State of the Store: CIO Roundtable

Tough questions, frank answers, straight talk from five leading retail executives. The result is a fascinating picture of where retailing is today and where it's heading tomorrow from the perspective of tech-savvy executives across a range of verticals.

It would be inaccurate to convey the impression that these executives were grilled by FoxNews interrogator Bill O'Reilly. Executives of this caliber — Larry Buresh of CSK Auto, Brad Friedman of Burlington Coat Factory, Ted Jackson of Sport Chalet, Terry Morgan of Food Lion and Keith Morrow of 7-Eleven — are much too savvy and far too busy to put up with ambush journalism.

The reason they made themselves available and answered probing questions is that they have worked with RIS News over time and understand our mission, which is a peer-to-peer exchange of information that puts a finger on the technology pulse of the most challenging industry in the world — retailing. To begin our discussion, we tackled the subject that's on the forefront of everyone's minds — RFID.

RIS News: RFID activity is moving faster through the industry than many retailers publicly admit. A recent study found that 14 percent of retailers are currently involved in some phase of an RFID project. Are you?

Keith Morrow, 7-Eleven: 7-Eleven is quite interested in RFID because it could change the way our products are delivered to and accounted for at the store. RFID has the potential to give us more detail about what our customers want, which would allow us to better serve them. We are starting slowly with our approach to using RFID and have some test projects underway in both our headquarters IT lab and in a few 7-Eleven stores.

Terry Morgan, Food Lion: The Delhaize Group, of which Food Lion is a part, has elected to pursue RFID as a group-wide initiative. The IT and supply chain teams across the group have worked together on developing a common understanding and vision for RFID. We will have our first pilot this year in Europe, followed by a different, but complementary, pilot in the U.S. in early 2005.

Brad Friedman, Burlington Coat Factory: We are currently in the information gathering stages, but we have recently increased its level of priority within the company. Even though early in the analysis, we plan to utilize it within our own distribution center and possibly at the carton level for shipments out of our DC destined for the stores.

Larry Buresh, CSK Auto: CSK is currently evaluating RFID technology and how it might be utilized in our warehousing/distribution environment. With the recent adoption of EPC global standards, the adoption of class 2 tags, and the increase in read rates from UHF devices, the industry is starting to build a strong foundation to mature on.

Ted Jackson, Sport Chalet: We are not currently involved in any RFID investigation, but of course are closely monitoring how larger retailers and suppliers are addressing the issues. The recently quoted failure rate for reading the RFID tags to be as high as 20 percent should cause a great deal of concern. In spite of these stories, I'm certain that the large retailers and suppliers will work through the problems. I'm equally certain that adoption of RFID will come much faster than earlier identification processes.

RIS News: Real-time systems or near-real-time systems are coming on strong in retailing according to recent studies. Are you involved in building out these systems and if so what are the benefits and hurdles?

Morrow: Not at this time. The cost for doing it remains extremely high and a clearer ROI opportunity needs to be identified.

Morgan: We are just finishing an implementation of a real-time inventory management system. There are growing pains anytime you go through implementing high-volume, large-scale, real-time applications. You have network issues to consider and address, processor capacity challenges, disk storage. You name it. From my experience, the most challenging aspect is the flawless level of integration you have to provide.

Friedman: We have strong initiatives related to having this information in the appropriate people's hands in a fairly quick period of time. As it applies to loss prevention, sales audit and inventory control, the closer to real-time the more effective.

Buresh: CSK sees real-time data processing as a growing requirement for most retail systems. We currently get real-time data feeds from our POS system on product sales and returns. That data is fed into our real-time fraud alert and inventory control systems thus giving us visibility to all current stores to see potential fraudulent returns. The largest hurdle that we had to overcome was network bandwidth. Anyone considering using real-time data from their POS system should ensure that they have a robust network infrastructure to handle the data traffic.

Jackson: We are not currently involved in any real-time systems except in our warehouse and inventory control systems. The next area that will be addressed will most likely be in loss prevention. Let's face it, most retailers have the data stored centrally and the network connectivity is becoming so reasonable that even smaller chains and mall-based specialty stores with lower sales transaction counts can afford to implement real-time queries.

RIS News: Approaching Sarbanes-Oxley deadlines have pushed financial system upgrades and deployments to the forefront of IT activity. Keith, I understand this isn't an area you can comment publicly. But for the others, what impact has Sarbanes-Oxley had on your IT department, on your business?

Morgan: I can point to one advantage of doing all of the Sarbanes work: our documentation will be in great shape. We really had an advantage going into this work because of the controls we had already put in place. Besides testing and cleaning up documentation, there is not really any specific systems work being done at this point.

Friedman: We are currently analyzing the requirements and the control practices that need to be in place and identifying the gaps surrounding the controls. Short term, the impact will be significant as there are some practices that will need to be established in order to ensure compliance. I believe this will be great for MIS in the long run. This is not a one time initiative like Y2K, but a new manner to control IT through the surrounding financial controls. The practices established by SOA will only help to make the IT department stronger and more reliable in the long run.

Buresh: Sarbanes-Oxley has had a major impact at CSK as it pertains to project methodologies and how each step of the project lifecycle is monitored and audited. We have re-reviewed all policies and procedures centered on systems development and implementation. To ensure continued visibility, we have implemented a financial impact designation for projects that have a potential to impact company results. All financial impact projects now require both senior financial and internal audit approvals prior to implementation.

Jackson: We've put a lot of emphasis on increased change control, improved testing techniques, project life-cycle methodology, and tools to provide increased control and reporting. In my opinion, the audit controls and governance issues are basically sound principles to which prudent organizations should already be adhering. Granted, this increased scrutiny from auditors and other third parties provide incentive to implement these controls sooner rather than later, but we feel much of the intent is needed regardless of why it is being implemented.

RIS News: We recently asked retailers about what scares them most about Wal-Mart and surprisingly 47 percent said Wal-Mart does not concern them. What do you make of this finding?

Morgan: It could mean a number of things. Wal-Mart is less of a factor for those who have differentiated and made themselves less likely to be in Wal-Mart's cross hairs. They could also be unwilling to admit that they fear Wal-Mart. We are all competitive, so some people have trouble crediting their opponents' strengths.

Morrow: It is more important for a company to execute strategies that differentiate themselves from the competition and meet consumers needs in a unique, memorable and favorable way than to spend time worrying about what Wal-Mart is doing. Smaller companies run the risk of losing their businesses to Wal-Mart if they are passive and don't create their own identity and value proposition for customers. However, they can become more agile and react faster to market shifts than large-scale companies.

Buresh: Every retail entity has now and always has had the mission and responsibility to differentiate itself from competition, to provide an offering that is different from and better than others. Ultimately, Wal-Mart's existence makes each of us stronger retailers as we strengthen the store and attributes that make us different and more appealing to customers. There is a Darwinian principle at work: only those willing and able to meet the challenge will survive.

Jackson: First of all, I think every retailer likes to believe they are different. In a past life we used to say that all retailers weren't really different, they just had different similarities. Part of the aggressive retailer mindset is not to be impacted by a competitor. In reality, the Wal-Mart buying power is a significant influence. Any time one company represents 2 percent of the GNP of both Mexico and the U.S. they have to be dealt with as a significant influence on the market. On the other side of the coin, however, is the old saying about masses and marketing — that is masses don't purchase, individuals do. The specialty retailers may not be able to match the buying power of Wal-Mart, but they can offer specialized, personal service that customers desire.

RIS News: Last question — outsourcing. Are you involved in significant outsourcing activities and, if so, why and in what areas?

Morrow: At 7-Eleven, outsourcing allows us to focus more energy on innovation in what we do best — retailing — versus keeping the technology lights on. All of our critical infrastructure operations are outsourced. Our corporate indirect accounts payable also is outsourced. As a business option outsourcing has been done for decades and it cycles up and down depending on where the most value can be found. As outsourcing demand and pricing goes up, people tend to insource those activities again.

Morgan: We leverage outsourcing, and at this time I don't see it growing or decreasing any. Except for our store call center, which is totally outsourced, we use outsourcing for experience, skill and staff augmentation around application development.

Friedman: I have a limited amount of outsourcing in the application development areas and database administration. I have no plans to expand the outsourcing to operational type issues. I personally believe that many times the cons of outsourcing outweigh the pros. I think it is a balance sheet issue more than a question of can we be more effective and provide a superior level of service by outsourcing.

Buresh: CSK tried the off-shore outsourcing model with mixed results. The problem we ran into was getting the project clearly defined in a manner that could be easily understood by developers that didn't speak much English. Although initially cheaper, the projects dragged on longer than anticipated.

Jackson: We've outsourced portions of our server and network administration as well as help desk for POS. We've been able to take advantage of a highly technical resource pool. We would not be able to hire these resources ourselves due to the cost of hiring and keeping these types of people trained and current in technologies that change very rapidly. We closely manage what these resources do for us, but have found a great value it utilizing them regularly. Outsourcing areas that directly support your core competencies like merchandising applications and business logic are generally not a good idea, in my mind. I'm certain there are ways outsourcing pitfalls can be overcome, but I've seen it fail enough to make me very cautious.

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