SCDigest editorial staff

Loblaw, the leading grocer and Canada and a leading retailer of general merchandise, announced in its third quarter financial report that costs and disruptions with a “transformative” supply chain project would had a substantial impact on company financial performance, though the company stated its confidence that the problems would soon be behind it and the strategy would ultimately pay off.

n March of 2005, the 1000+ store chain announced plans to revamp its supply chain systems and network, a strategy which called for shuttering six company-owned warehouses, moving some distribution operations to third- parties, and consolidating/standardizing its warehouse management and other back-end supply chain systems.

In October, Loblaw announced that challenges in executing the strategy had led to a material impact on both costs and sales. The company’s third quarter 2005 report noted that “the company experienced disruptions in the flow of inventory to its stores in particular in western Canada resulting from the supply chain restructuring and from certain supply chain systems conversions undertaken as part of the creation of a national information technology platform. In addition, the new third party-operated general merchandise warehouse and distribution centre for eastern Canada has not reached planned operating efficiency or capacity as quickly as expected.”

The problems impacted both operating costs and sales. Operating costs increased due to additional handling, storage and movement of inventory in light of the disruptions. Lack of inventory on the shelf was also estimated to have reduced expected sales growth in the quarter by approximately 0.8% to 1.2% when compared to 2004 .

Challenges in implementing and converting warehouse management systems were a leading cause of the problems. The conversion of Loblaw’s Calgary general merchandise distribution center to the new WMS was especially difficult, and resulted in store service levels falling “below normal running rates, resulting in recurring general merchandise out-of-stock positions at retail.”

The company also noted that “In Ontario, the transfer of the warehouse and distribution activities of general merchandise to a new facility operated by a third party continued into the third quarter of 2005. Complexities are being experienced during the start-up phase and as a result, service levels are not meeting expectations. This has resulted in some out-of-stock positions in Ontario and a delay in the transition of volume into the third party facility from existing Company distribution centers, which, in turn, is placing additional pressure on existing Company distribution centers.

inally, higher issues with operating costs and store service levels was also impacted by falling productivity in the DCs scheduled for closure but still operating in 2005.

It appears in part that the company’s SCM initiatives were just too much in too short of time to be executed effectively. Several financial analysts following the Loblaw’s stock, which took a mild hit as a result of the Q3 financials, suggested as much as well in their analysis of the company’s third quarter performance.

o you have any insight into Loblaw’s supply chain challenges/disruptions? Does it sound like a simple case of too much, too soon?