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The infinity loop

The infinity loop

Allison likes to talk about an infinity loop between the core systems and the store systems. The process starts with the ordering or re-ordering of a product. That action prompts a notification to the warehouse manager about the required distribution method. The warehouse management system confirms the inventory system of the dispatch, passing the same message on to the stores. The stores receive the stock and then onsell it, sending a sales notification back to the inventory system. The data warehouse determines what needs to be reordered, based on sales and rate of sales. And so it goes in its infinite cycle. One of the possibilities being considered under the Optimise initiative is how the infinity loop can be extended into the supply chain. Most of the ordering still happens via fax and email. Many suppliers overseas, particularly in China, do not yet have an adequate computer infrastructure to allow them to participate in a fully computerised supply chain environment such as an internet portal. That situation is gradually changing, however, and a number are now willing to participate in a more sophisticated offering.

“Our aim is to go further up the supply chain and share more information,” says Allison. “Having a relatively manual system means quite a lot of overhead for us and our suppliers. There are opportunities on both sides.”

Across the ditch

One of the more obvious things to do is to look at the advantages of taking the infinity loop across the Tasman, and Allison has been doing just that. The move makes sense because, on the whole, The Warehouse’s core systems are more sophisticated than those used by the Yellow Sheds. It makes even more sense when you consider that the Yellow Sheds are slowly being merged into The Warehouse brand, which has been opening at the rate of two a month during the past year. Another 20 will be opened in Australia over the next 12 months. Part of the reason for the Yellow Shed closures is that some of them look more like $2 shops than The Warehouse’s discount retail stores. All of the new stores are around 3000m2, says Allison.

The results of the merger strategy are starting to bear fruit, with the 120-store Tasman operation making a $2.6 million operating profit before interest and tax in the latest financial year. “It is working very well for us there,” says Allison. “Certainly, our move into the market and the decision to take those local brands achieved two objectives — first, to capture some of the existing market’s goodwill and, second, not to make it overly obvious that we are a New Zealand company.”

Allison recalls hearing a comedian talking about how New Zealanders are seen as having a big chip on their shoulders about Australians, who are completely ambivalent about the Kiwis and don’t really notice them most of the time. “Maybe that’s true — but there certainly has been a lot of Kiwi-bashing over the past few years. But what we have found is that there is probably one truism in retail: people will shop for a bargain. They will see the bargain before they see the company or institution and where it is governed.”

Add to that the fact that The Warehouse is in a part of the market that doesn’t really exist in Australia. Allison sees the situation as an open opportunity.

The rapid growth across the Tasman has provided a huge logistics challenge. The buying teams have learned that it is not possible to merely shift the range of products from a 300m2 shop to a 3000m2 store. “You need more dimension to your inventory,” says Allison. “It took a long time for the merchandising team to come to terms with that volume and scope of productivity. Clint’s and Solly’s already had fairly strong leverage with their suppliers but when we leveraged the Red Shed brand on top we had to introduce new products and suppliers.”

In fact, the number of stores in Australia has fallen but the total floor space has grown considerably as the huge Warehouse stores have opened up.

Yellow Shed, Red Shed, Blue Shed

Initially the Yellow Shed and Red Shed brands operated autonomously. Both sides held some discussion about infrastructure and intellectual property but little action was generated, though managers saw the opportunity for leverage between the two brands. The Warehouse Group CEO Greg Muir commissioned the IT general managers from each brand to look at the Red Shed systems to see if there was an opportunity to take them into Australia, and vice versa.

Yellow Shed management had recognised that there were a couple of roadblocks in the way of Australia’s aim to achieve 29% revenue growth year on year over the next three years. Replacement of the warehouse management and inventory systems in Australia would have cost many millions of dollars. The question had to be asked: Why not take the core Red Shed systems and adapt them to meet the needs of the Yellow Sheds?

Such a move wasn’t as easy as it sounded. First, the Yellow Sheds had a fundamentally different business operating model. The Red Sheds had always been in the retail business, while the Yellow Sheds were initially both importers and distributors. They imported product to move it on in bulk, to be sold by someone else. Only later did they add their own retail capability.

“The Red Sheds buy via their inventory system and manage a view of the barcodes from purchase to sale,” says Allison. “In the core systems in Australia the purchase happens in the warehouse management system. Basically, goods are imported into the warehouse and sold from the warehouse. The retail systems were completely independent. We had to consider whether the systems should remain that way.”

Allison compares the systems and processes in the Yellow Sheds as being similar to those used at The Warehouse 10 years ago. “We are not bullet proof but we have best practice in the use of our systems. And, certainly, things like our data accuracy and our shrinkage are fairly much best practice.” In retail the term “shrinkage” applies to loss of product through breakages, shoplifting or whatever.

Allison says the question for managers was to consider whether the Red Shed systems would provide sufficient benefit, as opposed to searching the market for best practice. From a cost-benefit perspective, they were able to show that leveraging the current Red Shed systems was a better way to move forward. While the Red Shed environment might not be the best on every level, it would provide sufficient gain for the Yellow Sheds for the next three to five years. No one could come up with a sufficiently strong reason not to use the Red Shed software.

As could be expected, cultural issues became evident during discussions. “I don’t think it was so much the Kiwi factor as the not-built-here element to their thinking,” says Allison. “I am sure the same issues would have been raised by the Kiwis if the reverse had been true. Certainly, the biggest challenge in the project will be change management.”

Allison emphasises that one thing The Warehouse has always done well is to extract more value out of every dollar spent compared with any other company he has known. The company even has an annual Stingy Award, although Allison laments that IT has not yet been a winner. The Red Shed still operates point-of-sale registers based around the old 486 chip from Intel. Anyway, says Allison, it would probably take five years to extract the real value of a leading-edge retail system in the Yellow Sheds. “In the meantime, you would have over-capitalised the business and be facing the added burden of that expense.”

What’s missing?

Talking of best practice, the obvious question to ask is what could be done to improve the Red Sheds’ information systems. The answer, Allison says, is not a lot. “If you look at the core online transaction capability of Tui and the Unisys ClearPath system, arguably we will see those running here in five years’ time,” he says. “They will be modified and some of the original concepts that were intertwined in Tui might be pulled off and replaced. But I don’t see changes in the core management of inventory.”

Tui is becoming more cost-effective as the volume it handles keeps on growing through the Tasman expansion. It is proving to be reliable and scalable. Allison is not so sure, on the other hand, about the warehouse management system. Already there are smarter warehouse management systems on the market. The current system does a good job of managing stock, but other applications have more sophistication when it comes to management of freight, which is mostly handled by third parties in New Zealand.

Another strength of newer warehouse management applications is that they have more labour handling capability and there is a far greater openness to the supply chain. At present, the labour side in the Red Sheds is handled by a separate application. A newer application would also supply far more dynamic interaction between manufacturer, supplier, shipping company and Customs.

“We have a shipping department that manages all that in terms of faxes and emails, and it feeds the information into the transaction systems. It’s a fairly refined process, with the systems automatically generating the orders and doing the faxing.” Inevitably, though, the system means quite a lot of to-ing and fro-ing between suppliers and Red Shed staff.

Management of suppliers is an issue that could benefit from more sophisticated computer systems, Allison acknowledges. If they could gain earlier visibility of a potential order, the more likely they would be able to manage their output. With greater visibility into The Warehouse’s sales of their products, the sooner they would be able to predict when they would have to ramp up their manufacturing side.

And it doesn’t stop there. Closer co-operation between manufacturer and the Red Sheds could free up space in the distribution centres. Red Shed staff could order late and order less, or order less more frequently, depending on the product type.

Allison provides a ready example of how all the systems can work together for the organisation’s benefit. “Last Christmas we increased our sale of toys by 20% on the year before, and we achieved that with 15% less stock than in the previous year. That’s the capability that the more scientific side of merchandising can achieve through the use of good software tools. I can be more accurate about providing the right products to the right stores offers. I can hold a minimum quantity in stock if the supply chain is capable of replenishing the items fast enough. Of course, I have to make sure I don’t end up with empty shelves — that’s worse than being overstocked.”

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