The key to success in large-scale retailing is no secret. All you have to do is offer the lowest prices in the market, and still make a profit.
That was the challenge confronting Kmart Australia, one of the country's leading retailers. Like many of its competitors, the company was coping with falling sales in a poor economy. The solution: cut prices, reduce SKUs, focus on volume buying and increase reliance on cost-efficient direct sourcing.
All well and good - except that the merchandiser's existing infrastructure for dealing directly with manufacturers wasn't up to the change. There were far too many manual processes that depended on spreadsheets and redundant administrative work. Kmart Australia's supply-chain IT infrastructure lacked the visibility, clarity and efficiency needed to ramp up direct buying from its base of more than 1,000 suppliers.
Michael Fagan, head of operations for Kmart Australia Sourcing, had just overhauled the international supply chain, revamping systems and processes for the management of cargo from overseas freight forwarders to the company's 187 stores in Australia and New Zealand. Now it was time to tackle the lifecycle of products as they moved from supplier to retailer.
Initial research uncovered more than 100 software companies that called themselves product lifecycle management (PLM) vendors. Further investigation identified no more than about 10 "serious contenders," says Fagan. That number was further whittled down to two, until a final "bake-off" involving the two-week trial use of software.
The winner was Core Solutions, whose CBX application proved the key to centralizing Kmart Australia's sourcing and merchandising-related information. Fagan says the retailer was impressed by Core's technology as well as its local presence and deep knowledge of sourcing in Asia. "Nearly all of our suppliers are Chinese," he notes. "We were able to communicate with all of our users in their native language."
More Than Private Branding
Michael Hung, chief executive office of Core Solutions, is careful to distinguish between the merchandising approaches of many big retailers and what Kmart Australia was out to do. (The chain has no relationship to the U.S.-based Kmart, other than through a licensing arrangement which permits use of the name.) Most companies seeking to boost their reliance on private brands continue to utilize agents to acquire the goods, he says. Kmart Australia was determined to eliminate the middleman wherever possible, and source directly from manufacturers.
The strategy called for tight control over such elements as supplier selection, price quotation, quality and ethical behavior checks, product allocation, export licensing and shipment tracking. Core's CBX would be the system that could bring it all together. In effect, Kmart Australia would be acquiring an enterprise resource planning system designed expressly for the sourcing unit.
The goal, says Hung, was to unify buyers, merchants and other departments through a single system, by which information is freely shared among offices, users and time zones, and the entire process is automated. "Everybody is using the same tool regardless of location," he says.
In the event, Kmart Australia could eliminate the time wasted on phone calls and e-mails that was previously needed to reconcile data disparities among the various functions. Product and price-quote uploads can happen in real time. And the company is better able to access critical information such as vendor accreditation, profiles and performance.
The company went live with the new application about nine months after signing the contract, but it took a conservative approach at the outset. "We went a mile wide and an inch deep," recalls Fagan. "We got full functionality but only to a small number of departments." Footwear, general merchandise and apparel were among the initial targets, allowing the company to tweak the system and accompanying processes before adding more users. Complete implementation took about a year.
One big challenge lay in instructing suppliers in the proper use of the system. "We've had massive problems with supplier turnover," says Fagan. In addition, suppliers would often send the wrong people for training - a general manager, say, who was never going to look at the system again. "We needed lower-level merchandisers who were actually doing the work." In the end, Fagan says, the company adopted the "80-20" rule, on-boarding those suppliers who were responsible for the lion's share of the volume.
In unifying and automating the company's sourcing function, Kmart Australia experienced a huge increase in transparency. For the first time, it could see when work was actually being performed, and determine the true cause of any shipment delays.
"Our ability to see into the future increased tremendously," says Fagan. "Now the stores are executing more efficiently."
Moving to the Cloud
CBX is delivered over the internet in a software-as-a-service mode, hosted externally out of Hong Kong. Running on IBM WebSphere and System pSeries servers, it is available through any broadband or wireless connection. Fagan says he had no concerns about the security or reliability of the cloud for the wide-ranging system. For Kmart Australia, remote management minimizes the headaches of dealing with software upgrades, patches or bandwidth limitations. Nor does the company need to keep internal experts on staff to manage the infrastructure.
With CBX in place, lead times for the sourcing process have been reduced by as much as three weeks. Kmart Australia is now on track to reach its target of $1.2bn in direct sourcing by 2013, compared with just $150m in 2000. In terms of total volume, direct sourcing will grow from 40 percent to 60 percent.
The retailer is continuing to find ways to streamline its operations, with a particular emphasis on improved quality assurance, says Hung. Beyond that, it's looking to do more international processing, while placing decision-making closer to the source.
"We're also trying to execute on our current strategy of delivering great value to our customers," says Fagan. "That's our number-one focus. The great thing about our strategy is that it's very simple."
Keywords: supply chain, sourcing solutions, IT supply chain, SaaS, supply management, inventory control, supply chain planning, retail supply chain, Kmart Australia, Core Solutions, product lifecycle management
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