Greendale Supermarkets
MILES GIETZMANN, University of Durham
Greendale operates a national chain of supermarkets. In the past Greendale have had a reputation for stocking almost exclusively well-known, brand-name products priced very competitively. The product-line range in each store was identical across the country. Additionally, each store had identical reorder rules for supplies. Stores tended to be compact with most available space being filled by storage racks on which all available inventory was held, and there was typically only a small storeroom to facilitate ease of unloading from transporters. However, it was found that during very busy periods some stores had up to 20 per cent of product lines out of stock. It was established that the major cause of ‘stock-outs’ was that it was only feasible for individual stores to receive up to five deliveries a day from suppliers, because Greendale did not employ any storeroom workers. In the past it had always been argued that one prime reason why Greendale could price so competitively was because of its ability to attain a low average stockholding of three weeks.
However, over the preceding year, Greendale Supermarkets had undergone many changes. Fergus McSway, the managing director of Greendale, had become aware of the fact that a major competitor, Hampstead Stores, was operating with a profit margin of 5 per cent, which was almost twice that of Greendale. On investigation, Fergus had established that, on average, well-known brands stocked by Greendale were 3 per cent more expensive at Hampstead Stores. In addition, Hampstead had a large range of own-label brands which were priced very close to comparable well-known, brand-name products. Hampstead Stores had the largest market share for the grocery industry of 16 per cent — a clear three percentage points above Greendale’s market share. These factors had convinced McSway that the way forward for Greendale was to improve its image by expanding the size of stores, introducing new and exciting product ranges and displays, and encouraging a less skewed customer profile.
McSway was initially concerned with how inventory control would operate. Change of style of presentation and increases in the size of product ranges meant that it would be essential to have large storeroom facilities and specialised staff to co-ordinate storeroom activities. In addition, McSway believed that there would be widely differing regional demand across the new product range.
McSway decided to embark on an active policy of decentralisation. Responsibility for the purchase of a number of key product lines such as fruit and vegetables was delegated to store managers. Some of the specific arguments presented to support the decentralisation policy with respect to fruit and vegetables were as follows:
(1)Individual supermarket managers would monitor the local markets more effectively than head office and ensure that high-quality produce was supplied promptly and at the right price by dealing directly with local suppliers.
(2)Individual supermarket managers would have superior knowledge of the local demands for produce and adjust stock policy accordingly.
(3)In general, fruit and vegetable suppliers did not offer significant additional discounts for the purchase of very large quantities of produce, so there were no cost advantages of buying centrally in bulk.
(4)Individual supermarket managers would now be prepared to accept that profit-related pay would form a significant element of their remuneration package as they had more control over the operations of individual supermarkets. It was argued that this would benefit the organisation as successful managers would be rewarded more effectively.
McSway decided that the profit-related pay scheme would operate as follows for each store manager:
(1)There would be a fixed basic pay;
(2)There would be an entitlement to a quarterly bonus of 2 per cent of the difference between the value of sales volume and the related costs for which store management was responsible.
Coinciding with the changes in management practice and store design, the marketing department of Greendale had recently embarked on an ambitious national-image advertising campaign to promote Greendale as a forward-looking leading supermarket chain. Part of this campaign included an advertisement purporting to show a typical fruit stand in a Greendale supermarket. The stand contained a selection of tropical fruit and vegetables, such as mangoes and yams, the inference being that Greendale were in the forefront of providing customers with a comprehensive product range. Detailed information on the forthcoming advertisements had been distributed by the marketing department to all supermarket managers. To their dismay, though, the marketing department received a host of complaints from sarcastic customers in Oldcastle complaining that their local Greendale supermarket did not, in fact, stock any mangoes or yams at any time during the advertising campaign. Sidney Satchwell, the head of marketing, contacted Angus Strong, the manager of the Oldcastle supermarket. They conversed as follows:
Sidney:Are you trying to destroy our advertising campaign, Angus? Is it true you have not been stocking mangoes and yams while we have been giving prominent airtime and paper space to the fact that this is, among other things, one of the distinguishing characteristics of Greendale Supermarkets?
Angus:Who are you to tell me what to stock! I am born and bred in Oldcastle. Nobody around here wants mangoes and yams. I leave mango and yam eating to all you trendy marketing folk.
Sidney:You are completing missing the point, Angus! We are not suggesting everyone wants to go out and buy mangoes and yams, but we are suggesting that your store should contain some less mundane products that will make customers feel they are shopping somewhere exciting and different.
Angus:No, you miss the point, Sidney! How exciting do you think it is for customers to see a load of unsold, over-ripe produce on my stands. At the end of the day, my supermarket bears the cost and it looks as though I have not been doing my job properly.
Given this final comment Sidney then decided to see Fergus McSway, as he was unsatisfied with Angus’s reply. After sending a letter to head office reporting the telephone conversation, he was summoned to see Fergus. When Sidney arrived, he found that Fergus was accompanied by Janet Cooper, a management consultant from an outside firm.
Fergus:Thank you for your letter, Sidney. I am glad you let me know at once what is going on. Your problem with Angus Strong is only one of a host of problems we have encountered since we decentralised purchasing. At one supermarket, the manager ordered a week’s supply of bananas only to find they were substandard and non-returnable. At another supermarket, the manager ordered a whole range of fruit with the Durba label. He had not realised that, in the previous month, a television report had heavily criticised Durba for secretly using excessive X-ray treatment to maintain the storage life of its fruit. Needless to say, hardly anybody bought the fruit. With this decentralisation, how do I know there are not many other purchasing mistakes being made? I don’t get all the information about mistakes, because supermarket managers often think it is in their own best interests to keep quiet. In addition, some of the supermarket managers are complaining that the new profit-related pay scheme is inequitable. Some managers of smaller stores argue that it will only be when all stores are the same size and have the same facilities that the profit-related pay scheme will reward directly according to merit.
Sidney:I think now is the time to return to centralised purchasing. Supermarket product lines should reflect, clearly, company policy. It is the job of supermarket managers to make sure they sell produce, no matter what we supply them. Often, it is just a question of correct presentation, don’t you agree, Janet?
Janet:I would favour a revised system. Many of the mistakes made were because of lack of expertise in purchasing. To be quite honest this is hardly surprising as supermarket managers have had little formal purchasing training. I recommend that all the managers be sent on an intensive purchasing training course which my firm has operated successfully for two years now. The managers will then be more skilled and will be grateful to Greendale for the expression of interest and confidence in them.
I would leave purchasing decentralised. However, I would introduce a revised profit-related pay scheme that would encourage managers to adopt company optimal policies. A team of travelling inspectors should be set up to conduct a ‘quality service assessment record’. Basically, this would involve inspectors grading the supermarket’s ability to meet company standards on a scale of 1 to 5. For instance, some of the factors to be gauged would be:
(1)Level of stock-outs;
(2)Cleanliness and tidiness of the store;
(3)Average length of checkout queues as a proportion of the fraction of unattended checkout tills;
(4)Quality of displays.
If, say, on this particular quality service assessment scale, a manager scores fourteen out of twenty, then the manager receives a quarterly bonus of 70 per cent of, say, 3 per cent of the difference between the value of sales volume and the related costs, for which store management was responsible. I could easily work out the exact details of a suitable quality service assessment record for you and make an adjustment for store size.
Sidney:How does that solve my problem with Angus Strong?
Janet:Angus would clearly realise that, in order to score well on the stock-out grade, he must stock an adequate level of all items.
Sidney:With great respect Janet, you are not proposing true decentralisation. You are merely arguing for ‘carrot and stick’ decentralisation. Managers will not feel they are in control. They will just feel they are being manipulated. Let’s be honest with them and reintroduce centralised purchasing.
Questions
1.Suppose you were asked by Janet to formulate the ‘quality service assessment record’ report. Construct such a report, noting why each variable is included, and explain how the grading process would function.
2.Given the construction of the report, how do you think Angus Strong would respond to the implementation of Janet’s proposal using your report?
3.Evaluate the following statement made by Henri Le Harve, one of the Greendale directors: ‘The basic problem is that Fergus has assumed that a change in business strategy required a fundamental change in business internal organisation. He could have implemented the revised business strategy with only modest changes to managerial responsibility. One has got to realise that our supermarket managers are used to a product sales policy of “stock them high, sell them quick”. One cannot suddenly expect the managers to become experts on fine cuisine and know what to stock, when in the past they were used to selling mainly baked beans and other convenience foods. Sidney Satchwell is correct. Recentralise and take back control, so that people actually will know what to expect, wherever in the country they visit a Greendale Supermarket.’
4.Formulate one clear, encompassing proposal to assist Fergus McSway to proceed.