- Analysis of the Case
The case of Kmart is shocking and an eye opener too, with regard to the state of an organization that brings doom to itself. The case provides many insights not only about the inventory management but also about the mindset of the management that are likely to damage a once successful company. Every business has key business activities and units of measurements unique to the business. The top management is supposed to pay close attention to them and organize their work to maintain what is optimum for their business. Kmart chose wrong units of measurements and ignored the right ones. One of the wrong methods that were applied was entrusting enormous powers in the hands of stores manager to make orders for merchandise and to calculate profitability based on the purchases rather on the sales. The mentality of top management that ‘the store-manager-knows-best’ contributed to Kmart’s bankruptcy.
A store manager in Kmart was remunerated and paid incentives on the profitability of the store, based on a crude formula called ‘theoretical gross’. This was a static approach to calculating the profits and in rewarding the store managers and this system alone has eroded millions of dollars from the capital of Kmart. The main business measure to be used in assessing supermarket business is the sales per square feet, Kmart just did not focused on it, while Wal Mart was mainly managing sales per square foot. Stocking merchandise was another issue Kmart failed to recognize, it never segregated the slow moving items from the fast moving and also did not provide enough shelf space for the fast moving items (again related to managing sales per square foot).
It was not just the lack of inventory management that made Kmart bankrupt; the mindset of the leaders and the key people within played a major role in the collapse of this great business empire. One obvious factor was that stubbornness to reject the key data on sales, margins, profitability of the merchandise etc. The managers were reluctant to follow the reports that were contrary to their practices. Second disastrous mindset was the habit of initiating a program and then abandoning midway without a proper analysis. At least four initiatives were killed before it could give the positive results. The VCR program was one such initiative that was showing signs of recovery, but got disowned.
On the other hand Wal-Mart built its business on solid inventory management and discipline of managing sales per square foot. It developed and strengthened systems for ordering on-time merchandise. Also they planned their transportation systems to get the products to the stores quicker. This helped in generating more sales, customers always found what they wanted in the store.
- Analysis of the Sales data
The attached file shows a cluster of 15 products having high volume, higher margins and higher revenues. Managing the merchandise of these products can enhance the store management, customer satisfaction and the profitability of the store. There is one product (1114) which sells in low volume but brings in high revenues and margins. If the company can take a special promotion for this product the company can earn higher profits. In the index cluster (high revenue, high volume, high margins) of this retail outlet, there are four products that are in decline stage, which need to be observed on day to day basis and ordered as per the trend in daily sales. Also the substitute product / new generation product that fulfill the function of this product should be identified for including in the merchandise. There is one product (1754) which is present in the index cluster that has demand only for a month. An in depth analysis of the customers is required in planning for this product such as buying pattern of the customers, the profile of the customers, and competitive product analysis too. ABC and Pareto analysis has tremendous potential to help a retail business that carries huge inventory and multiple product categories.
