Business Strategy Should Design and Determine Supply Chains: Part IV

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 final installment of a four-part feature.

In 1990, Wal-Mart sales overtook Kmart for the first time; by then, it was amply clear what Wal-Mart had been doing right—Wal-Mart had invested heavily in the automation of distribution centers, communication between stores and headquarters, real-time sales and inventory visibility, collaboration with vendors, and planned investments in technologies like EDI.

Kmart just did not seem to understand the importance of what Wal-Mart had been investing in. Kmart responded by expanding through unrelated acquisitions such as Borders, Office Max, and Sports Authority—only to have to shed these assets in the mid-1990s. Kmart had tough competition on pricing through Wal-Mart’s laser sharp focus on operations and cost reduction, and on assortment from Target’s high-end image. Whereas technology enabled Wal-Mart to create highly effective logistics and supply chain capabilities, Kmart simply stagnated due to a lack of strategy and antipathy toward technology. While Wal-Mart continues to squeeze value from its investments in supply chain, Kmart simply gave up.

Former CIO Dave Carlson depicts Kmart’s information systems in 1985 as one that was ‘‘cobbled together over time.’’ This is a good example of the organically grown supply chain capabilities rather than explicitly designing supply chain processes to actively support the business strategy.

When Chuck Conaway took over as chief executive of Kmart in 2000, he identified the company’s supply chain as the main target for improvement. In 2001, he announced that Kmart was writing off $195 million of assets that no longer had value. This included $130 million worth of supply-chain hardware and software that was being retired and $65 million for the replacement of two outdated distribution centers. He also had to write off 15,000 trailers full of inventory, sitting behind the stores. The inventory existed because the management did not believe its own information systems.5 Although Conaway got rid of the unwanted inventory, the inherent systems problems continued,
consistently showing up as out-of-stocks and pushing customers away from Kmart stores.

In 2002, Kmart announced it would invest $1.4 billion rebuilding and refurbishing its supply chain infrastructure and implementing IT changes. At the time, its spokesperson characterized the investment as being ‘‘more money than Kmart spent in the last decade on IT.’’ While the statement was supposed to underline the big investment, it also says a lot in terms of previously anemic investments in building a competitive supply chain for a company the size of Kmart—which had reported revenues of over $37 billion in 2001. In the meantime, time had run out for Kmart. Their revenues continued to falter and the declining sales resulted in a liquidity crisis and halts in shipments from major vendors, leading the company to file for Chapter 11 bankruptcy protection on January 22, 2002, becoming the largest retailer ever to do so. In March 2005, Kmart was merged with Sears to form Sears Holdings Corporation.

The misalignment between the business and functional strategies cost Kmart heavily.

The supply chain strategies at Kmart were clearly not aligned with their business strategy. While the business strategy focused on cost, Kmart’s inability to create capabilities for direct cost reduction and align their supply chain competencies to their business strategy eventually led to their bankruptcy. Even after their merger with Sears, the company has failed to grasp the importance of proactively developing and leveraging supply chain capabilities to support their business strategy. For example, they have failed to consolidate their supply chain assets to improve operational and capital efficiencies: In 2010, four years after the merger, only 4 distribution centers out of 39 were shared between Sears and Kmart, while others continue to serve Sears or Kmart stores exclusively.

In addition to having a well understood and articulated business strategy that drives the supply chains, it is also important to have a long term focus. Among the many reasons leading up to Kmart’s failure in 2002, another important reason was their lack of a long-term strategy based on a proven business model. While Kmart started with the same low-cost premise as Wal-Mart, they digressed from their stated strategy several times during their long history: among these digressions were the introduction of private label merchandise, unnecessary store format changes, growth through acquisitions (Borders and Sports Authority, among others), and their tentative foray into the grocery business. Most of these initiatives were rolled back by Kmart’s successive leaders, thus failing to create any long-term value for the business.

This lack of consistency also showed up in operations. Quoting from the book Kmart’s Ten Deadly Sins, “Few projects begun under one CIO were ever continued or completed under the next, requiring that work be stopped and restarted with each changing of the guard.” It is quite possible that this volatility in IT was simply a result of the lack of having a consistent and articulated business strategy and consequently a missing supply chain strategy that must have added to the chaos in evolving information technology as an enabler. In absence of a long-term strategy, it would be easy for the new incoming CIO to disregard the work already done and restart the project. Surely, this does not bode well for the capital investments in building business capabilities which typically take years to build and leverage, or for the morale of the team involved as they live through the volatile results of executive decisions made without an obvious reason to change direction.

Therefore an effective supply chain strategy must focus on aligning the business and supply chain strategies, designing the differentiators to build advantage, and pursuing a coherent technology strategy to support them—we call this supply chain nirvana. Nirvana typically denotes a state of simultaneous stability and dynamic equilibrium which is at peace with oneself and the world. It also denotes a complete awareness of self and the world outside. In the context of supply chain, it typifies a supply chain that is similarly stable, but also in dynamic equilibrium as it reacts to the changes within and outside the firm, and a supply chain that is fully aware of these changes and its capabilities to react to these changes.

But remember that supply chain nirvana is not a static state. It is a continuously evolving, but sustainable state of enhanced alignment of the supply chain capabilities with the objectives of the business strategy. As the business environment changes and the business strategy evolves, it changes the required supply chain capabilities and the expectations of the business from its supply chain. Since such change is frequent, therefore, the state of supply chain nirvana is an ever evolving journey. The keywords in the state of supply chain nirvana are dynamic alignment and sustainability.

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