Thursday, February 11, 2010

A Place for Everything, Everything in its Place

Being absolutely fastidious about where things go, labeling everything clearly, and getting upset when they are missing from their allotted space will quickly get you an obsessive-compulsive disorder diagnosis. But in a warehouse, all this is good, in fact, very good.

Warehouses thrive on order. They must have defined locations for the items they stock and it makes their operations productive. Such locations are picked after careful consideration and depend on various factors such as:

  • Item’s physical attributes (length, width, weight, volume, orientation, and co-location constraints). Physical dimensions determine feasibility of the location for stocking the item and co-location constraints determine if the item’s neighbors will play well with it.
  • Item’s handling attributes determine how this item will be moved to this location and later picked for shipping. Does it need a forklift, a hand-truck, or simply a cart? Can a person handle it without physical strain or does it require some kind of lifting assistance? These attributes also limit the number of locations that are suitable for the item under consideration and help determine where it will stay in the warehouse.
  • Item’s demand attributes, like the volume and velocity of demand also affect the best storage locations for the item. High velocity items are desirable to be kept in most accessible locations and so on.

But having a location defined for all items in the warehouse is simply a start. Change in item demand from season to season, discontinuation of old items and introduction of new items, changes in item packaging, changes in their handling attributes or their co-location constraints, inclusion in promotions or store clearance, and other similar changes affect the optimal item locations. These changes require can result in less-than-optimized item locations over time. As the item locations become suboptimal, they start affecting warehouse operations and efficiency.

Slotting applications ensure that item-locations in a warehouse are always optimized for their operations. Slotting is the science of placing the products inside the warehouse. In all warehouses, there are bound to be locations that are closer to the receiving or shipping docks, convenient to access or easier to reach. As the number of such locations is relatively fixed, it would make sense to utilize them for products with the highest velocities or manual touch points. Slotting applications determine the best placement of products in the warehouse based on different product attributes mentioned earlier.

Slotting applications can continuously slot the warehouse so that the routine warehouse activities of receiving, putting-away, picking, and shipping continuously result into an optimally slotted warehouse as the demand patterns change. Alternately, slotting can be run at pre-determined intervals or when seasons or demand patterns change. These slotting runs will then produce a new set of optimized item locations and a set of warehouse move tasks to execute. Some of the applications are capable of doing a cost-analysis to suggest if the cost of moves is more or less than the expected efficiency gains.

Slotting not only helps maintain operational efficiency in the warehouse, it also helps in maximizing the warehouse cube for storage. With emphasis on online retail channels that must cater to individual order fulfillment, slotting provides a substantial opportunity to retailers of all sizes to enhance their warehousing efficiency. For a more complete discussion on warehouse efficiencies, you can read this article.

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, February 9, 2010

The new Sears: Missed Opportunities?

Sears has issues around low ROA and low profitability, but most of their investments are into initiatives that don't directly address either of the issues. A case of misaligned investments or lack of understanding?

Based on the earlier detailed financial analysis of SHLD with its closest competition, I believe that Sears must focus on the following two areas immediately:

  • Optimize operations (symptoms: poor cash-flow, poor return on assets, poor profitability)
  • Optimize inventories (symptoms: low inventory turnover, declining revenues, poor profitability)

Both of these areas can be greatly impacted with focused supply chain initiatives (see related articles, Who is Your CFO’s Best Friend?, Business Strategy and Supply Chains, Need Working Capital: Try Inventory Optimization, and Optimization: Transportation versus Inventory). However, what is surprising is while SHLD has been vigorously investing in their online initiatives, their annual statements don’t seem to support any concerted effort to create supply chain capabilities. Most of the capital initiatives seem to be supporting the K-mart store resets to offer Sears brand merchandise in K-mart stores, creating Lands End store-in-a-store within Sears stores, creating and enhancing online properties (gofer and services), and creating customer-facing multi-channel capability. While all of these are great initiatives, do they really create any specific competitive advantages for Sears that would allow them to persist and grow in a hyper-competitive retail environment such as exists right now? From my perspective, these initiatives are targeted more towards enhancing sales (though that does not seem to be working either since SHLD sales have been dropping) more than reducing costs – which is counter intuitive for a mature retail chain (see Pillars of Retail for context) in the current environment. The picture below summarizes the investments and their most likely effect.


An integrated multi-channel strategy is, in fact, a great way forward. However, there are quite a few advantages that a conventional retailer can leverage in creating a multi-channel business through their supply chain capabilities (see Multi-channel Retailing: Are You up to the Challenge).

Within the supply chain capabilities, Sears will do well to first create the execution capabilities that can address their return on assets by creating the execution efficiencies and reduce their operational costs enhancing the profitability of operations. These are also relatively easier to create and maintain, simply because they can be deployed without having to necessarily undertake serious data-cleansing and consolidation challenges, which can seriously undermine supply chain planning initiatives. In a following phase, SHLD can train their focus on creating the planning capabilities which will eventually reduce the inventories in the system and create a supply-demand matching system that is lean and agile to react to changing demand patterns while addressing the need to keep costs low. Once the basic capabilities are established, these can be tuned, optimized, and continuously enhanced to support the corporation’s online initiatives by allowing SHLD to consolidate their supply chain assets and leverage them for all channels irrespective of the physical nature of the channel.

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Friday, February 5, 2010

The Soft Side of the new Sears

As I had promised, here is the rest of the story on Sears Holdings. In short, the biggest culprit is high operating costs across the board including extremely poor inventory turns.

Let me explain with the help of the data below. The first set of data compares SHLD with JCP and Macy’s. Most numbers look comparable, in fact, the S&A seem to be well under control for Sears Holdings, however here is what stands out:

  • The anemic cash-flow from the operations,
  • Fast-disappearing net-income, and
  • The shrinking revenues,
  • Though COGS and Gross Margins look worse than JCP and Macy’s, I am going to ignore these numbers for a minute and explain later.


Just hold your thoughts while I present another set of data points, this time, comparing with Wal-mart and Target. Again, notice the highlights:

  • ROA trending from 9.67% to barely positive 0.46% in three years flat, and
  • An inventory turnover less than 4, when Wal-mart’s inventory turnover is touching almost 9 and Target’s above 6.5!


The reason for presenting the second set of data and ignoring the COGS and Gross Margin numbers, are as follows:

  • While SHLD’s COGS of around 70% is way higher than JCP or Macy’s, it is really not of much concern when compared with Wal-mart or Target. That is why I ignored from the first set of comparison highlights. SHLD’s assortment draws from JCP and Macy’s, but also from Wal-mart and Target. Therefore, a broader comparison makes sense.
  • Similar reasoning exists for gross margins. While SHLD’s gross margins look poor compared to JCP or Macy’s, they are actually very much in line with the broader comparison with Wal-mart and Target.

Ok, with the numbers behind us, there seems to be two big problems that SHLD seems to be facing:

  • Excessive inventory, and
  • Excessive operational expenses.

Both of these underlying reasons do explain all the symptoms that we have seen in their financials: low ROA, low cash from operating activities, low inventory turnover, and finally the net income that is barely positive at 0.11%. Let us also not forget SHLD’s low capital investments in technology that I wrote about. These probably are a direct result of low net-income, however, they will continue to weigh heavily against their efforts to reverse the situation.


Next time: what should SHLD do? Can supply chain be the answer to their woes?

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Thursday, February 4, 2010

Sears Multi-channel Strategy

Yesterday, I made an argument that SHLD’s capital investments were simply not aligned with their objective of creating the next multi-channel retailing force out of the remains of a merged Sears/K-mart combo. I got a couple of requests for the supporting data, so here it is. All source data is from the published annual reports of the relevant companies with a single exception: that is the percent of total capital expenses spent on information technology for SHLD which I assumed at 25% in line with Wal-mart and Target.


Next time, more financials analysis comparing SHLD with its competition to see what else could be at the bottom of their troubled run!

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Wednesday, February 3, 2010

The New Sears: Too Little Too Late?

Sears Holdings announced yesterday that it currently plans to release financial results for its fiscal 2009 fourth quarter and full year on February 23, 2010, before the market opens. It will be interesting to see how their year ends.

So far though, their performance has been dismal. If you had invested a $100 in Sears in 2005, you would have lost three-quarters of that money by January 2009. The chart below is from SHLD’s form 10-K for the year ending Jan, 2009.


Since the merger of Sears with K-mart, Sears Holdings has charted out a plan for the merged retailer that focuses away from their brick-and-mortar stores. The strategy by itself may not be without merit, however, the planning and execution seems to be poor.

There is generally a lot of advantages that a conventional retailer can leverage when shifting their focus to online retailing. In fact, there is much more opportunity in a multi-channel retail environment rather than a single channel for retailers with broad assortments. A multi-channel retailer has the opportunity of presenting multiple ways for the customer to interact with them with each interaction having the potential for a sale. A multi-channel retailer also has the opportunity consolidate all their merchandising and supply chain assets to further reduce their owns costs to serve the end-customer whether that customer chooses to interact through an online, store, catalog, kiosk, or even a multitude of channels for a single interaction. This opportunity is lost for a retailer who is completely online – after all, you can’t buy a Kindle from Amazon and go return at a store if you did not like it. There are definite advantages associated with each of the channels and they can be leveraged through technology enabled processes that allows the customer to have a pleasant cross-channel experience and allows the corporation to spread the costs.

This seems to be a point totally lost on SHLD. The reduced investments in the stores have practically choked off customer interest/loyalty in a brand that was build over a very long time. The general message boards are abuzz with unhappy customers – the situation is very similar to the time at The Home Depot when Nardelli took over and cut all investments in stores and drastically reduced the number of associates on the floor in his effort to trim all possible expenses. Sears seems to be following a similar track. SHLD did take a leaf from Wal-mart and has started some amount of customer-facing integration between the online and retail channels, so that the customers can buy online, pick-up at a store, return an online purchase to a store, etc. It would work well if the stores were actually equipped to handle this, which requires adequate systems and people support – otherwise why would you direct your online channel customers to your stores if a pleasant interaction cannot be guaranteed? The reduced investments in the stores are bound to affect the cross-channel customer experience making it a questionable strategy.

Second, SHLD investments simply don’t seem to be aligned with their strategy. Unlike the traditional retail, where human interaction can hide a lot of process imperfections, successful online retail depends heavily on well deployed processes. These processes not only substitute the human interaction in most situations, but are also largely responsible for reduced cost overheads through automation and technology. This requires large capital investments. While the customer facing processes like product catalogs, web-based order management are important, the back-end order-fulfillment and execution processes are the ones that can make-or-break an online retail experience for the customer. Finally, the supply chain processes for planning, replenishment, and distribution directly affect the competitiveness and hence the profitability of the operations.

All of this requires targeted capital investments in the supply chain and fulfillment technologies. Retail industry, in general, lags in such investments. When you compare SHLD with its usual completion, the picture looks even bleaker: Wal-mart spends close to 1% of its revenues on information technology and Target spends around 1.5%, and it accounts for almost 25% of all their total capital investments into technology. Given their revenues, these numbers are huge and reflect these companies’ commitment in investing in technology as a competitive advantage. While SHLD does not provide specific break-up of their capital investment in technology, assuming that the same 25% of their total capital investments goes into technology, SHLD’s technology investments dwarf to only a ¼% of their revenues. In 2008, these investments look like these: $2.7B for Wal-mart, over a billion dollars for Target, and a paltry $127M for Sears (SHLD 10-K reports total capital investments of $508M without specifying the break-up, we assumed 25% of total was spent on technology, which is in line with the ratio for Wal-mart & Target). This just does not seem to be enough to create a brand-new online force in retail, given the fact that neither Sears not K-mart has ever been a leader in supply chain or merchandising technologies, which means SHLD must start building these capabilities from relatively low levels of capabilities.

While their share price has recovered substantially during 2009, partly due to the management’s decision to repurchase $500M of shares, it will be interesting to see how the year closes on February 23 on their revenues (which are still shrinking) and income which were just over 1/10 of a percent in 2008!

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Monday, February 1, 2010

Strategic Plans Lose Favor, Really?

Here is an article from Wall Street Journal proclaiming the death of strategic plans. Really? You can believe it only at your own peril. Unless of course, you never really knew what strategic planning was all about, which seems to be the case about WSJ.

Strategic plans are not about annual budget planning and it seems to me that is exactly what WSJ is talking about. Strategy is primarily about creating competitive benefits – if that is not what it is doing for you, sorry to say, but you don’t have a strategy. Strategy is also about assessing risks and having contingency plans. The competitive advantages don’t last forever, they erode over time. They can erode because they become commonplace (and everyone develops those capabilities), they can erode because the environment changes (what was a competitive advantage once is not any more), and they can erode because an expected situations arises (a risk for which the company has no contingency plans). It is the job of strategic planning to ensure that your business always has competitive advantages – creating new ones when the old ones erode.

Strategic plans are about positioning the business for growth and profitability; not about annual, quarterly, or monthly financial reviews to pore over the cost/revenues picture.

That said, the strategic plans are deployed through their attendant plans. Financial planning and budgeting is a prime example of one of those types of attendant plans. No less important, but they do not substitute the strategic planning. Almost all companies do have financial plans, but not all of them have strategic plans. Having a five year or three year financial plan does not equate to having a strategy. It only equates to having a broad understanding of revenues and expenses. It is an important tool towards realizing the business strategy, but it is not business strategy.

The WSJ article quotes, “a few even set up "situation rooms,'' where staffers glued to computer screens monitored developments affecting sales and finances” – this is a clear symptom of the argument above. They are worried about revenues (sales) and expenses (finances), not strategy. It also quotes Accenture saying, “Strategy, as we knew it, is dead. Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future”, and Boston Consulting Group as saying, “more business leaders will start to rely less on static five-year strategic plans and more on rough "adaptive" strategies that consider multiple scenarios”. The emphasis in italics is mine, but the point is simple: if your strategic plans did not have risk assessments and contingency plans for each identified risk, such as recession, decline in demand, low pricing power, supply failures, and so on, then all you were doing was financial planning as usual – there was nothing “strategic” about it other than, probably the long horizon.

As far as the frequency of reviewing plans is concerned, it has been shrinking for a long time now. For good reasons too – it is now possible to reduce the frequency of reviews and assess the plans more often. Where collecting and crunching the data from several thousand stores, divisions, regions, and factories used to take months, it is now a matter of minutes, sometimes a day or two, if you have the right infrastructure. Whether you have the right infrastructure or not is a matter of strategy – if your company believed that making decisions objectively and expediently was a competitive advantage, you would have invested in the right areas of infrastructure to make that type of objective decision-making possible, if not, you are probably going to have to set “situation rooms” and throw in a few bodies to monitor the “situation”. This is the typical fire-fighting mode for companies focused on next quarter’s analyst call more than developing any real business strategy!

These days, it is neither impossible, nor uncommon for corporations to establish real-time business intelligence systems that not only guide their financial plans but also provide valuable inputs to their business strategy. The financial reviews and controls also don’t have to be on a pre-defined frequency, in fact, it is entirely possible to simply set-up triggers for change in a set of pre-defined metrics that should initiate a review of financial plans whenever the triggers are tripped. Examples of such triggers can be demand, supplies, resource usage, inventories, payroll, overtime pay, or anything else that matters for the business and most of them can be computed much more frequently than a month.

But of course, setting up such infrastructure is completely a matter of strategic planning: mere long-term financial planning is not going to get you there, no matter how frequently it is reviewed.

© Vivek Sehgal, 2010, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.