***** Computer Select, February 1996 : Articles ***** Journal: PC Week Sept 25, 1995 v12 n38 pE1(2) COPYRIGHT Ziff-Davis Publishing Company 1995 ------------------------------------------------------------------------- Title: Blue light blues. (Kmart faces IS challenges) (includes related article on Kmart product stocking system) (PC Week Executive) Author: Moad, Jeff Abstract: New Kmart Corp Senior VP and CIO Virginia Rago faces the daunting tasks of revamping the company's failing information systems, ushering in an upgraded in-store IT infrastructure and improving IS morale, all while saddled with a mandate to significantly reduce IT overhead. Kmart has sustained $82 million in losses through two-thirds of 1995, numerous high-end personnel changes and its IS department has been hit by budget cuts, strategy shifts and layoffs of 250 people. Kmart has reduced the number of suppliers in its unwieldy Partners in Merchandise automated stock-replenishing system, instead relying on new analytical tools that more closely monitor a product's ultimate shelf-landed cost. Kmart will replace current Unix-based servers with Windows NT-based servers in its 2,238 retail outlets. Kmart has also taken a strict cost-justifying approach to all new IS expenditures. ------------------------------------------------------------------------- Full Text: Virginia G. Rago decided a year ago to shake up what she saw as a stodgy Kmart IS culture, more committed to satisfying the whims of users than delivering value to the struggling company and its shareholders. Rago, a 44-year-old former Californian, introduced "casual day," a once-a-week chance for programmers and managers in her store systems development group to show up in jeans and T-shirts. The idea was to send the message that it's not the color of your power tie but rather, says Rago, "it's a fact-based society and results-oriented. A lot of promises don't do you any good if you don't deliver." Unfortunately, Kmart wasn't ready for that message. Higher-ups forced Rago, then an IS vice president, to cancel casual day. "I guess they felt people might be offended or that people wearing jeans didn't work as hard," she says. What a difference a year makes. Today Rago is Kmart's senior vice president and CIO, and casual days are back. Early this year, Rago replaced David Carlson, the $34 billion company's former high-profile IS chief who was ousted last November just as Kmart was beginning a financial swan dive that has seen it lose $82 million so far this year. Rago, who joined Kmart last year as a Carlson lieutenant after a four-year stint as CIO of Hills Department Stores, in Canton, Mass., is facing perhaps the toughest tur naround task of any big-time CIO in the country. Her organization and some of its key systems have been held publicly responsible by Kmart top brass for contributing to the No. 2 retail chain's financial problems. She's being asked to quickly revamp those systems and upgrade an aging in-store IT infrastructure while, at the same time, trim IS costs and improve IS morale which, she admits, has been devastated by leadership changes, layoffs, budget cuts, and strategy shifts. Obviously this turnaround is going to take more than a once-a-week wardrobe change. "My job is probably one of the biggest IT opportunities in the world at the moment," says Rago. And one of the biggest challenges. In fact, more than a few retail IT experts and former associates openly wonder if Rago is up to it. To many in the retail IT establishment, Rago's appointment to the CIO job was almost as surprising as Carlson's departure. In an industry where top IS jobs are populated by high-profile men like Dave Evans of J.C. Penney Co. and Mike Heschel of Kroger Co., Rago was neither. Her experience at Hills, a small, $1.9 billion regional retailer that filed for bankruptcy protection in 1993, didn't exactly make her an instantly credible candidate to take over IS at Kmart. Since she landed the CIO job nine months ago, critics inside and outside the company claim Rago has been focused first and foremost on cost-cutting, putting the brakes on initiatives such as a major supply chain re-engineering effort, and slowing plans to move to frame-relay networking technology. Rago has reduced IS head count by 250 to 1,000 since the first of the year. Overall, Kmart's new chairman, Floyd Hall, has ordered $600 million in cost red uctions this year. "She's saying everything's got to be cost-justified except what blew out last night," says a former top Carlson aide. "She's in way over her head. She's strictly a caretaker. She couldn't fill Carlson's shoes." Rago acknowledges she has her hands full but disagrees she's in over her head. "I effectively had this job before, but in a company about one-tenth the size. We think we're making headway ... but the job's just huge." But there's no question they're big shoes to fill. Carlson, who has since moved on to the top IS job at Florist Transworld Delivery Inc., is widely recognized as having been a pioneer in retail IT while at Kmart. (He didn't respond to interview requests.) In the early and mid-1980s, he directed the development of Kmart's advanced in-store point-of-sale systems which, linked via satellite communications, feed inventory, merchandising, and replenishment systems. Carlson's organization was an innovator in using electronic data interchange to communicate with suppliers and one of the first large retailers to move into automated supplier-managed inventory and replenishment via Kmart's so-called Partners in Merchandise system. Until recently, more than 300 suppliers used the system, which allows them to tap into Kmart sales and inventory information so they can replenish inventories the moment they're needed rather than waiting for orders and invoices. Other retailers such as arch-rival Wal-Mart Stores Inc. and J.C. Penney have benefited from similar automated supplier-managed replenishment systems. Penney, for example, installed its system in 1992 and credited it with an 11.9 percent increase in sales that year. "Kmart's Partners in Merchandise system was seen as perhaps the No. 2 automated replenishment system in the business, right behind Wal-Mart's," says Andre Martin, a Montreal-based retail distribution consultant. But under Rago, Kmart has slashed the number of suppliers in the Partners in Merchandise system, claiming it is one reason the company's having trouble stocking store shelves. Experts say Kmart isn't the only large retailer likely to run into problems as automated vendor-managed replenishment systems grow. "It's relatively easy when you've got just a few suppliers, but it gets much more complex as the number grows," says Martin. "At some point when critical mass is exceeded, retailers like Kmart lose contr ol of inbound products." To help regain control, IS is rolling out new analytical tools that can be used by Kmart buyers to drive down the costs of getting merchandise to store shelves. Kmart is adding to buyers' workbenches a new Windows-based decision-support tool that will allow them to isolate and identify all of the component costs involved in moving an item through the Kmart supply chain, what Kmart calls "shelf-landed cost." How much does it cost a supplier to ship to the store vs. a distribution center, for example? Kmart buyers will be able to use that information to negotiate more effectively with suppliers or even eliminate less efficient suppliers. And Rago is going ahead with plans to modernize its in-store systems architecture. Rago says Kmart will replace the Unix-based servers in its 2,238 discount stores with Windows NT-based servers in an effort to drive down hardware and software costs and improve flexibility. Kmart is also investigating replacing the satellite network that links its stores with frame relay. These initiatives notwithstanding, Rago admits a big part of her charter is to hold down IS costs as Kmart struggles to regain profitability. In order to do that, she's bringing what she calls a new, no-nonsense approach to cost-justifying IS spending. She admits this approach hasn't increased her popularity either among users or her own IS staff. "We don't want to do something that doesn't have a return unless we identify it as something that specifically is a strategic imperative and that we don't have an alternative, and the cost of not doing it is going out of business. Historically that had not been done at all," says Rago. "I certainly haven't become incredibly popular by saying that the merchandising issues are more important than, say, the HR issues. But that's what has to be done." Rago has introduced some new ground rules for getting IS projects approved. IS project managers and managers from the business side now must formally sign up for project cost, delivery date, and dollar payoff. If any of those agreed-to parameters change during development, the entire project must be approved all over again. "It's a no-free-lunch thing," says Rago. "You can't just say, 'I want to spend this money, and this other guy down at the other end of the building is going to save $35 million this yea r.' If you're going to make that claim, then he has to sign up, too." This sort of fact-based approach to cost-justifying IS projects is something new for Kmart. Previously, IS resources were doled out according to what she describes as an "entitlement mentality." If HR or accounting got 15 percent of IS resources last year, they expected 15 percent this year. Breaking away from that approach has pointed more of IS' firepower at fixing Kmart's most serious problems, such as merchandise logistics and replenishment. Other areas are getting little or no IS attention for the tim e being. The company, for example, recently outsourced installation and maintenance of its point-of-sale PCs and terminals to Post Software International Inc., of Wake Forest, N.C. Rago admits that she's under fire from some Kmart executives who are finding their IS resources shrinking. But, she insists, she's not going to back away from her tough, "fact-based" approach to setting IS spending priorities. "This has been attempted before [at Kmart], but people didn't necessarily stand up for it," says Rago. "As soon as everyone starts yelling and saying you're horrible, then they all cut a deal. The first thing is to stand up for it and not knuckle under when all the screaming starts." So far, top management seems to be standing behind her. A tougher question, perhaps, is whether the IS staff will. Morale, she acknowledges, is low, and there have been several high-level defections. Most recently, sources say, top systems architect Paul Gafney left the company to join Office Depot Inc., in Delray Beach, Fla., as director of systems development. Fear, uncertainty, and doubt are all to be expected, however, says Rago, considering the financial problems of Kmart and the rapid changes she's brought. "There's a plunging sense of self-confidence. They're saying, 'I understood my mission was to please my customer, and now you're telling me I'm going to please the shareholder by not pleasing this other guy who's banging on my door.' " She expects that will begin to improve as Kmart sees the benefits of improving performance. Store in-stock levels have already risen to 95.2 percent, above the corporate goal for the year. But Rago understands that it's going to take time. And, in the meantime, there will be doubts. "It's always, 'Well, will [these changes] stick? Or are these guys going to be out soon and is a new crew going to come in and announce from now on it's white shirts and ties only?' " Related article: Finding A Better Way To Stock The Shelves It's tough to undo the work of a pioneer. But new Kmart CIO Virginia Rago had no choice when the company's standards-setting supplier-managed inventory system---developed by former CIO Dave Carlson--started showing cracks late last year. The problem? Many Kmart suppliers were making poor use of the Partners in Merchandise system because they lacked the expertise or hadn't yet changed their business processes. In addition, the system tended to treat all suppliers the same, failing to take into account the unique needs of makers of seasonal or very high-volume items, for example. All that meant merchandise wasn't getting on the shelves. And sources say the problems were so severe that the system played a role in Carlson's departure. As a result, Kmart and its customers increasingly found critical items---even items that were being heavily advertised---out of stock. Kmart officials say that's a key reason why the company's in financial trouble. And since new Chairman, CEO, and President Floyd Hall has come on board, he's linked bonuses for all non-hourly Kmart employees---including IS---to out-of-stock performance. Not surprisingly, fixing Partners in Merchandise and merchandise replenishment have been job No. 1 for Rago since she took over IS. Her first step has been to accelerate a scaling back of the number of suppliers using the Partners in Merchandise system while introducing new analytical tools designed to give Kmart more information on the flow characteristics of different items coming from different suppliers. In fact, sources say, the number of suppliers using the system has been slashed from more than 300 to about 50. Some retail systems experts have been critical of the move, viewing it as a Kmart retreat from the automated supplier-managed replenishment concept that has been successful for other retailers. "They seem to be going back to pencil and paper, which is crazy," says CFT Consulting Inc.'s Ken Morris. "It's like they've got a Cadillac sitting in the front yard but, because it's got a little rust on it, they decide to bring the old bicycle out of the garage." Rago says Kmart isn't so much backing away from Partners in Merchandise as giving it a make-over. "We're clearly moving to having more well-defined, well-managed relationships with our suppliers. We're also trying to understand why we have as many as we do. Is there a real business case to have the suppliers that we have?" Rago's organization is using data access and analytical tools in IBM's Inforem retail software package to give Kmart buyers and merchandisers a better understanding of the flow patterns and problems of specific types of items. The plan then is to add to Partners in Merchandise new replenishment processes that address specific product characteristics. "We're going back to understand how we should be replenishing a particular item based on an analysis of its characteristics, such as sales volume, volatility of sales, or whether it has a predictable seasonal pattern," she says. ------------------------------------------------------------------------- Company: Kmart Corp. Topic: Company Operations Company Personnel Management Company Employee Status Change Company Systems Management MIS Record#: 17 487 519 *** End ***