mysap SUPPLY CHAIN MANAGEMENT AT OfficeMax SAP Case Study

Transcription

1 mysap SUPPLY CHAIN MANAGEMENT AT OfficeMax SAP Case Study

2 INTEGRATING RETAIL AND E-COMMERCE CHANNELS TO SUSTAIN PROFITABLE GROWTH AT A GLANCE Strategic Goals: Grow market share by reaching customers through multiple channels, including physical retail stores, e-commerce, and direct mail catalogs Differentiate through diversification, high availability of merchandise, and knowledgeable staff Expand internationally and in vertical markets Maximize gross margin by minimizing supply chain and administrative costs Approach: OfficeMax addressed efficiency of human resource, financial, and retail merchandising processes, and concurrently initiated a widespread reengineering of its supply chain. The company eliminated direct-to-store shipments by vendors, established three central distribution centers to manage store replenishment, and put in place 17 regional delivery centers to serve the direct channels. OfficeMax focused on managing profitability at the product level, improving the efficiency of warehouse processes, and integrating its distribution channels. This approach was enabled by the SAP for Retail portfolio of solutions, mysap Supply Chain Management capabilities, and other SAP solutions. Results achieved over the period July 2000 to February 2003: Lowered inventory by $390 million and increased inventory turns from 2.9 to 4.1 per year Improved in-stock rates from 89% to 98% (99% for key items) Reduced labor cost per case by 30% Improved store replenishment cycle time from 35 to 8 days Contributed savings of $3.3 million to general and administrative expense reduction of $20 million, as gross margin improved by 157 basis points to 25% Lowered long-term debt from $220 million to zero ABSTRACT OfficeMax, a leading supplier of office supplies and equipment, had achieved substantial growth through the 1990s. However, toward the end of the decade, the company was facing intense competition from a variety of retailers, dealers, and distributors, and was consequently facing challenges to continued growth in market share and profitability. In response, the company initiated a redesign of its supply chain network, eliminating direct-to-store shipments by vendors, establishing distribution centers to manage store replenishment, and improving the efficiency of warehouse and in-store processes. In addition to improving the effectiveness of its retail store channel, the company focused on integrating additional channels, including e-commerce, catalog sales, and commercial sales. OfficeMax selected SAP for Retail, mysap Supply Chain Management (mysap SCM), and other SAP solutions along with additional third-party software to enable its new processes. The company s efforts led to a lowering of inventory levels, improvements in in-stock rates, reduced labor costs, and a foundation for growth through its planned integration with Boise Cascade Corporation (NYSE: BCC). BUSINESS OfficeMax is a leading player among office products superstores, selling office supplies and equipment to both businesses and consumers. The company operates superstores in 49 states, the Caribbean, and Latin America. With fiscal-year 2002 revenues of $4.8 billion and over 30,000 full- and part-time employees, OfficeMax is building on its retail store base by reaching customers through its e-commerce site, direct mail catalogs, and outside sales force. In the 1980s, the U.S. office-supply retail market was served by small stores with limited selections and by thousands of small suppliers serving businesses. OfficeMax, which opened its first store in Ohio in 1988, was founded to fulfill emerging demand for convenience, selection, and low prices for office supplies.

3 By the end of 1989, the company had 11 stores, and subsequently expanded rapidly by opening new stores and broadening its product offerings. The company pursued organic growth, and also grew through acquisitions and equity investments. In particular, Kmart purchased nearly 22% of OfficeMax in 1990, and as part of the transaction, OfficeMax acquired five additional retail stores. In 1991, Kmart bought another 71% of OfficeMax, and in 1994, Kmart reduced its ownership to 25% through an initial public offering (IPO). This IPO generated $678 million, which at the time was the largest initial offering of a retailer s stock. By 2002, OfficeMax had grown to nearly 1,000 retail stores and had assets of $1.8 billion. Each OfficeMax superstore now offers approximately 8,000 stock-keeping units (SKUs) of name-brand and OfficeMax private-branded merchandise, which represents a breadth and depth of in-stock items not available from traditional office products retailers and other sources. In addition to offering a broad variety of supplies for home offices and students, the company has focused on becoming a productivity ally for small businesses. The company expanded to offer computer equipment, software, business machines, print-forpay services (through its in-store CopyMax centers), and office furniture (through its in-store FurnitureMax centers). OfficeMax also reaches customers with an offering of over 140,000 items through its e-commerce Web site, OfficeMax.com, direct-mail catalogs containing more than 30,000 items, and an outside sales force, which targets businesses. In the future, OfficeMax plans to gain market share within its core businesses while maximizing gross margin key elements to success in retail operations. The company plans to grow its business through expansion opportunities in existing markets, targeting of new customers in vertical markets (such as education, real estate, and healthcare), product line extensions, strategic partnerships, and international growth particularly in Latin America. Competition: OfficeMax faces competition from a variety of retailers, dealers, and distributors. Competitors include highvolume office product chains, which are similar to OfficeMax in terms of store format, pricing, product selection, and services. OfficeMax also competes with wholesale clubs, computer and electronic superstore retailers, mass merchandisers, and grocery and drugstore chains, which have increased their assortment of home office merchandise. Acquisition of OfficeMax by Boise Cascade: In July 2003, OfficeMax reached an agreement with Boise Cascade Corporation to combine with its Boise Office Solutions group. Together, OfficeMax with Boise will be strategically and financially stronger, and rival the size of its closest competitors, says Michael Feuer, OfficeMax s cofounder, chairman, and chief executive officer. From a single store in suburban Cleveland 15 years ago, OfficeMax has emerged as one of North In our markets, we are facing other superstores, grocery stores, drugstores quite honestly, there has not been a lot of differentiation among the channels. So our first concern was: how are we going to be different? Robert Bailey, Senior Vice President and Chief Information Officer, OfficeMax America s leading and largest specialty retailers, serving small business through our retail superstores, e-commerce, catalog, and with a direct sales force. Boise Office Solutions primarily serves the larger institutional and corporate business segments. Melded into one, OfficeMax with Boise will equal huge benefits for all constituencies.

4 CHALLENGES AND OBJECTIVES OfficeMax plans to continue to develop its business by building on its combination with Boise Cascade and by pursuing development of its retail stores, e-commerce, and other sales channels. Nonetheless, in the markets in which OfficeMax competes, customers can easily migrate to competitors if selection, service, or other factors are more attractive. Although OfficeMax had grown rapidly through the 1990s, by the end of the decade, unanticipated shifts in the market for computers and others items, a consumer spending slowdown, and increased competition forced the company to reconsider key elements of its strategy. In our markets, we are facing other superstores, grocery stores, drugstores quite honestly, there has not been a lot of differentiation among the channels, says Robert Bailey, senior vice president and chief information officer. So our first concern was: how are we going to be different? In particular, the company realized in the late 1990s that it needed to focus on execution addressing cost and service factors it could control, so that the company could free We were over-inventoried in items that we didn t need, and under-inventoried in items that we did need. At the end of the day, that meant lost sales and disappointed customers. Robert Shovel Senior Vice President of Logistics, OfficeMax resources necessary for differentiation and growth. OfficeMax recognized that it had excess inventory, operational inefficiencies, and customer service issues that had surfaced over the years. These specific issues were largely a result of its established logistics processes, which included distribution of goods directly from suppliers to retail stores. The set of processes in place formed what was known as the direct-to-store environment. The pain that we were suffering as a company was that we were over-inventoried with the wrong merchandise, says Robert Shovel, senior vice president of logistics. Because of our direct-to-store environment, we were forced to buy in minimum quantities, determined by the supplier s minimum-order quantities. So we were over-inventoried in items that we didn t need, and under-inventoried in items that we did need. At the end of the day, that meant lost sales and disappointed customers. Specific issues that OfficeMax faced included the following. Inventory levels: There were no intermediate distribution points within the company, and thus the company s entire inventory was in its stores. OfficeMax had $1.3 billion of inventory in 1999, which was $700,000 per store over target inventory levels. As a retailer, if you consider the relative importance of resources, number one will be people, says Bailey. But number two in retail is inventory, and we had over a billion dollars worth. In order to improve our earnings and cash flow, a huge focus needed to be placed on reducing inventory. Inbound logistics: Associates in individual retail stores were focused on managing inbound shipments and had minimal time to focus on customers. OfficeMax had high administrative costs for handling purchase orders; retail stores had to wait more than a month to receive replenishment stock; individual stores were receiving hundreds of shipments per week; and the company could not take advantage of quantity pricing from suppliers. The suppliers were not satisfied either. One of our largest vendors said, We re not going to ship to 1,000 stores anymore, says Shovel.

5 Inventory availability: OfficeMax had an in-stock availability of approximately 89%, so items were frequently out-of-stock causing lost sales and motivating customers to consider taking their business elsewhere. The company s business is seasonal, with sales and operating income higher in the third and fourth quarters, which include the back-to-school period and the holiday selling season. The company faced challenges ensuring that there was sufficient inventory during these periods without incurring excessive costs. Customer shopping experience: Excess inventory created an environment in the stores that undermined ease of shopping. Due to the inventory situation resulting from our logistics processes, we had created a less visually exciting shopping experience for our customers, says Bailey. We ended up with a store layout, which had very high light fixtures and inventory stacked to the ceiling. So when a customer went into the store, a lot of the lighting was blocked. It was a clean store, but what we heard from our customer surveys was that once they got into these big valleys, the customers didn t have a good ability to navigate the store and find the products they were seeking. Moreover, our associates, who were already burdened with handling hundreds of inbound shipments each week, were spending a good amount of time helping customers find the right aisles. We clearly had opportunities for improvement. Category growth: In order to compete in the retail environment, OfficeMax must continue to broaden its product offerings. The company faced challenges determining the right mix We needed to find software to support an operation that was akin to a $5 billion startup. After careful deliberation, we selected SAP. Robert Bailey Senior Vice President and Chief Information Officer, OfficeMax of products to maximize sales and profitability, given factors including sourcing costs, inventory turns, appropriate grouping of related products to improve sales rates, and so forth. Integration of new channels: OfficeMax recognized that it would need to expand beyond the retail store channel in order to satisfy customer needs and continue to grow. The company needed to ensure consistency of product offerings and pricing across its key channels, including physical stores, e-commerce site, and catalogs, and it needed to track and respond to customers who shopped at multiple channels. Above all, OfficeMax needed to be different. It needed to continually develop characteristics that distinguished it from its competitors, who would quickly move to close gaps resulting from innovation in any channel. Maintaining a difference that mattered to customers largely depended on improving execution. You really have the in-stock position, the quality of service, and the shopping experience as the only areas that have long-term competitive advantage, says Bailey. We needed to develop a strategy to improve growth, profitability, and cash flow. We concluded we had to do a 100% redesign covering how our products would flow from suppliers to our customers and we needed to find a software solution to support a complete, ground-up rebuilding of the logistics infrastructure for our business. In short, we needed to find software to support an operation that was akin to a $5 billion start-up. After careful deliberation, we selected SAP.

6 IMPLEMENTATION AND OUTCOMES OfficeMax began planning in 1998 for new processes that would be enabled by a comprehensive enterprise resource planning (ERP) system. Although initial planning was driven by system considerations particularly to address the need to replace legacy systems with Y2K-compliant software the company soon realized that the overarching concern of OfficeMax shareholders was long-term value creation. Given the recent history of the retail sector particularly with the growth of Wal-Mart during the 1990s the equities markets recognized that OfficeMax s success would depend on sustaining productivity improvements and market share growth. OfficeMax understood well the associated performance metrics it would need to address. As we were pulling together our objectives for our process changes and enabling ERP implementation, we went to Wall Street with some straightforward objectives, says Shovel. We would reduce our inventory by $400 million, and at the same time we would improve in-stock rates at the store level. We went to Wall Street with some straightforward objectives. We would reduce our inventory by $400 million, and at the same time we would improve in-stock rates at the store level. Robert Shovel Senior Vice President of Logistics, OfficeMax In order to meet its specific inventory and service-level objectives, and address the broader opportunity of achieving a virtuous cycle of growth and scale-driven cost reductions, OfficeMax initiated a program to fully redesign its business processes. At the core of this implementation was the replacement of the direct-to-store model with a logistics model based on a network of intermediate distribution centers. The initiative would be among several programs that would require a substantial financial commitment. We made a decision to spend approximately $250 million on a number of business initiatives, says Shovel. We knew these investments would result in several difficult quarters but at the end of this, we felt we would build a stronger, more profitable operating model. And through our initiatives, we ve realized our goal. In fact, our recent business combination with Boise should help enhance the commercial contract side of our business and substantially improve our differentiation, and thus our market position. The implementation unfolded as follows. Selection of SAP solutions ( ): OfficeMax selected SAP in 1998 for ERP capabilities, because of its superior capabilities for retail services and its integrated offering. Over time, as SAP capabilities matured, warehouse management and other solutions, which had been provided by other software vendors, were replaced with SAP solutions. Strategically, we wanted the company to operate on one platform, says Shovel. Basic SAP ERP implementations ( ): OfficeMax focused first on administrative processes and the enabling SAP solutions. OfficeMax went live with SAP human resources capabilities in mid In April 2000, the company went live with SAP financial capabilities and limited merchandising and replenishment capabilities from the SAP for Retail portfolio. OfficeMax had decided to start its implementation with projects that have a high impact, limited complexity, and low risk. We have over 30,000 associates, and our legacy systems were disjointed, so getting a handle on staffing was critical and the downside risk was relatively low, says Bailey. Once we completed the human resources implementation, we moved to finance, which was simple and could be initially implemented to support a stand-alone financial process.

7 Supply chain redesign ( ): OfficeMax developed a new supply chain model, the key characteristic of which was the establishment of three large intermediate distribution centers to eliminate the direct shipment of product from vendors to stores. The first distribution facility PowerMax was established in 1998 in Nevada, and by 2000, the company also operated PowerMax facilities in Alabama and Pennsylvania. More than 95% of the company s inventory is now replenished through the PowerMax network. This network enables aggregation of demand across stores; a substantial reduction of deliveries per store; a limiting of the locations at which safety stock needs to be managed; maximizing availability of inventory that can be purchased; and internal control of fulfillment processes. This has permitted a reduction in the replenishment cycle time for the stores from 35 days to 8 days, enabled the reduction of nearly $400 million inventory, and thereby contributed to an improvement to return on net assets (RONA) of over 450 basis points to 7%. We ve spent a lot of time understanding all the costs and components of the supply chain, says Bailey. We focused particularly on inventory, which is a very large contributor to our costs. In July 2001, OfficeMax implemented SAP for Retail to support merchandising decisions covering pricing, in-store adjacencies of complementary products, promotions, and sales of consignment stock; seasonal planning; replenishment based on store allocation; push replenishment; processing returns to OfficeMax vendors; and other processes in an integrated fashion particularly to support the PowerMax facilities. Data warehouse implementation ( ): OfficeMax uses the SAP business warehouse capabilities of mysap Business Intelligence to manage a variety of data derived from its SAP systems. The company uses this capability to analyze profitability by SKU, find slow-moving and frequently out-ofstock inventory, and support stock replenishment decisions. The company also uses SAP business warehouse capabilities to understand customers purchase behavior to support planning marketing initiatives. Our facilities are fully automated, 600,000-square-foot distribution centers, so they need best-of-breed warehouse management systems to operate them. Mark Fedele Vice President of Retail Applications Development, OfficeMax Warehouse management ( ): Robust warehouse management capabilities were critical to operation of the new supply chain processes. Our facilities are fully automated, 600,000-square-foot distribution centers, so they need best-ofbreed warehouse management systems to operate them, says Mark Fedele, vice president of retail applications development. The company replaced its legacy warehouse management applications with the warehouse management capabilities of mysap SCM once the SAP solution had progressed sufficiently to meet the company s requirements. Starting with its newest PowerMax facility in Alabama in 2000, the company implemented the SAP solution in each of its three PowerMax warehouses. The company also began to implement this capability at its 17 regional delivery centers with related processes (although with lower volumes).

8 The SAP warehouse management capabilities enable and support the following processes: Selection in waves: In order to facilitate assembly of full pallets for distribution to multiple destinations, OfficeMax implemented a two-step picking process in its automated warehouses. In the first picking step (called a wave ), items for multiple deliveries are picked from each bin. The entire selection is then moved together to a central distribution point (a conveyor area at OfficeMax s warehouses). In this interim conveyor area, the second wave is executed: product cases are selected, labels are applied, and the cases are sorted by their labels according to their delivery destination. The products are then shipped to OfficeMax retail stores or directly to customers. Internal planning, scheduling, and sequencing of purchases and shipments at OfficeMax are based on the use of the wave-picking processes. Cross-docking: OfficeMax uses the SAP cross-docking capabilities in its warehouses in a limited fashion to support rapid picking of seasonal items. Items are selected based on the date they need to be available in stores. The company is considering expansion of cross-docking to support achieving increased warehouse flow-through rates. Stock movement transaction management: OfficeMax has employed radio frequency scanning devices and bar coding to manage all stock movement transactions in the PowerMax facilities to improve efficiency and accuracy. The company is starting to make use of this technology in the delivery centers to improve performance to the direct channels as well as in its retail stores. Goods receipt into warehouses: The goods receipt transaction may be posted before physical stock put-away in a warehouse. This ensures recording of the goods in the system and permits paying vendors even if manpower resources are not immediately available. This process was implemented by permitting stock put-away into a virtual storage area at the time of the detailed check-in for received goods. Subsequently, the physical put-away can be performed as resources are available within a 24-hour window. Catalogs, commercial sales, and e-commerce were strategic platforms for enabling our continued growth, and our logistics initiatives supported these channels through efficient processes. Robert Bailey Senior Vice President and Chief Information Officer, OfficeMax Operator tasks: OfficeMax has enhanced productivity by 20% by improving operator workload management within warehouses, particularly by assigning multiple sequential tasks to operators and reducing overall travel time within warehouses. However, OfficeMax has not yet implemented an SAP warehouse management capability called task interleaving, which determines task assignments based on priorities and operator proximity to the work area. OfficeMax expects further productivity gains by making use of this task interleaving capability in the future to more efficiently assign tasks including picking, receiving, stock put-away, inventory cycle counting, and so forth. Inventory reconciliation: By virtue of managing inventory in a more centralized fashion and minimizing inventory at stores, OfficeMax has improved its inventory accuracy, lowering the number of end-of-period adjustments and reducing the need for cycle counting.

9 Goods receipt into retail stores: Merchandise shipped from a PowerMax facility is received with a single bar-code scan, and then subsequently may be put away onto shelves outside of prime operating hours. OfficeMax is using this process to ensure that the retail stores are fully stocked at the beginning of each business day. When we pick and load an order for a store, it s very store friendly, so that there s minimal labor that is expended at the store level, says Shovel. Through this implementation, OfficeMax achieved results that supported strategically significant improvements in operations. The following sections describe these improvements: Channel development and integration: The reengineered logistics processes provided a robust platform for developing multiple sales channels. We needed to provide more channels for the shopping experience beyond just retail stores, says Bailey. Catalogs, commercial sales, and e-commerce were strategic platforms for enabling our continued growth, and our logistics initiatives supported these channels through efficient processes. As we become a more mature retail operation, we need to make sure we invest our profits to promote integration among channels. Our strategy is simple: the customer can shop his or her channel of preference for convenience, and we will deliver seamlessly with consistent pricing. Of course, the implementation is far from simple; we have hundreds of implemented and planned tactics to achieve this. Integration will mean that OfficeMax will recognize the requirements, discounts, and other arrangements with specific individual and business customers regardless of the channels they are shopping. Also, integration will mean that OfficeMax will be able to make use of diverse ways of interacting with customers to gain additional knowledge of customer requirements in a planned, systematic way. As highlighted in Figure 1, retail store and e-commerce integration is particularly valuable. Motivating consumers to make use of both channels increases their loyalty to OfficeMax, and thereby facilitates OfficeMax s growth. Use of OfficeMax.com is growing (the rate of use had reached over 3 million visits per month in 2003), and the company has found that per-customer sales are higher by a factor of four for customers who shop multiple channels versus those who only shop in stores. Deployment of OfficeMax.com has contributed to the rise in the number of transactions per customer (Figure 2) and the average sales per transaction (Figure 3). Shoppers use Internet to get information and then shop stores. Customers research products in stores and then buy online. Figure 1: OfficeMax.com, Increasingly Important to the Customer Precise lot sizes: The minimum-order quantity from a vendor is normally at least two cases, which may be much larger than the monthly rate of sales for a single store. Through use of the PowerMax network and developing SKU forecasts that incorporate service-level requirements OfficeMax was able to change the store replenishment lot size to precisely meet forecasted requirements for each store. In our warehouses, our process allows us even to break up individual cases received from suppliers, says Shovel. The only way to give a store what it really needs is to break-pack cases. We don t want to give it six if it only needs one; if a store needs one, we ll give them just one.

10 Transportation costs: Due to the establishment of intermediate distribution centers, the number of shipments to stores has declined substantially, and transportation costs have thus decreased. OfficeMax has also made use of inbound planning and optimal truck-routing capabilities of SAP for Retail to further contribute to transportation cost reductions. In-store inventory management: The company tracks instore inventory through the use of portable handheld radio frequency terminals. These terminals permit store associates to scan a product on the shelf and update perpetual inventory records in the SAP for Retail system. Through integration with SAP for Retail capabilities, associates may retrieve specific product information, such as recent sales history, gross margin, and inventory levels. Point-of-sale transactions: OfficeMax has established in-store point-of-sale (POS) registers to capture sales information at the time of each transaction. This information is transmitted on a daily basis to corporate headquarters, where it is evaluated and used in merchandising and replenishment decisions. The company has begun evaluating this data using the analysis capabilities of mysap Customer Relationship Management (mysap CRM) to provide specific insights into customer buying habits. It is expected that this capability will ultimately enable sales associates to make real-time purchase recommendations to customers and to enhance targeted marketing efforts. Direct mail: OfficeMax has analyzed its customer database, eliminated duplicate records, and improved processes for better segmenting and targeting its customers with direct mail. The company has reduced the volume and cost of its mailings while improving response rates; moreover, the average resulting purchase is 50% higher than the average retail transaction. The customer analytics capabilities of mysap CRM have been contributing to this effort. Increase in private-label merchandise: Supply chain infrastructure improvements have enabled a 50% increase in direct import volumes at OfficeMax. (Prior to establishing the PowerMax network, imports were relatively low due to the difficulty for individual stores of procuring goods from offshore.) Consequently, the ability to market private-label (OfficeMax) merchandise which is based on large volumes of imported goods and economies of scale to lower printing and other costs improved substantially. Although privatelabel goods carry lower prices, the company earns a greater margin on this merchandise, and the goods provide the benefit of continuous advertising of the OfficeMax brand after the sale is made. The company offered 800 OfficeMax private-branded products in 2002 and expects to increase this offering considerably. You ll see in our financial statements that our gross margin has improved significantly which can be attributed in part to our efforts in private-label development, says Bailey. Private labeling is dramatic from a marketing standpoint as well. It s a great marketing tool; when you leave the store with this merchandise, you have a constant reminder that you shopped at OfficeMax. -9% -4% +1% +1% Post 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 9/11 Figure 2: Increasing Number of Customer Transactions +4% +5% +4%

11 Staff focus on sales and service: As a result of processes enabled by SAP, OfficeMax has centralized most administrative functions at its corporate office and two customer call centers. Instead of handling 600 receipts per week, the stores are handling about two deliveries per week and are taking the inbound shipments directly to physical locations within their stores. The company automated many store-level tasks or shifted such tasks to off-hours, implemented a pay-forperformance program, and improved store layouts to minimize the need for sales staff to help customers find items. These changes are enabling staff to focus on increasing sales and serving customers, and help contribute to overall general and administrative (G&A) expense reductions. In fact, OfficeMax s G&A expenses remain at about 2.8% the lowest in its industry. In 2002, OfficeMax implemented Boundless Selling, which makes use of real-time communication enabled by wireless technology in its stores to help further the focus on sales and customer service. At the store level, what we ve really done is focus on customer-centric activities, says Bailey. We have not reduced payroll. We ve reinvested in boundless selling and other customer-facing activities to drive the top-line growth. consulting expertise. The implementation teams were aligned to the businesses by functional areas, including finance, logistics, and human resources, and all involved in the implementation were based at the OfficeMax headquarters in Ohio. Integration testing was centralized to ensure that all SAP releases were coordinated across channels, and any oversight covering cross-functional requirements was caught during integration testing. Each project leader reported to the project management office, and OfficeMax established a traditional steering committee, consisting of all senior executives. The steering committee ensured that projects were prioritized based on their ability to add business value, either from the perspective of financial return or competitive advantage. We used a very traditional approach for managing this project, and it produced good results for us, says Bailey. Broad training for the IT staff was also established during the implementation. Individual IT staff would float from project to project and contribute as appropriate, says Fedele, so they acquired a cross-application view of the entire SAP package. Category growth: OfficeMax maintains a centralized group of product category managers who manage the product mix for each store based on data provided from the field. The SAP solution provides information to facilitate optimal management of the product mix, based on sales, gross margin, inventory turns, and sourcing factors. The company has been able to double the number of SKUs by virtue of the processes it has established. -3% -3% -3% -1% Flat +4% +5% Governance and project management: About 250 staff in OfficeMax s information technology department contributed to the SAP implementation, and approximately 90 consultants were engaged at the peak of implementation activity. SAP was the primary consulting partner and the source of technical Post 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 9/11 Figure 3: Average Ticket is Climbing

12 NEXT STEPS OfficeMax is making a number of changes across its channels to differentiate its brand by enhancing customer convenience, improving shopping efficiency, and promoting impulse purchases. The company continues to foster a customer-centric sales culture that focuses associates on making customer service their number-one priority, and the company is upgrading its stores with wide aisles, bright lighting, and bold graphics. The company is also pursuing a variety of specific systemenabled initiatives to improve its efficiency and effectiveness, including: E-commerce development: The company is working to further integrate the OfficeMax.com site with other OfficeMax channels. For example, the company plans to provide kiosks in its stores, and will thus have further motivation to ensure coordination of Internet and in-store pricing as appropriate. The company will enhance provision of online information about in-store discount sales and its digital connections to CopyMax services. OfficeMax will use e-commerce as a foundation for expansion into new international markets, enabling the company to enter these markets with minimal capital investment. Price optimization: OfficeMax is exploring the use of mathematical models that will allow it to optimize prices in its retail environment. Pricing at the store level has typically been set based on market conditions and competitive intelligence, rather than on actual consumer behavior. The company intends to more closely review price and volume history, and develop models to price goods based on price elasticity of demand that is, the responsiveness of quantities demanded to a change in price. Vendor performance: OfficeMax plans to monitor vendor performance by evaluating suppliers in specific categories, including margin contribution, inventory turnover, lead-time variances, and delivery compliance. This data will assist with contract negotiations and determining the set of suppliers with which the company should concentrate its business. OfficeMax also plans to develop a vendor Web portal, which will improve the effectiveness of procurement processes for both OfficeMax and its suppliers through improved communication about forecast sales by store and by article, historical purchases, inventory, order status, and so forth. The company plans to make use of mysap Enterprise Portal and mysap Business Intelligence to enable the associated processes. Enabling the mobile sales force: There are about 200 associates in the CopyMax sales force and about 200 in the commercial sales force. OfficeMax plans to provide the mobile sales capabilities of mysap CRM to support these personnel with capabilities to manage customer accounts and sales campaigns, to provide access to product and pricing information, and to facilitate closing sales.

13 Partial receiving: Since a single purchase spans several truck deliveries, OfficeMax plans to implement partial receiving of items identified in an advanced shipping notice. This will enable improved visibility into items that have physically arrived before the complete shipment has been received. Employing the Theory of Constraints in distribution management: OfficeMax plans to deploy processes to maximize throughput in its distribution network while minimizing the capital invested in inventory and facilities, which is consistent with its efforts to improve RONA. The company plans to achieve this objective by employing a Theory of Constraints model to manage its network, establishing ongoing processes to identify and optimize critical material and capacity constraints including supplier capabilities, transportation capacity, warehousing capabilities, and manpower. OfficeMax will be driven to make further changes as it completes its integration with Boise, and as its retail, e-commerce, and related markets evolve. The key thing about the retail business is that there will always be frequent changes, says Bailey. Let s face it when someone is doing something well in one retail channel, the competitors will find out very easily, simply by shopping the stores or reading the newspaper. And the new idea will get adapted quickly into the business model of other channels. Therefore, once we ve tackled all these initiatives, we can be sure that there will be a continual evolution with more changes ahead. The pace won t slow down.

14

15

16 (04/01) 2004 by SAP AG. All rights reserved. SAP, R/3, mysap, mysap.com, xapps, xapp, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. MarketSet and Enterprise Buyer are jointly owned trademarks of SAP AG and Commerce One. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves information purposes only. National product specifications may vary. Printed on environmentally friendly paper.