Restaurant Chain Meets The Inventory Management Challenge

When Carl Karcher and his wife, Margaret, bought a hot dog cart for $326 in 1941, they had no idea it would become the nucleus for a business of more than 600 full-service restaurants.

Karcher's hot dog-only menu quickly expanded to include charbroiled hamburgers, chicken sandwiches, prepared salads and a salad bar, stuffed baked potatoes, breakfast items, side orders and "all you want" beverages. In 1977 Carl's Jr. became the first fast food chain to introduce salad bars at every location. Today, Carl's Jr. is recognized by its star logo and is famous for its hamburgers, including its signature Famous Star and Super Star.

Carl Karcher Enterprises Inc. (CKE), founded in 1945 and based in Anaheim, Calif., supplies 677 Carl's Jr. restaurants in the western U.S. and Mexico with more than 1,500 items of inventory.

While hard work and determination have contributed to CKE's continued business success, even more vital to the company's prosperity is its ability to create and effectively manage inventory. Logistics manager Hamlet Manouchehri plays a leadership role in helping each restaurant fulfill its mission of high levels of customer service.

"Managing inventory accurately is crucial when you are dealing with food items with a limited shelf life. Inventory velocity is so high that you must be very accurate to manage it effectively," says Manouchehri.

CKE works to maintain a balance between inventory investment and customer service, dealing with the continuing challenge of establishing accurate inventory targets for frozen, fresh and dry food items as well as dry goods and packaged items, while maintaining the high level of customer service for which the company is known.

CKE distribution centers ship approximately one million cases of hamburger patties, 940,000 cases of french fries and 310,000 cases of chicken breasts a year.

As the company continued to grow, CKE realized it was facing new inventory management challenges. If the company had too much inventory, it became too big an investment, tying up assets and creating space constraints in distribution centers. Inventory carrying costs, taxes and insurance soared. If the company pared inventory to more manageable levels, restaurants sometimes experienced a shortage of some items, disappointing customers. In both cases, the system cost too much money and consumed too much time.

"In the retail industry there are no second chances. When a customer wants a Super Star burger and can't get one because the store is out of stock, you've lost that piece of business," says Manouchehri.

Prior to 1993, the company's antiquated inventory planning and management system was not able to respond adequately to marketing changes and it did not have accurate forecasting capabilities. To alleviate this problem, CKE installed the Finished Goods Series (FGS) system from E/Step Software in Tieton, Wash. The PC and Windows-based FGS system incorporates statistical process control techniques to help users manage their inventory and forecast product demand. The system uses existing demand history for thousands of stockkeeping units (SKUs) to generate forecasts and identify appropriate inventory levels, and employs exception reporting to allow management to focus on items which require human intervention.

But CKE's transition to a new system wasn't easy. The company had no previous forecasting experience. Modifications in the program were needed to accommodate CKE's unique requirements. The resulting learning curve was approximately one year.

A company has to accept changes to continue on a road to success. In fact, E/Step Software engineers encouraged CKE to hire someone to take ownership of the forecasting function. Shortly thereafter, CKE created a position responsible for forecasting.

Most companies forecast their products monthly, often because that's all their software will allow. This one-size-fits-all approach doesn't work any better for forecasting than it does for clothes.

For Carl's Jr., the best forecasting frequency is weekly, not monthly. But for other companies, the opposite often is true.

In the five years CKE has been using the FGS software, inventory in the company's distribution centers has dropped from $4.7 million to $3.2 million, a 29 percent reduction. The average retail food chain distribution turns 25-40 times a year; before implementing FGS, Carl's Jr. managed 40 turns a year. Today, the company turns inventory 64 times on average.

According to Manouchehri, customer service levels have also improved dramatically. In 1993, the average systemwide stockout per month was 265 SKUs. Today, the average is 176 SKUs — a 34 percent improvement. The volume of distribution center space needed for finished goods inventory has also dropped dramatically, along with costs.

CKE's inventory planner also works with marketing personnel to manage the extra inventory needed for special product promotions. Using FGS, planners can measure the results of promotions and respond dynamically, adding supplies only where necessary and avoiding the build-up of unnecessary inventory. n

Mercedes-Benz Explores Kaizen In Brazil

In 1991, the challenge for most Brazil-based manufacturing companies was simply survival. The national rate of inflation had long been near 40 percent per month. Plant managers and corporate executives were unable to make adequate long-term growth plans, invest in resources, count on strategic alliances or plan for their companies' futures.

More than 50 percent of their time was devoted to renegotiating wages and benefits with unions, jawboning down costs with vendors and suppliers, and revising upwards sales prices with wholesalers and retailers. The stress of managing a company in a hyper-inflationary environment eliminated most controls and incentives for planning for the future and rendered virtually all projections meaningless.

The standard rules for profitability did not hold true in Brazil. Companies manufacturing large ticket items benefited from larger inventories, as they could sell products produced earlier at two or three times their originally envisioned sales prices.

Suddenly, the federal government decided in 1991 to switch its economic trading plan from that of a closed economy to one of an open economy. And this was to be achieved in conjunction with a strategic "war" on inflation.

The rapidly falling rates of inflation, combined with the threatened, imminent competition from lower-priced merchandise to be marketed by foreign competitors, placed Brazil-based manufacturers in a perilous position. Suddenly, large inventories were deleterious to the balance sheet, long inventory turn-around numbers were virulent, waste as a cost of production was a cancer, and a fixed, closed marketplace was about to be flooded with lower priced, competitive products.

The scenario gets worse. Somewhat unique to foreign-owned auto plants based in Brazil was a history, since 1978, of frequent work stoppages and strikes. The stop and start convulsive nature of this environment wreaked havoc with production schedules, parts deliveries, inventory control and shipping deadlines. And during the 1990s, the overall Brazilian market for new truck sales declined from 65,000 to just 40,000.

In the midst of this managerial nightmare, Mercedes-Benz of Brazil decided to make life even more interesting for its management staff: Mercedes was to produce a comprehensive written plan for a successful march into the millennium ... with increased profits.

Karsten Weingarten, a member of the board and technical director for the Mercedes-Benz truck and bus factory in Sao Bernado, Brazil, took on the responsibility to produce the plan — Factory 2000. Selecting three trusted plant executives as fellow members of the planning committee, Weingarten ran a series of weekly creative sessions. Production methodologies, some utilized by Mercedes-Benz, others not, were weighed and judged. Needs, capabilities and resources were evaluated. Corporate objectives and plant goals were redefined.

Out of this process came three defining objectives:

• Agility — The ability to respond rapidly to changing customer requirements, consumer demands, fiscal realities and supplier relationships.
• Quality — If Mercedes-Benz was to maintain its reputation for quality, and maintain a competitive edge on that issue, the level of product quality had to be increased still further. Furthermore, quality was to be achieved in the production process itself, and not by subsequent inspection.
• Profitability — Increase it.

Weingarten is a student of management theory, and he was familiar with the success of the Toyota Production System and the concepts of the kaizen breakthrough process and continuous improvement. He and his Factory 2000 team decided this was the direction in which to take their division.

Weingarten decided the key was to involve floor workers directly. The plan was to divide the company into five separate divisions or manufacturing centers. The organizational structure of the company would be realigned to bring decision-making near to the shop floor level. Empowerment, involvement, self-motivation and recognition were to be the tools.

TBM Consulting Group, along with its Japan-based partner Shingijutsu, conducted the first kaizen for Mercedes-Benz in Sao Paulo. "The first event was conducted with senior management participation on the teams," explains Mark Okeson, project leader for TBM's Brazil-based activities. "The results were dramatic and accomplished in only one week."

TBM then oversaw two major approaches to achieving Mercedes' goals: factory rationalization and production preparation. Factory rationalization addressed improving the current manufacturing processes for commercially available products. Production preparation encompassed the procedures for development of new processes for new products, from concept to finished production system.

The overriding message of TBM was to convert the manufacturing process from batch flow to one-piece flow. This would improve productivity and quality, as well as reduce inventory, enhance flexibility and eliminate waste.

By December 1996, Mercedes-Benz had conducted 850 kaizens and started work on an additional 400 kaizens to be completed in 1997. Over the first 500 kaizens performed, productivity averaged an increase of 12 percent per kaizen. In addition, manufacturing space over the past three years decreased by 30 percent, inventory decreased by 45 percent, and lead time and setup time were both reduced by 70 percent.

As a direct result of these successes, Mercedes-Benz will use the kaizen method to help in the design of a new Mercedes to be built this year at another one of the company's factories in Brazil. The plant will produce a brand new model of Mercedes. The new auto design will be the first modern compact car ever produced by Mercedes, and is targeted as an economy car for the Latin America market.

"We are quite pleased with the kaizen experience," says Weingarten. "It achieved everything we had hoped and more. We expect to continue the kaizen method for many years to come."

Canadian Manufacturer Benefits From IT Investments

Six years ago, surging production demands were beginning to cause problems for Propak Systems Ltd., a Canadian manufacturer of natural gas and oil processing equipment. At that time, Propak was realizing annual sales of $30 million, but was beginning to experience sharp growing pains as more and more customers were seeking manufactured-to-order processing plants across the globe. Propak's IS manager, Henry Denoudsten, had to make sure the company's information systems could handle this rise in demand. But the technology just wasn't there.

"Our system at that time consisted of fragmented, unintegrated mini computers running COBOL financials and small, homegrown database applications that were becoming a liability," said Denoudsten. "Back then, every division involved in our manufacturing process was having to re-key old information so that it would work with their specific computers and needs. Engineering sent its specs to purchasing, which then had to re-input those specs in a language that worked, then move it to the next step, and so on."


Exhaustive search
Denoudsten's first step to finding a solution was to identify an ERP system that would meet his immediate needs while remaining sufficiently scalable to address future requirements. Specifically, Propak's new system needed to integrate the company's various departments; decrease the engineering, purchasing and manufacturing throughput times; reduce operating costs; and increase responsiveness to customers.

After an exhaustive search that included attending many training courses himself, Denoudsten chose a Baan IV system in June 1996 because of its flexibility in an engineer-to-order environment such as Propak's. "The Item Master portion of the application can accommodate thousands of customized items that we often create only once for a specific project. It can also store information on standard items. In other words, Baan can classify and differentiate all our component pieces — customized or otherwise," Denoudsten says.

Deciding on an implementation process was a less simple proposition. Propak's IS staff was not prepared to install Baan themselves, so Denoudsten sought help from an outside consulting firm. By inviting several firms to visit the company's headquarters to propose an approach, Denoudsten soon found that all IT consultants are not alike.

"We had some folks coming in and telling us how it was going to be, without even trying to listen to our specific needs and concerns. They wanted to roll right over us, and frankly, we were a bit intimidated by the whole process and needed a partner that was not only experienced but that could empathize with our situation," says Denoudsten.

Propak chose Mastech as its partner for the Baan IV implementation.


An implementation solution
"I was thinking of the implementation as a building block process," says Denoudsten. "Because we were growing so quickly, we had so much data being manipulated and moved and developed that we were worried a massive, one-time implementation would cause information to fall through the cracks. This was a volatile time, and we didn't want the wheels to fall off."

Mastech sent four consultants to join Denoudsten on-site to introduce Baan first to the company's purchasing, engineering and inventory functions. This Phase I work included developing process models, conducting gap analysis, integrating project requirement planning into Propak's environment, and making sure Baan's technical requirements were integrated in both the system set-up and stabilization processes.

"Of course, all these steps eventually were fed into financials, including pricing and labor rates," says Lisa Kustra, vice president of the Enterprise Package Solution Division for Mastech. "The entire time we were at Propak's headquarters conducting the implementation, we were also aware that Propak's people required 'change management' and personalized training as well."


The pay-off
Mastech began working with Propak in October 1996 and completed Phase I in April 1997 by providing comprehensive training to 16 key end-users.

Propak is already reaping the benefits of both the Baan system and Mastech's counsel.

"We've eliminated five or six manual steps thanks to Baan. For example, now when we cut a purchase order, we have only one source of data look-up. Before, a secretary would have to process numerous forms in order to start the purchasing process," Denoudsten says.

In addition, Baan has allowed for a standardization of Item Master, and of the company's item coding schemes. Baan also gives Propak the ability to cut and paste project parameters so that common elements of one customer project can be applied to another.


Next steps
Phase II, which will bring the Propak Baan user total to 120, began this month. Throughout the process, Mastech will be responsible for the complete implementation, including project management, change management, technical consulting, strategic planning, enterprise modeling, data conversions and testing utilizing the SIM process.

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