Kmart to supply new vendor terms in '02

Troy, MI — Well into the conversion of vendors to a new supply chain system, Kmart has opened negotiations with members of its supplier base to seek much more exacting terms for the future.

Speaking last week during a conference call to discuss third quarter results, chairman and ceo Chuck Conaway also said the company has swept out 25 percent of its suppliers so far this fiscal year, and intends to do more culling going into 2002.

"Our strategy is to give more business to fewer vendors so we can be more meaningful to each other," noted John McDonald, executive vp and cfo.

Conaway, clearly bent on refuting recent criticism in the consumer press about the company's performance since he took the reigns 18 months ago, focused his remarks on the status of operational improvements, including inventory position, in-stocks and advertising productivity.

"Kmart is woefully uncompetitive on terms and costs compared to competitive benchmarking," he acknowledged, pointing in particular to Kmart's inventory to accounts payable ratio.

Wal-Mart earlier in the month told analysts that its ratio had been boosted to 65 percent — meaning that 65 percent of goods are already sold to consumers before payments to vendors fall due.

Kmart's ratio at the end of the third quarter was 39 percent, up from 32 percent at the end of the second quarter, Conaway said. The company plans to reach a 40 percent ratio by the end of the fourth quarter, he said.

"While we have a commitment to our supplier partners to continue to improve execution, we expect nothing less than to be fully competitive on terms and costs with any vendor who deals with Kmart," he said.

The first key to boosting these gains is ELMO, a new supply chain system that consolidates Kmart's product flow procedures for both hard lines and soft lines, each of which previously had its own system.

"ELMO will allow us to flow any item through any distribution channel based on the optimum flow rate," Conaway said. "It will also allow us to simplify and standardize business processes while reducing lead times to 14 days."

Half of the company's soft home vendors have already converted to the new system, he said, and the remainder will be completed by the end of January. Men's, women's, fashion accessories and children's — the only other categories that have not converted — will also have made the transition by the end of the fiscal year.

The company took a $148 million charge during the third quarter related to the restructuring, which includes reconfiguring soft lines flows by replacing two old distribution centers with new state-of-the-art facilities and upgrading two other DCs. In addition, new software installations due to wrap in July 2002 will provide real-time supply chain data, resulting in $15 million in productivity gains, Conaway said.

"At the end of the fourth quarter, new warehouse management systems will kick in, creating new flow paths, resulting in store orders being created as close as possible to DC receipt," Conaway added. "Bulky items like pillows will be slotted at the DC rather than taking up space in the store's backroom, and will be delivered when the store needs them for replenishment."

As vendors began integrating into ELMO, Kmart stopped levying compliance fees on those making the conversion, Conaway said, resulting in a $160 million hit to net income. Kmart now expects suppliers to give back by negotiating what cfo McDonald called "competitive payment cycles."

This does not mean that Kmart will impose "a blanket policy to extend terms," he added. Instead, negotiations are taking place with vendors individually, part of the conversion to ELMO.

ELMO also inaugurates a new accounts payable system, and the company acknowledged last week that some vendors experienced payment delays while Kmart brought the program on line.

"Certain invoices involved with the integration were dropped, and this clearly caused some confusion," Conaway said. "This has been corrected."

The upshot for 2002, Conaway told analysts, is that Kmart is already improving its operating metrics:

  • In-stocks are now 86 percent and closing in on the goal of 90 percent; DCs are processing 90 carts per hour, up 10 percent from last year;

  • Of those orders, 99 percent are shipped with 100 percent accuracy, up from 85 percent;

  • Auto replenishment and/or pulled product now accounts for 60 percent of in-store inventory, vs. 40 percent last year;

  • Store inventories are up 8.3 percent on average, but DC inventories are down 20 percent vs. last year;

  • All orders are received and processed within four days.

"For the first time, I can honestly say that Kmart is flowing goods," Conaway said.

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