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.

Three-Pronged Approach
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.

	Putaway time and skills are both down.

The first stab at collaboration tends to involve the largest vendors. But TruServ also took aim at small and mid-market suppliers, through a hosted internet link created by Newark, Calif.-based Advanced Data Exchange. ADX allows smaller suppliers to send, receive and archive key documents such as purchase orders, invoices and inventory updates. By assuming the task of electronic data processing, ADX lets suppliers concentrate on their core businesses, while reducing TruServ's procurement costs.

On the systems side, TruServ was dependent on an antiquated mainframe for information management. The solution: get rid of the chief information officer, who backed the mainframe strategy, and bring in smaller, more flexible IBM AS/400 servers.

For a new inventory management and replenishment system, TruServ turned to E3 Corp., now part of the Scottsdale, Ariz.-based JDA Software Group. E3 was chosen to provide a single system that promised to "decrease the cost of goods sold, reduce inventory and overall expenses, while also improving service levels," said E3 industry manager Al Radford at the time. Results were expected within a year of implementation, he said.

As it turned out, TruServ had the E3 system implemented within eight months. It would oversee more than 700,000 stock-keeping locations throughout the company's distribution network. Users could be trained and certified on the system within a week, says Linder. That meant the system was no longer dependent on a handful of experts.

TruServ started out with E3's core wholesale inventory management system, known as E3TRIM (for true replenishment and inventory management), according to Fred Baumann, now director of collaborative industry marketing with JDA. Instead of focusing on the single goal of more inventory turns, E3 provided simulation tools that allowed TruServ to examine the tradeoffs between acquiring or holding inventory. The ultimate decision would be based in part on product availability, value, service level and demand. The holding costs for nuts and bolts, for example, are significantly lower than those for high-value power tools.

With the problems inherent in a triple merger, E3 had to take special care to ensure data integrity, Baumann says. Information feeds were checked and double-checked to avoid mistranslations or lost data between formerly separate systems.

E3 also offered a collaboration piece that could improve TruServ's vendor relationships. Partners would include such major suppliers as Delta Faucet and duct-tape maker Manco Inc., who could share supply and demand data in order to create more accurate order forecasts. The system draws on precepts laid out by the Collaborative Planning, Forecast and Replenishment (CPFR) effort between major retailers and their biggest vendors. It combines the retailer's knowledge of consumer tastes with the manufacturer's expertise in regional and seasonal buying patterns, Baumann says.

Enter the Internet
TruServ saw the internet as a crucial medium in its push for better vendor relations, Linder says. The World Wide Web would be its chief means of conveying vendor standards, purchase projections, scorecard measurements, feedback and penalties. A staff of four would manage compliance issues, based on 30,000 inbound transactions a month from a pool of around 2,000 active vendors.

The internet was also key to managing TruServ's domestic truckers for inbound deliveries. For that function, it acquired collaborative software from Cambridge, Mass.-based Celarix Inc. The package, known as Celarix Visibility, would give the user real-time visibility of product in transit from a U.S. port or factory to the distribution center. The goal was lower inventories and reduced time to market. The application would allow TruServ to take at least one day out of its supply chain, says Deborah Zajac, import manager of Celarix.

At the same time, TruServ was reducing its common-carrier base to 40 from around 200. (For outbound deliveries to stores, it relies mostly on a private fleet of 450 vehicles.) With the remaining few carriers, all certified and linked up via Celarix, the company had access to data by shipment, order and item. It could use the information to determine the best carrier for a given route, track "hot" products in order to prevent stockouts, and bolster the vendor-compliance program, Zajac says.

TruServ's most dramatic consolidation has taken place with the company itself. At the outset of the troubled merger, it closed down the Butler, Pa. headquarters of Coast to Coast/ServiStar, moving those functions to Chicago. (Just two years earlier, Coast to Coast personnel, in combining with ServiStar, had been shifted from Denver.)

It was more than a case of moving people around, Linder says. The marriage was one of sharply different business models. Coast to Coast was essentially a franchise operation, with 90 percent of store stocks purchased directly out of its warehouses. True Value, through Cotter, supported a network of independent store owners who weren't tied to its products. Member loyalty depended on a high level of service, not a purchasing contract.

Consequently, TruServ had to be more responsive to the membership, even as it sought to reduce distribution costs and excess warehouse space. Since the merger in 1997, the company has reduced its inventory investment by nearly half. It has closed 11 distribution centers, the latest in Brookings, S.D., leaving 13 in operation. Additional closures might be in the cards.

Culture change was the toughest and most important task facing TruServ following the merger. "If we didn't get that done," says Linder, "the other two parts [communications and systems] wouldn't matter." A flattened management structure resulted in just six corporate officers, down from 17 at the time of the merger. To eliminate finger-pointing and internal management silos, TruServ stressed the need for teamwork, rewarding successes with bonuses.

Things Looking Up
If the numbers are to be believed, TruServ might finally be waking up from its nightmare. Compared with four years ago, it now has half the number of people managing its inventory. Yet their combined customer-service performance is 10 points higher than before. Meanwhile, the number of SKUs has plummeted from 150,000 to 65,000, with consolidation of some items and elimination of non-performing product.

Putaway time within the TruServ warehouses has gone from five days to 24 hours, and first-time order fill rates from around 88 percent to 95 percent. (Big red signs, posted in the merchandising and inventory areas, are a constant reminder to employees of their daily fill rates.) The number of receipts associated with an order now stands at 1.2, the occasional extra document arising from an order that exceeds truckload capacity. Linder expects further improvements in both inventory levels and fill rates in 2002.

Few companies could make a better case for the impact of a reengineered supply chain on the bottom line. Between 1999 and 2001, TruServ's annual logistics costs declined from $156m to $126m. Corporate debt fell from $649m to $451m. And with warehouse inventory turning better and faster, cash flow improved significantly, by $167m in 1999, $115m in 2000, and $100m in 2001.

Along the way, TruServ has learned a number of valuable lessons, says Linder. They include the need for aggressive managers willing to take calculated risks, and for the highest level of communications with vendors. Change in vendor behavior comes through a mixture of strict measurements and rewards, he says - not by ordering more product. As for information technology, TruServ views it as an essential tool, but won't tolerate the kind of multi-year implementations that have bedeviled so many software buyers in recent years.

The Way Forward
TruServ intends to advance on several fronts. The Collaborative Commerce Program, involving partnerships with vendors at the wholesale level, will be expanded from its current roster of 12 participants to as many as 30 by early 2003. Vendors sign up with TruServ to get access to the company's AS/400 servers -providing daily information on warehouse activity - via the internet.

They also become users of JDA's collaborative forecasting and replenishment system. "It's all about eliminating as much demand-chain uncertainty as possible," says Baumann. In the end, partners share the benefits of reduced costs and inventories, improved service levels, and a higher return on investment. They also share the risk of failing to meet those goals.

Additional plans call for a retail collaboration program, extending TruServ's partnerships to the store level. Scheduled for launch in 2002, it also involves the use of JDA's "scientific inventory" approach. An initial test will focus on non-seasonal items that flow to the stores without ordering. Linder sees plenty of room for improvement in store inventories, which currently turn about three and a half times a year. The low rate is partly the result of excessive ordering by co-op members, who were hedging against an unreliable supply chain.

Simplifying the distribution flow is another TruServ goal for 2002. A graphic representation of the current system of getting product from vendor to consumer looks like a hopeless tangle of telephone wires. TruServ has been supporting five different store systems (and hundreds of "brother-in-law systems," Linder notes), and merchants frequently haven't gotten what they needed. They have turned to other suppliers, undermining the stability of the cooperative.

TruServ intends to create a flow-through model that greatly simplifies order processing and shipment. Five store-ordering systems will be reduced to two, and eventually one. The company will draw point-of-sale data from between 1,500 and 2,000 stores, using the information for improved product planning and merchandising.

Linder expects the new approach to result in an expanded assortment of items, synchronized systems and additional reductions in supply-chain cost. Stores embracing the new point-of-sale link have experienced an "immediate turnaround" in inventory efficiency, he says.

In repairing its broken supply chain, TruServ began in the middle, the sourcing link between itself and suppliers. Now it plans to broaden the program to include transportation and distribution at both ends of the chain. "We were good at getting shipments from vendors," Linder says, "but then they went into a transportation abyss.

The inbound tracking capability from Celarix will go a long way toward bridging that abyss. So will a new multi-year contract with Transplace, Inc. for logistics management services, including load optimization. Based in Plano, Tex. Transplace was cobbled together from the logistics units of six of the nation's largest publicly held truckload carriers: J.B. Hunt Transport Services, Inc.; M.S. Carriers, Inc.; Swift Transportation Co., Inc.; U.S. Xpress Enterprises, Inc.; Covenant Transport, Inc., and Werner Enterprises, Inc.

On TruServ's behalf, Transplace expects to handle some $80m of freight each year, with an emphasis on cost-efficient truckloads. Today, says Linder, a dozen trucks might arrive at the warehouse, each carrying a skid of product. According to Jun-Sheng Li, Transplace president and chief executive officer, the deal will improve TruServ's transportation efficiency, reduce inventory costs and provide better inventory visibility to the client.

TruServ has no plans to scrap its private truck fleet, which it views as a valuable tool for customer service. On the contrary, says Linder, it plans to get more use out of the equipment, through reliance on backhauls and multi-vendor pick-ups.

TruServ eventually will address each step in the sale of product, including manufacturing, sourcing by vendors, and the consumer experience. "Our overall goal is to control the supply chain," says Linder. But a world-class operation is still a year and a half to two years away, in his estimation. In the meantime, TruServ will strive to retain co-op members through steadily improving service - as it fights to retain its position as the only hardware cooperative on the Fortune 500.