Sainsbury's dumps inefficient systems

Sainsbury's is to write off £260m in costs associated with flawed IT and supply chain systems blamed in part for its recent poor performance.

The company's chief executive Justin King revealed the costs alongside plans to get rid of 750 head office jobs and replace them with 3,000 in-store staff, following the results of its business transformation review.

The supermarket is now being forced to restructure its operations. It will:

• * Stop using its automated supply chain system, closing some newly automated depots, and revert back to manual processes for stock-level management
  
• * Renegotiate its business transformation contract with lead contractor Accenture
  
• * Write off £120m worth of supply chain assets and £140 million in related IT systems.
  
  

'Our supply chain systems and automated depots are not fully operational. And the IT systems that were built to back up that have not delivered,' King said. 'The IT cost is a greater proportion of sales than they were three years ago.

'The system was developed to account for stock but the system can't see the stock on the shelves. Every store is now going to manually update the stock levels on its shelves,' he said.

Asda went through a similar transformation during its integration with US giant Wal-Mart, claiming a number of supply chain benefits.

An Asda spokesman said: 'We can track stock more effectively at depot, shelf and warehouse levels. This means we are better at availability and, the cost savings from the operational efficiencies means we can invest in price competitiveness and pass that onto our customers.'

King also said Sainsbury's will renegotiate its contract with services firm Accenture, who has been responsible for the business transformation programme, to ensure systems run smoothly in the future.

Accenture has stressed that its contract does not cover the four automated depots that will now be closed or converted to manual procedures.

The business transformation programme began in 2000 when former chief executive Sir Peter Davis signed a £1.8 billion seven-year contract with the managed service provider to modernise its IT and take on 800 staff.

But Tuesday's write-offs were the culmination of recent re-organisation in its IT service provision over thirteen months.

In February 2004, Sainsbury's spent £553 million to buy back Swan Infrastructure Plc, the intermediary company it had set up for Accenture to run as part of its business transformation programme.

At the time Sainsbury's was at pains to stress its motives for the move would save the company £25 million a year through better accounting practices.

A spokeswoman said at the time: 'We would not have extended the deal [with Accenture] last November if we had any concerns about them.'

It did deploy new in-store systems including 14,100 tills and 5,800 PCs as part of its responsibility for Swan and its IT estate of PCs, servers, supply-chain packages and point-of-sale systems.

But analysts felt the move was made to simplify relations at the time - a view fuelled by King's comments about the relationship with Accenture.

'The balance of responsibility currently lies far too heavily on Accenture,' he said.

Douglas Hayward Ovum senior analyst said: 'Essentially Sainsbury's was too ambitious on the business side, trying to over-segment its customer base which meant that it, in turn, created an overly complex IT system that wouldn't scale.'

He also said that Sainsbury's should have retained enough management of the programme to ensure it maintained its responsibility for the IT function.

'There are some immediate lessons to be learned. Users should be involved in IT projects and outsourcers shouldn't be handed responsibility for the whole thing,' said Hayward.

Mike Godliman, director of retail consultancy Pragma agreed that Sainsbury's problems were not purely down to IT.

'It's easy to blame technology, but technology is a tool, a labour saving device. [Arcadia Group owner] Philip Green would never look at a computer screen to tell him what products to put in what store.

'Sainsbury's could've had the best IT system in the world and it would still have [financial] problems.'