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.

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