When Reuben Slone penned his Harvard Business Review article entitled “Are you the weakest link in the supply chain?” he wasn’t referencing the company that employs him. From the time he joined OfficeMax in November 2004 as executive VP supply chain, he has led the charge to battle a recessionary climate and often rising fuel costs without sacrificing an internal supply chain code that reads, “Never do we compromise service to our customers.”
As economic woes have taken their toll on consumer demand, supply chain executives across retail have found themselves challenged by overstocks and out-of-stocks. But Slone, a self-professed supply chain zealot and published author, and his team have managed to outwit the downturn and do their part to contribute to OfficeMax profitability initiatives that resulted in net income of $24.8 million in the first quarter of 2010.
Senior editor Katherine Field spoke with Slone about how his areas of responsibility—which include inventory management, supply chain operations, real estate and store development—have survived, even thrived, in the downturn, and about how the chain will continue to maintain its course during the economic-recovery period.
In your role at OfficeMax, how have you managed to cut costs in the downturn with as little disruption to your customers as possible?
When it comes to supply chain, we have three priorities that are in a hierarchy: first, product availability, then inventory productivity and cost productivity.
We tackle all challenges—primarily declining sales and rising fuel costs—in that order. Never do we compromise service to our customer, which is measured via in-stocks at retail and next-day delivery for contract customers.
On the real estate side, we’ve partnered with our landlords to negotiate rent relief toward helping poor or marginally performing stores survive in this tough environment. Many of our leases have either come due or are coming due during this period—in fact, about 60% of our leases come up for renewal between now and 2014. That puts us in a good position to take advantage of the commercial real estate glut.
Will you allow some of those leases to expire and therefore further trim store counts, or will you use the opportunity to upgrade your real estate?
Both. We may relocate, and in a relocation we may effect a downsize. We may move from an existing location to one that allows us to reduce square footage from a standard 34,000 sq. ft. to less than 20,000 sq. ft. to accommodate our new Advantage store format. We may close a store in a micromarket and open a new store in a better location but roughly in that same market area. Or we may opt to stay where we are and refresh the store.
What is the status of the new, smaller store format?
The Advantage store format is 18,000 sq. ft., and we built about 169 between 2005 and 2009. The pace and degree that we open new stores has slowed substantially, and at this point we have no new stores planned. But when we relocate for the purpose of downsizing, the new store will be in the Advantage store format. If we simply relocate, the new store will be in the Advantage format, and certainly when we remodel or refresh we will do it within the specifications of the Advantage store format.
Specifically, what changes have been initiated to reduce costs and drive operational efficiencies?
At OfficeMax, we actually felt the recession in the fourth quarter of 2007. We saw the storm clouds on the horizon, and we took strong action. Sam Duncan, CEO, and Sam Martin, COO, focused us on creating a fortress balance sheet to weather the storm, and supply chain played a prominent and critical role. (Martin recently left OfficeMax to become CEO of Great Atlantic & Pacific Tea Company.)
The thrust of the effort was to reduce inventory and costs without sacrificing any of the priorities in our hierarchy. Of our approximately 1,000 retail stores, we operate at less than 85 out-of-stocks per store on any day of the week. And that’s out of 7,800 SKUs. Of the top 2,000 SKUs, there will be no more than two outs. On the contract side, we maintain our 99.9% next-day delivery.
Between 2006 and 2009, while maintaining that customer performance, we took out over $250 million dollars in inventory, dropping our per-store inventory nearly 40%. In the supply chain area, we took out nearly $120 million in operating expense in that timeline.
We did that by employing intense collaboration among store operations, inventory management, replenishment and supply chain operation, and by external collaboration with our transportation partner Werner Transportation.
Explain the process of shoring up your supply chain.
We converted floor loading of our products to pallet loading, which involved converting our three Power Maxes (warehouses over 600,000 sq. ft. that feed the stores) that supply 250 to 300 stores each. The next step was working on load quality and working very closely with our stores to load the way we unload. We embrace Kaizen, which is a Japanese word that means “