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— July 26, 2006 |
Retailing Trends--Shopping Anyway and Everywhere
From Technology Evaluation/P.J. Jakovljevic
It is certainly not news that the Internet has been a disruptive technology which has irreversibly changed many of our habits. One change comes from the convenience of leisurely web browsing and online shopping from our cozy places. However, this trend is sometimes unfortunately bundled with the inconvenience of late or incorrect deliveries, and lack of order visibility and status tracking, followed by annoying and costly returns. This is inevitably followed by unnecessary trips to the post office, which negates any of the convenience promised in the first place.
Still, the need for online purchasing, account management, electronic bill payments, and so on, is indeed not only here to stay, but will likely grow in the future: more users will pass the phase of disillusionment (“How do I reverse a wrongly clicked transaction?” or “Where on earth are my goods?”), and come to realize how beneficial, effective, and “cool” the technology can be once it has been put well in place. Many have also turned to the convenience of online holiday shopping in the wake of the horrific events of September 11, 2001 in New York (US) and July 7, 2005 in London (UK), as well as occasional terrorist threats to shopping malls and other places of mass gathering.
Moreover, many savvy retailers and merchants have realized that Internet has certainly not cannibalized “brick and mortar” store operations, but that quite to the contrary, the two can even supplement and complement each other. Consumers today shop almost everywhere--in stores, at home, via mail catalogs, over the phone (soon--if not already--over many mobile and wireless gadgets), via TV infomercials, and over the Internet. Most retailers obviously try to sell through as many of these channels as possible. According to the adage “different strokes for different folks,” some research indicates that TV shopping is mainly attributable to impulse purchases (on the fly--either because of a good deal price, or because of the customer's conviction that the item is absolutely necessary now, on the spur of the moment), whereas Web shopping is usually attributable to considered purchases and preliminary research before the step of going to the store to see the “real life” product (except for when the web site flashes certain promotions, in which case some shoppers might be hooked for an impulse purchase there too).
Some savvy retailers have explored in depth such important aspects as what people like about shopping online (for example, the depth of detail and range of options, the convenience, the ease of comparison shopping, and other related research) and, conversely, what they do not like about shopping online (such as the cost of shipping, delays in shipping, the inability to see and touch the product before a final purchase decision, the consequent likelihood of returns and additional shipping inconvenience, and the inability to talk to or otherwise reach a sentient being). Also, they have researched what customers do like about the in-store shopping experience (such as the ability to touch and feel goods, the atmosphere, the fact of having a person to talk with, and the ability to get the product immediately) and, conversely again, what they do not like about in-store shopping (long lines and crowds, the parking cost and inconvenience, and the possibility of arriving only to discover that the product a clerk on the phone had said was there is no longer available).
Some research and surveys indicate that the online channel is expected to account for 7 percent of all retail sales by 2010, which is a potential increase of nearly $200 billion (USD). Key to this growth has been the realization by many companies that they do not necessarily need to restructure their entire operation to accommodate the electronic commerce (so-called “e-tail”) channel. In fact, “brick and click” commerce modes are becoming more closely intertwined, owing to advances in the technology infrastructure that facilitates information flow between retailers and suppliers, and that overcomes the key shortcoming of early e-commerce systems, such as non-alignment with business demands, unwieldy integration with other retail processes, and customized and inflexible underlying software applications.
Even today, few retailers can effectively and seamlessly interact with customers across these channels. Such interactions might include selling accessories and installation services in-store when customers pick up goods they have bought online or via the phone, or even allowing them to redeem promotions they have come across through any other channel. Today's so-called multichannel retailer is still too often a brick-and-mortar store that also offers some supplemental merchandise on a web site, where the two operations likely function as separate entities--almost as if they came from and were run by two different companies. In any case, whether the merchandise is displayed on store shelves or on the Internet, the retailer usually sells only those goods that it can stock in its own network of warehouses, which limits the potential assortment and choice.
Still, despite differing profiles of customers for different channels, savvy merchants are increasingly trying to offer cross-channel promotions. An example is provided by QVC, a $4 billion (USD) company, and an e-commerce leader marketing a wide variety of brand name products in such categories as home furnishing, licensed products, fashion, beauty, electronics, and fine jewelry. QVC reaches over 80 million homes in the US, and claims that the TV customer who is attracted to the Internet side of the business will spend about 25 percent more than they normally would, while the Internet customer who crosses over to TV might spend up to twice as much. Although multichannel sales might look like cannibalization to some brick-and-mortar store executives, these fickle customers want first-class products configured just for them, backed by higher levels of information and service, and delivered through whatever channel suits their needs at the moment.
In other words, these are the most valuable customers one can attract--they have more to spend, and are willing to spend it. By capturing them, retailers should be able to improve sales transaction values, order-to-cash speed, customer retention, and marketing return on investment (ROI). There are other indications that “multichannel” customers spend up to 50 percent or more during the holiday season than their traditional single-channel counterparts. These multichannel customers are also typically well-informed, and often more profitable buyers for a retailer, since they are driven by deliberate choice, convenience, and selection. Furthermore, more and more former mainstream, single-channel (primarily in-store or mail catalog) shoppers are “going multichannel” on a daily basis.
It is thus no small wonder that many traditional stores offer Internet kiosks to offer customers a wider and broader assortment of items than could possibly be effectively stored at the location. Genuine, integrated multichannel retailing will inevitably become the norm, so that if the customer does not see the desired appliance model (for example) on the shelves, the next step will simply be to use the kiosk to order it from the store's web site. And at the store's customer service desk, it will be possible to return items bought online as easily as if the customer had bought them off the shelves. In an evolution from the early Internet, where online retailer (e-tailer) pioneers were manually processing online orders (with many consequent fulfillment glitches), the fulfillment methods of today are based on a new generation of technology solutions, although these may leverage some of the ideas of traditional mail catalog order fulfillment.
Although better Web design and a wider selection of products offered online are important, the key to multichannel success lies in understanding the factors that drive revenues and the ability to fulfill Web orders. Overall revenues are driven not by simply offering products via online channels, but by creating a hybrid sales model that uses the Web and other (more traditional) channels (such as the phone, TV, and brick-and-mortar store) in a mutually beneficial way in order to maximize profit from these different retailing models. Except for a few groundbreaking companies, this is still uncharted territory, though the retailers who engage customers across many channels are likely earning their trust and more repeat business.
There have been examples of retail companies using a multichannel retailing system to streamline sales of an expensive consumer product, only to discover that Web sales were significantly lower than sales made over the phone. The reason was that sales consultants were able to up-sell consumers to higher-end systems over the phone. This forced these retailers to redesign their Web sites or storefronts to provide places for customers to interact with a sales consultant, in person. It will still take much time and effort for software developers to come up with applications that can completely emulate the human touch, through combining applications for searching and indexing, analytics, content management, and customer management, with a personalized and relevant shopping experience (for example, with easy product navigation, individualized promotion, self-service, and so on).
Retailers must start with an understanding of what generates the most revenue and profit across multiple channels--and e-tailing web sites must not be seen as totally independent of other channels, but quite to the contrary. Web storefront usability should be addressed first, but the focus on product information management (PIM)/global data synchronization (GDS) and cross-channel inventory visibility and fulfillment infrastructure should follow soon afterwards. It is certain that multichannel retailers will attract new business, on the condition that they continue with good delivery service, wide product and service selection, and reasonable price incentives. Unless, of course, rising gasoline prices significantly changes the profit-loss equations of global versus local sourcing and deliveries.
http://www.technologyevaluation.com/
Retail Cycle Time Reduction: Still a Work in Progress
From AMR Research/Mickey North Rizza, Michael Barret, Robert Garf
Demand-driven retailers must use agile supply networks to sense and profitably respond to demand. Having agility throughout a network of suppliers lets retailers slash overall lead time for product and new product introductions in an effort to capitalize on demand.
AMR Research and the National Retail Federation (NRF) recently surveyed retailers and vertically integrated manufacturers to assess their performances, abilities, and initiatives for cycle times within their supply networks. The findings show that although much work has been done, there is still more to do. For example, while increasingly faced with the need to be more responsive to changing consumer demands, half of respondents indicated a total lead time in excess of six months (see Figure 1).
Retailers and branded suppliers must improve supply chain collaboration, visibility, and flexibility to continue to shrink lead times.
One-size-fits-all sourcing doesn't cut it anymore. The top retailers are creating a variety of interchangeable sourcing models aimed at different product types--short lifecycle fashion and seasonal items versus long lifecycle, predictable demand items. Rules in logistics, inventory, and orders are based on the variances between the sourcing models, ensuring the optimization (balancing tradeoffs among cost, quality, and time) of the overall network meets demand. Consider the following:
1. Hedging strategies may be deployed where raw materials are purchased in advance. Greige materials may be purchased on the front end, but the application of colors is postponed until the last possible minute.
2. Vendor capacity may be reserved from a manufacturer before product requirements are finalized to ensure production availability when it's needed at the shelf.
3. Supply visibility functionality that identifies breakdowns and opportunities in supply chain execution is also a component of responsive and nimble sourcing strategies. A view of orders that have been placed, adjustments to orders as conditions change, alerts when activities go beyond defined thresholds, and an overall view of the network itself provide the framework for reliable supply.
4. Segmented sourcing models must be based on joint value creation among trading partners, including raw materials suppliers, finished goods vendors, contract manufacturers, logistics providers, and retailers. All parties involved will inevitably take on short-term incremental risk, but will mutually benefit over the long term by increasing service levels, lowering operational costs, and, most importantly, shaping and fulfilling customer demand (see the AMR Research Alert article “Fast Fashion: Get Ready, Apparel or Not” for more).
Over the past two years, retailers and vertically integrated manufacturers have focused the majority of their efforts on logistics, followed closely by manufacturing cycle time reductions, the survey found.
Companies have created efficiencies through the use of lean techniques over the past decade. The focus has been on execution-type activities, such as inventory visibility, carrier management, and freight optimization, to reduce the logistics cycle time. As retailers have matured, with supply networks and infrastructure to support their sourcing initiatives, a shift has naturally occurred.
Today we find that most retailers target product development with their primary cycle time reduction efforts. In fact, our survey found that 61% of the participating companies will look to reduce the development component of lead times over the next two years.
The development cycle encompasses product design, materials, and finished goods development activities. While sourcing organizations have responsibility for managing finished goods suppliers and order visibility, they do not necessarily own the direct materials during the process. Our survey revealed that 36% of retailers and vertically integrated manufacturers believed that direct materials sourcing was owned by merchandising, 28% by sourcing, and 11% by operations.
Regardless of ultimate ownership, collaboration among these groups is critical to successful and efficient development processes. When asked about how their cross-functional teams collaborate, results showed that 71% of retailers and vertically integrated manufacturers said they don't collaborate effectively in some manner. However, a deeper look into how they collaborate showed some interesting results:
1. 53% collaborate across their functions
2. 36% report into the same organization
3. 7% collaborate on technology
While technology isn't and shouldn't be viewed as a panacea, we were surprised at how low the use of technology rated as the primary form of collaboration--a mere 7%--given the typical silo organization models in place. The technology employed shows a relatively inconsistent view of the important areas for collaboration (see Figure 3). While product lifecycle management (PLM) represents the smallest percentage of the applications used, it is rapidly gaining traction. We'll see this number increase significantly over the next few years.
Once product specifications are handed off to manufacturers, visibility to product status gets more complex, but remains equally as important. On average, retailers and vertically integrated manufacturers rated visibility from their offshore manufacturing facilities to their distribution center (DC) a 5 in maturity on a scale of 1 to 10, with 10 being the best.
Many companies experience a dark period between the time that product leaves the factory to the time that it hits the inbound DC. The complexities of generating product- or carton-level data out of the factory and maintaining virtual oversight through the freight and customs processes have created this gap for many retailers.
As a result, many are exploring technology to increase visibility, but any investment here must be integrated with upstream development processes and downstream warehouse and store activities. Visibility into handoffs throughout the extended supply chain will aid productive collaboration to ensure products hit the shelf in an efficient and timely manner.
Companies continue to build more responsive and agile supply chains to reduce lead times in the product development process. While logistics was the focus for the past few years, the future belongs mainly to the concept-to-specification phase and reducing cycle times there.
Sourcing and product data management (PDM)/PLM software are typically distinct applications employed to support these interrelated processes. However, as users look for more robust and integrated functionality to remove transactions, gain visibility, and further reduce cycle times, the handoffs among the steps are blurring.
The future technology suites will combine the following functions of product development:
Product lifecycle management--Design, line planning, component libraries, workflow, and calendars
Product data management--Product specifications, bills of materials, and components
Sourcing--Supplier management, supplier workflow, e-negotiations, purchase order management, and in-bound logistics
For the complete report and tables, go to:
http://www.amrresearch.com/
Demand-Driven Supply Networks: The Joint Value Creation Meeting
From AMR Research/Lora Cecere, Robert Garf
Success in demand-driven retailing hinges on joint value creation with suppliers. For retailers that have always relied on the stick--compliance fines, penalties, and punitive action--a shift to collaborative practices that focus on the carrot, joint value creation, can be tough to chew. Here we share secrets for success along with the top questions and relevant industry data to begin this journey.
A successful joint value creation meeting has three primary characteristics:
1. A top to top meeting. Top managers from each of the companies explore how the supply chain can be aligned to improve joint value.
2. Open cross-functional team exploration. To gain the most benefit, the meeting should be comprised of cross-functional people from both partners--those chartered to rethink the relationship for greater value. This is much different than the standard meeting of the merchandiser and the consumer product (CP) company account representative aimed at improving the efficiency of the current buy/sell relationship, and requires a structured agenda by the retailer to create the right behaviors.
3. A focus on true collaboration. The meetings are sustainable and have the greatest results if the focus is on joint value creation. This is very different from the win/lose posturing of retail/CP interactions the past decade.
To start the discussion, here are some questions each side should be asking. The top three questions for the retailer to ask the CP supplier are:
1. How can we jointly reduce waste in the supply chain? A joint study published by the Grocery Manufacturing Association and Food Marketing Institute (FMI) found unsaleables from warehouse distribution topped $2.52B in the United States in 2005. While this has fallen as a percent of sales, to 1.06% in 2004 from 1.18% in 2002, it's still a significant opportunity for both parties.
The highest rate of unsaleables is in the drug and supermarket channels. The three major reasons are physical damage, expired product, and discontinued promotions.
Action item: Hold a Kaizen (joint problem solving) event to discuss how you can help your major suppliers reduce waste. Focus on inventory management in the extended supply chain, physical product handling and product design, and the use of demand shaping techniques to push product that is expiring or has limited promotion lifespan through the channel. Offer to split the savings. Warehouse delivered sales represent 44% of customer purchases of $286.5B. This is too important of a nut not to crack.
2. What steps are you taking to better sense demand and improve in-store positions? The majority of CP companies forecast monthly (36%), and when they have vendor-managed inventory (VMI) processes, these systems are largely disconnected from corporate supply chain planning systems, according to a recent AMR Research study. The result: 45% of CP companies with greater than $1B in revenue take more than two weeks to see channel demand.
Action items: Demand sensing is tightly linked to perfect order performance in CP industries, our research shows. CP companies that can better sense demand have a 15% better performance rating in delivering the perfect customer order. And better performance on the perfect order is a big step toward reducing the 8% out-of-stock levels seen (or not seen) on store shelves on average. To improve results, measure your supplier on channel sensing and perfect order performance. Work with your supplier to use point-of-sale (POS) transactional data and customer loyalty data to reduce the latency in demand sensing.
3. What action plans do you have to improve your customer scorecard performance? In the same study, only 26% of CP companies actively use their customer scorecards to measure success. And when they do it is most often used to judge the success of the account team, not the corporation.
Action items: Put a review of the customer scorecard on the agenda for each joint value creation meeting. Measure the performance of the supplier versus other major suppliers in the category and ask for an action plan of how the supplier is going to improve performance. Reward cross-functional, actionable plans and encourage bidirectional feedback on how to improve the value chain.
The top three questions for the CP Company to ask the retailer are:
1. How can I get more insight from you to improve the in-store experience for our customers? Fewer than 3% of CP companies understand how to use downstream data--loyalty card data and POS transactional data--to improve fulfillment, our research shows. This is an area of opportunity: 15% of retailers state that they share loyalty data today, and an additional 15% state that they will share customer loyalty data in the next 12 months.
Action items: Aggressively invest in systems to use downstream data. Use insight from downstream data to craft unique retail programs to improve the customer experience. Tie demand shaping activities--promotions, off-case allowances, trade funds--to actual performance.
2. How can you help me improve my direct store delivery (DSD) fulfillment system? The gap is widening between efficient and inefficient DSD retail practices, the 2005 joint GMA-FMI study found, with the average grocery retailer receiving on average 225 DSD deliveries per week.
The DSD supply chain delivers 10-times to 30-times more frequently than a retail warehouse supply chain. It also represents up to 30% of the store volume for large-format retailers, making up more than 80% of the retail dollar growth for the top 20 large format CP categories.
The power of DSD is in the ability to merchandise and promote products to deliver the customer experience. While progressive retailers have slashed backdoor check-in delays by as much as 10 minutes per delivery and automated check in processes to reduce item-by-item verification by 60%, most retailers have not improved DSD practices.
Action items: Push the retailer for flexible windows for receiving, get them to implement technology for automatic invoicing and streamlining check-in, and have them dedicate backroom space for promoted items and best-selling products. Use pilot data from retail leaders of DSD practices to help less progressive retailers rethink the role of DSD in the extended value chain.
3. What measures do you take to ensure promotional execution compliance? CP companies and retailers are seeking to improve collaborative promotion planning, but they can't overlook day-to-day promotion optimization and store-level promotion execution enforcement. According to an AMR Research survey, 80% of retailers have never effectively measured their store operations to determine the root of breakdowns. One Tier 1 retailer estimates that only 65% of its stores complied with promotional plans, but it isn't even sure which stores complied and which ones didn't.
Action items: Encourage retail partners to remove variability from store execution by directing, tracking, and measuring store tasks so that every promotion consistently performs at the highest level possible. One retailer that did so saw 10% faster promotion execution and a 7.9% improvement in markdown event execution. Another example is a consortium of CP and retail companies have partnered to deploy a proof-of-concept with the goal of tagging promotional displays to increase the compliance rate for executing promotions at the store level.
These relationships need to be created with a view of outside-in processes--insight on benchmarking industry practices, improving performance through joint dialogues on performance through scorecards, understanding industry trends and drivers and better defining the desired customer experience--to redefine value. For many, this is a new way of doing business.
http://www.amrresearch.com/
Supply Chains: Reinventions, Successes, and Failures
From Technology Evaluation/Dylan Persaud
Some of the most spectacular results in business realignment come from altering your supply chain chemistry to best deliver products to the consumer. If your company touches a physical product, it is part of a supply chain. The key to victory in supply chain reengineering is to have a definitive strategy, and to be able to implement and execute the plan.
There have been several instances where, without careful planning of systems, strategies, and change processes, a supply chain has crippled an organization, and in some cases even bankrupted the company. In cases where there were heavy losses due to supply chain inefficiencies, stock prices were affected, and the value of the company itself changed. We'll look at several companies which reengineered their supply chains. Some had major successes and some had major failures, and the reasons for this were varied. We'll examine the motivations, changes, and results from both ends of the spectrum, and provide insight and lessons learned.
Siemens Corporation has a special medical division that designs and manufactures custom medical equipment (such as specialized x-ray machines). Price erosion, rising manufacturing costs, and dwindling market share were primary drivers negatively affecting the division's profitability. To increase profits within the division, Siemens investigated and reinvented its supply chain. With this reinvention came many new processes and significant changes in the way it conducted business. Some of the major operational changes included cutting out two layers of middle management, switching to team structures within the organization, and aligning incentives with supply chain success. Additionally, employees were given more responsibility and control of design and creativity; intermediary warehousing space was eliminated; just-in-time (JIT) techniques were adopted; and transportation methods were switched.
These changes were directly responsible for the complete turnaround of the division. There were also some substantial gains: lead time improved from twenty-two weeks to two weeks; and there was a 76 percent reduction in assembly time, a 50 percent reduction in factory workspace, a 40 percent reduction in inventory carrying costs, and a 30 percent reduction in total costs. Production of units produced per year also doubled without increasing head count
Siemens changed the way it did business by adopting kaizen techniques and total quality management. This is a shining example of how changed supply chain methodologies can actually influence the bottom line and increase the company's value.
Other organizations have similarly tried to reengineer their supply chain in order to gain shareholder value. Although there is no right or wrong business model for a particular industry, an organization should evaluate what is best for its particular situation and environment. Another company that was losing market share due to escalating costs was the Gillette Corporation. Gillette, a $9 billion (USD) consumer packaged goods (CPG) company, took the initiative and challenged the way it did business to maximize efficiencies within its entire supply chain.
Previously, all groups within the organization had been fragmented, and many were operating as separate entities within the same corporation. This caused inaccurate results, from the purchasing of raw materials, down the rest of the chain, to the delivery of finished goods.
Gillette's major strategy was to create an operating group that combined purchasing, packaging, logistics, and materials management and shipping with total authority to rework the supply chain. This new group analyzed each operation, and consolidated the position of the task in relation to the task's supply chain process. With the new autonomy and team structure, Gillette found that the collaborative effort with respect to each task paid big dividends in increased efficiencies and reduction of losses.
Over the next eighteen months, Gillette realized a 30 percent reduction of inventory within its chain, and a reduction of 40 days' worth of materials for manufacturing, resulting in savings of $400 million (USD).
Although Gillette recognizes that its work is still not done, the effort has saved the company another $90 million (USD) in operating expenses alone so far. This poses the question: How much value can a supply chain add to company's bottom line, if done properly? In this case, where significant gains were achieved, it helped Gillette to become more profitable, and added shareholder value to the company by saving over $490 million (USD). This gain in company value would not have been possible if each operation had not been reexamined and acted upon. Gillette also had significant support from senior management, which is a critical success factor for any supply chain management (SCM) project.
In the late 1980s, the Chrysler Corporation was on the verge of bankruptcy, having posted a $644 million (USD) loss in one quarter alone. It knew that its only chance was to reinvent itself, especially its supply chain. Subsequently, it adopted the supplier cost reduction effort (SCORE) methodology, and underwent significant operational changes: cross-functional teams were formed, bringing together engineering, purchasing, manufacturing, marketing, and finance; autonomy for the teams was given for improvement purposes; teams cut the supplier base in half; and the remaining suppliers were brought in on design, and developed long term relationships. Chrysler also took the step of asking its suppliers how it could save money, proposing to split the savings with them.
A savings of $1.7 billion (USD) resulted from the implementation of 5,300 ideas. Furthermore, the cost of developing a new vehicle fell by nearly 40 percent, and the time required for the development process fell from 234 weeks to 160 weeks. Profit per vehicle increased from $250 (USD) in the mid-80s to $2,110 (USD) in the mid-90s--an increase of 844 percent.
Despite Chrysler's new success, it failed to keep the SCORE methodology. After its merger with Daimler Benz, the program rapidly degenerated, relationships soured, and cost reduction was mandated to suppliers to stave off massive losses. With the two separate philosophies of the German supply chain and Chrysler's SCORE methodology, it was nearly impossible to merge the two chains without reengineering yet again. Chrysler's moment had passed. Within the same timeframe, Japanese carmakers were constantly evaluating and improving their chains. And by doing so, they increased their competitive advantage.
DaimlerChrysler is closer now to completing the merging of the two supply chains, and a corporate philosophy has helped immensely in getting this done. Since it has revisited its supply chain strategies, it once again is seeing a closer return to the SCORE methodology way of doing business. This demonstrates that diligence must be continually practiced and executed in order to keep pace with the competition.
In the case of the Wal-Mart Corporation, a startling change of supply chain efficiency is still occurring. The giant corporation has changed the way supply chains are viewed and modeled. A number of business components were targeted for change, in particular supplier collaboration, systems collaboration, and the use of new technologies. It also aimed at frequent orders for merchandise (similar to a JIT system), and strict policy enforcements of regulations and procedures for employees, suppliers, and measurable key performance indicators (KPIs).
The results were demonstrated by the formation of RetailLink--a total system, from electronic data interchange (EDI) to the user, with traceable results. Other important results included reduced lead times; more efficient use of technology (including barcodes, scanners, radio frequency identification [RFID], point of sale systems [POS] , and so on); reduced inventory costs; and lower prices to the consumer.
Despite Wal-Mart's success, another big box retailer that tried similar strategies and experienced different results, was one of Wal-Mart's biggest competitors, the Kmart Corporation.
By the end of the 1990s, Kmart was desperately struggling to compete with the lower prices of Wal-Mart and Target. Its “blue light” specials lured some customers back, but they often found little to no stock of the special items in the store. Kmart found it difficult to keep products in stock, and lengthy lead times diminished its sales further, even with advance warning. In 2000, Kmart invested $1.4 billion (USD) to purchase, develop, and implement technology systems from EXE Technologies and i2 Technologies to overhaul its supply chain.
Before going live with the system, Kmart announced that it was abandoning most of the software it had purchased, and taking a $130 million (USD) write-off. Not long after this, it announced that it would try again with a $600 million (USD) purchase of Manhattan Associates WMS, in order to ease pressure on its supply chain. Kmart also announced that it would be closing 250 stores to recoup some savings.
What went wrong? Kmart failed to define, to execute, to enforce, and to monitor, and some key mistakes were subsequently identified. It later admitted that it lacked a clear strategy on how supply chain software could help turn the business around. Furthermore, there was a lack of commitment and management buy-in, and a lack of execution from the auxiliary projects integrated to the supply chain. Finally, integration was not defined, and other systems were not considered.
Several other things contributed to the failure. Kmart realized that the supply chain was deficient, but did not know how to execute the strategies to fix it. Furthermore, it failed to acknowledge how the other systems and processes affected its supply chain. Systems like procurement, order management, merchandising, warehouse management systems (WMS) and vendor-managed inventory (VMI) systems for overseas suppliers, EDI, accounting, and POS each had their own initiatives, and were not interrelating with one another.
The experience of Nike provides additional lessons. In February 2001, Nike went live with the i2 Technologies system, and claimed that the resulting debacle in their chain cost them $100 million (USD) in one quarter. This was due to problems reading and interpreting the data with respect to where the Nike's product was (whether in transit or in physical locations), how much was ordered, what orders were filled, how much product it had, and the cost of those products. When this announcement was made each company blamed the other for the disaster, and Nike stock fell 20 percent that day (while i2 stock fell 22 percent).
This was a clear case where both companies failed to take full responsibility for their respective assigned project tasks, but were hoping the tasks would integrate smoothly anyway. Negligence was the cause of this dilemma. Both Nike and i2 felt that their strategies were complete, but the overall plan was lacking in crossover redundancy. Although the software was mostly configured correctly, it was the exceptions and lack of training from both sides that caused it to fall short.
Cisco Systems took a $2.2 billion (USD) write-off, the largest inventory write-off in business history. It had outsourced manufacturing to different contract producers. Meanwhile, Cisco's competitors had placed bids for the same hardware, for the same contracts. The results were that the suppliers looked at each bid as an individual demand, thus double-counting and triple-counting the same bids. When the business did not materialize, the company that had originally placed the bids--Cisco--was stuck.
This could not be blamed solely on Cisco's failure to properly forecast and consolidate demand, but was more of an industry blunder. The dot-com era of tech companies created a frenzy for most hardware equipment, based on false demand. Suppliers worked overtime to fill orders that were never placed. Tech companies were decreasing margins rapidly. The perception was that if you were not bidding on new business, you were weak economically. Solid ideas were conceived by dot-com companies, but with lack of business know-how, the failures were imminent. This problem was built on verbal promises and false stock options as forms of payment on deals which never materialized. The lesson learned here was that although you need new business to survive, you should not lose focus on your current operations. Cisco failed to maintain its existing customer base, and lost major accounts due to inattentiveness.
When companies reinvent their supply chain to alter the way they do business, it can have dramatic results, and even change an entire industry. Dell Corporation, like many other manufacturers in the industry, stored inventory and mass-assembled product. Consequently, consumers had few options and configuration alternatives at retail outlets when purchasing new computers.
But then Dell reinvented the way personal computers were sold. Originally a mail order house, its new approach was a direct sales strategy of building PCs to order, and then shipping them directly to the customer. A new strategy like this included the use of new technologies. Indeed, Dell was one of the few companies at the time to start to truly harness the power of the internet. Dell started selling computers online in 1996, and four years later it was generating sales volumes of $50 million (USD) a day from web sales alone. In 2001, Dell became the largest computer supplier in the world, and only surrendered this position briefly after the merger of Compaq and HP, once market leaders themselves.
Dell wasn't the first computer supplier to try this model; others had mixed results, and usually lost money. What made Dell successful was the way it executed its strategy: it was relentless in pulling costs and time out of its supply chain. Suppliers are located near assembly plants, and deliver a JIT stream of parts supply. Monitors are shipped directly from the manufacturer, and merged in transit with Dell's own shipments arriving in Dell's own boxes.
Since forecasting and planning are down to a science, Dell enjoys the competitive advantage of a negative cash-to-cash cycle. Dell actually collects the money before ordering the parts, which is realized as 5 percent profit advantage from the start of production.
These are just a few illustrations of major successes and failures which illustrate that companies are now realizing that the supply chain can increase the value of a company. It can positively contribute to the bottom line, or in some extreme cases even cause bankruptcy. In the case of Wal-Mart, Dell, Siemens, and Chrysler, an efficient supply chain generated lower prices for the consumer, which is an added benefit.
When addressing supply chain problems, organizations should develop and execute a plan, and then diligently monitor the supply chain as it evolves. There are also some critical success factors:
1. having a well-defined strategy, from both a business and systems standpoint
2. having the ability to define, execute, enforce, and monitor according to the requirements as laid out
3. treating the supply chain and its functions as part of a process that integrates with the rest of the business
4. understanding how all components work together, and how change can affect operations up or down the line
5. management buy-in
Supply chain victories are most often realized when companies look at entire business processes as holistic (from a company standpoint), rather than just as a chain.
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