Business and Management
Submitted By 469362181
IMPORTANT NOTES ON THE USE OF THIS EXAMPLE
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B-A2-XXXX-X Name as in ClassList, (Short Name)
Case Analysis Report (CAR): “ShopKo and Pamida: Systems Triumph or Tragedy?” (L&L, 9th ed. Companion Website, Additional Cases Link)
This case shows how a U.S. retail chain (ShopKo) in late 1990s tried to improve its competitive position through a hasty acquisition of another retail chain (Pamida, Inc.), but failed to manage the organizational/IS changes involved, and thereby faced serious operations management problems.
Our analysis mainly focuses on Pamida’s Distribution Center (DC) Project and the Warehouse Management information system (WMIS) involved. We identify some broader alternatives that Shopko should have considered, but did not.
Organizational Context (Major Organizational Structures, Goals, and Strategies)
The organizational context of this case is centered on ShopKo, Inc. (the main business organization in the case), the 2 retail chains which it purchased, and some software systems vendors involved in the case. Major features of these organizations are outlined below: • ShopKo, Inc.: The main Business Organization of this case, ShopKo is a typical general merchandise retail chain (GMRC) in USA. Headquartered in Green Bay, WI, it focused on clothing/apparel products, had about 140 stores in 15 states, with total sales of USD3.18B for fiscal year ending Jan.’05. Competition & Strategy: Traditionally it relied on the 4-seasons/cycles markdown pricing strategy (common in apparel business), but was now under competitive pressure from “designer” chains (e.g. GAP) using shorter product cycles. So, ShopKo had invested in the Markdown Optimizer system from Spotlight Solutions, Inc. In addition, ShopKo rather hastily purchased other retail chains, like Pamida, to grow into small-town areas where competition was not so strong. In the end, ShopKo itself was acquired by another business corporation in 2005. • Pamida, Inc.: Another GMRC/clothing chain of about 40 (180 minus 140) stores mainly in “small-town” rural areas of Nebraska and South Dakota. It relied on the “high in-stock” (rather than low prices) approach that needed warehousing and IS support. ShopKo bought Pamida in 1999, and began warehousing modernization through the Distribution Center (DC) project. In reality, this decision led to the major problems of the case. 1) PM Place, Inc.: Another small-town chain with 49 stores purchased by ShopKo and merged with Pamida to attack small-town market. 2) Spotlight Solutions, Inc.: Vendor of the Markdown Optimizer system successfully used by ShopKo to maximize its revenues and shelf-space availability in view of the newer, shorter, product cycles. Case has little information about it, and not important in analysis 3) Catalyst International, Inc.: Vendor of Pamida’s warehousing software; Catalyst has enhanced the capabilities of its product (the software) through several versions and upgrades which Pamida has never bothered to purchase and incorporate in its WMIS.
In ShopKo’s “environment, we also see other businesses like “designer chains” (e.g.GAP) and “powerhouse” retailers (e.g., Wal-Mart, Target), but they do not seem important to our analysis of this case.
Main Problem and Focal Systems (of the Case)
ShopKo’s Markdown Optimizer System (focal system): From the case, it is clear that ShopKo implemented this IS to be able to meet the challenge of the new shorter product cycles imposed by designer chains. The challenge really involves balancing the conflicting “objectives” of (a) making the store-space available for the next cycle, while (b) pricing the older goods to maximize the revenues! Fortunately, the related performance measures found in the case are all very satisfactory: Leftover gross margin up 25%, Store-staff payroll costs down 24%, Unsold good down from 5% to 2% (that is 60% reduction!), Expected Net Profits up USD15M or 15%. Since all these measures are clearly “good”, there is no need for further analysis of the markdown Optimizer system. In contrast, the story for Pamida’s Distribution Center project is quite different, as summarized below.
Pamida’s Distribution Center Project (focal system): Considering ShopKo’s goal of expanding into the small-town market, it seems natural for Pamida’s (with its High In-stock Strategy) to modernize all its warehousing facilities to meet the expected high demand. Accordingly, Pamida embarked on a massive modernization of its warehouses through the Distribution Center Project. The goal of this project was to transform the existing flow-trough type warehouses (where goods arrive and are immediately shipped to the stores) into a latest type of full-service Distribution Centers (DC) where inventory is stored, and shipped to the stores on a more responsive, Just-in-Time, basis.
Despite of its Hi-Tech ambitious goal, the performance measures in terms of the stock availability in the stores, and associated monetary performance for the DC project is rather disappointing: ‘2000 revenues down by USD6.7M in 9 months; Estimated Sales Loss caused by Lebonon DC: USD5M (lagging 5% behind other stores); Quarterly Gross margin down to 20.3% (from 26.3%); Lawsuits by shareholders complaining poor management of distribution problems. This poor performance clearly identifies Pamida’s DC Project (or Warehouse Modernization”) as the “main problem” source for this case. Hence, our analysis focuses on the DC Project itself, to examine how things could have been done differently to avoid problems.
Major Alternatives and their Analysis
Identifying the Alternatives: Here, we identify and analyze other major alternatives that ShopKo should have considered to ensure the success of DC project. From an IS perspective, our cue for important but ignored alternative comes from the following case-fact: Pamida expanded and upgraded (i.e. modernized) only the “physical warehouse facilities,” but not the associated IS (WMIS)! Given the vital importance of IS in business world today (Laudon, Chp-1), we feel Pamida should have given a serious consideration to upgrading the WMIS as well. Moreover, they could have also considered “only expanding” or “only upgrading” the warehouse facilities! This line of analysis leads us to the following, more comprehensive, and list of possible alternatives:
[Don’t just imitate this pattern of Cis! Study what alternatives make most sense in the given Case.]
C1: Only Upgrade the Physical Warehouse Facilities (Do not expand)
C2: Only Expand the Physical Warehouse Facilities (No upgrade)
C3: Upgrade & Expand Only Physical Facilities (This is what they did, and had all the problems!)
C4: Upgrade Only WMIS
C5: Only Upgrade BOTH WMIS and Physical Warehouse Facilities
C6: Upgrade BOTH (i.e. C5) and Expand Physical Warehouse Facilities
[“Only Expand” doesn’t mean anything for software, so we don’t include it above.]
Analysis of the Alternatives:
The case tells us that Pamida chose C3, which led to lot of problems in terms of ultimate stock-availability in the stores. So, that is clearly not a good solution. The “holistic” nature of systems in general suggests that upgrading only some parts of a system cannot be as effective as upgrading the “whole.” Therefore, C1 through C4 must be clearly inferior to C5 or C6 in terms of the overall DC performance. That leaves only 2 real alternatives (C5 and C6) to be compared.
The choice between C5/C6 should be based on a detailed analysis of costs, benefits, and any risks involved. For example, while it is cheaper to upgrade and expand in one go, C6 could be more risky because of it is more complex than C5. On the other hand, if increased storage capacity is “absolutely required” (e.g. based on demand forecasts!) then C6 may have to be chosen. Although such detailed analysis cannot be shown here, in real life it is a must before the final decision.
In the end, budget constraints must be used to choose the best alternative that your budget can afford. The case-text does not tell us of any budgetary limits. In fact, “Pamida had the support of ShopKo’s management in making technology investment,” but the choice of the kind of technology to invest in was left up to Pamida. Pamida chose to invest in upgrading their main business computer systems (hardware) and some merchandising SW from Retek, Inc. (Case p. 4). It seems Pamida did NOT evaluate the two IT investment opportunities before choosing one. The Case also tells us that the IT budget was indeed large enough for replacing Pamida’s “major computer systems and software,” so it would have been surely enough for even the most costly alternative C6, if not then at least C5.
In conclusion, we think Pamida could have easily afforded either the “total solution” C6, or if not, then at least C5. Instead, they seem have simply jumped on the first thing that came to their mind (C3) without any analysis, probably because they did not see WMIS upgrade as important.
Recommendations/Conclusions and Implications
From the above analysis it seems clear that Pamida indeed had the opportunity (and most likely enough funds) to “plan” their Warehouse Modernization and “design” their new Distribution Centers in a more effective manner, that is, without running into the problems they had. Unfortunately, Pamida did not exploit this opportunity to its advantage. No systematic analysis was performed in planning (and design) of the new Distribution Centers.
Moreover, the case mentions the sudden “management turnover” (p. 4) indicating problems in the “behavioral” aspects of the organization and its management, our major conclusions, with associated recommendations, are as follows: • Systematic business analysis, and cost-benefits evaluation, of ALL major alternatives should have been performed before replacing the main computer systems/software. • Since Pamida was acquired by ShopKo, the above analyses should have been performed from the overall perspective of ShopKo-level corporate Goals (and Business Strategy) as well as associated IT strategy. • As the parent company, ShopKo should have taken much more initiative and leadership in the above type of analysis, and perhaps the final decisions. • ShopKo executives need to learn more about Management of Change so they can manage any future acquisitions better.
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