Marks & Spencer has brought investors up to speed on plans to update its supply chain, finally answering its critics' cries for investment. Chloe Ryan reports

The question on people's lips when it comes to Marks & Spencer is: "Who will succeed Sir Stuart Rose when he stands down next year?" Several internal candidates, including head of food John Dixon and general merchandise chief Kate Bostock, are being considered and Sainsbury's chief executive Justin King hasn't ruled himself out.

However, far more important decisions about the future of M&S are arguably being made behind the scenes right now. With the retailer plotting how to build its online presence and its overseas business, M&S's already outmoded supply chain and IT systems are creaking under the pressure. So how does M&S plan to pacify investors demanding it bring itself up to date?

The answer is Project 2020, a programme of improvements announced in May designed to show that M&S is paying its supply chain some long-overdue attention. Finance director Ian Dyson, who is in charge of the £1bn project, presented the plans to analysts and investors earlier this month, describing the IT transformation as going from "bespoke, unconnected and inefficient, to best-of-breed architecture".

Within five to seven years, the retailer's 100 general merchandise warehouses around the country many of which are operated by suppliers are to be consolidated to just four, operated by M&S alone. A new e-commerce distribution centre will also be opened to cater for this growing part of the business. The sheer scale of the rationalisation speaks volumes, although Shore Capital analyst Kate Calvert says the retailer's ambitious timescale is unlikely to be achieved.

As the programme has been ongoing since May, the move was clearly designed to address accusations that this long-neglected part of the business is holding M&S back from becoming an international, multi-channel retailer fit for the 21st century.

One of M&S's harshest critics is retail analyst Tony Shiret of Credit Suisse. He spoke out when Sir Stuart defied standard industry practice last year to take on the combined roles of chief executive and chairman. And his recent note to investors spelled out his concerns about the retailer's creaking systems. In the missive, Shiret wrote of M&S's need for "a substantial, costly and extended modernisation". Areas he claimed were particularly in need of updating included warehousing, online, international, operating and control systems. "The financial impact of this will not be fully transparent until new management emerges," he added.

The extent of Shiret's concerns would have come as a relief to staff, who are well aware of the problems with M&S's organisational processes. Many are not only complex but chaotic, claims a source close to the company.

"The bread for the M&S sandwiches in the Simply Food stores in Hong Kong is freighted from the UK, even though the products are made locally," he says. The logistics for the UK-based general merchandise and clothing businesses are also unnecessarily complex, with a lot of rerouting of stock amid sometimes chronic availability issues. The new system will mean each warehouse specialises in a particular item."

"The systems haven't had any significant investment for the past 10 years or so," a former M&S executive reveals. "There have been amendments but really there is no doubt the supply chain is behind the competition."

"The software used to organise the food business was probably cutting-edge 15 years ago," he says, "but these days it does not provide the flexiblity that Tesco or Asda have with their supply chains."

Individual stores are restricted in the product range they offer, says another source familiar with the M&S business. "The major multiples refine the offer for each particular store, and the local store manager has far more scope to adjust the ranging to suit their market," he says. "At M&S it is much more rigid. Stock is pushed out to stores rather than pulled."

While head of food Dixon has gone some way to resolve the availability problems that have also dogged M&S food supply, the company admits it is still a work in progress. A spokeswoman claims availability has improved by 0.5% in the past 12 months, but adds the retailer's target is to improve this by a further 2% over the next three years. This would ensure 96% of shelf space is filled at all times.

Dyson has renegotiated all third-party logistics contracts including Gist, which currently handles all of M&S's food distribution, slashing £20m from its previous contract in exchange for extra business from M&S in the Republic of Ireland.

The 12 warehouses servicing food outlets are more efficient but the former M&S executive suggests three or four of the warehouses could still be disposed of in the future.

In the meantime, M&S is also understood to be introducing SAP business management software, widely considered the gold standard in business IT systems. And the international supply chain will also be restructured so foods are not unnecessarily shipped to the UK only to be sent back out again.

Turbulent years
M&S claims modernisation has been in the pipeline for some time, but that it has been held up by a turbulent past few years. When Sir Stuart took over as chief executive in 2004, M&S had problems more urgent than the supply chain.

"It was never seen as a priority," says the former M&S executive.

Fending off repeated bids by Arcadia boss Sir Philip Green, Sir Stuart concentrated on modernising stores, revamping the clothing ranges and rolling out Simply Food branches. He also launched the eye-catching Plan A environmental programme. But now the supply chain and IT systems are a priority and, as well as predicted savings of £250m by 2015/16, overhauling the systems may allow new developments to become viable.

"Developing our food offering in our international stores is something we believe is worth exploring," says an M&S spokeswoman, "but it's important that we ensure our UK distribution and range is right first. It is something we are thinking of, but it's very early days."

An online food offer is also on the cards, although no timescale has been put on a launch.

Whoever takes over from Sir Stuart next year will be well aware the role is not the plum job in British retail it was once considered; the high street is struggling through the recession and Sir Stuart will probably be relieved to hand over the reins.

But while he has been widely praised for turning the retailer's fortunes around, there is scope for his replacement to carve out their own legacy by bringing the business into the 21st century.

Marks & Spencer's Project 2020

Changes made:
- renegotiated third-party logistics contracts
- new IT and supply chain top team
- 21 warehouses closed
- £30m savings so far

Changes still to be made:
- consolidate warehouses from 100 to four
- new PoS system
- new HR systems, including all staff clocking on
- SAP system to monitor promotions and sales data