Business Strategy Should Design and Determine Supply Chains: Part II

Editor’s Note: Vivek Sehgal is senior director, development, at Manhattan Associates. Prior to working with Manhattan, Vivek worked for Fortune 20 companies, including The Home Depot and GE, in various leadership roles in their supply chain technology groups. This is the second of a four-part feature.

To illustrate the point and the disastrous consequences that can come about as a result of the misalignment between the business and supply chain strategies and the inability to leverage technology, we will use the case of Kmart.

Kmart and Wal-Mart were both founded in 1962. Both focused on cost as a business strategy and adopted super-center retail formats. In 1987, Kmart had 2,223 stores and revenues of $25.63 billion to Wal-Mart’s 1,198 stores and revenues of $15.96 billion. When it came to leveraging their supply chains, though, they could not have been more different. Wal-Mart, staying true to their business strategy to cut costs, invested heavily in developing supply chain capabilities that would directly support their business strategy of competing on lower costs. Pro-actively designing their supply chain, Wal-Mart went beyond developing the conventional supply chain capabilities at the time.

Wal-Mart introduced concepts that were unheard of at the time, such as bypassing the whole-sellers to replenish their stores, developing a network of regional and local distribution centers, cross-docking at the warehouses, owning a captive fleet for store delivery, investing in the data-link connecting stores to the headquarters so that demand can be communicated effectively and without delay, and actively collaboration with suppliers like P&G to share demand data. While we take these capabilities as the standard retail staple now, these were pioneered by Wal-Mart in response to developing a supply chain that will support their business strategy.

Kmart on the other hand did not quite understand the value of designing their supply chain to meet the needs of their business strategy. Kmart did not adopt many of these practices mentioned above for over a decade after they had been well established at Wal-Mart. Instead of reducing costs by building a more efficient supply chain, Kmart invested in acquisitions to grow their topline.

Originally conceived as the bargain offshoot of the Kresge department stores, the chain had blanketed the suburbs with stores carrying everything from Tide detergent to clothes, makeup, electronics, and housewares. However, when customers started shunning its poorly made dishtowels, cheap makeup brands, and tacky clothes, instead of reducing costs by building supply chain capabilities (like Wal-Mart), Kmart went shopping, buying Sports Authority, OfficeMax, Builders Square, and Borders.

The Big K and Super K store formats were introduced to lure customers back, but still no concerted effort was made to reduce the underlying cost structure.

Most of Kmart’s investments went into marketing and merchandising capabilities that do not directly help in reducing costs (both of these strategies are targeted toward increasing revenues rather than on reducing costs). The misalignment between the business and functional strategies cost Kmart heavily. In contrast, Wal-Mart chose to invest in the supply chain as a strategic advantage to support its business strategy of being a price leader. In 1991, Wal-Mart sales overtook the sales at Kmart.

By the late 1990s Kmart was heading for bankruptcy and eventually merged with Sears.

The functional strategies at Kmart were clearly not aligned with their business strategy. While the business strategy focused on cost, the functional strategies at Kmart were focused on creating a perceived differentiation through their marketing and assortment, while largely ignoring the cost. Kmart’s inability to create capabilities for direct cost reduction and align their functional competencies to their business strategy eventually led to their bankruptcy.

Part III: Wal-Mart started investing in technology in 1966, an innovation that was championed by none other than Sam Walton himself.

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