Australia’s Woolworths stabilises IT systems after “worrisome time”

Just over a year ago Australia’s largest supermarket chain, Woolworths, embarked on a new strategy to turn around its fortunes and take on some some of the discounted brands in the market. Competition in the retail market is incredibly tough, and Woolworths thought it necessary to bring in new leadership, make over a thousand job cuts and put the customer at the centre of its strategy going forward.

This turnaround strategy evidently still has some way to go, with the company reporting a record loss in recent days. Woolworths has reported an annual loss of A$1.2bn, after it announced that it would quit the DIY market and separate from its joint venture with US firm Lowe’s. This has resulted in a $1.8bn write off and legal action being taken against the firm.

Not only this, but the company’s results highlighted a number of IT troubles in recent months, with Woolworths having made a number of company-wide system upgrades in a bid to introduce a leaner operating model. That being said, managing director of Woolworths Group CEO, Brad Banducci, seemed confident about the stability in the systems going forward and the benefit that they would bring to the chain. But more on that later.

Banducci said:

FY16 was a year of unprecedented change for Woolworths. The decisions we have taken and investments we have made have had a material impact on our FY16 results but have been necessary to begin the rebuilding of Woolworths.

We are seeing early signs of progress as we work to restore our competitiveness and improve our culture in Australian Food. We have also addressed significant issues facing the Group with the decision to exit Home Improvement and decisive action taken on BIGW to reposition the business.

Top of my five priorities is getting our customers to put us 1st and making the right business decisions to enable this to happen. We are regaining competitiveness with improving customer metrics and sales and transaction growth demonstrating our customers are recognising our investment in lower prices, better service, fresh fruit and veg and improved store experience. Our improving team engagement scores show we are also changing our culture for the better.

A new model

The following image, which is found within Woolworth’s annual report, gives a visual representation of the company’s strategy going forward. Speaking to investors, CEO Banducci explained that one of the things he has been keen on doing is putting in place a new operating model that provides “a lot more clarity to the business”.

This has involved taking costs out of the centre, changing roles for employees across the company (with more emphasise being placed on in-store staff) and getting more insight into processes across the entire supply chain. Banducci said:

That's what made Woolworth's greater when it was great to very focused in stores and everyone was lined up and is what will make us successful again going forward and that's why I was very keen on implementing the operating model. But there is only one component in driving this, customer and store-led culture back into our business and breaking down what is seen as the Northwest corporate office.

My last priority and not my least priority is we have got a lot of opportunities to become a true lean retailer. We are not a lean retailer right now. I would not confuse lean with cost, what we have been doing in the last few years and what was this cutting cost instead of improving process. You have saved cost by improving processing is my view and that's the journey we are on.

Further to this, Woolworths has also been improving and reengineering its feedback loops. It has introduced a new app that allows in-store staff to immediately give feedback to the support office on produce, meat or any other goods, which is then deducted from their sales target and goes to the penalty of the buying team concerned.

Banducci wants a feedback loop running that forces everyone to care about the quality in the store, whilst empowering the store teams, allowing them to call out problems when they see things that they’re not happy with.

Systems challenges

Part of Woolworths’ plan to introduce a leaner operating model is to replace and implement a number of company-wide systems, so as to improve underlying processes. Banducci said that it was about “getting process stability”.

As well as trialling a new point of sales system with NCR Retalix software, and having upgraded RF guns and introduced more responsive support desk for stores, Woolworths has also introduced SuccessFactors HCM across the company.

As part of the work on improving the end-to-end view of the supply chain with superior systems, Woolworths said that 500 support office and supply chain roles would be removed.

However, Banducci also pointed to a new SAP implementation to replace Woolworths’ ERP, which has proved troublesome in previous months. Banducci said:

Our new ERP system…our merchandizing platform, is now stable, it's been implemented, it caught a lot of challenges for us going into Christmas and I have spoke to few you about those challenges. It was one of the major reasons why we had availability issues in stores, but there was a point in time when we lost visibility on sales and profit performance in our business. And those were very worrisome time, because retailers in everyday business you need to know everyday where you are at and we had moments where we didn’t do that. That is now a lot better.

One of my key KPIs, which was actually lasted about two weeks ago is that every store now once again gets its daily sales numbers by department and it get to gross profit by department and it gets to stock loss by department and that happens daily. And we always used to have it, we lost it during the SAP implementation and that's unbelievably important to me so that our stores can really earn accountability for their performance.

So we have really been focusing getting new systems in place. We still have some work to do, but they are materially implemented now, not only have we been a new ERP system, but we have just replaced out payroll system with our human capital management system. That is the biggest individual payroll implementation probably entering Australia.

I'm delighted to say that's gone far less painfully than our ERP systems. But that will also help us materially and we are in the process on the back of implementing our new operating model. Now that we have got our systems in place starting to drive and end-to-end redesign and hopefully from that we will see major performances improvements in process and of course in cost and that'll be the focus in FY17, but in particular going into FY18.

However, despite the challenges, Banducci has spoken about how the SAP system will benefit the company’s stock taking going forward and Woolworths said that the implementation has now stabilised. The company hasn’t seen any unplanned outages in last 3 months.

My take

Need the pain before you can see the gain, so they say. Let’s hope that’s true for Woolworths. The focus on customer and improved processes bodes well, but whether that can lift the hit taken by breaking away from Lowe’s remains to be seen.