IT DRIVES SUPERVALU'S TURNAROUND

BRAD BARTH

MINNEAPOLIS -- It might be said that Supervalu's IT department is pulling a double shift, as it rapidly responds to fundamental changes within not one but both of the company's core businesses.

The food wholesaling giant, with the nation's 10th-largest supermarket retailing operation, is in the process of redefining itself, overhauling its distribution network and shifting the focus of its retail division. These sweeping initiatives came to light as Supervalu, with $16.3 billion in sales after three quarters of fiscal 2002, recently reached a major crossroads.

Early last year, the company lost $2.3 billion in annual revenue after its top client, Kmart, Troy, Mich., announced that it was terminating its contract in order to pare down to a single food provider, arch-rival Fleming, Oklahoma City. Supervalu was ultimately forced to close seven distribution centers as its relationship with the troubled discount retailer, which itself filed for Chapter 11 in January, wound down over the summer.

Meanwhile, Supervalu's retail division experienced a disappointing second half of fiscal 2001, which concluded in February, and had only recently begun a long-range plan to expand in key markets, exit non-core ones and aggressively grow one of its top banners.

If that wasn't enough, Supervalu was undergoing a leadership transition, as President and Chief Operating Officer Jeffrey Noddle prepared to succeed Chairman Mike Wright as chief executive officer. Upon filling the position in June, Noddle (who retained his presidential title) spearheaded a strategy to eliminate low-return assets, increase efficiencies and improve returns.

But rather than destabilizing the company's IT development, these tumultuous circumstances actually accelerated an era of progress that has spawned several new solutions on both sides of the business, including an enterprise-wide data warehouse, a Web-based portal and voice-activated picking technology.

Share and Share Alike

In response to Noddle's directive to maximize return on investment, Supervalu has stepped up a budding initiative to "leverage enabling technologies across multiple lines of businesses," said Bob Borlik, Supervalu's senior vice president and chief information officer. This includes not only the company's warehousing division and its corporate and franchised stores, but many small and midsize independent retailers that outsource IT management to Supervalu due to their own capital constraints.

Thus, as Supervalu continues to upgrade its own technology, it will subsequently offer its independent clients the chance to share these solutions, most likely through an application service provider (ASP) relationship. "If we can continue to bring value to the table at our own corporate stores, at the same time we will offer additional value and more tools for our independents, who face the same challenges that we do in terms of data and ability to report," said John Eversman, Supervalu's vice president of retail.

Supervalu provides distribution services to some 4,000 individual business locations. While some of its clients also happen to double as retail rivals in key markets, the company nevertheless expects that increased revenue from its new technology offerings will offset any competitive advantage it may lose by sharing its technology with other businesses.

In the meantime, however, Supervalu still has work to do to modernize its own disparate legacy retail systems, which have long bogged down its nine banners -- Cub Foods, bigg's, Farm Fresh, Hornbachers, Save-A-Lot, Shoppers Food Warehouse, Metro, Scott's and Shop 'n Save. With retail operations that have rapidly grown to over 1,200 stores, thanks to a slew of acquisitions in the 1990s, Supervalu has been in dire need of IT standardization and, until about 18 months ago, had lagged in this area.

"Supervalu, like a lot of companies, has grown up through acquisition and expansion, and so what we've inherited is a lot of unconnected systems," said Borlik. "Our strategy right now is to bring them together so that we have a very consolidated, controlled and reliable information network not only for our corporate stores but also for our independent retailers."

"We've had a strategy for the last 18 months or so to come to market with a more streamlined mechanism, where we're trying to take the complexity out of our business," added Eversman. "And complexity, as we often say, is our biggest cost."

This initiative has resulted in the introduction of new front-end technology, a corporate-wide hosting system (for merchandising and category management) and the company's first enterprise data warehouse.

Last year, Cub Foods became the first banner to undergo IT standardization (scaling down from five to two front-end systems) and to fully integrate these three major components into its operations. By year's end, Supervalu will likely address a second and third banner as well.

For its in-store technology upgrade, the company selected a flat-screen, point-of-sale solution from NCR, Dayton, Ohio. With 70% of the front end's total cost of ownership attributed to labor, Supervalu wanted an intuitive solution that was easy to master. "You can train people in about 30 minutes, where it used to take a couple of hours," Eversman explained. Additionally, "it is clearly a quicker, more efficient system to get people through the front end."

Moreover, new POS payment capabilities from Buypass, Atlanta, allowed Supervalu last Thanksgiving to introduce an electronic gift-card program in two markets. "We did close to $2 million in sales in a very short period of time," said Eversman.

Having also implemented back-office receiving technology from TCI Solutions, Irvine, Calif., and SofTechnics, Garland, Texas, Supervalu is now allowing vendors to electronically communicate prices for any product that arrives via direct-store delivery. "That has had a labor impact, and that's had a margin impact," noted Eversman.

The data warehouse, also from NCR, combined with a decision-support application from MicroStrategy, McLean, Va., and data tools from Informatica, Redwood City, Calif., allows Supervalu to compile and analyze daily transactional information captured at the point of sale. The hosting system, from Armature, Leeds, England, then enables corporate-level management to query the database for a variety of applications, including financial planning, merchandise planning, category management and price modeling. The software solutions run on an enterprise server from IBM, Armonk, N.Y., and an application server from Sun Microsystems, Palo Alto, Calif.

"We now have a very sophisticated headquarters hosting system that allows us to not only model but come up with sophisticated merchandising and pricing strategies, and ensure that at the store level those strategies are being executed," said Borlik. "And then through the data warehouse and our data gathering, we can line up the stores' performances against these models. So it really kind of closes the whole loop and it gives us a higher level of assurance that we can actually execute."

Thanks to improved data management, added Eversman, a category manager now "knows fairly accurately what his expected gross margins will be for a given set of categories. Before, we didn't have the technology or discipline in place, whereas now we can fairly well predict what our margins will be -- and that makes it much easier if you want to predict profitability."

New-Look Stores, Supply CHAIN

Some stores are beyond the help of technology. Last year, Supervalu closed up shop in parts of New Jersey, Pennsylvania and Indiana, and today it is relying on improved data management to continue its strategic exodus from troubled markets. "Macromarketing, performance data, research data and geographic data of a particular market facilitate that process for the people who are making those decisions," said Borlik.

The company has been singling out its non-core and underperforming locations, looking to sell off these stores, remodel them or convert them to its thriving Save-A-Lot banner. Featuring a limited-assortment value format, Save-A-Lot has been in an aggressive expansion mode, reaching 953 stores as of January, with plans to pass the 1,000 mark by the end of 2002.

While still mulling over its retail real estate options, Supervalu finished selling off its non-core distribution facilities last summer. With the help of an upgrade to its logistics software from Manugistics Group, Rockville, Md., the company rerouted its remaining warehousing operations, creating a more efficient network of distribution centers that provide service to Supervalu's retail stores and wholesale clients.

Logistics management remains an important goal. Supervalu has set a standard to improve its cube per load by 16% and reduce its miles traveled by 6%. Said Borlik, "We're focusing a lot on our transportation efficiency, including both centralized routing and improving how our customers manage orders with us so we can improve our transportation to them."

To address the latter issue, Supervalu introduced a Web portal last year that allows its warehouse operations to conduct transactions with its corporate, franchised and independent stores. "Through this, we're allowing our clients to look at their order status and see how well they're maximizing the efficiency of their ordering, and then it allows the Manugistics software to do optimized routing," said Borlik.

Supervalu already has more than 300 stores -- the majority belonging to its retail clients -- on the solution, and expects to expand that number to around 2,500 by the end of the calendar year. Information that can be looked up or exchanged through the portal includes purchase orders, invoices, advanced shipping notices (ASNs), order status and product specs. Borlik said the portal virtually eliminates the need for sending paper-based communication, thus saving time and money.

Eventually, the portal will help Supervalu rely less on costly client-server applications, allowing the company to Web-enable more of its store- and corporate-level functions, including many of the tasks performed via the hosting system and data warehouse. And it is the platform that Supervalu intends to leverage in order to support its budding ASP business model.

Also as a result of restructuring efforts, Supervalu rolled out a voice-activated, hands-free, warehouse-picking system from Pittsburgh-based Vocollect. Using this wireless device, employees enter voice commands into the warehouse management system, sending verbal instructions on what specific items and quantities to pick.

Supervalu reduced mispicks by 85% when piloting the system in its Fargo, N.D., distribution center. The system also boosted overall production, which is significant, considering that Supervalu cut back on staff over the past year and thus needs to maximize output from its reduced workforce.

All of these changes may be sparking new life into Supervalu. Retail comp sales were slightly up in the first half of fiscal 2002, a development largely attributed to the burgeoning Save-A-Lot banner. And third-quarter numbers, released last December, included record net earnings of $59 million, indicating a more pronounced financial rebound. While the wholesale business has understandably diminished since the Kmart fallout, operating earnings as a percentage of sales improved last quarter as a result of a reconstituted and more efficient distribution process.

In a press release last December, Noddle said, "Our strong performance is a direct result of our commitment to improve both execution and efficiency across our operations, while investing selectively in the best growth opportunities for Supervalu. We are confident that the business strategies currently under way will differentiate us with our customers and drive improved financial results."