99 Cents Only Stores: IT Infrastructure
on a Budget
99 Cents Only Stores is one of the leading retailers in the deep-discount
sales industry. The first 99 Cents Only Store opened in 1982, and the
company now operates 194 retail locations, including 150 in California,
19 in Texas, 15 in Arizona, and 10 in Nevada. The stores carry mostly
name-brand general merchandise, including food and beverages, health and
beauty aids, cleaning supplies, house wares, hardware, stationery, toys,
gifts, pet products, and clothing.
The chain
makes purchases from over a thousand suppliers, including such notables
as General Electric, Colgate-Palmolive, General Mills, Johnson & Johnson,
Procter & Gamble, Kraft, Nabisco, and Unilever. Stores cover an average
of 21,500 square feet, and those stores that were open for the entire
year in 2003 averaged $4.9 million in net sales per store. Overall, 99
Cents Only Stores experienced a 21 percent company-wide increase in sales
in 2003, totaling $863 million.
The majority
of products can be restocked regularly. 99 Cents Only Stores also feature
close-out merchandise, which is not available for reorder. The deep-discount
industry is characterized by the purchase of close-out and special opportunity
merchandise at costs below wholesale. Deep-discount retailers pass the
savings on wholesale from these purchases to customers, who are able to
buy products at prices that are well below retail. There is increasing
competition with other deep-discount retailers for this special-situation
merchandise, and some competitors have more financial resources and buying
power than 99 Cents Only.
99 Cents
Only Stores’ recipe for continued growth is to open more stores while
expanding same-store sales and trying to wring more out of each dollar
to keep profit margins higher than competitors. The company has set a
target of expanding its store square footage by 25 percent every year
and believes that the states in which it already operates have the potential
to support over 400 stores. Approximately half of the new stores launched
in 2004 are in Texas. These stores will be serviced by a 741,000-square-foot
distribution center near Houston that the company purchased for $23 million
in 2003.
How does
99 Cents Only Stores manage its widespread chain of stores while keeping
down costs? The answer is, with information technology, but on a budget.
In 2003, despite opening 38 new stores and beginning operations in the
new distribution center in Texas, the company’s IT budget did not surpass
$5 million. Although David Gold, 99 Cents Only’s founder, chairman, and
CEO, resists computer technology in his own office, he knows that computers
have played a large role in enabling his company to grow. Gold introduced
Radio Shack TRS-80 personal computers to the business in the 1980s. Gold’s
son, Jeff, now a senior vice president, programmed the company’s first
order-entry and warehouse inventory systems on those computers.
Today the
company obviously requires far more computing power. The task of choosing
and implementing that power without breaking the bank falls to Robert
Adams, vice president of information services for 99 Cents Only Stores.
99 Cents Only Stores is not a typical single price point business. The
average 99 Cents Only Store is about five times larger than the industry
standard and generates approximately five times more in sales than its
competitors ($4.8 million to $1 million). 99 Cents Only Stores also differs
from its competitors in its target customer demographic, even pursuing
locations in high-income areas. David Gold says, "Rich people like
to save money too, and they do it in higher volumes.”
With these
factors in mind, Robert Adams continues to improve and expand the company
while keeping the clientele satisfied and not spending too much money.
For example, he saved the company tens of thousands of dollars on database
management software licenses by searching the Web for the best price available
rather than simply defaulting to the usual vendor. Adams acknowledges
that he is able to make such decisions because the company is family-owned
and-run, which concentrates the power among only a few people. In fact,
most projects that the company takes on are implemented rapidly because
there are fewer people involved in the decision-making process.
At every
step of the way, Adams evaluates actual cost versus business value to
the company of every initiative, whether it involves technology, real
estate, or the melding of the two. Because Adams has a programming background,
when it comes time for the company to deploy a new system, he can effectively
weigh the cost of purchasing software off the shelf against the cost of
writing the software code himself or with his IT team. Since 40 percent
of 99 Cents Only Stores’ products flow through the inventory only once
because they are close-out items, the company’s systems need to be very
flexible to deal with unique nonrepeating items in inventory. Given these
parameters, Adams often finds that the cost of buying prepackaged software
combined with the time and cost required to customize such software for
the deep-discount business makes programming the company’s systems in-house
the better option.
One of Adams’s
greatest challenges was launching the company’s new distribution center
in Texas. The sale of the facility, which David Gold purchased for $23
million from Albertsons, included over 200,000 square feet of refrigerated
storage, approximately 500,000 square feet of dry storage, forklifts,
cabling, and furniture. Working with a tight time constraint, Adams had
to decide between revising the warehouse management system he had designed
for the company’s distribution center in City of Commerce, California,
so that it could be used in Texas and purchasing a system from a developer
or vendor. Adams already knew that his own system would have to be replaced
in California to keep up with the company’s aggressive growth plans, so
he set about finding a warehouse management system that allowed for the
degree and ease of customization that his company would require.
In addition
to carrying close-out merchandise that only goes through inventory once,
99 Cents Only Stores sometimes receives shipments of products that aren’t
exactly what the company ordered. However, as Adams says, “We have to
accept it, get it to our stores, and turn it fast.” A system that would
lock out such shipments because of inflexible rules would be a hindrance
to the business.
Adams found
the flexibility he needed in HighJump Software’s Supply Chain Advantage
software. The HighJump package addressed all of the major concerns related
to the operation of the new distribution center: quick implementation,
high functionality (particularly in regard to receiving), adaptability,
and interoperability with the advanced automation technology of the new
distribution center. One of the most attractive aspects of the package
was that it didn’t force 99 Cents Only Stores to change its business processes
to conform to the structure of the system.
Christopher
Heim, president and CEO of HighJump, explains that his company has basically
developed a set of tools that enables users to build their own sets of
functions according to the needs of their particular businesses, “almost
akin to an Excel spreadsheet.” The Supply Chain Advantage system is designed
in such a way that users can make changes themselves instead of relying
on IT specialists, the vendor, or outside sources to upgrade and manage
the system. This is especially important to Adams, who likes to avoid
recurring costs that can drain a company’s budget.
HighJump
developers worked with Adams and his staff to integrate the system with
the specific needs of 99 Cents Only Stores, including a radio frequency
identification (RFID) system and a voice-based inventory picking system.
The Supply Chain Advantage package includes a warehouse management system,
Warehouse Advantage, that tracks the status of every product during its
time in the warehouse. Warehouse Advantage works closely with a Voxware
voice-based picking system, which instructs warehouse employees known
as “pickers” to retrieve products that need to be released from the warehouse
for shipment to stores. The Voxware system also informs pickers when storage
bins need to be refilled and where to find replenishments.
The Supply Chain Advantage software module called Yard Advantage
manages the company’s delivery trucks, directing them to the proper locations
for loading or unloading and monitoring the inventory that each truck
is carrying. Customer Service Advantage creates a portal that employees
at 99 Cents Only Stores retail locations can use to check on scheduled
shipments. Managers use Advantage Dashboard to monitor the performance
of both facilities and workers using charts and graphs that update in
real time. Event Advantage alerts warehouse managers to unforeseen problems
in the supply chain before they can have a negative effect on profit margin.
Adams has
been sufficiently satisfied with HighJump’s solutions to plan for implementation
of the Supply Chain Advantage systems at his company’s City of Commerce
distribution center. The process of installing the systems in this California
center could be more complex because the center operates three shifts
and employees need retraining. Furthermore, the City of Commerce center
already serves 150 of 99 Cents Only Stores’ retail locations. When the
Texas center went online, it was responsible for far fewer stores. Adams
has also decided that the receiving process in City of Commerce should
undergo the conversion to the HighJump system first. Once that process
functions smooth, other functions will be added.
99 Cents
Only Stores planned to have the City of Commerce distribution center running
on HighJump technology beginning in the fall of 2004. In the meantime,
the need for improved systems has become very apparent. In mid-2004, the
company’s stock price had fallen around 50 percent. One factor contributing
to the falloff was that the California distribution center was working
beyond its means, which decreased productivity, affected delivery schedules,
and left stores unable to replenish their shelves. Overall the chain experienced
lower same-store sales and increased sales of products with lower profit
margins.
99 Cents
Only Stores has to reevaluate its inventory control procedures and to
expand its warehouse capacity. Robert Adams will continue to explore advanced
information technology using what he calls the “low-hanging fruit” method.
He gives the highest priority to technology initiatives that promise the
best return on investment (ROI). If a new project comes along that offers
a better opportunity to improve the business, Adams will shift gears even
if the previous project has not been deployed fully. The company still
receives most of the benefit of the first project, and doesn’t miss out
on a new opportunity. Can 99 Cents Only Stores continue to rely on the
uneasy relationship between leading-edge technology and a bottom-line-oriented
business to rebound from its recent struggles?
Sources:
“Case Study: 99 Cents Only Stores’ Efficient IT Infrastructure,” CIO Insight,
January 1, 2004 (www.cioinsight.com); Janet Rae-Dupree, “Thinking Out
Loud: Robert Adams,” CIO Insight, January 1, 2004 (www.cioinsight.com);
“Big Problems at 99 Cents Only,” TheStreet.com, June 14, 2004; “Supply
Chain Advantage: 99 Cents Only Stores Drives Expansion with Solutions
from HighJump Software, a 3M Company,” HighJump Software, www.highjumpsoftware.com,
accessed September 15, 2004; Merrill Douglas, “Flex Time: Finding Adaptable
Software,” InboundLogistics.com, July 2003; Mike Cianciolo, “99 Cents?
That May Be Too Much,” Motley Fool via Yahoo! Finance, biz.yahoo.com,
accessed June 15, 2004; and 99 Cents Only 10-K Report.
CASE STUDY QUESTIONS
Analyze 99 Cents Only Stores using
the value chain and competitive
forces models.
Evaluate the current business strategy
of 99 Cents Only Stores in
response to its competitive environment.
What is the role of information
technology infrastructure in
that strategy? How does it provide
value for 99 Cents Only Stores?
How effective is 99 Cents Only
Stores’ strategy for IT infrastructure
investments? Explain your answer.
How successful have 99 Cents Only
Stores’ strategy and use of information
systems been in addressing
the company’s problems? What
kind of problems can they solve?
What are some of the problems
that they cannot address?