a product and a receipt of a cash
payment for that product. Basically, how much time it takes a customer to pay
the company. DSO is calculated by taking Accounts Receivable divided by
Annual Revenues, multiplied by 365.

DIO is the number of days with which materials are converted into finished
goods. DIO is calculated by taking Inventory divided by COGS, multiplied by
365.

DPO is the number of days between the purchase of inputs/materials and

payment to the vendor. Basically, how much time it takes us to pay our liabilities.
DPO is calculated by taking Accounts Payable divided by Annual Revenues,
multiplied by 365.

CCC is then calculated by taking DSO plus DIO and subtracting DPO. The lower
the number, the better. If a company’s CCC is negative, this means that the
company is getting paid by their customers fast, but milking their liabilities to the
very last day to pay.

23
http://www.investopedia.com/terms/c/cashconversioncycle.asp
Supply Chain Management Concepts 7 of 10
Table 7 is a display of KR’s key financial information, for 2006 & 2007 fiscal year,
to calculate the topics mentioned above.

Table 7: Key Financial Data KR*24

2006 2007
Revenues 60553.0 66111.0
COGS 45565.0 50115.0
Inventory 4486.0 4609.0
Acct Rec 686.0 778.0
Acct Pay 3550.0 3804.0
*Numbers in millions of USD

Table 8 is a display of KR’s competitor’s key financial information, for 2006, to

use for calculations.

Table 8: Competitor Key Financial Data*

SWY25 SVU26 WMT27
Revenues 40185.0 19863.6 348650.0
COGS 28604.0 16977.35 264152.0
Inventory 2642.5 954.0 33685.0
Acct Rec 461.2 439.0 2840.0
Acct Pay 2464.4 1147.0 28090.0
*All data taken for the 2006 Fiscal Year End and are in millions of USD.

Calculations for IT, DSO, DIO, DPO, and CCC were performed for all companies.
All data can be found in the following tables. Each company’s data for the 2006
year was used for comparison to see where KR stood. The 2006 and 2007 data
for KR was used to compare IT from year to year.

Table 9 displays the calculations for IT & DSI for KR.

Table 9: IT & DSI for KR*

2006 2007
IT 13.5 per year 14.3 per year
DSI 27.0 days 25.4 days
*All numbers rounded to the nearest tenth

When comparing these IT, managers for KR can see that the percent change
from 2006 to 2007 is 5.93%. This tells us that turns have increased 5.93% from
2006 to 2007, which is a good thing. Improvements over the years are due to
SCM practices being more prevalent within the company.

When comparing DSI, managers want to see a decrease from year to year.

24
http://finance.google.com/finance?q=KR&hl=en
25
http://finance.google.com/finance?q=NYSE%3ASWY
26
http://finance.google.com/finance?q=SVU&hl=en
27
http://finance.google.com/finance?q=NYSE%3AWMT
Supply Chain Management Concepts 8 of 10
Table 10 displays several calculations. IT, DSI, and CCC is calculated for KR’s
three competitors. Also included in the table is the calculation of the CCC for KR.

Table 10: Key Asset Management Metrics*

KR SWY SVU WMT
IT - 15.2 20.8 10.4
DSI - 24.0 17.5 35.3
DSO 4.1 4.2 8.1 3.0
DIO 35.9 33.7 20.5 46.5
DPO 21.4 22.4 21.1 29.4
CCC 18.6 15.5 7.5 20.1
*All numbers rounded to the nearest tenth

In comparing the four companies, SVU has the highest IT and the lowest DSI.
This is mostly due to SVU’s SCM practices. SVU’s roots in distribution date back
to the 1870's when they first began servicing their grocers' needs. 28 Due to the
company practicing and improving their techniques through so many years, they
are able to maintain good stats. SVU demonstrates their achievements with their
successful merchandising programs, logistics team experts, and advanced
distribution center technologies.29

Strategic Assessment

Information Systems

We do not believe that KR is still in the dark ages in regards to their product
tracking methods. Most companies are still using this type of system.

However, there is an alternative that is available to KR to improve their supply

chain management practices. This improvement is known as the Radio
Frequency Identification (RFID). RFID are tags or transponders (computer chips)
that are attached to a product. These tags/transponders have antennas that can
read up to 300 feet. Heschel’s current observation on RFID is that it is not a
mature capability because it is somewhat costly and the technology is not what it
should be.30 The cost can range anywhere from 40 – 70 cents per tag, whereas
bar codes cost less than 1 cent per tag. Heschel has visited a number of
suppliers and has found that none of them have been able to cost justify RFID
yet in their manufacturing and distribution operations. He feels it will come as
costs come down.31 When asked if KR is really looking into switching to an RFID
system, Heschel responded: “We’re trying to see where we would get the biggest
bangs for the buck and how we should start it, and then of course we’re watching
Wal-Mart very carefully because I really do believe RFID will revolutionize the
whole logistics process. Think about it – a product now has a small brain. It’s
not a very smart brain, but that’s okay. We’ve talked to Procter & Gamble and
28
http://www.supervalu.com/sv-webapp/supply/capabilities.jsp
29
http://www.supervalu.com/sv-webapp/supply/capabilities.jsp
30
http://www.logisticstoday.com/displayStory.asp?sNO=5555
31
http://www.logisticstoday.com/displayStory.asp?sNO=5555
Supply Chain Management Concepts 9 of 10
Gillette and different companies to see how we can move forward with this. So
we’re in the evaluation phase of it, but I think it’s got a lot of promise.” 32

Supply Chain Measurement

When comparing KR to its competitor SVU, there are some noticeable

differences. If KR is looking to improve IT and DSI, they should take some notes
from SVU. SVU may have an alternative plan that management is doing to keep
their numbers at a steady increase.

This project is well laid out. Excellent research and corresponding use of
footnotes. You’ve demonstrated connection to class concepts through your
examples, tables, and graphs. Areas that could improve: logistics/transport
(ESQ example?), inventory (EOQ, newsboy applicability?), info systems (ERP,
bullwhip discussion?), e-commerce (good idea for KR?), power issues (how
applied). Overall, though, very nice. If you follow-up on a couple of the above,
coupled with what you already have, I’d forecast a grade of at least 95 here.
MWF 12/1/07

32
http://www.logisticstoday.com/displayStory.asp?sNO=5555
Supply Chain Management Concepts 10 of 10