Known to all customers, inventory is the key to going to any store. If the supplies are not there, customers lose faith in their supplier and look elsewhere for the merchandise. Perhaps the biggest problem K-mart has is its ability to keep stock on the shelves. K-mart in 2001 was able to keep its goods fully stocked on shelves only 86% of the time. In the industry, anything less than 90% is considered unacceptable. Wal-Mart, however, runs close to 100%. Wal-Mart and others have emphasized “everyday low price” selling, which is more predictable for both customers and the distribution system. Inventory, for such retailers as K-mart is having a negative effect. On the average, K-mart’s inventory swells up as sales fall. In the beginning of 2002, for example, inventories rose by 5.6% as sales fell for K-mart. It is estimated that K-mart’s cash flow would drop by $40 million for each 1% increase in inventory if this problem persisted. The bottom line is that in the third quarter of 2001, Wal-Mart raked in $52.7 Billion Dollars while K-mart only made $8 Billion (Saporito, Buamohl, Szczesny).
Wal-Mart is the power house it is today because of its readiness to share information with its suppliers. As the store chain saw the benefits of sharing data with suppliers, they moved the information online on its Retail Link Web site. Rena Granofsky, a senior partner at J.C. Williams Group Ltd., a Toronto-based retail consulting firms says that Wal-Mart approached its suppliers as if they were partners and not adversaries, and by implementing such a collaborative planning, forecasting and replenishment program, they have began a just-in-time inventory program that reduced carrying costs for both the retailer and its supplier. Therefore there is a lot less excess inventory in the supply chain because of this system. This type of efficiency is a key in maintaining low price leadership amount retailers as well as allowing for far lower cost margins due to the supply chain. The company’s cost of goods is estimated 5% to 10%
less than most of its competitors (Johnson). Basically Wal-Mart is better at obtaining better terms from suppliers and having lower overhead. Due to this, Wal-Mart sales rose 15.5% in the third quarter of 2001.
K-mart’s problems stem from poor marketing strategy to lack of innovation. Its management team has made some very poor choices when it comes to a marketing strategy which detrimentally affected its supply chain. Everyone remembers K-mart’s famous “Blue Light” specials, as the retailer used advertising circulars to lure customers. Even though this worked, it also put a strain on merchandising and distribution systems because particular demand for items came in sudden waves. It also opened the door to product mistakes leaving K-mart with either too much of one product or not enough of another. Promotions also forced costs up at K-mart’s suppliers, as they could not reliably predict manufacturing runs. Furthermore, after finding out that ad circulars did not work as well as they used to because of the massive waves of merchandise ads, K-mart decided to take itself away from the weekly circulars. However, in the third quarter of 2001, the company cut back too fast and left loyal ad customers in the cold. Although management did try to counteract the problem by cutting prices on some $38,000 worth of items, without the ads customers were not informed of the price cut and this resulted in K-mart sales dropping by 2.2% in the third quarter. At the same time, Wal-Mart management caught on to the price cuts and followed suit reeling in even more customers than before (Saporito, Baumohl, Szczesny).
In order to counteract supply chain problems, technology had to play a large role in the distribution process. Unfortunately, while Wal-Mart was a pioneer of using technology in the distribution process, K-mart only recently started this venture. Wal-Mart invested in technological systems earlier than most of its competitors, starting to use computers to track inventory in 1969. In 1980 it was the first to adopt bar codes and in 1985 it instituted Electronic Data Interchange which rang up sales and tracked inventory deductions to better coordinate with suppliers. Wireless scanning guns were later used in the late 1980’s. In 1987 a massive satellite system linked all of the stores’ company headquarters, enabling Wal-Mart’s centralized IT department to view real-time inventory data (Johnson). These implementations allowed Wal-Mart to reduce its inventory and gain savings.
In 2002, K-Mart’s CEO James Conaway started trying to figure out how to lead the chain out of its supply chain troubles. He determined that the problem lied in underinvestment in technology. The scanners in the stores were outdated and didn’t feed purchasing information back to headquarters leaving the central planning system without enough information about what customers wanted in terms of inventory. Forbes Magazine noted that when Conaway came to K-Mart, late delivery to stores by distribution centers was 11% of the time or 1 in 10 deliveries. This was a big setback as most retailers are late only 5% of the time. Even when the inventory was being received by the stores on time, the supply chain on average was wrong on 15% of stores’ orders received from distribution centers. In an effort to fix the detrimental effects of the lack of technological capability for the K-Mart Corporation, the new CEO devoted $1.7 billion to upgrade store and back-office technology including new software to fix the problems. There was an additional $200 million invested on high-tech checkout scanners from IBM. Also, a new project, “Project Elmo,” was devoted to a 400-person initiative to combine two separate hard-line and soft-line purchasing systems into one. This conversion would eliminate 5,000 computer jobs and get merchandise to the stores two weeks faster. There would also be a renovation of demand-planning and forecasting software to get the right goods into stores, reducing the replenishment cycle from the current 5-7 day levels to between 48-72 hours (Hartmann). However it would take some time before these changes could be fully implemented and used efficiently to turn things around for K-Mart.
Business Week author Joann Muller thinks that adding full-line groceries to core urban stores, developing more unique, fixing supply chain problems, and improving marketing to give consumers a reason to shop, will significantly help K-mart’s problems (Muller). If K-Mart had been as efficient in selling as Wal-Mart, it could have earned $200 million in the third quarter of the 2001 season instead of losing $224 million. During the critical Christmas season 2001, Wal-Mart increased sales by an estimated 6%; K-Mart will probably report a 2% decrease (Saporito, Baumohl, Szczesny). It will take a lot of catch up and innovation before K-Mart can make up for its lack of innovation and efficiency in its supply chain management and retail business to even get close to the retail giant Wal-Mart’s numbers. Furthermore, Wal-Mart is making it even harder for others by still innovating and staying on top of the supply chain management system. It is always attempting to make its IT infrastructure more efficient, most recently with planned radio frequency identification (RFID) microchips, replacing bar codes and security tags with a combination technology that costs less money (Johnson). This will definitely make Wal-Mart an unstoppable force as it keeps setting the highest standard in the industry.
Hartmann, Chris. “Hospitality Industry Innovation in Technology A call to Arms.” HVS International. 2/11/02.
Johnson, Amy Helen. “A New Supply Chain Forged.” Computer World. 9/30/2002. http://www.computerworld.com/industrytopics/retail/story/0,10801,74647,00.html.
Muller, Joann. “Attention Kmart: Find a Niche.” Business Week. 2/4/2002. Issue 3768, p72.
Saporito, Bill and Baumohl, Bernard and Szczesny, Joseph R. “K Mart’s Blue Period.” Time. 1/14/2002. Vol. 159, Issue 2, p45. http://www.hvsinternational.com/Jump/?aid=316&rt=2