Retails Well Told

From April 1992 until February 2001, Bill Irons was senior vice president and CIO at North Carolina-based home improvement retailer Lowe's Companies. Like Wal-Mart, Lowe's was an early user of technology, but the company had drifted for a while, according to Irons, as it had in-store layout and design for product placement.

When Irons joined the company the then chief executive and one of the early founders was forward looking enough to decree that if Lowe's didn't learn how to deploy technology effectively by 2000 it would cease to be in business. IT was consequently made a key initiative and Irons himself was appointed to Lowe's policy making group, the executive management committee,.

Irons says that during his time at Lowe's the company undertook a substantial amount of systems development which included a brand new logistics system for the company's new and state-of-the-art distribution centres.

"Lowe's had always used a central warehouse. However, we were embarking on a plan to double the average store size, and to support the [new] volumes we decided to fully automate and expand the distribution process. We came up with the concept of regional distribution centres and we built the systems to support that effort. We also did a lot of work on inventory replenishment and merchandising management systems and made many changes to our in-store systems, " Irons says.

Perhaps the most impressive initiative during Irons' tenure at Lowe's, though, was its CRM program, even though it didn't actually use the terminology, preferring to simply call it "direct marketing ".

In late 1993 Lowe's set about building a data warehouse, which Irons considers a prerequisite to a CRM program. In particular, he says it wanted to do a better job of managing product assortment as it moved into new markets and set its sights on becoming a national chain as opposed to a regional south-eastern US chain. Much of the company's legacy data was unreliable so Lowe's created a managerial accounting group to help IT validate the numbers with which it wanted to populate the data warehouse. Irons admits there were many "moments of truth " throughout the process.

Lowe's collected and stored over two years of transaction information in the data warehouse. Irons says this level of detail opened a lot of eyes in the company. For the first time, people were able to look at what drove sales and what didn't; which products sold with which other products; and what unforeseen product affinities existed. This in turn enabled the company to make product placement decisions in the stores.

For example, the company was surprised to learn that one of the biggest affinities with paint was not brushes, sandpaper or disposable gloves but electrical switch belt covers. "That makes a lot of sense; but we had never thought about it until we had the data in the warehouse where we could [study it], " he says.

"Another product we sold was called Qwikcrete — essentially instant concrete. It was a low-margin item that instinctively you wouldn't advertise or promote. We discovered that it was in a surprising number of shopping carts with very high-margin items. So even though it was a commodity, it was supporting the sales of other products that we did make good money on. It was a project starter. We changed our approach on Qwikcrete and started promoting it. We stacked it up high in the stores, and the sales came along with it. Those were the kinds of insights we were able to draw from the data warehouse, " Irons says.

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Due to its size and the need for greater ease of access, Lowe's moved its data warehouse on to a Teradata platform towards the end of 1995 and at this point Irons says the company started to think about direct or database marketing.

Lowe's first looked at what it did know about its customers. From its market research and exit surveys in which it interviewed customers as they left stores, the company knew it had two broad classes of customers - the relatively affluent baby boomers and commercial business customers. It also knew that 15-20 per cent of customers used the company's private credit card, another 20 per cent paid by cheque, another 20 per cent used a bankcard and the rest paid cash. However, Irons says Lowe's didn't know much below that level. It was difficult to understand what those customers' buying habits were and the company was concerned about customer acquisition and retention.

The company had also launched some special interest, free-of-charge publications on topics such as gardening, woodworking and home decorating. These enabled Lowe's to obtain subscribers' names and addresses and obviously let it know what their interests were, but there was no way of knowing if the subscribers actually responded by coming into the stores. In addition, Lowe's had a lot of what Irons calls "shoebox data " containing names and addresses of people who, for example, had registered for a prize at the opening of a new store, or who had complained and returned products.

In fact, according to Irons, Lowe's initially had 50 different sources of information about its customers. Irons' staff built a data model from these sources, to which they added what Lowe's wanted to know about the customers. Lowe's also introduced a process for store cashiers to ask customers for their phone numbers where this was practical and not too intrusive. These were then reversed through the phone directory to obtain the customers' names and addresses, which were recorded in the customer database along with the items purchased and form of payment used. This information was of particular value in the case of customers who didn't use Lowe's private credit or frequent buyer cards.

Irons admits that initially the customer data contained inaccuracies, multiple entries and redundancy. But by the time he left Lowe's, the company was matching 70 per cent of its transactions against promotions, which Irons considers the proof of the pudding in a CRM system. "You can't say you mailed John a promotion because you know he's interested in gardening and that he came into the store and bought these gardening products unless you can match those transactions to him. You must be able to say [definitively] that on July 16, 2001 you mailed him and that three days later he was in the store and bought the products you suggested he buy, " Irons says.

"As the data cleansing of the customer database evolved and the transaction matching expanded, we did bigger and bigger promotions. You have to continually update the database for changes of address and other details. The US Postal Service sells a computer file containing address changes that we used to keep the database current and we came up with the idea to contact people after they had moved. These might be existing customers who had moved into a new store's market or potential new customers who had moved into our marketplace. We suggested items they might want for their new home and it was a phenomenal success.

"The response rate [in number of trips made to the store in the first 90 days after they were contacted] was around 19 per cent and the cost of contacting them was less than $US1 each. Great ROI. " vFrom Retail to E-TailAfter leaving Lowe's, Bill Irons founded management consulting firm WLI Enterprises, which focuses on retail strategy, logistics and IT. He is practice leader at WLI. Randall Mott, on the other hand, chose to remain in a CIO role, albeit in a different industry.

As senior vice president and CIO at Dell, Mott is responsible for managing the company's global IT infrastructure and reports to the office of the CEO. "I spent 22 years in retail and from a career standpoint I wanted the experience of being in another industry. I was not interested in going to a different retailer, " he says.

"In Dell, I saw an organisation that reminded me very much of Wal-Mart in the 1980s in that it was very innovative in its space and in a position to grow very competitively. I felt I could bring some value to that as well as learn a lot. Manufacturing, sales and marketing had not been part of my career and I saw that as an interesting challenge both personally and professionally. I've now had 18 months to learn what I had 16 years to learn at Wal-Mart before I took over as CIO there, " Mott says.

With 35,000 employees - 2500 of them working in internal IT - and $US32 billion in sales last year, Mott says Dell is very similar to many of its corporate customers. Consequently, one of Dell's objectives is to validate its own products in an internal environment. Mott's group works with Dell's engineering groups and other areas of the business to showcase Dell's products running its in-house applications. The goal is to demonstrate that Dell is a technology company and not just a PC company, and thereby act as a reference site for its sales teams.

Mott also claims that Dell's Web site, www.dell.com, is a good example of best practice in IT, as is Dell's supply chain management in that the company builds to order and keeps very little (four or five days) inventory, all of which is components rather than finished goods. In fact, he says his new role is similar to his CIO role at Wal-Mart in that both companies view technology as an enabler and think of IT as a strategy rather than a cost. Consequently, he says that by being aligned with and part of the business strategy, the IT professionals in both organisations have a much higher sense of accomplishment.

"Companies really need to have their [top] technology person on the executive committee. Without those ears and voice at the table they miss out on the business strategies being discussed, what the challenges are and what their technology choices are - that's key. I was fortunate to sit on the executive committee at Wal-Mart and I have that opportunity at Dell too.

"The other thing is to make sure you stay focused on what's important to the company and what you are trying to achieve, and not let yourself get into the mode of trying to do everything for everybody. Because regardless of the size of your organisation, there's only a limited amount of resource, " Mott says.

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Keith Power talks to the former CIOs of US retail giants Wal-Mart and Lowe's about the benefits their IT strategies delivered.

Wal-Mart at a Glance - Wal-Mart Stores, Incorporated is the world's largest retailer, with $US191 billion in sales in the fiscal year ending January 31, 2001. The company employs more than 1 million associates worldwide through nearly 3500 facilities in the US and more than 1000 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany and the UK. More than 100 million customers per week visit Wal-Mart stores.

Lowe's at a Glance - With 2000 sales of $US18.8 billion, Lowe's Companies, Incorporated is the world's second largest home improvement retailer. Headquartered in Wilkesboro, North Carolina, Lowe's is the 13th largest retailer in the US as well as the 34th largest retailer worldwide. Lowe's and its 100,000 employees serve nearly five million do-it-yourself retail and commercial business customers each week at more than 720 stores in 40 states.

Dell Computer at a Glance - Dell Computer Corporation is the world's number one computer systems company and provides products and services required for customers to build their information-technology and Internet infrastructures. The company's revenue for the past four quarters totalled $US32.6 billion. Dell, through its direct business model, designs, manufactures and customises products and services to customer requirements.

With only a handful of major retailers in Australia, all enjoying reasonable market share and relatively comfortable margins, competition in the industry is less intense than it is for many of their overseas counterparts. They have thus been slower to embrace initiatives such as collaborative planning, forecasting and replenishment (CPFR), and to some degree, even customer relationship management (CRM).

Wal-Mart in the US, for example, was an enthusiastic pioneer of supply chain management and its more sophisticated evolution, CPFR. Wal-Mart's RetailLink system provides weekly forecasting data to the company's suppliers, which has resulted in significant reductions in its inventory and product cycle times. In the drive to improve efficiency and reduce costs between manufacturers and retailers, Wal-Mart is, in fact, often hailed as a shining example of collaboration in action.

RetailLink was the brainchild of Randall Mott, Wal-Mart's former CIO and senior vice-president. Mott held a variety of technical and management positions during his 22 years at Wal-Mart, and was appointed CIO in 1994. He left the company in February 2000 to join Dell, also as senior vice president and CIO (see "From Retail to E-Tail ", page 50).

Mott's IT organisation at Wal-Mart consisted of some 1900 people. He joined the company as a programmer right out of university and, even in those early days, he says technology was seen as a key part of how the company could continue to expand and become more efficient. More importantly, senior management understood IT's business value. Consequently, the company was an early investor in technology compared to other retailers. In fact, 90-95 per cent of its systems were developed in-house, given that there were far fewer off-the-shelf products available at the time.

"If you look at the amount of automation in the stores, Wal-Mart clearly has the fastest checkouts in the world, " Mott says. "There are also a lot of the handhelds in the stores that the associates use to get information that enables decision-making inside the store. "According to Mott, Wal-Mart was also a trailblazer in sharing information externally with its suppliers and giving them details that most retailers weren't willing to share, such as what price items sold for in the stores and what kind of mark-downs products had. "One of the key strategies Wal-Mart adopted fairly early on was what we termed Â'store unique', " says Mott. "Each store needed to be unique in its assortment [of products]. In order to be unique, we basically allowed our suppliers to become an extension of the buying office so they were all motivated to drive the right assortment in the stores. "RetailLink first launched in 1991 as a PC version and later evolved into a browser-based and password-protected system, accessible by any of Wal-Mart's suppliers. Mott says that one of the project's key challenges was dealing with the volumes of data and making it intuitive and easy to use. To this end, Wal-Mart hosted a number of free-of-charge training sessions for its suppliers throughout different US cities, which covered both the tools and aspects of retail. As Mott points out, the suppliers themselves weren't retailers and a lot of the terminology and what they needed to think about were new to them.

For Me to Know . . .

Two years ago, CPFR had the consulting community very excited. However many companies still jealously guard their information from outsiders, and while much of the hype surrounding CPFR has since died down, Mott still considers CPFR to be a huge concept in retail. He concedes that nobody is yet practising it on a large scale, but that the likes of Wal-Mart, Kmart and Target in the US, as well as players on the supplier side, have seen the opportunity it presents and are working towards it. Progress has been steady, he says, and industry standards are evolving. He is also emphatic that there is more to be gained than lost by sharing information between different business partners.

"A lot of companies become concerned about others getting to know their information, but understanding common goals is a very powerful thing, " says Mott. "You run some risk that information will be shared inappropriately, but you can usually protect yourself from that just in terms of the agreements you have with the other company.

"In Wal-Mart's case it's very one way, as it is in our current Dell model - us sharing information with suppliers. The real value of CPFR comes in replenishment of course, whereby suppliers also let us know as soon as they know something. For example, if an order's going to be short, the sooner you know the better. You can plan for it and therefore the better the customer experience. Just how much value there is in that is still not fully recognised. Achieving true implementations of CPFR does involve significant change because all of a sudden you are working across boundaries that have never been worked across before, " Mott says.