The Supply Chain in Bankruptcy

Fixing operational, service issues oft-forgotten key to post-Chapter 11 survival for retailers, consultant argues

Hillsborough, NJ — March 26, 2003 — Retailers looking to emerge successfully from Chapter 11 bankruptcy must ensure that their management and consultants have thoroughly addressed the supply chain and service issues that drove them into reorganization in the first place or risk falling into liquidation, according to research by a turnaround consultancy.

According to research conducted by the Hillsborough, N.J.-based Clear Thinking Group, of 141 retailers with annual sales exceeding $100 million filing for Chapter 11 between 1990 and 2002, only 19 (or 14 percent) have successfully emerged without a change in control and with virtually the same store count and distribution network in place as when they entered the bankruptcy process.

The vast majority of these retailers, 99 (or 70 percent), were eventually acquired by other companies or had significant assets liquidated. According to the firm, it is still too early to determine whether the remaining 23 (or 16 percent) will survive.

"While poor leadership and management, inflated egos, and a lack of ability to execute rank among the reasons so many operations eventually fade away after emerging from bankruptcy, neglecting to remedy real operational problems during the Chapter 11 process constitutes an even stronger catalyst for failure," said Jim Welty, chairman of Clear Thinking.

Welty, whose career has included senior management positions at retailers Ayres and Gimbel's, said that companies tend to focus on the balance sheet, cash flow, financials, and real estate, while failing to correct the issues that got them to bankruptcy status in the first place.

"In many cases, these companies have poorly developed supply chain and customer service processes," Welty explained. "Few have maximized the use of technology to drive these processes. With all the Y2K and [enterprise resource planning] hype of the late 1990s, less than 50 percent of all consumer marketers have unlocked the power of technology to help drive their supply chain."

Rethinking the planning and management of inventory through merchandising, distribution, and systems constitutes an essential step for companies striving to remain in business long after they have shed their Chapter 11 status, Welty advised. Management of inventory flow is a shared responsibility across the merchandising, operations, finance, systems, stores and distribution functions. Accordingly, an entire organization may suffer as each group strives to optimize operations within its own area, Welty noted. "That is why we encourage companies to benchmark — not only in their industry, but also outside of it," he said.

Retailers wishing to remain viable beyond bankruptcy filing also must strive to make their mark from a customer service standpoint. "Many retailers are trying with greeters, kids' buggies and other attempts to make shopping a friendly experience," Welty said. "But they may have forgotten the 35 non-selling functions that help drive service, from clean, well-lit stores to knowledgeable personnel. When 25 percent to 30 percent of one's business is done on the weekends, but payroll is less than 20 percent, it is difficult to provide winning service."

Kmart and other merchants looking to emerge from Chapter 11 in the months ahead must do so against the backdrop of a sluggish U.S. economy, and an over-stored retail environment rife with players who sell similar products and often lack sufficiently innovative items to generate impulse purchases. Given those conditions, Welty asserted that only those companies that have gone back upstream to remedy supply chain and service difficulties possess a real chance for long-term survival post-Chapter 11. "Wal-Mart, Walgreen, Coca-Cola, Dell, GE, and others have figured this out and will continue to win whatever the market conditions," he concluded.

Clear Thinking Group is a subsidiary of Liquidation World of Calgary, Alberta.