INDUSTRIAL ENGINEERING APPLICATIONS IN RETAILING:INTRODUCTION TO RETAIL LOGISTICS

INTRODUCTION TO RETAIL LOGISTICS

If your business has all the time in the world, no sales or profit pressures, and a strong competitive advantage in the marketplace, then you do not have to be concerned about the efficiency and effect- iveness of your supply chain management. This is not the world of retailing, where margins are thin and competition plentiful (and aggressive).

The Retail Supply Chain

By and large, consumers don’t know (or really care) how the product made it to the retail shelf (or to their door). They do care that retailers have the right products, in the right sizes, in the right colors, at the right prices, where and when they want it. The business challenge for retailers is to manage the thousands of paths that exist between raw material to putting the product on the shelf, from the small one-store operation to the 2600+ store chain Wal-Mart.

The retailer’s role is to manage these complex relationships and make it possible for the consumer to make a choice easily among the many thousands of vendors and manufacturers creating products that consumers would want. By reducing the complexity of finding and acquiring the right merchan- dise, retailers help deliver something of value to the consumer. The goal of the retail supply chain should be to minimize expense and time between the manufacturer and the consumer so that con- sumers find what they want at a competitive price. Customer relationships are only developed by designing product paths that deliver what the customer wants, when they want it, at the price they want it. This is what shareholders pay the executives to do. Executives who do not marshal the supply chain well will have a business that will underperform (see Figure 1).

Strategic Advantages through Retail Supply Chain Management

Today an executive whose goal is not lowering costs is not shepherding the resources of the company well. Procurement, distribution, and storing accounts for about 55% of all costs. By contrast, labor

accounts for 6%. Thus, leveraging cost savings on supply chain issues creates a greater return than almost any other single category. A 5% savings in supply chain expense adds almost 3% to net profits (a 5% labor savings adds less than 0.3%). To achieve the bottom-line impact of a 5% supply chain saving, you would have to cut personnel costs by 46%. According to a study by Computer Sciences Corporation and Consumer Goods Manufacturer Magazine, almost 75% of executives re- sponding to their survey said that reducing supply chain costs was one of the most significant market forces driving their companies and that integrating systems with their customers (e.g., retailers) was a top information system concern (57%) (see Figure 2).

How could such a large area be almost invisible? Quite simply, lack of interest, knowledge, and the clear priorities of sales and marketing drive it into invisibility. The issues in the supply chain seem almost coincidental to the business. It is clear that many senior executives don’t quite understand the nature, scope, and bottom-line impact of their supply chain.

But the issue is not simply cost savings. The real benefits of supply chain management come when the retailer develops relationships with suppliers that add value for customers. Wal-Mart is the number one retailer in the world—$160 billion in sales in 1999. Its advantage in the marketplace is based on its ability to give customers what they want at the lowest price every day. The reason for its success is not really its outstanding customer service (although customer service doesn’t hurt). The reason is that it manages it supply chain better than any other retailer does. Wal-Mart dictates to vendors the manner and costs by which goods will be delivered to its distribution centers and stores. Wal-Mart’s ability to track and know what consumers buy, and its control over the process, result in over 50% of all Wal-Mart products on the shelves and out the door before it has to pay for them. Its efforts to increase this to 100% of all products sold will lead Wal-Mart’s dominance into the 21st century. Wal-Mart’s ability to manage its supply chain allows it to have the lowest cost structure in the industry, allowing lower prices and maximizing profitability.

What Is Supply Chain Management?

Supply chain management goes beyond mere transportation, logistics, warehousing, and distribution. It is a relationship among manufacturers, suppliers, vendors, retailers, and customers working together to provide a product that the customer wants at a price that the customer is willing to pay. The ‘‘extended enterprise’’ makes optimal use of shared resources to achieve greater operating efficiency than any could achieve alone. The resulting product is the highest quality, lowest cost, fastest delivery, and maximal customer satisfaction.

The best retailers are focusing on the complete supply chain, developing and maximizing whatever partnerships can exist to get what customers want, before they know they want it (Kuglin 1998). The new terms going into the 2000s are quick response, category management, continuous replenishment,

supply chain partnerships, efficient consumer response, flow-through merchandising (cross-docking), and enterprise resource planning.

A Short History of Supply Chain Management

In the beginning, it was sufficient for the owner / proprietor simply to order the products he or she thought the customer would want, and these would be delivered to the store. As business got more complex (and larger), the need arose for a division of labor in which a separate expert department / function was born for the major areas of the business. One part of the organization and set of people was empowered to order, track, plan, negotiate, and develop contacts. The greater the size of the retailer, the greater the number of buying functions—accessories, socks, underwear, coats sportswear, petites, men’s wear, furnishings. Each department worthy of its name had an ‘‘expert’’ buyer and assistant buyer. Each buyer reported to a divisional merchandise manager (DMM). Each DMM re- ported to a general merchandise manager (GMM), and the GMM reported to a senior vice president.

Small retailers have direct store deliveries from the manufacturer or middleman. Larger retailers have centralization of storing, transporting, and distributing from regional distribution facilities (dis- tribution). Technology development over the past 15 years has focused on more efficient and faster ways to get ‘‘stuff’’ into the regional distribution facilities and out to the stores or end user. Success was measured in the number of days or hours it took merchandise to hit the distribution center from the manufacturer or supplier and go out the distribution door. The end result of these developments is the situation today (Fernie 1990; Riggs and Robbins 1998):

• Many small transactions and high transaction costs

• Multiple suppliers delivering similar goods with the same specification but little price compe- tition

• Very low levels of leveraging purchasing or achieving economies of scale

• Too many experts and executives focusing time and effort on very narrow areas that frequently have nothing to do with the core competency of the business, essentially wasting time that could be otherwise be devoted to improving the business’s competitive advantage

• Little time for strategy because the experts are involved in daily transactions

The Current State of Supply Chain Management

We have seen what was. Now here is what some retailers have achieved. Expected demand for a product is forecasted (forecasts can be updated as changes in demand reflect change is needed). Stock levels are constantly monitored. The frequency of production and shipment is based on the difference between demand and on-hand goods. When stock falls below some number, the product is ordered by electronic data interchange (EDI). There is immediate electronic acknowledgment with a promised delivery date and mode of shipping. The mode will be automatically selected by comparing the current level of inventory and demand. When the product is shipped, it is bar coded and a packing skip is EDIed to the company. When the products arrive, bar codes are matched to the order. Any discrepancies are handled electronically. The product is cross-shipped, inventoried, picked, and en- tered into the purchaser’s inventory electronically and is immediately available. Store shipment goes out according to store inventory levels and cost considerations.

There are a number of state-of-the-art processes and technologies at work here. Forecasting and monitoring is used to minimize inventory levels while maintaining very high levels of in-stock po- sitions for the consumer. Money is saved by reducing the inventory at each distribution center. Inventory can be assessed at any of the distribution centers. Almost all handling and clerical labor is eliminated and greater accuracy is achieved. Lower handling costs per unit translate into savings and efficiency. Finally, if you don’t have excessive inventory in the stores, it may be possible to raise the percentage of goods sold prior to the need to pay for them. This reduction of cash to cash cycle time is a major benefit of supply chain management.