Academic journal article The McKinsey Quarterly

Accelerating IT Innovation

Academic journal article The McKinsey Quarterly

Accelerating IT Innovation

Article excerpt

A case study of how Mervyn's built a new store inventory system in record time

They are the Oscars of information technology: every year the Smithsonian Institution and Computerworld magazine award prizes to a handful of computer programs that, in the eyes of the judges, exemplify the most innovative applications of technology. In 1994, the prizes went to software that enables more natural use of artificial limbs, a computer simulation of the world's oceans, the programs that created realistic dinosaurs for the movie Jurassic Park, NASDAQ's networked financial markets, and the inventory control system at Mervyn's, the well-known department store. Why Mervyn's? Why inventory control?

Mervyn's executives asked themselves the same questions as they mounted the stage to accept their award. The answer is not simply that their Planned Store Inventory system (PSI) is an interesting and useful piece of software, that adds tens of millions of dollars a year to the company's profits. The real achievement is that Mervyn's has worked out a new way to build systems that, by making the inevitable risks of innovation more manageable, can speed IT-led innovation throughout a business - any business.

The accomplishment of PSI

From its headquarters in Hayward, California, Mervyn's manages a chain of nearly 300 department stores stretched across America, selling over $4 billion-worth a year of mostly middle-market clothing. Its PSI system addresses two problems at the heart of its business. First, how can Mervyn's get the right goods to each of its stores, even as sales fluctuate through local promotions and changing fashions? And second, how can it get its employees to take full advantage of the opportunities created by advances in information technology?

Neither of these problems is unique to Mervyn's, or to retail. Be it inventory management or product development, companies everywhere are struggling to use IT to help them react more quickly to change - and to tailor their services more precisely to local markets. That means they must learn how to change business practices rapidly and enthusiastically to take up the new opportunities that technology brings. On both counts, there is much to learn from Mervyn's experiences.

One of the first things to appreciate about the PSI system is how successful it was in reaching its goals. Instead of distributing inventory on the basis of average sales in a group of stores, as Mervyn's had previously done, PSI distributes to each store a mix of products, sizes, and colors matched precisely to local sales. As a result, Mervyn's now sells more products with less inventory. Overall, the inventory handled by PSI (over half of Mervyn's total) has been reduced by over $100 million-worth of goods. At the same time, PSI halved the frequency with which goods are out of stock when a customer asks for them. The net result has been, even in a very difficult market environment, to add tens of millions of dollars each year to the bottom line.

What makes PSI really merit a prize, however, is the speed with which it was created, as well as the innovative ways in which developers and eventual users worked with each other - and with the technology. From conception to the end of roll-out took less than a year, including three months to test and improve the prototype as it was used to manage the inventories of a few selected items over the busy Christmas selling season. More broadly, Joe Vesce, who was chairman of Mervyn's when PSI was built, credits this rapid systems development process with creating a new company-wide culture of innovation, a new ease in working with technology, and a new excitement about business change.

In the past, Vesce argues, Mervyn's had been held back by its highly complex information systems. Since every part of the business depended on IT, every change initiative had to compete for me scarce resources available for improving computer systems. …

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