INDUSTRIAL ENGINEERING APPLICATIONS IN RETAILING:THE EMERGING PARADIGM FOR RETAIL SUPPLY CHAINS

THE EMERGING PARADIGM FOR RETAIL SUPPLY CHAINS

Up to this point, retail supply chains have largely generated greater profit margins through driving out inefficiencies. For example, retailers have pushed the function of maintaining an inventory back onto the vendor or middleman. Vendors, in turn, have required lower prices and faster deliveries from their suppliers. This type of approach has been effective, but for many supply chains there is precious little fat still left to cut out of the system. To reach the next level of efficiency, productivity, and profitability, a new perspective on what retail competition means will have to be adopted.

Relationships / Alliances / Partnerships

Perhaps the factor that will have the greatest impact on supply chain management issues is not a technology or a system but a way of thinking. The gap between winning and losing retail organi- zations in the last decade was defined by their ability to manage the supply chain better than the competition: squeaking out margins and profits from cost savings and efficiencies in the supply chain. The winners in the 21st century will be those retailers who structure, organize, coordinate, and manage partnerships between manufacturers and stores to meet better, faster, and more closely the needs of the consumer. A survey of U.S. companies by Forrester Research shows that 50% of companies share inventory data with supply chain partners. Only 30% share demand histories and forecasts. It is this latter category that holds the greatest promise for all chain partners . . . and U.S. business has a long way to go.

The commoditization of products and services dictates that the real competition will come from organizations that will compete as configurations of partnerships. These partnerships allow greater probabilities of stores having the right item, at the right price, in the right size, in the right color, JUST before the customer wants it. Moreover, supply chain partnerships mean that retailers can spend less of their time and effort in accomplishing this portion of their operation, freeing time, energy, people, and financial resources for developing and maintaining customer relationships. According to Lewis (1995), these partnerships allow:

• Ongoing cost reductions

• Quality improvements

• Faster design cycle times

• Increased operating flexibility

• More value to the customer’s customer

• More powerful competitive strategies

A partnership starts with a discussion based on ‘‘You are important to us and we are important to you. Now how can we do this better so we can both make more money.’’ To be successful in this new paradigm will require skills that have not been well developed as yet.

Integrated Forecasting, Planning, and Execution

Multiple forecasts for the same line of business within the organization are common (if any planning is even done). The gap between what is planned and what actually happens represents lost profits and lost opportunities. The new paradigm for retail supply chain management begins with an accurate view of customer demand. That demand drives planning for inventory, production, and distribution within some understood error parameters. Consumers will never be completely predictable. At the same time, prediction is bounded by limitations in our statistical and modeling sciences. We can predict only as well as our tools allow us. Computer advances will allow easier and affordable management of millions of data points so that demand can be measured. Effective demand manage- ment represents an untapped and significant opportunity for most if not all retailers. Effective demand modeling allows greater forecast accuracy, increases supply chain effectiveness, reduces costs, and improves service levels, and all reflect greater profit. The result—lower inventories, higher service levels, better product availability, reduced costs, satisfied customers, and more time available to respond to other areas of the organization.

Statistical Techniques

Understandable, usable, and affordable software to accommodate millions and millions of individual consumer purchases has only recently become available. But that is only part of the equation. It is still unusual to find company executives who understand the capability and use of these sophisticated software packages. Of equal importance is the need to have a uniform database representing the forecasting target. Typically, different data needed to accomplish accurate forecasting resides in iso- lated silos of databases that cannot talk to each other.

In addition to decisions regarding the supply chain, these tools would:

• Provide the CEO with an important strategic view of the business

• Provide opportunities for cost savings

• Aid in developing long-range strategic plans

• Assist in resource allocation

• Identify inadequate areas in existing management and operations

The Role of Senior Management

Logistic, warehouse, and other supply chain management efficiency can result from a piecemeal decision-making process. But true partnerships must flow from a strategic alignment with the mission and values of the organization. Wal-Mart’s industry-leading supply chain operation did not result from chance but from Sam Walton’s understanding of the business and a strategic view that saw that investments in state-of-the-art technology and systems will pay off handsomely in the future. For most companies, the appointment of a supply chain czar is needed to push supply chain management through the organization.

Information Technology

No advances in supply chain management can occur without a layer of middleware. Information and its collection, management, availability, and use serve as the foundation for all advances in supply chain management. Sustained success of retailers comes from an understanding of how information technology (IT) creates competitive advantage. Prepackaged enterprise-wide IT solutions are availa- ble, but they make it difficult to be different. Unique and strategic IT enterprise-wide solutions are difficult to integrate and implement.

The IT system should allow new and better customer–vendor relations, provide new insights into a company’s consumers and markets, maximally exploit efficiencies in the supply chain, transform product development and delivery, increase the capability to make real-time decisions, increase plan- ning ability, manage increasingly complex national and global markets, and eliminate traditional and costly processes.