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Contents
Chapter 13 Supply Chain Management .................................................................................... 4 13.1 Supply Chain Management ............................................................................................. 5 13.2 Concept of Supply Chain Management ........................................................................... 5 13.3 Need for Supply Chain Management ............................................................................... 6 13.4 Evolution of Supply Chain Management .......................................................................... 7 13.5 Issues Involved in Developing the Supply Chain Framework ........................................... 8 13.6 Supply Chain Integration ................................................................................................ 9 13.6.1 Retail Market Characteristics: ................................................................................... 9 13.6.2 The Lead Time Gap ................................................................................................. 11 13.7 Innovation in Supply Chain Management ....................................................................... 11 13.7.1 Cross Docking .......................................................................................................... 11 13. 7.2 Collaborative Planning, Forecasting and Replenishment (CPFR) ............................ 11 13.8 Retail Logistics ............................................................................................................... 12 13.9 Reverse Logistics An Emerging Trend ......................................................................... 13 Summary: ............................................................................................................................. 14
Certificate in Retail Management TCS Business Domain Academy
Page 4 of 15 Chapter 13 Supply Chain Management
Introduction This chapter will help associates to understand the importance of the supply chain in retail. It also tells about the new developments in supply chain and helps associates to come with innovative ways to serve the client.
Learning Objectives After reading this chapter you will know: Why supply chain is important New methods to improve the chain Different methods in supply chain
Certificate in Retail Management TCS Business Domain Academy
Page 5 of 15 13.1 Supply Chain Management The business of retail has been defined as one that makes goods available to the consumer, when and where he/she wants them. In order to be able to service the customers requirements, the retailer needs to understand their preferences, to identify the right products and their manufacturers, to locate the wholesale or retail stock points, as the case may be, and to make arrangements for the right quantity to be available. While this appears to be simple, it is one of the most complex aspects of retailing. We can easily see the degree of complexity by taking the example of a local department store. A typical department store has a number of departments, such as apparel, gifts, cosmetics, kitchenware, appliances and electronics. Take one such department, such as apparel; this will have sections for men, women and children. Each of these sections will have sub- sections for casual wear; formal clothes, accessories, etc. Further each category in each sub section will have different designs, colours and sizes. We now see that put together it represents a very large number of items. This is further complicated by the involvement of merchandisers, buyers, stores, finance and other functionaries in the department store. The department store, in all probability, has at least a hundred suppliers. Some of these could be manufacturers, some of them agents and other distributors. The challenge of managing a continuous supply of goods from all these different entities is managing the supply chain. We start this chapter by understanding the need of supply chain management for a retailer. This is followed by a brief discussion on the evolution of the concept and innovations in this field. The concept of retail logistics and reverse logistics are then examined. 13.2 Concept of Supply Chain Management A supply chain is a network of facilities and distribution options that performs the following functions: Procurement of materials Transformation of these materials into intermediate and finished products, Distribution of these products to the customers. Supply chain management ensures smooth and efficient flow, from raw material to finished goods in to the hand of the consumers. It is a concept which has increasingly replaced the traditional fragmented management approaches to buying, storing and moving goods. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and from firm to firm. It aims to integrate activities across the entire merchandise flow, to achieve quick response in supplying products Certificate in Retail Management TCS Business Domain Academy
Page 6 of 15 and services to the customers who need them. By doing this the production time can be set close to selling period, achieving better prediction of selling targets. It is difficult to put down the value of the supply chain industry. However it is estimated that the global market size of the supply chain and logistics industry, is US$ 3 trillion, which is significant chunk of global domestic gross product. The estimated market size for supply chains globally includes aspects like trucking, warehousing, inventory costs, transaction costs and administration costs for these key elements. The importance of supply chain management in India can be gauged from fact that logistics cost constitutes 10 12 percent of our GDP. It is estimated that over Rs1, 00,000 crore of the total capital, is tied up in inventories in the industrial sector. This is close to 22 percent of the aggregate industry sales. 13.3 Need for Supply Chain Management Not long ago, retail stores existed to cater to the needs of the local markets. When one needed bread and eggs, one visited grocery stores. To buy the garments, one simply, either bought fabric and had it tailored or bought what was available in the market. Buying for the retail organization was a much simpler task then. It meant dealing with a few products and a limited number of suppliers. What existed at that time was a simple supply chain, as illustrated below. Managing this was fairly simple and easy for the retailer. However, as markets expanded and retailers business grew, the number of products offered by the retailer, also increased. While the number of suppliers increased, there was also an increased pressure on margins. Retailers needed to think of ways of cutting costs. In order to be able to cut down on costs, it was necessary to integrate the complete supply chain. Supply chain management today, links demand management, resource management, and supply management and hence plays an important role in retailing. Today retailers operate in a dynamic world. Customers buying habits are constantly changing and competitors are continually adding and improving their product offerings. Demand changes mean a shorter life cycle for the companys products and inventory. The cost of holding inventory may restrict the company from providing a reasonably priced product, as funds are tied up in inventory. The number of suppliers of an organization may vary from a few hundreds to thousands, depending on the range of products offered to the consumer. Sourcing, vendor management and logistics play a major role in getting the right products to the right place, at the right time and the right condition. The second reason partially, is the increased national and international competition. Customers have multiple sources to choose from, to satisfy their demands: locating the product throughout the distribution channel for maximum Certificate in Retail Management TCS Business Domain Academy
Page 7 of 15 customer accessibility, at a minimum cost, becomes crucial. The third reason is the increasing pressure on the profit margins earned. Companies are becoming aware that they need to look at the whole picture and not at the functional excellence of individual departments alone. Lastly, it is a technology driven world. Advances in technology enable companies to get sales, inventory and production data, across various locations not only within the country, but also internationally. Information is the key enabler of supply chain management. 13.4 Evolution of Supply Chain Management In the 70s and the early 80s, as the cost pressures started building up, most organizations started to take a look in their operations, to see where they could cut costs. Initially, the focus was on optimizing the levels of raw material, work- in progress and finished goods stored. Depending on the industry characteristics, different organizations started focusing on achieving efficiencies in different areas, such as procurement, logistics, manufacturing, operations, etc. Out of these initiatives emerged various models for production and operations control and management, such as Just In Time (JIT) inventory management model, the total quality management (TQM) model, etc. JIT is an inventory strategy that strives to improve a businesss return on investment by reducing in-process inventory and associated carrying costs. To meet JIT objectives, the process relies on signals of Kanban between different points in the process, which tell production when to make the next part. Kanban are usually tickets but can be simple visual signals, such as the presence or absence of a part on a shelf. TQM is a management philosophy that seeks to integrate all organizational functions (marketing, finance, design, engineering, and production, customer service, etc.) to focus on meeting customer needs and other organizational objectives. These models focused on various components of the supply chain, in isolation. Each one of them was oriented towards optimization of a sub part of the system. However, soon, organizations realized the need for taking an integrated look at the entire chain. From this emerged the discipline now commonly referred to as supply chain management. Early beginners of the supply chain management initiative can be traced to the apparel industry in USA. The textile industry in the USA faced intense competition in the 1980s. The industry leaders came together and formed the crafted with pride in the USA council, in 1984. They commissioned a study on the supply chain analysis. This study found that the delivery time for apparel supply chain, from raw material, to the final consumer, was 66 week long, 40 weeks of which were spent in warehouses or transit. The long supply chain had resulted in major losses Certificate in Retail Management TCS Business Domain Academy
Page 8 of 15 to the industry, due to the need for financing the inventory and the lack of the right product in the right place, at the right time. In order to overcome the problem, the strategy of Quick Response (QR) was developed. The basic premise of quick response is to share information. Retailers and suppliers work together to respond more quickly to the consumer needs, by sharing information. The installation of the Point of Sale (POS) scanning systems and sharing of data through Electronic Data Interchange (EDI) became the new standard of the industry. The industry also adopted the Universal Product Code (UPC). QR incorporates marketing information on promotions planned, discounts and forecasts into the manufacturing and distribution plan. It increases the product availability and lowers inventory investments. It also helps in reducing logistics expenses. With QR systems, retailers can negotiate a direct store delivery system, in which the vendors supply floor ready merchandise to each store, rather than to the distribution centre (DC). The cost of the DC and transportation thus is eliminated. The success of QR initiative prompted a group of grocery industry leaders in the USA, to create a joint industry task force, called Efficient Consumer Response (ECR) working groups. This group primarily, worked on identifying opportunities to make the supply chain more competitive in grocery retailing. Studies commissioned by this group revealed that by expediting the quick and accurate flow of information up the supply chain, ECR enabled distributors and suppliers to anticipate future demand far more accurately than the current system. A little change in the technology was required to improve the performance, besides further development of the EDI and POS systems. 13.5 Issues Involved in Developing the Supply Chain Framework
A useful framework for analyzing the issues involved in developing a supply chain can be represented as a pyramid. This framework is depicted below. At the strategic level, the retailer can focus on service level required to support unique value proposition that the retailer has developed. The retailer can then evolve appropriate channels and networks, to achieve the uniqueness desired. The next, structural level, allows the retailer to identify the suppliers and stock points and to develop an appropriate transportation model. The extent of outsourcing is also determined at this level. At the functional level, the operational details are worked out. This includes developing policies and procedures around the facilities and the equipment to be deployed, implementing information systems to support the operations and ensuring the right organizational and Certificate in Retail Management TCS Business Domain Academy
Page 9 of 15 training inputs. The constructs developed using any framework, must be successful implementation usually requires a programmed approach to ensure that the implementation is effective and the goals are achieved. 13.6 Supply Chain Integration As stated earlier, supply chain management links, demand management, resource management and supply management. Let us understand this in terms of retail organization. In a typical retail organization, the marketing team or department would be the one looking at the sales data, working on targets and looking at the ways to meet these targets. The merchandising and design team would work on getting the best price for the materials required for manufacturing the product so as to fulfil the customers needs, while the purchase department would work on getting the best price for the materials required to manufacture the product. The aim of each department would be different and while they may individually excel, the organization as a whole, would benefit only when they share a common approach and the information is shared between departments, suppliers and vendors. The nature of the industry that the retail organization operates in also influences the supply chain and logistics decisions. Nowhere is this more apparent in the apparel and grocery industries. 13.6.1 Retail Market Characteristics: Retail markets in these industries typically exhibit the following characteristics: 1. Short Life Cycles: Many products in these sectors have a short life cycle. In many cases, the product may have been created to capture the mood of the moment; consequently, the time period in which it is saleable is likely to be short and seasonal. Similarly due to the perishable nature of the products in the grocery business the shelf life is short. 2. High Volatility: Demand for these products is rarely stable or linear. It may be influenced by the vagaries of weather, movies, TV shows or indirectly, by advertising. 3. Low Predictability: Due to the volatility of demand it is extremely difficult to forecast, with any accuracy. 4. High Impulse Purchase: Many buying decisions for these products are based on impulse and occur at the point of purchase. 5. Conventional wisdom holds that the way to cope with uncertainty is to improve the quality of forecasts. However, as this may not always be possible, ways must be found to reduce the reliance on forecasts and focus on lead time reduction. Shorter lead time mean, by definition, that the forecasting horizon is shorter hence the risk of error Certificate in Retail Management TCS Business Domain Academy
Page 10 of 15 is lower. There are three critical lead times that must be managed by organizations that seek to compete successfully in the retail business. 6. Time To Market: The time that it takes the business to recognize a market opportunity, translate this into a product or service and to bring it to the market. 7. Time TO Serve: The time that it takes to capture a customers order and to deliver the product to the retail customers satisfaction. 8. Time To React: The time that it takes to adjust the output of the business, in response to the volatile demand.
Some of these concepts are explained in detail below: Time To Market In the shorter life cycle markets, being able to spot trends quickly and to translate them into products in the shop, has become a pre requisite for success. Companies that are slow to market, miss out on a sale opportunity that may not be repeated. An example of this would be a style of clothing that may become popular. If the retailer is fast to spot the trend and procure the goods for the store, it would definitely be beneficial for the organization. On the other hand, trends can be spotted by looking at the changing consumer habits, like the need for pre cooked meals has prompted a few Indian companies to enter this field and retail ready to eat meals.
Time TO Serve Traditionally, in retail, orders from the retailers had to be placed on the suppliers many months in advance. This may give rise to the risk of obsolescence and high stock outs, as well as an increased cost of inventory. The lead time was long, not necessarily due to the process of manufacturing, shipping and transit, but due to the excessive documentation required at each stage.
Time To React Ideally, in any market, a company would want to meet a customers requirements at the time and place that the customer needs them. The challenge for any business in the fashion market is the ability to perceive real demand. Real demand is what the customers are buying or requesting for. Because most supply chains are driven by orders, which themselves are driven by forecasts and inventory replenishments, individual parties in that chain will have no real visibility of the final market place. Inventory hides the demand. Certificate in Retail Management TCS Business Domain Academy
Page 11 of 15 13.6.2 The Lead Time Gap The fundamental problem that faces many companies is, that the time that it takes to source the materials, convert them into products and move them into the marketplace is invariably longer than the time the customer is prepared to wait. This difference between what might be called the logistics pipeline and the customers order cycle is termed the lead time gap. The challenge for logistics management is to find ways to reduce, if not close the gap. Successful companies in retail, seem not only to be able to capture the imagination of the consumer with their products, but are also often, characterized by their agility. Many organizations have found that it is possible to make significant improvements by adopting a twin strategy of simultaneously reducing the logistics lead time and capturing information sooner, on actual customer demand. 13.7 Innovation in Supply Chain Management 13.7.1 Cross Docking Cross Docking is a function of the warehouse or distribution centres (DC), which was introduced by Wal-Mart. Cross Docking is a system in which the vendors ship merchandise to a distribution centre, pre-packed in quantities required by each store. The merchandise is delivered to one side of the DC, for delivery to the shipping dock, thus, the expression cross docking. The DCs are equipped with miles faster guided conveyor belts that read the UPCs on the incoming cases and direct them to the right truck for their onward journey. These DCs are less costly than the traditional DCs because there is little or no storage required and the processing is minimal. 13. 7.2 Collaborative Planning, Forecasting and Replenishment (CPFR) Collaborative Planning, Forecasting and Replenishment (CPFR), is one of the hottest buzzwords in the chain context. By aligning the forecasts of a retailer and the vendor, CPFR offers the opportunity to increase in-stock positions, gross margins and sales, while reducing inventory investments and stock-outs. CPFR is business practice that reduces inventory costs, while improving product availability across the supply chain. The process begins with an agreement between the trading partners, to share information with each other and to collaborate on planning, with the ultimate goal of delivering products based on true market demand. The business partners share forecasts, results and data over the internet. CPFR technology analyzes the data, and if the forecasts do not match, it notifies the planners at both the companies. The two then work together to resolve these exceptions. The final plan is agreed to by both, describes whats going to be sold and how it will be merchandised and promoted. Certificate in Retail Management TCS Business Domain Academy
Page 12 of 15 The function of supply chain management is perhaps the most important function of a retail organization. Indian retail organizations still lack supply chain sophistication. However with organized retailing set to grow in India, and the increase in competition in each sector, efficient management of the supply chain is bound to become a necessity. 13.8 Retail Logistics An integral part of supply chain management is Logistics Management. The main objective of logistics management is to reduce inventory- holding costs and improve profits. The word logistics is derived from the French word loger which means to quarter and supply troops. In the last decade, there have been several well-published logistics exercises, internationally. The Gulf War of 1991 was on e of the largest, since World War II. Many international retailers have built their success on logistical prowess. Speedy restocking of goods, elimination of poor sellers and promotion of successes, also contribute to a clear sales advantage. Logistics entail more than mere trucking and distribution of goods. For without good information about sales and insight into customer needs, the finest distribution centre and transport capabilities are likely to send the wrong products, at the wrong place, at the wrong time. Effective logistics therefore, needs an efficient information system, as well as good transport, distribution centre and store handling capabilities. A single recipe for success does not exist. A logistics system has to be built to suit the needs to the organization, keeping in mind the kind of products that the company retails and the competition prevailing. Fashion retailer may need to focus on speed, discount retailers on cost. The needs of each are different. Retail logistics is the organized process of managing the flow of merchandise, from the source of supply to the customer. Thus, it incorporates the following functions: Physically, moving the goods from one place to another, where the location may be a distribution centre, warehouse, store or manufacturer. Stocking the goods at locations needed, in the quantities needed.
13.8.1 The Management of the Entire Process Good logistics cut costs, speed, and work and improves customer service. A logistics strategy can either be a pull strategy or a push strategy. A pull logistics strategy has orders for merchandise being generated, at the store level, on the basis of the demand data captured by the POS terminals. A push logistics strategy has the merchandise allocated to stores, based on the historical demand and the inventory position of the store and the warehouse. Certificate in Retail Management TCS Business Domain Academy
Page 13 of 15 As retail operations become more complex and the flow of information within the organization is established, more retailers are now moving towards the pull strategy. At the heart of the logistics is the Distribution Centre (DC). It serves several functions, from coordinating the inbound transportation, receiving, checking, storing and cross docking to coordinating the outbound transportation. The method used for handling logistics largely depends on the nature of the industry and the number of outlets that the organization has in each city, state or region. Food World, a grocery retail chain in India, works on hub and spoke system.
Figure 1: Hub and Spoke model (Source: http://ostpxweb.dot.gov) The hub is the distribution centre, which it develops in each city. The hub services all shops in that particular city. On the other hand a department store, like the Shoppers Stop, may find that it is not feasible to develop and maintain a distribution centre in each city, as it would have one or at the most two shops in every city. In such a case, a regional distribution centre may be developed. Some retail organizations in India, like Globus, have outsourced their needs for logistics and distribution. 13.9 Reverse Logistics An Emerging Trend At the simplest level, the disposition of returned goods consists of junking them or giving them away. But with more sophisticated systems and processes, returned goods can be put back into the inventory, sold at liquidation centres, or broken service. How companies handle product returns can also be a competitive differentiator. It is a new area to exploit for increased efficiencies. However, handling reverse logistics is not easy. Specifically, designed software is needed for this purpose. Many third party service providers, such as Federal Express Worldwide Logistics, GenCorp Distribution System, and UPS Worldwide Logistics, use customized systems to usher Certificate in Retail Management TCS Business Domain Academy
Page 14 of 15 customers returned products to a central recovery centre, where they are stored for parts, reconditioned or junked. Summary:
Supply chain management ensures smooth and efficient flow, from raw material to finished goods in to the hand of the consumers. In India can be gauged from fact that logistics cost constitutes 10 12 percent of our GDP. Logistics play a major role in getting the right products to the right place, at the right time and the right condition. Retail markets in these industries typically exhibit the following characteristics Short Life Cycles, High Volatility, Low Predictability, High Impulse Purchase There are three critical lead times that must be managed by organizations Time To Market, Time TO Serve, Time To React The difference between what might be called the logistics pipeline and the customers order cycle, is termed the lead time gap Cross Docking was introduced by Wal-Mart Collaborative Planning, Forecasting and Replenishment (CPFR) offers the opportunity to increase in-stock positions, gross margins and sales, while reducing inventory investments and stock-outs.