Flexing Supply Chain Muscle

Unique stories sometimes have universal appeal. That was certainly the case when Tractor Supply Co.’s VP of logistics, Mike Graham, discussed his company’s flexible supply chain and the strategies it employs for managing volatility and risks. One might expect that the supply chain challenges of a niche retailer providing agricultural and equine products to farm and ranch hobbyists would be so far removed from typical mainstream retailing that the story would hold little interest for other retailers. Not so—Supply Chain Summit attendees consistently ranked Graham’s presentation as one of the most enlightening and interesting on the agenda.

Characteristics of Tractor Supply that distinguish it from most national retail chains include its rural locations and volatile product mix. Tractor Supply’s 700th store opened in July and for the most part stores, like the consumers they serve, are located “out there” in small-town America. In addition to the transportation challenges of serving stores off the beaten path, inventory management is subject to huge fluctuations in demand, weather and seasonal impacts, and SKUs that run the gamut from high-volume nuts and bolts to huge cattle chutes that a typical store might sell in quantities of one or two per year.

On the positive side, inventory forecasting is not complicated by quirky trends, as Graham noted, “There is very little, or no, fashion influence on our products.” This lack of fashion-fluctuation is another difference from the majority of retailers that are catering to fickle consumers who live to buy only the freshest, latest and greatest products.

Although they might not demand high fashion, Tractor Supply customers expect to find the breadth and depth of products needed to run a farm. Only 8% of Tractor Supply customers make a living off their land, but the hobbyists are no less dedicated to their operations and, with average household incomes 25% above the median United States income average, they have the resources to support their hobby.

“We are committed to be the most dependable supplier of basic maintenance products to farm, ranch and rural customers,” declared Graham. If that means stocking a large piece of farm equipment that might sell only once every 12 to 18 months, the stores carry it. As Graham explained, these are “category validation” products that cement Tractor Supply’s dominance in the farm and ranch business.

Additionally, Tractor Supply is the only publicly traded company in its niche, so return on invested capital is closely scrutinized.

The bottom line: Tractor Supply requires a flexible supply chain that can efficiently and economically manage its volatile inventory.

The majority of its inventory is processed through one of five company DCs. Products are segmented into distribution channels based on their physical size and velocity. For instance, small products with lower velocity are stored in one of two centralized DCs, and small products with higher velocity are kept in all five DCs for more frequent replenishment. Low-volume, large items are also inventoried at the DCs, but high-volume, large products typically ship direct to stores from the suppliers.

“When deciding which distribution channel is best, we also look at the value of the product and we consider if the product is perishable, such as horse feed that has a limited shelf life,” continued Graham. “Feed is a low-value commodity product that moves in bulk. Some stores receive a full truckload of feed daily, so we utilize 12 cross-docks to flow this through our transportation network.”

Fuel pellets are another extremely volatile commodity product that are used for supplemental heating. Because fuel pellets are sawdust-based, they are a by-product of the construction industry and their availability fluctuates with the housing industry. To preserve margins and keep costs as low as possible, Tractor Supply works to ship commodity products as few miles as possible. Flexibility within its supply chain allows the retailer to replenish from different locations as needed.

Technology provides the infrastructure to support flexible decision-making and agile adjustments. Among the solutions Tractor Supply has deployed are an on-demand transportation management system (TMS) from Nistevo (now owned by Dublin, Ohio-based Sterling Commerce); an ERP system from SAP that supports its corporate as well as DC functions; and a voice-picking solution for the DCs from Pittsburgh-based Vocollect.

“In 2005, transportation capacity was really tight after Hurricane Katrina hit, but the way our TMS is configured we have the ability to escalate carrier service from low-cost to high-cost providers and sometimes when all the carriers in a market were taken, we had to take carriers in from another market,” said Graham. “We also have the flexibility within our DC network to react quickly if there is an event and move stores from one DC to another.”

In May 2006, Tractor Supply’s DC in Waco, Texas, was struck by a tornado, leaving huge holes in the roof, two to three inches of water standing on the floor and product scattered for miles. Fortunately, the storm happened on a Friday night when no one was in the DC. Graham, who was on a family vacation at the time, received the news at two in the morning. When he arrived at his office on Saturday morning, plans were already in place to repair the damage and within a couple of hours all of the stores served by the Waco DC had been linked to one of the other Tractor Supply DCs. “We did not miss a delivery the following week and May is actually a peak season for us,” he reported. “We reconstructed the DC and put all the systems back in place within a week—the experience was a testament to the flexibility of our supply chain network.”

It also helped that about one year prior to the event Tractor Supply had established a disaster-recovery plan. Based on that plan, Graham had anticipated that the DC would be down for three to four weeks. The one-week recovery was a pleasant surprise and a huge accomplishment.