Many Supply Chain Matters readers are familiar with our ongoing blog commentary on the most important developments and strategies related to global supply chain business process and supporting technology needs. While I serve as the Executive Editor and most frequent contributor to the thought content appearing on this blog, I also provide individual consulting services to companies and supply chain technology providers through our consulting arm, The Ferrari Consulting and Research Group LLC.

We provide consulting services to manufacturing and services companies in global supply chain business process strategy and technology deployment.  Other services include assisting in reengineering, business performance and change management initiatives, identification and training in supply chain risk mitigation, or wider adoption of existing supply chain technology.

Consulting services are also provided to supply chain technology and software providers in product strategy, positioning and go-to-market messaging, and the development and integration of Web 2.0 and other social media tools that can leverage product marketing programs.  Custom consulting is available for market research, alliance or acquisition strategy, or media / industry analyst and blogger partnership development.

If you have specific consulting or external viewpoint needs, let us provide you with proven and pragmatic approaches.  You can obtain more information and assistance by sending an email including your name, firm, and contact information to supplychaininfo@ (at) theferrarigroup (dot) com, or by filling out a request on our Contact Us page.

 Bob Ferrari

Vice President and Managing Director

 We would like to remind premiere supply chain technology and services providers that opportunities still remain to have your company noted as well as benefiting as a sponsor of the Supply Chain Matters blog

Continued business uncertainty in 2010 across various vertical industries and the ongoing consolidation of the supply chain industry analyst community warrant that technology providers need to be more creative in insuring identity and recognition of their brand. The continued importance and proven success of leveraging social media strategies such as high quality blogs to provide timely thought leadership, market influence, and identify future prospects and customers has become a more cost efficient means to leverage product marketing spend. Supply chain professionals and decision makers will continue to seek out advisory sites such as Supply Chain Matters to help sort out the implications of strategic, business process and technology selection decisions.

2009 was a great year for this site, and our momentum continues in 2010.  Our readers continue to seek knowledge, commentary and insights related to business process and technology needs of global supply chains.  This blog was also recently designated by Technobabble 2.0 as one of the Top 100 of Analyst Blogs, a ranking derived from quantitative factors such as Google PageRank, Yahoo and Google Inbound Links, Google Reader Subscribers and Twitter links  Qualitative factors include amount of influence on technology selection, volume and quality of postings, all of which combined added to an overall ranking total score. This site is one of few independent industry analyst sites to achieve such a ranking.

Unlike other top-tier blogs catering to the supply chain community, we do not continuously boast that this site is the number one site for breaking news and commentary.  Instead, we take pride in the fact that the quality of the commentary and content featured on Supply Chain Matters has led to an explosive and sustained growth in our readership and web-site links.  This volume is also reflected in the site click-through rates for current sponsors.

Tiered sponsorship programs are capped to a designated number and include your firm’s involvement in sponsoring timely supply chain advisory content.  There are several cost-affordable and competitive levels of sponsorship.  The premiere single Gold sponsorship is currently available along with affordably priced Bronze and Associate level sponsorships. Gold and Silver sponsorships include my personal consulting services in reinforcing market themes, assisting in inbound marketing lead generation and supporting content for your marketing and industry influence programs.

The 2010 Supply Chain Matters Media Guide outlines in much more detail the various levels of sponsorship opportunities available in 2010. You can obtain a copy by both sending an email including your name, firm, and contact information to bferrari at blog1 dot com, or clicking on this Sponsorship Information Request Form link under the Pages Section, on the top-right hand side panel.

Take advantage of the opportunity to springboard your 2010 product marketing and brand awareness initiatives and to have your firm’s name featured with our current stellar list of sponsors.

 Bob Ferrari

Recent media and print news articles continue to bring to light the ongoing incidents of procurement bribery and tainted shipments involving processed tomatoes. The most recent article featured in the New York Times last week, and also noted by U.S. television media, outlines the disturbing incidents involving the U.S. food and grocery industry, and as noted, “has raised some serious questions about how well food manufacturers safeguard the quality of their ingredients.”

The article specifically outlines incidents of bribery among procurement managers, as well as the shipment of sub-standard product under falsified documentation.  Procurement managers for Kraft Foods, Frito-Lay, Safeway and B&G Foods have pled guilty to taking bribes in connection with the acquisition of tomato products. According to the article, one manager, Robert Watson, a senior purchasing manager for Kraft Foods from 2004 to 2008, “needed $20,000 to pay his taxes.”  Watson pled quilty In January 2009 and was sentenced to two years in jail and ordered to pay restitution to Kraft.

SK Foods, a now defunct tomato grower and processor of vegetable products based in Monterray CA, allegedly orchestrated these bribery schemes, and for years shipped customers millions of pounds of bulk tomato paste and puree that fell short of basic quality standards including the falsification of documentation to mask sub-standard product.  It was reported that in 2007, faced with a product shortage, 3.4 million pounds of moldy tomato paste was shipped to Kraft.

Sub-standard shipments were reported to involve more than 55 companies.  In some cases, companies had detected problems, but many reportedly did not. Tainted and potentially moldy product wound up in food sold to consumers.  The United States Attorney in Sacramento, California is also looking into allegations of collusion and price fixing.  A BNET blog commentary in September of 2009 laid out the scope and extent of potential bribery. The federal probe has been far reaching and senior executives at SK Foods began to be indicted as early as August, including the senior vice-president of sales operations. In early February, the actual owner of the company was taken off a plane at Kennedy Airport and later indicted on racketeering, fraud and obstruction of justice charges.

Supply Chain Matters joins others in the supply chain community blogosphere to condemn the practice of procurement fraud. The practice harms consumers / customers, companies, and all those in the procurement profession itself.   These past months of severe global recession have been personally challenging for all professionals, but that does not excuse any such behavior. Neither should we excuse the behavior of the most senior of management blaming other managers, when a culture of bribery has been supported.

Since the very origins of Supply Chain Matters in 2008, we have often commented on the increasing problem of counterfeit or substandard parts and commodities. The problem has reached alarming proportions, and now more public incidents of bribery and collusion do not add to the confidence of consumers.  Where consumers may have believed that these occurrences mainly came from products produced in China and other developing countries, we now have evidence that the U.S. is not immune to such practices.  While the practices of SK Foods could be described as a “desperate act by a company suffering from tough economic times”, it does excuse such practices, irregardless of country or geography.

The best and most advanced technology cannot overcome unscrupulous practices.  The essence and accountability of a process in the end, always comes down to the people associated with that process.  Perhaps ISM and other procurement certification programs should now include more distinct testing on the issue of ethics and the law.

It is also somewhat of a shame that so many advancements in supplier collaboration, trust and self-inspection may now suffer a setback as companies react to this news.

 Those who are convicted of bribery will certainly pay a price in their jobs and their careers, but, what about consumers who now have yet another concern regarding the quality of the food and products that are consumed.

What about your firm or procurement organization?  Do you feel that the motivation for unscrupulous practices has increased as a result of the current challenging economic environment?

 Bob Ferrari

Note: The following posting can be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

A Wall Street Journal article last week, Home Depot Undergoes Renovation (paid subscription may be required to view) once again highlights how this remodeling and building materials retailer continues to try to overcome market share loses to rival Lowe’s. The article notes that Home Depot’s history of supply chain capabilities is hampering the company’s productivity and customer service, as compared to Lowe’s, its prime industry rival.  In the article, Home Depot executives concede that the company’s supply chain still won’t be state of the art even after a current investment phase is completed.

Home Depot just reported its first rise in same store sales since 2006, and its stock has lost half of its value over the past 10 years because of shareholder perceptions that the company is not competing efficiently with its industry rivals.  In the article, rival Lowe’s CEO is quoted as noting that he was confident that the Lowe’s supply chain capabilities would continue to provide a competitive edge [over Home Depot].

The notion of losing market share does not lie squarely on the shoulders of Home Depot’s supply chain teams. Rather it is on the awareness and actions of its former senior management.  They did not adequately address both the need for more responsive customer service and investing in industry leading supply chain operational effectiveness.  Instead of enhancing these capabilities, former management led by ex-CEO Robert Nardelli chose to focus on a strategy of centralization and massive IT, and the results are still a rather heavy anchor for this retailer. Much has been written in traditional supply chain media about the Home Depot transformation story, but in my mind, these stories fall short of addressing insight and learning that can be derived.  More importantly, there are some key takeaways around the specific notion of whether smaller, more-focused IT systems deployments trump large-scale and unwieldy deployments that promise multiple benefits for multiple business objectives.

Past history and learning from others are the greatest lessons in management.  There are constant reinforcements and learning that point to the fact that the success of any large-scale transformation lies in the right balancing of the three most important factors of right people, right process and right systems. Take a moment to scan an August 2004 article published in CIO magazine.  The article notes that the origins of Depot’s original success were a decentralized business model where stores were populated with highly knowledgeable sales persons with backgrounds in various building trades.  When customers had a home improvement project, they were confident that their Home Depot store could be just as knowledgeable as the local hardware store in recommending what to buy and how to install.  Regional and store-level managers, those closest to the customer, were empowered with decisions of merchandising and inventory mix.  An original business process design principle was that individual stores would serve as principle stocking centers, in essence a warehouse store model.  IT systems were for the most part homegrown, under the belief that the Home Depot business model was unique and beyond the capabilities of packaged software at the time.  Average store revenues in prime geographical markets were roughly $60-$80 million, which could justify high levels of de-centralization.

Home Depot’s troubles began when the chain decided to accelerate store growth.  A hodgepodge of different store layouts caused customers to be confused as to where to find articles. Multiple store expansion in primary and secondary geographies also caused average store revenues to decline, exposing inefficiency in inventory management.  The majority of supplier shipments flowed directly to the stores and resulted in the Home Depot being the single largest less-than-truckload shipper in the United States, since about 80 percent of supplier shipments were sent directly to individual stores on half-empty trucks. Individual stores were their own stocking centers and store associates had to spend more time in unloading trucks than serving customers.  Managing individual suppliers on delivery performance was an individual store task, causing suppliers to have the upper hand in hiding inefficiency.  Economies of scale for buying from individual suppliers were lost, and transportation systems were not up to the job of managing these higher volumes of activity. The homegrown IT systems also became unwieldy and expensive to modify as the overall scope of business increased.  The business model became compromised as to who had the most stores in the most locations vs. superior customer service.

When previous CEO Nardilli took the reins in December 2000, he decided to make dramatic changes.  From his origins of senior management at General Electric, the primary goal became lowering the overall costs of operating the business and returning more to Wall Street and shareholders.   Reorganization included the centralization of merchandising, store planning and marketing, which rival Lowe’s was already successful at doing.  The goal was to make all stores look the same for shoppers, as well as to dramatically reduce operating costs at the store level.

The prescription further called for large IT that could deliver dramatic gains in productivity, efficiency and decision-support needs. In 2002, he hired a new CIO who came from Delta Airlines, and a $1 billion overhaul of IT infrastructure was prescribed.  This IT transformation included among its projects, replacement of point-of-sales systems, including installation of self-checkout systems, a huge data warehouse for sales and labor management information look-up needs, and assorted ERP investments in PeopleSoft and SAP.  The 2004 CIO article notes a background quote from retail consultant George Whalin, President of Retail Management Consultants.  He did not accept the assertion that all this technology could improve customer service, and further asserted that technology was rather being positioned as the answer to eliminate workers and improve margins.  I found this Whalin quote to be most profound: “their ability to distinguish the stores is going to be badly damaged the more they go to this model of more technology and little in the way of service.”  That was a consultant quote from six years ago.

For 10 straight quarters, from Q2 of fiscal 2001, through Q3 of fiscal 2003, same store sales and net earnings paled in comparison to Lowe’s.  Home Depot stock felt the impact, dropping from $67 in December 1999 to $20 in January 2003. During this same post 9/11 era, consumers were very active in their home self-improvement projects, meaning lost-sales for Home Depot. Meanwhile, Lowe’s had already been quite successful in practicing a conservative IT model, one more focused on highly specific business needs such as implementing retail planograms, and empowering existing store associates with automated inventory information. Whereas Home Depot was the first to implement automated checkout, Lowe’s continued to have existing store associates trained to cover registers during peak volumes.  Their assumption was that people were to be supplemented by process improvement as opposed to eliminated.

During SAP’s 2005 Sapphire customer conference, the then CIO Robert DeRodes hand picked by Nardilli, was on center stage touting a multi-year, $50 million rollout program. I attended that conference and distinctly recall hearing about the multiple customer support and supply chain process improvements that would be garnered as a result of this SAP deployment. 

In 2006, Mark Holifield was hired as senior vice president of supply chain and mandated to modernize the supply chain. Holifield has extensive retail industry supply chain and merchandising credentials, and had previously led the supply chain efforts at OfficeMax, for 12 years.  Holifield is a pragmatist, and he rightfully surmised that the supply chain deployment model had to be turned on its head, and fast.  Lowes had implemented a logistics hub and spoke store distribution model as far back as the early nineties. Holifield laid out an aggressive plan of transformation.  A primary goal was to flip inventory flows, moving the majority of inventory through regional flow-through distribution centers, while shifting inventory replenishment decisions to the RDC’s themselves. With the endorsement of current CEO Frank Blake, the company announced an additional $260 million investment in improved supply chain capability through 2010. The end-state goal is have more than 75% of COGS (cost of goods sold) flowing from the RDC’s.  The company also smartly invested in both a supply chain network design and inventory optimization analysis in order to understand the most efficient means to deploy its new RDC network to balance transportation and inventory investment needs.

Flash forward once again to January 2007, after the resignation of Nardilli. A blog entry published on ZD Net commented on the IT report card to date, and then speculated that a new CEO would most likely usher in a downshifting on the benefits of large IT. In 2008, Home Depot hired Matt Carey, formerly the CIO of EBay for two years. More importantly Carey spent more than 20 years with Wal-Mart, where he was senior vice president and chief technology officer. During his tenure at Wal-Mart, he managed the rollout of the wireless RF infrastructure and led the implementation and integration of Walmart.com, Samsclub.com and the grocery home delivery business in the U.K.  The sense was that Carey would bring a more pragmatic and complimentary approach to IT, but keep in mind that Walmart is not noted as having a high customer service model within stores. The emphasis has always been on lowest cost.

Meanwhile on the supply chain front, Home Depot’s project teams have been hampered by the need to not disrupt exiting retail store operations while the transformation to RDC’s occurs. These same teams must also balance this changed distribution and inventory management model with the existing SAP rollout.

Flash forward one more time to January 2010, and in an effort to dramatically impact customer-facing capabilities, there is now the announcement of a $60 million investment in Motorola hand-hand terminals.  A direct quote from Carey notes the following.  “If you compare us to a world-class retailer, from a technology perspective, 1991 is kind of where we are pegged. This is the first big customer-service tool we’ve given our associates in a very long time.”  While I suspect that this quote was made in the context of customer-facing IT, it certainly does not endorse the merits of the previous multi-million IT investments.

While this has been an uncharacteristically longer than usual posting for this blog, I wanted readers to dwell on the important lessons that can be derived from the ongoing initiatives underway at Home Depot.  Industry competitive advantage is really about the practical ways that teams can balance the needs for people, process and technology to solve customer needs.  Too often, especially in today’s business environment, firms fall into the trap of focusing on the near-term needs for eliminating people to increase profits. Applying massive amounts of technology to solve large problems vs. tailored technology to enhance a business process or in the case of retail, providing answers to customer problems and buying needs seems to be a perspective lost by those who stand to gain by huge transformations.

In the specific case of Home Depot, closing the supply chain gap with Lowe’s remains a self-admitted open question. 

What your view on near-term vs. longer-tern transformation which occurs in phases?  What about large IT vs. focused IT applied to supply chain transformation needs?

 Bob Ferrari