On August 30th, O’Reilly Auto Parts gave a presentation to financial analysts from one of its distribution centers (DCs) in Kansas City, Missouri. This signaled that the company considers distribution excellence to be a core differentiator, a message that comes out loud and clear when you look through the presentation the company gave.
O’Reilly Auto Parts is an auto parts retailer with $5.6 billion in sales over the past 12 months. The company has more than 3,600 stores in 30 states and over 49,000 employees. O’Reilly serves two markets: Do-It-Yourself shoppers, folks who like to fix their own cars; and Do-It-For-Me, auto repair shops and service centers that fix cars for customers.
The Do-It-Yourself market has lower service levels. If it takes several days to get a part in, that is good enough. The Do-It-For-Me segment, however, is less forgiving. Ideally, an auto parts store will have the part right available when a customer comes in for service. But there are so many old cars on the road (new car sales have fallen from 17.5 million cars in 2005 to 11.5 million in 2010) and so many models (imports have increased greatly over the years), that having every stock keeping unit (SKU) in available at the retail outlet level is impossible. So part of O’Reilly’s competitive differentiation is enabling next-day delivery from its DCs to its stores.
To support this distribution model, O’Reilly needs a lot of DCs – the company has twenty three. O’Reilly considers these DCs as “state-of-the-art facilities” with “advanced material handling equipment, progressive slotting and picking technology.” Its current warehouse network is capable of supporting 550 more stores before the company has to invest in new facilities.
To complement the advanced warehousing, O’Reilly has robust delivery capabilities. As of the date of the presentation, the company has a private fleet of 483 tractors and 540 trailers that it uses for five-night-a-week delivery to all stores in the continental US. In addition, O’Reilly’s DCs are located in metro areas. For stores located in a metro area that includes one of its DCs, the company offers multiple deliveries per day.
O’Reilly also competes based on having broad inventory coverage. The company stocks an average of 118,000 SKUs with a total of 156,000 unique SKUs in stock. This is a multi-echelon model; most DCs are linked to multiple master inventory DCs. O’Reilly also has 314 strategically placed master inventory “hub” stores that carry an average of 17,000 additional SKUs. These hub stores can provide surrounding stores with same-day access to expanded inventory.
Ideally, service performance should not come at the expense of bloated inventory levels. O’Reilly has taken steps to make sure that doesn’t happen. The retailer uses Manhattan Associates’ Inventory Optimization solution (Manhattan Associates is an ARC client). In its second quarter financial call, O’Reilly’s CFO said the following:
“Year-to-date, we’ve opened 87 new stores with an increase of inventory of only $12 million. On a per-store basis, inventory at the end of the quarter was $557,000 versus $567,000 per store at the end of 2010. We expect to see continued reduction in our per-store inventory within the next few years. For this year, we continue to believe we can add 170 new stores with only a small increase in gross inventory.”
It is worth mentioning that spare parts inventory creates a particularly difficult inventory optimization problem. It is much easier to forecast an SKU’s demand if it comes in large numbers. Spare parts have what Operations Research folks call “an intermittent demand profile.” Special math is needed to forecast intermittent demand.
In short, distribution excellence is part of O’Reilly’s core differentiation. Because the company services the Do-It-For-Me market, the Do-It-Yourself-ers benefit with higher service levels. Further, O’Reilly’s extensive distribution network provides significant barriers to entry to competitors hoping to compete in the Do-It-For-Me segment. Warehouse automation and inventory optimization helps to ensure that high service levels don’t come at a high cost to the consumer.
It’s very cool that the company chose a distribution center to give its financial presentation. I love visiting DCs; I’m not sure how the financial analysts felt about it.