Covansys Puts Heat on Landlord

January 20, 2OO3
Page 3
CRAIN'S DETRoIT BUSINESS
Kmart
needed
toexit INDIX
markeb,
analysbsay
Delphi
makes
CRAItt's
Compensatloncholce:
Kaydondirectorsforgo
cash to bet on stock.
PaEe4.
vendors
toe
'lean'line
BY TERRYKosnnosxv
Incomplete
NOT
TOCLOSI
raithdraz.aals
,
puzzLesome
BY BRENT Snevnr,y
cru r N'sDETRot? austNt's.s
Ul tl I N'S D E7' IIO I ?' /JU.S/rYI]SS
The worlcl'slargestautosupplieris taking the Japanesesupplier modeland using it as part of its new purchasingstratecv.
Troy-basecl
DelphlCorp.is sending"lean
etrterprise"teanrsto key suppliersto help
them put in placeits lean-manufacturing
system.Delphi wants to reducethe nunlber ofvendorsit usesand form long-terrn
relationshipswith the onesit keeps.Delphi (NYSE: DPH) so far
has hired 30 supplierdevelopment engineers
to take the lean-rnanufacturing
system to
suppliers and will hire
20 more.
If a supplier wants to
do business with Delphi, it must commit to
Iean manufacturing,
said David Nelson, Delphi's vice president ofglobal purchasing.
"Going forward, all of Delphi's suppliers will take the lean journey with us," he
said. Delphi purchases gl4 billion annualIy from about 9,000suppliers.
Nelsotr said Delphi hasu't set a "magic
number" of snppliers or a specific
timetable. The company is just beginning
to tind out which suppliers will stay on
board. However, President and CEO J.T.
Battenberg III said the reduction will be
"huge."
Delphi plans to increase its early collaboration with suppliers to take the cost
out ofa component before it goes into production. For existing programs, Delphi is
working with suppliers to reduce production costs so their margins don't take as
much of a hit from annual price cuts demanded by automakCIS.
Delphi is trying to
create a better system
than simply passing
automaker price cuts
along the supply chain,
said Donald Runkle,
vice chairman of enterprise technology and
lean enterprise.
Runkle
"We want to change
purchasing lrom the poker-playing auction to developing key supplier partners,"
Runkle said last week at the Automotlve
/Vews World Congress in Dearborn. "We
want a good, solid partnership and not
just switch suppliers around." Automotiue News is a sister publication of Crain's
Detroit Busirrcss.
Delphi's strategy is similar to the supplier models used by Toyota Motor Manufac'turlng North Amerlca Inc. and Amerlcan
HondaMotor Co.
Nelson, hired in early 2002,is a former'
SeeDelphi, Poge 23
KMRTQ),
which filed
for Chapter
11
bankruptcy pl'oFinancialand
tection
strategicfactors
22,
wereused in
Jan.
which
evaluating
2002,
anstores to close.
nounced
Flnanclaltactols:
the
Sales,earnings
planned
beforetaxes, cash
flow and lease terms. store closings and reStrateglc factors:
lated 3?,000
Competition,
job
cuts
distancefrom a
distributioncenter
last Tuesand numberof other day, along
storesin the market. with plans
to
exit
bankruptcy by April 30.
Kmart plans on Jan. 28 to ask
U.S. Bankruptcy Court in Chicago
for approval of the. store-closing
plan and said it will file a proposed reorganization plan Friday.
Kmart said it plans to close 13
Michigan stores, irrcluding 11 in
metro Detroit.
The company said it took a final, hard look at its store pordolio
and said that after this round, it
doesn't plan on closing any more.
In Texas, the state hit hardest
by both last year's and this year's
closings, Kmart will go from 106
stores before declaring bankruptcy to 19. Kmart also closed a distribution center in Corsicana.
just south ofDallas.
Tocros
on
Kmart Gorp.'sdecision last week
to close 326 mot'e stores fell short
of what is needed to get the retailer out of highly competitive mar.
kets and the low-margin perishable grocery business, analysts
said last week.
The announcement left as ferv as
19 stores in Texas, once a major
market for Kmart. And the closings cut by nearly 50 percent
Kmart's supercenters, the largest
store format, which sells perishable groceries such as produce
along with hard goods and apparel.
"As draconian as the cuts were,
it was not enough - they really
need to exit the Southwest and the
Southeast," said Burt Flickinger,
managing director of Westport,
Conn.-based Reach Marketlng.
"The surviving stores don't give
Kmart enough critical mass to
survive in the major markets in
the
Southwest
and
Southeast."Troy-based Kmart (OTC:
Ron Hutchison, chief restructuring oflicer for Krnart, acknowledges that Texas is a troubled
market for Kmart. But he said the
remaining stores are profitable
and can continue to operate profitably, even though the nearest
distribution center is now in
Lawrence. Kan.
"The problem was, we really
didn't have any markets where all
of the stores in that market, or g9
percent of the stores in that market. would meet the criteria for
closure," Hutchison said.
Julian Day, Kmart's president
and COO, said financial and
strategic factors were used to
evaluate stores. The financial factors were sales, earnings before
taxes, cash flow and lease terms.
The strategic factors were competition, distance from a distribution center and the number of othel stores in the market.
Fifty-four stores were identified for closing in the latest plan.
Walter Loeb, president of the New
York City retail consulting firm
LoebAssoclates Inc., said Texas is a
stt'onghold for WalMart Stores Inc.
and said Kmart appears to be trying to scale back in Wal-Mart's
dominant markets.
Still, Hutchison said many of
Krnart's stores compete favorably
with Wal-Mart, even at some sites
SeeKmart, Page 22
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puts
heat
Covansys
onlandlord
L azasu'itseeksreli,ef
temp
from 9}-d,egree
'in computerroom
BY ANDREW DIETDERICH
CfuII N'SNI:TTIO
I?'BU.S'N&'SS
Soaring temperatures in the computer room of
Farmington Hills-based CovansysCorp. have left the
cornpany and its landlord hot under the collar.
Covansys (Nasdaq: CVNS) has filed suit in Oakland
County Circuit Court against its landlord, Orchard
Rldge Ofllce Park L.P.The complaint
alleges that the stability of nearly
100 computer servers was jeopar.
dized as recently as November,
when the temperature of the room
in which the machines are stored
reached nearly 100degrees.
The servers, a few of which
President and CEO Marty Clague
said have been moved, hold information for clients including Fod
clague
Motorco., Generat
J"
teon Corp.,Lucent""-ti"ti.,
Technologles
Inc.,SprlntGorp.and
Kroger Co.
It's a situation that also puts Covansys at risk in
general, according to the lawsuit, fi-ledNov.5.
Covansys' landlord could not be reached via
phone, and the attorney handling the case was unavailable last week. The general partner in Orchard
Ridge is Enriko Sasson.
Covansys'complaint contends the landlord has refused to let it install a new air-conditioning system to
cool more than 100 selvers in a 3O&square-foot room
that reached more than g0 degrees because ofthe heat
generated by the machines. Servers are high-powered
computers that hold large amounts of data and are
used for tasks such as handling e-mail and Internet
activity fol a business or storing Iarge projects.
In its answer to the complaint, Sasson says that
not until Nov. 12 did Covansys present detailed
plans, permits or other documentation detailing
how it warrted to improve the ventilation system, despite requests to provide such documents.
In the aflidavit, Sasson says Covansys also did not
make clear the potential harm it faced if additional
air conditioners were not installed and that he would
have apploved the project as long as Covansys agleed
to pay for the installation and electricity. Covansys
says in its complaint that it would pay for the costs.
In the affidavit, Sasson says Covansys'lease provides for heating and air conditioning only between
7 a.m. and 7 p.m. Monday through Fl'iday and g a.m.1p.m. Saturday.
Clague said the lawsuit is the latest in a long line
of disagreements, r'anging from terms of the lease Covansys says it ends in 2008,the landlord 2015- to
things such as basic maintenance.
He said the information on the servers is backed
up on computers at other Covansys locations and
SeeCouansys,Page 23
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January20,2OO3
CRAIN'sDETRoIT
BUsIilEss
Govansys:
Heatputon
landlord for temperature
t lrron Pose 3
said the larvsuit is "just a troLnral
part of llegotiations" and that the
court systenr is sometimes relied
on when two sides can't settle a
disagreenrenton their orvn.
"At the preseut tinre, there is no
risk for our clients," Clague said.
The comlrlaint states that, at the
time of the filing: "The situation
has becornecritical. Should a systemwide failure occur, Covansys'
clients would be rlilectly and negatively intpacted."
The complaitrt says that rvithout
an upgrade, "the computer equipment houseclat that location is irr
danger of intnrediate ancl irelrarable loss, and Covansys' business
operations are placed at risl<."
According to an affidavit of
,Iolur Talieri, Covansys cltic'f intbr'nrntion olficer, the tenrperature in
the Farnrington Hills cornputer
room had exceeded g0 degrees on
"a ttumber of days" leading up to
the liling.
Talieri also saicl in the afidavit
that file-server failule calt occul'at
85 degrees, and at g5 deglees they
will shut dorvn. TIte affidavit also
says the company tries to keep the
roonr cool by r"rsinga separate aircottditioning systenr. poltablc' airconditioning units and thns.
"Covansys also lcaves tlte door
open to release sorne of the l-reat
generated by the equipnrent, despite the security risk strch a nloasut'e entails," the complaint says.
Jay Harrison, presidcnt ol'
Southfield-basetl Internet Opera-
14/Itrn (r,'rlum lt'i,ts
90 rlrgn,r,s,tlu,
t.t'ttt,7
tctvtttln,'it tsirk u
urt t t'lttrt(t' ('}'til d,Ix, u,s
high us LJ| rlcervrts.
tlons Center Inc., a conrpany that
maintains hundreds of servers lor
its own clients, said a good envirortnrent is as important as the
servers thernselves.
Iuternet
Operations Center
sel'vel's are maintained at the opti
nral ternpernture ofbetrveen 65 and
68 degrees, Harrison saicl. When a
loonr hits g0 degrees,he said, the
temlreratule inside a cornputel'
coulcl be as high as 130degrees.
Harrison said nornral officebuilding air-conditioning systems
rvould not be able to adequately
cool a concentration ofhighlower
conu)rJtel's.
'l'he
tu'o sides will cotltinue to
battle in court unless an agleenrent is reached. Oakland Circuit
Juclge Colleen O'Brien denierl a requcst by Covansys asking to be allorved to install the system irrunediately.
A trial clate has not been scheduled yet.
Andreu Dietdericlt: (31il 44603I it. ud ietdet'ich tu cra i n.cont
Page 23
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Delphi:Srppliermakes
vendorstoeleanline
I l,'nnn Pege ll
Houda and Deere& Co. purchasing
executive. His role is to bring that
collaborative urodel to Delphi. Tlrt:
cornpany also still nreetsrvith Toyota and llonda executivc's.Ilunkle
said.
Suppliers often sa1' the Japanese-owtredalttornakers are easier
custolllefs. Not that thev don't clenrand redtrctions, but supplier.s
arc blought in earliel in the desigtr phase, artd corngtorrentcosts
are taken out rvhile it's still bc'ing
designed. 'l'hat rerluces thc ncerl
lbr across-the-boarrlanntral plicc
reductions as thc part is delivered
fol production.
That systenr is easier on profit
tnargins and allows suppliers to
kecp putting ntouey into research
and developnrent.
Runkle said the North Anrer.i<:an supplier business nroclelputs
too much enrphasis on cutting
tnargins, stifling the innnvation
needed to nrake cars sexv.
Delphi saicl its strategy is designecl to help its sr.rppliersstay
protitable enough to pump ntoney
into lesealch and development to
create unique products.
"Snppliers are not creative
errough,and (autontakers) don't
reward technologl'." Runkle said.
"We rvant good technologv front
our stl'atcgicsuppliels."
The high nunrber ol' tier-two
supplier Iailures is another reasoll
fol Delphi's strategy. Runkle saicl
Delphi finds itselfpropping up key
suppliels too often.
"Not a rveek goes by where we
don't have sonreboclyupside down
someplace,"he said. "Over the last
six to nine nronths, the sultply base
has been prettv stl'essedup." Nelsotr r,l'otrkln't reveal horv rnuch
Delphi spends anntrally on flinancial assistancc.to suppliels.
Runkle estinratesthat half of all
auto suppliet's al'e not nraking
their cost of capital. That's one
reason Delphi is trying to change
the businessmodel.
Ilattenberg credited Delphi's
new purchasing stl'ategy and lean
manufactuling with helping the
conU)zuryt'each net incorne of $343
million ol'6l cents a shale on revenue of 927.4 billion in 2002.That
compares with a net loss of $370
million or 66 cents a share on l'evenue of$26.1billion in 2001.
Terry Kosdrosky: (313) 446-1626,
lA'osdr?sAj't{cr a i n. cotrt
Communication SystemslnsfaIIed.
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