Midrange Stuff, OS/400 Edition

The forecasting and replenishment planning system jointly developed by O'Reilly Auto Parts and supply chain software vendor Evant nearly took home the gold at Retail Systems 2003 Achievement Awards in Chicago last month. O'Reilly, which was one of the first companies to implement Evant's software on AS/400s, and worked closely with the vendor to improve the package, lost out to industry juggernaut Wal-Mart in the end, but that does little to sour the retailer's tremendous ROI.

With more than 1,000 stores throughout the South, Southwest, and Southeast, O'Reilly Auto Parts is one of America's largest providers of specialty auto parts. The Springfield, Missouri, company is also one of the country's largest OS/400 shops, and certainly one of its most progressive. Ever since it implemented a "dual market strategy," to serve professional mechanics as well as do-it-yourself types, O'Reilly has relied on computer technology to give it a strategic edge over its competitors, and to fuel its growth.

That reliance and trust in technology comes down from the top. "David O'Reilly (the company's chairman and CEO) was the company's first RPG programmer. I was the second," says Mike Williams, the company's vice president of information systems, and an O'Reilly employee since 1975. "People used to laugh at us for running baby [AS/400 Model] 150s in the stores. But I don't think they're laughing anymore. The stability of that machine is incredible."

During a period of expansion in the late 1990s, O'Reilly began the search for a new system to forecast demand, rate suppliers, handle replenishment, and generally manage its inventory levels. The company was set to increase the number of stores, as well as the number of products it carried, but its aging legacy system was unable to keep up with the new demands. O'Reilly considered software from a number of vendors, including E3 (since acquired by JDA Software Group), American Software, and IBM, but the company finally settled on the Score application from a young San Francisco company called Supply Chain Solutions. Supply Chain Solutions was later bought by NONSTOP Solutions and eventually became Evant.

It was not an ordinary implementation. As part of the deal, the two sides agreed to work together very closely. What O'Reilly got was a highly customized version of the software, tailored just for its needs. Evant walked away with one of its first implementations on the OS/400 platform, and a better product. "We understood inventory management pretty well. But there were lots of things we learned, and they learned to make the product better," Williams says. "They were willing to roll up their sleeves and work with us, for their own good."

The rollout commenced over the next several years. The Evant software was eventually installed on all of the AS/400 Model 150s running in each of O'Reilly's stores, on the larger OS/400 servers located at the regional distribution centers, as well as the largest OS/400 server located at headquarters. As the company opened new locations or acquired other chains, the stores would receive a new AS/400, connected to the Evant system.

Here's how O'Reilly's set up works today: Every 30 minutes, each store's OS/400-based point-of-sale system sends sales data to the central iSeries Model 830 eight-way server, located in Springfield. Similar data is sent on a nightly basis from the AS/400 Model 720 and iSeries Model 820 servers located at the distribution centers. By constantly updating the central Evant database on product sales, the software is able to continually adjust O'Reilly's sales forecasts to reflect actual changes occurring at the store level. This system also gives O'Reilly extremely accurate insight into product availability and the location of inventory at any given time.

The effect that the Evant software had on O'Reilly's business has been well-documented in numerous articles. As you would expect, the capability to more accurately forecast the demand of 100,000 products on a store-to-store basis had a ripple effect on O'Reilly's business. First, it allowed the company to reduce inventory in its distribution centers from a three-month supply to a two-month supply. This saved the company $66 million right off the bat, according to a report by AMR Research, and the company realized an additional $20 million in savings by reducing inventory at the store level. AMR also reported that O'Reilly managed to maintain a 95 to 97 percent service level, while it increased inventory turns by 44 percent.

O'Reilly reduced operating costs overall by $60 million as a result of the Evant implementation, money that the company used in order to expand, acquire, and become stronger. Following the Evant implementation, O'Reilly basically doubled in size, adding 474 new stores and five new distribution centers. During this time, however, the company only hired three additional buyers. This is another benefit stemming from the Evant software: exception-based inventory management. That is, O'Reilly's buyers intervene only when something unexpected pops up. This efficiency is further reflected in the fact that each buyer is now able to manage 90,000 SKUs, up from 45,000 before Evant was installed.

"We're trying to let the system manage the inventory, instead of doing that manually," Williams says. "However, some demand can't be determined mathematically. It takes a human to do that." As an example of exception management, an experienced buyer may be able to forecast when certain parts will begin to fail at a higher rate and therefore make inventory adjustments that the computer would not predict, he says.

Williams says understanding the basics behind inventory management was the key to successfully using technology to make O'Reilly's inventory management process more efficient. "You need to understand why there is safety stock, lead-time variations. You need to understand the mathematics behind it, and the business processes, absolutely . . . But at same time, some companies don't understand the benefits that this technology can deliver to them, in terms of letting the computer do the work for them," Williams says. "Inventory is our number-one asset, and the management of that inventory is the key to being competitive."

O'Reilly Auto Parts has been so successful in managing its inventory that it is offering its expertise to others. In collaboration with CCI-Triad and several other competing auto parts chains, O'Reilly has created a B2B site called Internet Auto Parts, which allows professional mechanics and dealers to order parts over the Web. The site, launched in March, includes two components, both of which are based on WebSphere Application Server. The application's user interface is served from a Windows 2000 server, while O'Reilly's gateway runs on an iSeries. O'Reilly has developed a second B2B application, called the Partnership Network, which allows EDI documents to be sent over the Internet, thereby avoiding steep value-added network (VAN) charges, for itself and for its suppliers. The Partnership Network, which O'Reilly also runs on WebSphere on iSeries, has been so successful that the Automotive Aftermarket Industry Association is now promoting it as a standard for electronic orders for aftermarket parts.

The Evant implantation earned O'Reilly a chance to compete against 50 other companies for top honors in Retail Systems' 2003 Best in Corporate Systems category--the most prestigious category. It's not easy going up against the world's biggest company, which employs the world's biggest IT department, and Wal-Mart Stores walked away with top honors for the efficiencies it created with its recent implementation of the EDIINT AS2 standard to collaborate electronically with its suppliers. But O'Reilly held its own and was named a finalist. And, of course, the company is still reaping the rewards of $60 million in savings, and it continues to grow.

This article has been edited since it was first published to correct several errors. Internet Auto Parts was incorrectly identified as "Intranet Auto Parts," and the Web address given for the company was incorrect. The article also gave the wrong impression that the application ran entirely on Windows, when in fact the application also runs on the iSeries. The article incorrectly stated that Internet Auto Parts accepts EDI orders, when in fact Internet Auto Parts doesn't handle EDI orders; that service is provided by Partnership Network. The article also incorrectly stated that Intranet Auto Parts is working with the Automotive Aftermarket Industry Association to promote a common standard for electronic orders for aftermarket parts; the Automotive Aftermarket Industry Association is in fact promoting the Partnership Network as a standard for electronic orders for aftermarket parts. Guild Companies regrets the errors. [Corrections made 7/9/03]