Supermarket group Morrisons will increase the centralisation of its distribution network as part of a plan to make savings of more than £1 billion over the next three years from supply chain and procurement.
It has identified some £300m of savings from improved end to end operations, including use of vertical integration to optimise what it makes where, and to enhance end-to-end product flow and processes.
It wants to improve stock flow through greater centralisation, from regional to central distribution centres. Increased penetration of high volume stockless lines by 50% over three years is also a priority.
The stock ordering process will also be streamlined with improved electronic order pad, and plans to roll out sales-based ordering by 2017.
Enhance store process efficiency will also be improved with better labour scheduling and optimised checkout technology.
It also expects to save £200m from indirect procurement and loss prevention. But the biggest saving, £500m) is expected to come from promotional investment and improved sourcing.
The retailer revealed a pre-tax loss of £176m in its results for the year to 2nd February. The compares to a profit of £879m the year before and the group blamed increased competition from discounters such as Aldi and Lidl as a prime cause.
It expects to reduce working capital by £200m in this financial year by reducing inventory. It is looking for improved visibility, range reduction, reduced stock in depots, and operating model changes.
It said that it currently has 14 days depot stock cover, compared to an industry benchmark of 8-11 days.
In addition, it said, it was reviewing its property portfolio and saw opportunities to realise value from its development pipeline, distribution centre assets and investment properties. The objective is to realise £400-500m in 2014-5.
Chief executive Dalton Philips said: “The strategy we are announcing today is a bold and comprehensive response to the fundamental structural changes that are taking place in grocery retail.
“We are significantly reducing our cost base and will invest £1bn into our proposition over the next three years, to improve our value even further and to defend and strengthen our competitive position. Customers will see this in our stores as well as in our fast growing online and convenience offers. At the same time we will exit non-core activities, significantly reduce our capital expenditure and deliver improved operating cash flow and return on capital employed.
“Together with the strategic value of our vertically integrated supply chain, these measures will provide a firm foundation from which to provide outstanding value to our customers and to generate meaningful shareholder returns over the medium term.”
Morrisons plans to sell off Kiddicare, the business it bought 2011 and which was intended to be the core of its home delivery business. It will also exit Fresh Direct, the New York based specialised in the home delivery of fresh fruit and vegetables. It has since reached a deal with Ocado on home delivery which has made the original rationale for these acquisition no longer valid.
Kiddicare account for £163m of the £903m in exception costs that the group has taken this year.