The 1997 merger of True Value hardware stores with two of its competitors was a bold move to challenge the dominance of nationwide chains such as Home Depot and Lowe's. It was also the beginning of a long corporate nightmare.
Now, the company is relying on supply-chain excellence and customer service in order to fix what Gregory A. Linder, director of supply chain, candidly refers to as a "mess."
Based in Chicago, the entity known today as TruServ Corp. is the nation's largest hardware cooperative. It boasts more than $4bn in wholesale sales, supporting retail sales of $12bn. Owning no stores of its own, TruServ consists of nearly 7,500 independent retailers with the freedom to buy from any supplier. And while most of them fly the True Value banner, TruServ also does business under the identities of Grand Rental Station, Taylor Rental, Party Central, Home & Garden Showplace and Induserve Supply.
All well and good, except that the company had more than 10,500 co-op members when it combined the assets of Cotter & Co. (wholesaler to True Value retailers), Coast to Coast and ServiStar to create TruServ in 1997. Since then, it has seen a steady attrition of members, lured away by rival Ace Hardware Corp. and others, who grew frustrated over a malfunctioning supply chain. At the same time, the company suffered some major accounting gaffes, as it tried to reconcile physical inventory with what was on the books. Last year's net income of $34m translated into a $23m loss, minus one-time gains from the sale of its lumber and building materials business. That followed a loss of $131m in the prior year.
Any merger of three corporate entities is bound to create problems. But TruServ faced a special challenge. As Linder tells it, the three companies (ServiStar and Coast to Coast had actually merged previously, but their systems still weren't integrated) were different in almost every way. They had separate retail identities, corporate cultures and inventory systems - all of them antiquated. And, despite different ways of classifying product, there was significant overlap in SKUs, order processes and distribution networks. Many of the 25 regional distribution centers were in similar locations, and would have to be consolidated or closed.
TruServ quickly uncovered "loose behavior" among vendors, and acted to cut excessive lead times. It also began slashing inventory levels, a move that seemed smart at the time, but initially hurt service to the stores. Having taken on a "mess," Linder said at a presentation at the annual Council of Logistics Management conference in Kansas City, Mo., "we created a bigger mess."
That mess included nearly $700m of inventory to support $2.2bn in sales. Vendors were shipping at 75-percent fill rates, even though TruServ was promising 95-percent service levels for next-day delivery to the stores. Vendor lead times were as long as 28 days, versus three days for a powerhouse retailer like Wal-Mart Stores. An average vendor purchase order might involve six different receipts, due to the prevalence of partial deliveries and back orders. Product entering a TruServ warehouse might take five days before it got to a bin and was available for picking.
The results were no surprise: sluggish cash flow, service levels to the stores of between 85 and 89 percent, and dissatisfied store owners. In short, says Linder, it was "cultural chaos" at a time when Ace Hardware was breathing down TruServ's neck, pulling away members at an alarming rate.
The roots of the dilemma lay in a combination of poor communications between departments, turf-guarding among the formerly independent pieces of TruServ, and information technology dating back to 1970. The company needed between three and four weeks to respond to demand changes, while churning out a 30-foot stack of paper each week.
The solution called for major changes in three areas: communications, systems and culture. In the first category, TruServ started with the vendors. Having never had a standards manual, it assembled one. It began measuring vendor adherence to the new performance criteria, including fill rates, on-time performance and electronic data interchange capability.
Vendors were given a brief grace period, receiving mock debits and scorecards, as they grew familiar with the rigorous program. During 1999, TruServ increased the number of "A" vendors participating in the program from 330 to nearly 800 by year's end.
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