As a young lad, I remember going to The S. S. Kresge Company (we used to call it Kresgees) to buy Snickers Bars for fifteen cents, or to sit at the lunch counter with my father and munch on BLTs. The store offered a young boy model airplanes, inexpensive jeans, an endless supply of Goldfish and the ever-exciting "Blue Light Special." Years later, the store changed its name to Kmart - and then shortly went out of business.
I recently met Bill Hannon, who worked for S.S. Kresge for twenty-two years prior to its demise. For the past decade, Bill has worked for an industrial chemical company as a sales and service representative spending countless hours in various manufacturing facilities. According the Hannon, the comparisons between Kmart’s failure and the various problems that occur in some U.S. manufacturing facilities are eerily similar.
Problem 1: Upper Management Takes Away Control Of The Floor
Often a manufacturing line is unique to a particular plant. In a manufacturing environment, the floor manager, plant engineer or line manager has oversight and authority to make production decisions based on experience and knowledge. A plant that adopts a one-size-fits-all mentality and takes away a floor manager's power to make critical decisions may be doomed.
In the case of Kmart, the company discontinued autonomy at the local level by taking away the buying decisions, display choices, and the local advertisements. The company centralized and systemized everything, which stifled creativity. Local store managers at one time had APA, which stood for Authorized Price Adjustment. The store manager could increase or decrease various prices in order to increase sales and/or profits. This power was taken away from the manager, who had insight into how and why their customers bought what they did and could adjust prices to suit the economic climate. Corporate headquarters did not understand the customers the way the store managers did, and sales suffered.
Problem 2: Reduce Compensation And Eliminate Your Experience Base And You Will Eliminate Your Business
The equipment in a manufacturing plant is often customized in order to maximize throughput while reducing downtime. When a company eliminates an employee who spent several years understanding the various intricacies of a machine or a business, the company is sure to suffer.
In 1987, Kmart purged the District and Regional Managers. According to Hannon, “They canned people who were over 40 years old. The employees that built the company with over 20 years experience were replaced with recent college graduates.”
Kmart also eliminated stock options and other fiscal incentives such as commissions, bonuses, and “spiffs.” Financial reductions have always proved to be a major factor in reduced employee morale, and the employees felt they were overworked and underpaid. Employees were asked to unload trucks, set-up displays, cover registers without proper compensation.
Kmart also eliminated the departments that were successful but did not have high profit margins. When sales would slump, the company would enforce “cost control” which meant reducing payroll. Another interesting phenomenon occurred: the company began to experience product loss not due to shoplifters but rather to employee theft.
Problem 3: Break A Company’s Spirit And Break The Company
A facility or business has a unique spirit. When that spirit or business soul is compromised, no acquisition will save it. Take a walk into any excellent manufacturing facility and you can feel the spirit. From the sight of clean tools to the lack of scrap, the plant produces and succeeds. The faces of the line workers reflect pride, and the plant hums with a certain tempo.
Kmart’s original “Blue Light Special” established a carnival like atmosphere. Employees who announced the Special were trained to act like carnival barkers. In a low voice they would begin “Shoppers, for the next few minutes...” They then would yell, “Are you listening?! For the next few minutes we have …” They were taught to romance the product and establish a sense of urgency. (Ironically, The Special was a flashing red light on a cart.)
The “Blue Light Special” was discontinued for several years, but was recently reinstated with a picture of a blue light. There was no excitement - the Special was not special. When Kmart tried to expand into other markets with stores such as The Sports Authority, Walden Books, and Builders Square, it was met with failure. The Sports Authority (acquired in 1990) and Walden Books (1994) were sold off in 1995. Builder’s Square stores were closed in 1999.
There are as many theories as opinions why the acquisitions failed. Wall Street analysts believed that Kmart management could not provide leadership and could never settle on a strategic course long enough for it to take hold. Kmart lost its spirit and soul.
Problem 4: Inability To Use Technology
When data are stored and properly analyzed, it is exceptionally powerful. Manufacturing facilities that have a strong understanding of raw material inventory, quality control, process downtime and production entitlement will succeed. Information is power. Wal-Mart’s information system is legendary. From inventory to procurement to customer purchases, Wal-Mart understands its business climate better than any company. It also pressures suppliers to reduce prices and the vendors comply due to the large volumes purchased.
Wal-Mart stepped up with information technology and aggressive sourcing while Kmart stalled. Kmart inventories were reduced due to the lack of expertise and a faulty inventory system.
In January 2002, Kmart filed for Chapter 11 bankruptcy protection, and closed more than 300 stores in the United States and laid off 34,000 workers as part of the restructuring. In May 2003, Kmart officially emerged from bankruptcy protection, and in November 2004, Kmart announced its intention to purchase Sears, Roebuck and Co.
Kmart may be on a slow road to recovery, but will never be the powerhouse of Wal-Mart or even Target. Manufacturing facilities can learn valuable lessons from the mistakes that Kmart made.
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