INDUSTRIAL ENGINEERING APPLICATIONS IN RETAILING:RETAIL SUPPLY CHAIN COMPONENTS

RETAIL SUPPLY CHAIN COMPONENTS

Retail supply chains are different than other industry models. Many of the components of the supply chain are the same: product sourcing, inbound transportation, processing, location and storage of inventory, outbound transportation, company operations, and information. However, retailers are at the end of the chain, just before the products touch the consumer. As a result, the retailer is at the end of the cumulative efficiencies and deficiencies of all the chain partners. It may be that retail supply chains are just a bit more complex. Imagine the thousands of vendors, each with their own ideas and operations, all moving with a thousand different retailers’ set of unique requirements and multiply this by the 90,000+ different stock keeping units (SKUs) in the typical large discount store.

Product Selection and Sourcing

Retailers must establish competence in selecting products that consumers want. The retailer must discern the needs and wants of its consumers and translate that into category assortments. Sourcing describes the manner in which the retailer forms relationships with manufacturers or vendors in order to deliver the products at the right time. Guess wrong and the retailer suffers a season of lower sales and profitability (e.g., short skirts when long is in). Guess right and the retailer becomes a hero.

Retailers have two broad choices as they strategize sourcing. With branded merchandise, the retailer selects manufacturers who have established some image equity with the consumer. The supply chain is simplified for the retailer, for all it has to do is inform the manufacturer how much and when it wants to get the ‘‘stuff’’ to the store. With private-label merchandise, the retailer must manage the whole process, from design to material to manufacturing to shipping, all the way to selling, and advertising the brand equity. Retailers choose to develop private-label merchandise because of the market advantage that this strategy allows. First, there is added profit margin. Retailers can make greater profit margins, even though private label goods are generally priced lower than manufacturer brands. Second, with private labels, retailers have the ability to develop products that are unique in the marketplace because the consumer can get the private label only at that retailer.

Inbound Transportation

The issues here revolve around getting the merchandise to the retailer’s warehouse and distribution centers in the quickest time, minimizing the handling. The faster goods can be at the distribution center, the faster the speed to market.

Processing of Retail Goods

All products require some type of value-added service to make it ready for the shelf. Ten years ago, retailers received the merchandise in centralized warehouses and the warehouses tagged and priced the products before the products left for the stores. Today, retailers are forcing manufacturers to deliver the items already tagged and priced. Indeed, the greater the ability of the manufacturer to create shelf-ready merchandise, the greater the retailer’s ability to develop just-in-time strategies for merchandise replenishment. Manufacturers with the ability to meet country-specific requirements for labeling and presentation will have a better chance of biting off a piece of the global marketplace.

Warehouse Management Technologies

Warehousing is a critical part of retail success and can add value as a crucial link between supply and demand. The key issues in warehousing are efficient handling, inventory management, product flow, transportation, and delivery.

Let us follow merchandise as it comes into the warehouse. Systems are needed to plan the break- down of merchandise into manageable orders. Weight, size, and shipping dates need to be scheduled. Dock area management facilitates the loading and unloading of product. There is a need to make certain that products coming in match what was ordered. Discrepancies with merchandise not caught here will cause problems as the merchandise flows through the retail organization. The second sig- nificant function of the warehouse system is ‘‘put away’’ and replenishment. Inventory that will not be cross-docked has to be stored and available for retrieval. Merchandise that has been stored will need to be found and shipped out to stores that need it. In modern warehouses, this function is highly computerized, with automated picking tools and belts. In less sophisticated facilities, a lot is still done slowly and by hand. Finally, the warehouse system must pack the items and make certain accurate paperwork and order consolidation occur.

Given the complexity of the warehouse, it is easy to see how systems and technologies can be of considerable benefit. An effective warehouse-management system saves labor costs, improves inventory management by reducing inaccuracies, speeds delivery of merchandise to store or consumer, and enhances cross-docking management.

Distribution

Distribution is the set of activities involved in storing and transporting goods and services. The goal has been to achieve the fastest throughput of merchandise at a distribution center with minimal cost. These efforts are measured by internal standards with very little involvement by manufacturers / vendors and consumers. The service standards are typically set by pursuing efficiencies, not neces- sarily making sure that consumers have what they want, when and how they want it.

Outbound Transportation

Moving the correct quantity and type of merchandise to stores or direct to the consumer can create great economies, flexibility, and control. Inefficient transportation can be disastrous. Systems that do  not get the correct merchandise to the proper stores during a selling season or when an advertising campaign is scheduled (e.g., winter goods three weeks after the consumer starts shopping for winter clothing) face very poor sales. The effect is more than simply the store not selling a particular piece of merchandise. Each time the consumer does not find what he or she wants, the customer’s chance of shopping at a competitor increases.

The diversity of merchandise and the number of stores create several important challenges for retailers. How do you transport merchandise to reach all the stores efficiently at the lowest cost and time? How do you fill the trucks to maximize space in the trucks? Differences in demand and geographic concerns make empty trucks very expensive.

Every day, merchandise moves into the city from a variety of vendors to a variety of stores. Yet for most stores, full truckloads have not been purchased. Third-party distributors that combine loads from different vendors to different merchants allow economies of scale to develop but nothing like the advantage of a large store that receives and buys full truckloads many times a week. The delivery expense to cost is a significant one for retailers. It cuts into the profit and makes prices for the smaller retailer less competitive.

Getting the goods from point A to point B is neither simple nor pedestrian. Tomorrow’s business leaders will see this as part of the seamless experience leading to short lead times and reliable service at the lowest price. It has recently been estimated that the cost of transporting goods is 50% of the total supply chain costs. Significant improvements in the movement of goods have been advanced by improvements in software that aid in planning transportation, vehicle routing and scheduling, delivering tracking and execution, and managing the enterprise.

Cross-docking of merchandise occurs when the delivery of product to the distribution center is put directly into the trucks heading for the stores. For cross-docking to work well, suppliers and retailers must have fully integrated information systems. For example, Federal Express manages the complex task of getting all the component parts to Dell at the same time so that a particular Dell Computer order can be manufactured without Dell having to have inventories on hand.

Outsourcing

Many retailers make use of third-party logistics in the form of warehouse management, shipment consolidation, information systems, and fleet management. Outsourcing allows a retail management to focus on core competencies of purchasing, merchandising, and selling.

Storage

Consumers buy merchandise that is available—on the shelf—not merchandise in some backroom storage area. Storage costs money (which must be added to the price that consumers pay). Not every retailer is Wal-Mart, which claims to be able to restock products in any of its 2600+ stores within 24 hours. As a result, Wal-Mart stores can have minimal storage areas and maximal selling areas with shelves that always have the merchandise. Just-in-time, quick response, and vendor-managed inventory hold the promise that less merchandise will have to be stored at the local level because systems will dictate that manufacturers or central storage facilities will fill shelves with product as the product starts to decline. Most retailers must still carry inventory so that they may achieve a responsible level of service for the consumer. As a result, compared to Wal-Mart, they have fewer products to sell, more out-of-stock positions, greater consumer frustration, and greater cost structure because they have more nonproductive space used for storing inventory.

The Internet is increasing the pressure on retailers to have better in-stock positions. The only real sustainable competitive advantage that retailers have right now over the Internet is their ability to get product in consumers’ hands immediately. If the consumer cannot find what he or she wants in the stores, and its takes just as long for the store to order the merchandise and get it to the customer, the customer might just take advantage of the Internet. Because information and pricing are more transparent on the Internet, if stores do not have the product, the competitive advantage goes to the Internet. This is assuming that the Internet has the same product available at a lower price. The consumer can use a shopping agent like My Simon (www.mysimon.com) to compare all the prices for a particular product on the Internet and choose the lowest price.

As this chapter was being written (December 1999), Toys ‘‘R’’ Us reported very significant problems in getting Internet orders delivered to consumers. Not only will this impact their bottom line in cancelled orders (all customers who were promised delivery that now could not be met were offered cancellation), but all affected customers received a certificate worth $100 on their next Toys ‘‘R’’ Us purchase. This will cost Toys ‘‘R’’ Us millions of dollars which would have gone directly toward their bottom line. More importantly, we cannot estimate the number of customers who will never go to a Toys ‘‘R’’ Us website again.

Internet retailers understand this, and independent or third-party businesses are offering almost immediate delivery in major metropolitan areas. If this is successful, Internet retailers will be re- moving one of the only barriers and will be competing head-on with store retailers. This suggests

large multibrand / manufacturer warehousing in central urban locations with technology and systems to support it.

Storage is also a major issue for Internet retailers. While Internet retailers have a competitive financial advantage because they do not have to support stores on their balance sheets, they still have to maintain extensive storage and distribution facilities. Their efficiency in building and maintaining and efficiently running these massive facilities will actually determine their success to a greater extent than any other single factor.

Inventory Management

The goal of managing inventory is to have what customers want in the right styles, colors, and prices, while holding costs down. The cost of maintaining inventory is from 25% to 40% of the value of the inventory. Too much inventory and you are not profitable. Not enough inventory and you miss sales and increase the likelihood that consumers will shop in other places. Money tied up in inventory that is not selling takes up money that could be profitably invested in inventory that would be selling. Because of inefficiencies in the supply chain, retailers often have more products in inventory than required by demand.

Vendor-managed inventory (VMI) means that the retailer shifts to the manufacturer the role of counting and replenishing dwindling stocks. Many vendors believe that this is simply an effort by retailers to reduce retailer costs by making the vendor pick up the tab for work the retailer used to do. VMI is most common in large mass merchandisers and in grocery stores. VMI helps reduce stock outs, a benefit to the vendor because when the item is out, consumers may try and switch to a competing brand.

Store Operations

Merchandise is not cost neutral when it arrives in the stores. The expense associated with unloading, unpacking, and storing the merchandise is considerable. Retailers have aggressively tried to minimize the amount of effort required once the merchandise enters the back room. Five years ago, it was common for central distribution facilities to receive the merchandise, unpack it, tag or bar code it, repack it, and ship to stores. Larger retailers have tried to shift many of these functions back up the supply chain to the manufacturer and demand that merchandise be priced, tagged, and packed for individual stores. However, not all suppliers are advanced enough to accomplish these simple tasks. For example, 20% of Saks’ 12,000 suppliers are unable to accomplish these back room functions. In about 25% of these cases, the ability of Saks’ to process products is hindered.

Retailers also have costs and problems of matching supply to demand across the chain. Adherence to a customer-satisfaction goal may require retailers to ship merchandise from store to store to meet different demands. This reshipping is quite expensive and inefficient. Systems and technologies that better predict what is needed, when, in what size and color, and in what quantity is essential for progress on this issue.

Customer Support Logistics

This refers to the support of customer service operations. Services that require logistical foundations include service parts management (parts shipment and inventories), service management (equipment, technology, scheduling involved in servicing and repairing products), and customer contact manage- ment (problem resolution, contact management, training). For example, a large Japanese consumer electronics company believed its products to be of superior quality. As a result, they saw no need to inventory parts in the United States. When product repairs were needed, they had to ship the required parts to the United States. Not only was this expensive, but consumer satisfaction was low with the repair process and the electronics manufacturer. The low satisfaction had an impact on repurchase of the product in that product category and other product categories carrying that brand name.