Enterprise-Wide Optimization of Total Landed Cost at a Grocery Retailer

Abstract

We describe an enterprise-wide tool for tactical planning at a grocery retailer. The tool enables a “total landed cost” perspective by coordinating decisions across functions of the supply chain. It dynamically optimizes across logistics, purchasing, and warehouse management, while considering the necessary joint replenishment economies and accounting for a wide variety of complexities, such as discounts on total order quantity, intermittent demand, multiple distribution centers, vendor deals and forward buys, and promotions. The application combines appropriate operations research techniques to solve the problem; furthermore, it is created in the newly available information technology infrastructure. The entire application “sits above” and coordinates existing execution tools from commercial vendors by setting key operating targets and providing operational guidance. Within weeks of a pilot, we observed a reduction in on-hand inventories, an increase in service levels, and substantial improvements in logistics decisions. The total landed cost is substantially lower—with an improvement of 20.8% of operating costs, or 11.6% of net profits—while providing superior fulfillment to the stores.