The Case for Innovation

According to recent AMR research four to six percent of total retailer spending on IT is focused on innovation. At the RIS News Retail Executive Summit in Las Vegas, the CIOs of four retailers got together to discuss how to make the most of that four percent of the IT budget earmarked for innovation. The CIO Roundtable consisted of Michael Jones, senior vice president and CIO of Michaels Stores; Zeke Duge, senior vice president and CIO of Smart and Final; Robert Fort, CIO of Virgin Entertainment Group; and Mark Stone, senior vice president and CIO of Zales. Here's what the CIOs had to say.
> > Zeke Duge, Smart and Final.
Smart and Final is a warehouse grocery chain that operates more than 250 non-membership warehouse stores for food and foodservice supplies in six Western states and northwestern Mexico.
> RIS: How can you keep your organization focused on innovation?
Mark Stone, senior vice president and CIO of Zales:
You have to be realistic. In certain cases, you have to educate the organization as to why a certain innovation is necessary and in other cases you have to market to the organization in order to convince them. If you have a project that pays for itself by increasing revenues, decreasing expenses carries a positive ROI, it is pretty obvious. The reality is that not every innovation can be justified through an ROI. For example, the replacement of our POS system in all 2,400 stores €" there is no financial ROI to justify that. It is a business necessity. Getting the innovation implemented requires really knowing your business and then doing everything you can to sell to upper management.
Michael Jones, senior vice president and CIO of Michaels Stores:
We have tried to get the support of the executive team and focus our energies on things that affect the larger whole rather than silo optimization. The way you succeed is to adopt an informal process of getting your executive committee on board prior to any formal meetings of the steering committee. If you go into a steering committee meeting trying to tell your logistics person that you aren't going to do something that they want and that is the first time they have heard about it, you lost the battle.
Zeke Duge, senior vice president and CIO of Smart and Final:
One of the hard parts about the job is that everybody at the executive table expects you to come up with the idea before them but they want it to be their idea and they want to get credit for it if it works. There are all of these wonderful things you can do. There is a finite amount of resources and a finite amount of tolerance for pain in the organization. You have to be nimble; you have to be cost efficient which really doesn't work with being nimble. Being nimble means being everywhere at once. There is an expense to that. You have to be ready to do what is good for the company before the company knows what is good for it. If you can envision that, so that you can know it is coming, you stand a far better chance of succeeding.
Robert Fort, CIO of Virgin Entertainment Group:
We can focus on saving pennies here and there but that is not what our company needs nine times out of ten. The company needs something that is going to drive sales and help differentiate in the marketplace. A good example is the kiosks at our Virgin MegaStores, they don't have an easy ROI. They do contribute to sales, but is hard to calculate what percentage comes directly from the kiosks. But, they are definitely a part of our brand image. You have to stay focused on where the business is going and where the priorities are.
Zeke Duge, senior vice president and CIO of Smart and Final:
This is called the CIO Preservation Act. We sat down and said what is it that the corporation needs to grow and expand and some of you know that Smart and Final was sold last week to a group of investors and one of the things that was gratifying to me was that I could pull out this plan that was crafted in 2003 and say this is where we planned to be and this is where we are. If I maintain my job it will partly be because I had all of these things in a row and we were able to execute against them.
> > Robert Fort, Virgin Entertainment Group.
The Virgin Entertainment Group operates 20 U.S. Virgin Megastores ranging in size from 35,000 to 70,000 square feet and carrying up to 400,000 music CDs, as well as extensive inventories of DVDs, video games and books.
>> Michael Jones, Michaels Stores.
Michaels Stores, is the nation's largest retailer of arts and crafts materials. There are more than 920 Michaels stores in 48 states and Canada. The corporation also operates 166 Aaron Brothers stores, 11 Recollections stores and four Star Decorators Wholesale stores.
>> Mark Stone, Zales.
Zales operates more than 2,300 fine jewelry store locations throughout the United States, Canada and Puerto Rico under the brand names Zales Jewelers, Zales Outlet, Gordon's Jewelers, Bailey Banks & Biddle, Peoples Jewelers, Plumb Gold and Piercing Pagoda.
> RIS: With SAP staking out a position that enterprise resource planning (ERP) is a growth opportunity in retail, Oracle buying into the vertical, and Lawson, Escalate and even Microsoft getting into the act, is retail ERP a reality today? Does it have an opportunity in retail or do you still need to think in terms of a best-of-breed world?
Jones: There have been a lot of failed implementations attached to retail ERP. In reality, I don't think there are ERP packages. SAP may come close to it but even they are missing some portions of it. We are really in a best-of-breed environment. I have products that say Oracle Retail now because coders went in about three months ago and changed it from Profit Logic or other names. That is the way you should approach it. For example, we are doing an upgrade of our Retek (now Oracle) system from a 6.6 to version 12. We aren't upgrading the whole thing. We are keeping our perpetual inventory at 6.6 because there is no business benefit from bringing it up to the latest version. There is a lot of business interruption so I will just put in a piece of middleware. In essence, I am creating my own best of breed within an existing package. You can't tell people to wait 18, 24, or 36 months. If you do, there is a large likelihood that the project will get cancelled. Ours is a modified best-of-breed.
Fort: I have a different angle on this since our core systems are being reevaluated right now. I worked at Nestle and installed a SAP integration so I come from a consumer packaged goods and manufacturing environment which is what SAP's core is and where ERP originated. Idealistically, I am saying it would be great to have ERP, but you need to look at it as a concept and how to do things efficiently and strategically. It doesn't seem that there is a realistic ERP for retail yet.
Duge: So what do you do when you take this to the illogical extreme? You have invested in a pseudo-ERP package from one of the big vendors because it covers the majority of your business and now you are taking point solutions and you are integrating them back into the pseudo-ERP. Do you integrate those point solutions one at a time or do you architect a strategy for an introduction of all point solutions across the enterprise?

>RIS: Zales has recently implemented a third generation e-commerce platform. Could you give a little input as to your e-commerce strategy?
Stone: This past fall we rolled out our third generation platform through an outsourcing arrangement. In December the site had five million unique visitors. We had a conversion rate of 1.2 percent which we are very pleased with. We know that most of the people that visit our Web site are taking it as an educational opportunity. We don't know what percentage of people who visited the site actually show up in one of our stores. But, we are very excited to have the ability to communicate with that many people. Our next goal is to take advantage of our 2,400 stores. We want to be able to order online and pick up at the store. Our average online transaction is a little over $200, so we are clearly not selling our larger diamonds, such as engagement rings, but with that said if Blue Nile can average between $1,500 to $2,000 per transaction in a pure play environment, we would like to reach the same level. We believe the e-commerce space will remain robust for us, because we are still increasing our sales by 50 percent year-over-year on a three-year average. We believe that it is critical for us to take advantage of our brick-and-mortar stores and link that into our e-commerce strategy, so that we might gain a competitive advantage.

> RIS: Can you comment on your experience partnering with outside vendors to drive innovation and the practices you have seen to bring in the outside vendors to help you drive that innovation?
Duge: It is critical. It is the only way we survive. We view our vendor selection as probably the most critical part of the entire planning operation. We try to hold our vendors tight to us. We do not try to nickel and dime our vendors. We find that the best way to alienate your vendor is to insist on the lowest price. It is dumb. The vendors that stick with us really are our partners. They are an extension of the IT organization. We try to give them a reasonable amount of funding to stay in business so that seven years from now I can come back to the same people that I have a working relationship with and get sterling results. I think if you don't do that, you will be disappointed.
Fort: At Virgin, we have a reputation for being very innovative, so we are approached constantly with ideas. One of the issues we have is to weed through them. We do look forward to some of these strategic partnerships. We are a very small IT group. There are only 12 of us. The value the vendors bring to me is they are out there looking at all of the latest and greatest, and bringing it to the table. Unfortunately a lot of the burden falls on us to weed through that. As far as price goes, we negotiate for some good pricing, but we turn around and give a lot of value back.

> RIS: Do any of your IT people work in a store? Are they required to have any blocks of time where they are required to work in a store with face-to-face customer engagements so they can really understand the dynamics of what they are working on and how it is executed by the sales associates on the sales floor?
Fort: My IT staff has two people who have both come from the stores. They both worked their ways through various ranks. They bring a lot of experience and they spend a fair amount of time in the stores working with the store managers and associates. I have been given a task this year to look at our customer experience in the store. Our personnel are very dedicated to music, but they are busy with task work and shy about approaching customers, so we are trying to figure out how to overcome this. That eye-toeye contact with your customer is incredibly important. The fact that we have people on staff who have come through the stores is very important.
Jones: I have tried programs like that before, and stopped doing them because the burden is often on the stores that host these folks. With 180 people in my IT department, when someone from corporate shows up, in a lot of cases it is more work for the stores. We have a lot of people in our IT who came from the stores. We try to keep a real close touch with the stores but we aren't great at it. We are constantly striving to improve our ability to help the stores. Our focus in the future will be on reducing tasks that take the associates away from customer interaction so they can focus on being a resource for our customer.

> RIS: Zales is rolling out a new POS system across 2,400 stores and also a new forecasting system. Is that centralized? Do you have one planning department?
Stone: The new POS system will be rolled out over four years. The new demand forecasting system will be implemented this summer. This Oracle application will be the first application in the Oracle Retail Merchandising Suite to be rolled out over the next three years. The corporation has switched back and forth between a decentralized and centralized model. It appears that we will be migrating back to a centralized model next January. Regardless of the timing of this migration, we need to put in the building blocks for a centralized merchandising organization. This will enable all of our merchants to use the same tool in the same way, making the merchants more transferable within our various brands. RIS

This article is based on the closing session at the 2007 RIS Retail Executive Summit, February 27-March 2. The session was moderated by Rob Garf, vice president, retail strategies practice of AMR Research.
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