DPPM: MIS Course work
Case study:
ShopKo and Pamida: Systems Triumph or Tragedy?
ShopKo, ( http://www.shopko.com ) a regional discount merchandise retail
chain headquartered in Green Bay, Wisconsin, has about 140 stores in larger
Midwestern cities, and 221 Pamida stores serving rural areas in the Midwest,
Mountain, and Pacific Northwest regions. ShopKo focuses on popular highermargin categories such as casual apparel, health and beauty items, and
housewares. Sales totaled $3.18 billion for the fiscal year ending in January
2005, and the company was recently acquired by a private company affiliate of
Goldner, Hawn, & Morrison Inc.
ShopKo has been an intensive user of applications to improve decision making
about inventory levels, sales performance, store layout, and selection of
merchandise. One of its most powerful tools has been a system to determine
prices and timing of apparel markdowns. Traditionally companies that sell
apparel have four product cycles a year, one for each of the seasons. However
such companies now face serious competition from companies like Gap that
now operate on rapidly changing product cycles, often bringing in new product
lines every two to four weeks. One of the growing problems ShopKo had to
address was what to do with the excess (or overstocked) merchandise when a
cycle ends.
At the end of a season (or cycle), companies have faced two problems. One is
the need to empty its shelves in time for the arrival of the new cycle products
(bathing suits do not sell well in the winter while fur coats are not in demand
in the summer). The other problem is getting rid of the overstocked items at
the highest possible price in an attempt to minimize losses in revenue.
Traditionally the method ShopKo (and most other clothing retailers) used to
determine clearance prices for overstocked items was to set each product price
based upon clearance prices of similar products in past years. On average it
found it needed to lower prices four times to clear the overstock at the end of
a cycle, selling as much at each price as possible before lowering the price
again. However, it always faced the calendar in addition to the customers'
willingness to purchase at each price. Mike Martin, ShopKo's director of
business alignment and planning, explains, "The first few markdowns buyers
tend to take are very conservative. So they [Shopko] end up taking too many
markdowns to clear [merchandise] out."
This markdown strategy proved to be costly as the number of cycles per year
increased. The clearance price for each item was the same in every store
throughout the entire chain. However, specific items were more popular and
sold better in some stores than in others. Also, traditionally markdown timing
was always the same for all stores, and yet seasonal changes can differ from
store to store based on local geography and culture. The result was that the
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company could have set higher markdown prices in stores where the demand
was higher or the cycle lasted a little longer. Moreover, a clothing markdown
usually means a manual price change on each clothing item, and the staff time
required to change the prices can be very costly. Four markdowns per item is
very expensive.
ShopKo had made substantial information systems investments and one was a
system to help the company optimize prices during markdowns. ShopKo
implemented Markdown Optimizer from Spotlight Solutions in Mason, Ohio,
which helps companies price leftovers so that the products will sell faster and
with a better profit at each store. The software enables companies to price a
product according to season, geography (specific store location), local tastes,
and past demand, by analyzing historical pricing and sales data. It is proving
very useful in helping stores get rid of the leftovers in time to make space for
incoming products of the next cycle. This type of computer systems is similar
to the yield management software developed by the airlines. This software
determines the best prices for its seats at any given time. The goal is to fill the
plane at the best total price possible.
ShopKo's CIO, Paul Burrows expressed his understanding that "The more you sell
during the first markdown, the fewer you have left even if you have to take a
second markdown." ShopKo's weekly sales data are stored in its merchandise
data warehouse, and its computer system automatically feeds the data into
Markdown Optimizer. Each piece of data contains the specific store, item
number, and date for each item sold. Markdown Optimizer automatically stores
the previous recommendation for each item in each individual store so that it
can evaluate past results and then produce recommendations for the closeout
of the current cycle. In 2001, ShopKo ran a pilot on the new product and the
results were excellent. For the leftovers the pilot showed a 25 percent increase
in its gross margin from previous years, while its payroll costs fell by 24 percent
and the percentage of unsold goods at the end of each cycle fell from seven
percent to two percent. Burrows was most pleased, claiming that a 15 percent
increase would mean a $15 million growth in net profit.
In 1999, ShopKo purchased Pamida, a general merchandise retail chain focused
on small towns such as Crete, Nebraska, (25 miles southwest of Lincoln,
population 6000+) and Belle Fourche, South Dakota (Butte County, population
about 4,000). With headquarters in Omaha, Nebraska, Pamida's slogan is
"Bringing smaller communities what they want." ShopKo's aim in purchasing
Pamida was to increase its presence in the small towns where competition from
retailing powerhouses such as Wal-Mart and Target was not as strong. Pamida
was the only major retail store in most of these small towns, and its strategy
was to compete by maintaining a high in-stock rate rather than by becoming
the lowest price competitor. Pamida relies on information systems to execute
that strategy, and its SEC filing stated, "Pamida's information technology
strategy is aimed at providing the customer with . . . merchandise which is
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always available as advertised." When ShopKo purchased Pamida, the chain had
a total of about 180 stores, although that number increased to 229 stores in 16
states when ShopKo purchased the P.M. Place chain of 49 small town
Midwestern stores in May 2000 and merged it into Pamida.
Despite its strategy, Pamida had a too many out-of-stock items. To make it
worse, many key products were in warehouses even though they were not on
store shelves. In addition, the company's gross margin was too low and falling.
ShopKo wanted to expand the number of Pamida stores in small towns.
Pamida's solution was to consolidate its five warehouses into three and
modernize its inventory management systems to increase stores' ability to keep
their shelves stocked. The plan execution began early in 2000 with the Lebanon
(Indiana) Distribution Center Project to convert the Lebanon distribution center
servicing 107 of Pamida's 229 stores, to a full-service warehouse. The concept
was to transform the warehouse from a flow-through facility (where goods
arrive at the warehouse and are immediately shipped to the stores) to a fullservice distribution center (where inventory is stored so that it can be shipped
to the stores immediately when needed). The warehouse was expanded from
200,000 square feet to 418,000 square feet, but the warehousing software was
neither updated nor replaced.
Initially, the new inventory management system created serious bottlenecks in
Pamida warehouses, causing Pamida's earnings to decline in the first nine
months of 2001 and its corporate parent ShopKo to lose $6.7 million in overall
revenue. Pamida's old warehouse management information system came from
Catalyst, International, and the company had never updated the software,
which was several versions behind. According to Dan Trew, Catalyst's vice
president of product strategy, "We have made significant enhancements in the
configurability of the product, things we couldn't do when Pamida was
[originally installing] its system," and so the system was out-of-date and
inadequate. The software made it difficult to lay out and run a full-service
center in the most logical and efficient manner. "It's not real flexible so the
processes at the distribution center had to conform to the system," said
Pamida's CIO Dan Nicklen. Newer versions of warehouse management software
can handle full-service distribution centers much more easily.
Nicklen said Pamida's warehouse management software was not updated when
the rest of the warehouse was modernized because the software had been
working fine under the old distribution system. Pamida had the support of
ShopKo's management in making technology investments to become more
effective, but chose to continue using the old warehouse software. Instead,
Pamida focused on a three-year program to replace all of its major mainframe
systems and software, including new merchandising software from Retek
Information Systems.
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The product supply shortage became even more serious as the 2000 holiday
season approached. The estimated loss in sales for the 107 stores served by the
Lebanon distribution center was $5 million, lagging 5 percent behind sales for
the remaining 122 stores in the chain. Shareholders filed several class-action
lawsuits, charging that management had not revealed the seriousness of the
distribution center problems, partly to keep its stock prices up until November
2000, when it could no longer hide the problem. The quarterly report released
that month showed gross margins of 20.8 cents in that quarter versus 26.3
cents previously.
Pamida partly blamed the problem on the previous owners, "Our resources
were stretched thin," said Nicklen. "Under our previous owners we were always
under funded." But there were also other problems. Certainly Pamida
management turnover contributed, with the CEO, Steve Fishman, leaving in
July 1999, and a new COO arriving early in 2000. ShopKo also had a major
management turnover when CEO William Podany resigned as chairman in May
2001. Moreover, the task of merging P.M. Place with Pamida in the spring of
2000 placed a heavy burden on the company.
Pamida eventually turned around its distribution center and became fully
functional by the end of 2001. ShopKo felt confident enough in Pamida's new
distribution system to close a smaller warehouse in Missouri to consolidate
distribution at its Indiana and Nebraska centers.
Sources: "Success Story: ShopKo," MicroStrategy Inc.,2005; Associated Press,
"ShopKo Agrees to Be Sold to Private Firm," April 8, 2005; Carolyn Abate, "Going
Once, Going Twice... Sold!" Smart Business, May 1, 2002; Edward Cone,
"Pamida's Distribution Debacle," Baseline, January 1, 2002. Meridith Levinson,
"Everything Must Go," CIO, May 1, 2002; Meridith Levinson, "They Know What
You'll Buy Next Summer (They Hope)" CIO, May 1, 2002; and Bob Tedeschi, "The
Price is Right," Smart Business, May 1, 2002.
1. Evaluate the role of information systems in the way ShopKo and
Pamida run their business. How important are they?
2. Evaluate the importance of Pamida's distribution center consolidation
project on for both Pamida and ShopKo. What management,
organization and technology factors prevented Pamida's new
distribution center from working successfully?
3. Are ShopKo and Pamida using information systems effectively? Why or
why not? How much value do their systems provide to the business?
4. If you were the CEO of ShopKo, how would you have addressed the
problem? If you were the CEO of Pamida when it was purchased by
ShopKo, would you have recognized the problem? Explain. How would
you have solved the problem?
5. What management challenges does this case study illustrate? Explain
your answer.
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