October 14, 2008

Supply chain triage

By DC Velocity Staff

In January 2006, OfficeMax's supply chain was on its last legs. Plagued by out-of-stocks, a 1-percent return on sales, and negative cash flow, the office supply retailer was struggling to compete against the likes of Staples and Office Depot.

How bad was it? Senior Vice President of Inventory Management and Replenishment Dov Shenkman remembered receiving a call from his CEO, who was in the middle of touring one of the retailer's stores. Product availability was so bad, the CEO informed him, that the store was not only out of several key products, it was also out of the signs apologizing to customers for being out of stock.

In his presentation at CSCMP's annual conference, Shenkman outlined how OfficeMax's executive team revived the floundering company by implementing an "emergency room" environment in the supply chain. This allowed managers to focus on the most important problems first. Improvement opportunities were assessed based on their impact on OfficeMax's top three priorities: product availability, positive cash flow, and cost productivity.

One of the top priorities for Shenkman and his team was to solve the company's out-of-stock problem, but they recognized that they couldn't expect every SKU to always be in stock at every store. Instead they identified those SKUs that were the office supply industry's equivalent of bread and milk—products that absolutely have to be in stock all the time. About 500 of the company's products fell into this category. For the remaining products, the company categorized them according to velocity, margin contribution, and dollar contribution. For each category, the company set different service levels and then measured and tracked them accordingly. The benefit was immediate: Availability increased, and the feedback from stores and customers improved.