Chapter 10

Information Systems and Supply Chain Management

McGraw-Hill/Irwin

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Retailing Strategy
Retail Market and Financial Strategy Chapter 5, 6 Information Systems & Supply Management Chapter 10 Organizational Structure and Human Resource Management Chapter 9 Customer Relationship Management Chapter 11
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Retail and Site Locations Chapter 7, 8

Questions
How does merchandise and information flow from the vendor to the retailer to consumers? What information technology (IT) developments are facilitating vendor-retailer communications? How do retailers and vendors collaborate to make sure the right merchandise is available when customers are ready to buy it? What are the benefits to vendors and retailers of collaboration on supply chain management? What is RFID, and how will it affect retailing?
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Creating Strategic Advantage Through Supply Chain Management and Information Systems Supply chain management ..
A set of approaches and techniques firms employ to efficiently and effectively integrate their suppliers, manufacturers, warehouses, stores, and transportation intermediaries into a seamless value chain. This chain incorporates which merchandise is produced and distributed in the right quantities; to the right locations; and at the right time; as well as to minimize system wide costs, while satisfying the service levels their customers require.

Ryan McVay/Getty Images

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Illustration of Supply Chain

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Why is Efficient Supply Chain Management so Important to Retailers? Improved product availability Higher return on investment Strategic advantage

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Improved Product Availability

Benefits of Efficient Supply Chain Management to Customers: Reduced stockouts merchandise will be available when the customer wants them Tailoring assortments - the right merchandise is available at the right store

Ryan McVay/Getty Images

These benefits translate into greater sales, lower costs, higher inventory turnover, and lower markdowns for retailers
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Strategic Importance of Supply Chain Management

Opportunity to Increase Sales by Making the Right Merchandise is in the Right Place at the Right Time
 Fewer Stock-outs  Greater Assortment with Less Inventory

Opportunity to Reduce Costs

 Transportation Costs  Inventory Holding Costs

Improved ROI

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Fast Fashion Enabled by Efficient and Effective Supply Chain Management

Fast Fashion: a retail business strategy that uses a supply chain management process to rapidly introduce fashionable merchandise and quickly respond to customer demand for the merchandise

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ZARA
 Timely information from store

mangers with handheld devices to the corporate office  Shorter cycle time from design to production to delivery to stores  Shorter lead time - own production, small quantity production in close proximity, efficient logistics, premium transportation, frequent delivery  No discounts necessary

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H&M
Improve channel performance by owning key components of SC Private label - designed by design teams, manufactured by subcontractors More efficient SC, shorter lead time ( 3 weeks to 60 days)

Zara : 7-30 days, however, own production plant Typical clothing retailer : 40-50 weeks

Minimize reaction time to market trend & customer feedback cost advantage - production time & inventory are reduced

Effect
reduce the fashion risk, avoiding overstocks and markdown product characterized by high exclusivity climate of scarcity

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Strategic Advantage : Wal-Mart

Wal-Marts success is from its information and supply chain management systems Why are competitors lagging behind?
Made a substantial investment in developing its systems and has the scale economies  Through experience and learning, changes are always made to improve the system  Coordinated effort of employees and functional areas throughout the company


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Why are coordinated efforts important? Example: A task of keeping stores in stock
Stock stores with adequate shelf space Stock stores with appropriate frequency Forecast accurately

Distribution Centers need to send right quantities when the stores need it

Buyers place accurate, timely orders with vendors and distribution centers Managers need to provide enough lead time for deliveries

Buyers and marketing managers coordinate merchandise delivery with special sales and promotions

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Higher Return on Investment

Return on assets = Net profit margin x Asset turnover Net profit = Total assets Net profit x Net sales Net sales Total assets

Efficient Supply Chain Management leads to Increased Sales from more attractive assortments in stock Improved Net Profit Margins from increased gross margin and lowered expenses Lowered inventory from less backup inventory in stock and higher asset (inventory) turnover

Same Sales Using Less Inventory

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Information and Merchandise Flow

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Information Flow

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Information Flow
When a customer makes a purchase (the toaster oven), sales associate scans UPC code on merchandise and customer credit card/loyalty card (1)
Steve Cole/Getty Images

PhotoLink/Getty Images

Information about purchase is transmitted from POS terminal to the buyer/planner. The planner uses this information to monitor and analyze sales and decide to reorder more toaster ovens or reduce its prices if sales are below expectations (2)

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Information Flow
Sales transaction data are also sent to the distribution center (6) When the store inventory drops to a specified level, more toaster ovens are shipped to the store, and the shipment information sent to the corporate computer system (5) so that the planner knows the inventory level, which remains in the distribution center. Information about purchases are aggregated by buyer/planner and sent to distribution center and vendor to ship merchandise (3)
StockTrek/Getty Images

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Information Flow
When inventory drops to a specified level in the distribution center, buyer/planner communicates with vendor, and then places a purchase order to re-supply stores (4) Buyer/planner notifies distribution center about incoming orders and how they are to be distributed to stores (5)
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Store managers inform distribution center about receipt of merchandise and coordinate deliveries (6)
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Information Flow
When the manufacturer ships the toaster ovens to the distribution center, it sends an advanced shipping notice to the distribution (7) Advanced shipping notice (ASN) is a document that tells the distribution center what specifically is being shipped and when it will be delivered. The distribution center then makes appointments for trucks to make the delivery at a specific time, date, and loading dock. Store managers inform distribution center about receipt of merchandise and coordinate deliveries (6)
David Buffington/Getty Images

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Data Warehousing
Data warehousing is the coordinated and periodic copying of data from various sources, both inside and outside the enterprise, into an environment ready for analytical and informational processing

Wal-Mart makes good use of its data warehouse. Experts estimate that it is second in size only to that of the U.S. government

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Data Warehousing

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Electronic Data Interchange

EDI is the computer-to-computer exchange of business documents between retailers and vendors
Merchandise sales, Inventory On Hand, Orders Advanced shipping notices, Receipt of merchandise, Invoices for payment  Standards: UCS (Uniform Communication Standard) VICS (Voluntary Interindustry Commerce Solutions)  Transmission system: Intranet: local area network (LAN) that employs Internet

technology Extranet: collaborative network that uses Internet technology to link businesses with suppliers, customers, etc.
Ro y-Free/CORBIS

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EDI Security
There are implications of security failures (loss of data, loss of public confidence), but retailers have security policy objectives:

Authentication - system assures person on other end of session is who it claims to be Authorization - that person has permission to carry out request Integrity - info arriving is the same that was sent

Ryan McVay/Getty Images

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Benefits of EDI

Reduces cycle time - inventory turnover is higher Improves overall quality of communications through better record-keeping Information can be easily analyzed

Stockbyte/Punchstock Images

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Pull and Push Supply Chain

Push Supply Chain Merchandise is allocated to stores on the basis of forecasted demand Pull Supply Chain Orders for merchandise are generated at the store level on the basis of POS sales data

Less likely to be overstocked or out of sock Increases inventory turnover Responsive to changes in customer demand Efficient when demand is uncertain, and hard to forecast
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Requirements for a Pull Approach to Work

Requires a more costly and sophisticated information to support it Should have the flexibility to adjust inventory levels on the basis of demand

Push supply chains are efficient for merchandise that has steady, predictable demand

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The Physical Flow of Merchandise Logistics

Logistics:
The aspect of supply chain that refers to the planning, implementation, and control of the efficient flow and storage of goods, services, and related information from the point of origin to the point of consumption to meet customers requirements


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Merchandise Flow

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Advantages of Using a Distribution Center

More accurate sales forecasts are possible when retailers combine forecasts for many stores serviced by one distributor Enables retailers to carry less merchandise in the store Easier to avoid running out of stock Retail store space is more expensive than space at the distribution center

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Advantages of Direct Store Delivery

Gets merchandise faster, and is thus used for perishable goods (meat and produce) Helps the retailers image of being the first to sell the latest product (video games) or fads Some vendors provide direct store delivery for retailers to ensure that their products are on the stores shelves, properly displayed, and fresh

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Who Can Use DCs?

Retailers selling non-perishable merchandise Retailers offering merchandise that has highly uncertain demand like apparel Retailers selling merchandise that needs to be replenished frequently Retailers that carry a large number of items shipped in broken case quantities like drug stores Retailers with many outlets
Ryan McVay/Getty Images

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Activities Performed by Distribution Center

Managing inbound transportation Receiving and checking merchandise Storing or cross docking merchandise Getting merchandise floor ready
 Ticketing and marking  Putting on hangers

Preparing to ship merchandise to a store Managing outbound transportation

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Reverse Logistics
The process of moving returned goods from their customer destination for the purpose of capturing value or proper disposal Retailers recover loss through on-line auctions

image100 Ltd

The McGraw-Hill Companies, Inc./Andrew Resek, photographer

Steve Cole/Getty Images

Royalty-Free/CORBIS

Customer

Store

Distribution Center

Vendor

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Logistics for Fulfilling Catalog and Internet orders

When fulfilling orders from individual consumers, retailers ship small packages with one or two items to a large number of different places
Distribution centers for picking and packing orders for consumers


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Outsourcing Logistics
Retailers consider outsourcing logistical functions if those functions can be performed better or less expensively by third-party logistics companies Transportation Warehousing Freight Forwarders Integrated Third-Party Logistics Services

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Bull-Whip Effect
The built up inventory in an uncoordinated channel where retailers and vendors do not coordinate their supply chain activities

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What Causes a Bull-Whip Effect?

Delays in transmitting orders and receiving merchandise Over-reacting to shortages Ordering in batches rather than generating a number of small orders

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Retailers and Vendors Work Together

Four approaches for coordinating supply chain activities to reduce the level of inventory in the chain and reduce the number of stock-outs (in order of the level of collaboration)
PhotoDisc/Getty Images

Use EDI Exchange information to reduce need for backup inventory, improve sales forecasts and production efficiency Vendor manage inventory (VMI) Collaborative planning, forecasting and replacement (CPFR)
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Initial Efforts at Coordinating Vendor and Retailer Supply Chain

Efficient Consumer Response (ECR) - Food Retailing Trade Promotions => Forward Buying => Extremely Uneven Production Motivation for Packaged Goods Mfrg  Stop Price Promotion, Forward Buying  Level Out Demand Motivation for Supermarkets  Rise of Warehouse Clubs/Discount Store Use of EDLP Pricing  Need to Become More Efficient  Excessive Inventory - $30 Billion Quick Response (QR) Apparel Inherently Unpredictable Demand Old Solution - Over Buying and Markdown Quick Response (modeled after JIT)  Provide Initial Assortment  Forecast Sales for Intermediate Form  Monitor Early Sales  Make Final Assortment

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Vendor Managed Inventory (VMI)

Manufacturer access to POS information Replenishment automatically triggered Enables demand-based view of replenishment & production planning - reduce bull whip effect

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Vendor Managed Inventory (VMI)

The vendor is responsible for maintaining the retailers inventory levels in each of its stores

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VMI Logistics

POS Make Decide Buy Store Pick Pack Ship Order Receive Sell

Pack

Buyer
Ship

Factory

Store

Warehouse
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Why VMI Works

Supplier

Manufacturer

Distribution

Store

Consumer

Order

Order

Order

Demand

Time

Time

Time

Ti

Reduce Bullwhip Effect

React to real demand can reduce inventory & out of stock 1

VMI Limitation
The vendor does not know what other actions (e.g., promotion) the retailer is taking that might affect the sales of its products in the future

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VMIWhat it Lacked
Focused on replenishment activity only Static-model based (assumed fixed reorder points to trigger replenishment) Often only moved inventory ownership rather than removing it Incomplete information for decision making Vendor and retailers use different systems and data bases

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CPFR (Collaborative Planning, Forecasting, and Replenishiment)

Developed by VICS and adopted by ECR Europe The sharing of forecast and related business information and collaborative planning between retailers and vendors to improve supply chain efficiency and product replenishment The most advanced form of retailer-vendor collaboration that involves sharing proprietary information, such as business strategies, promotion plans, new product developments and introductions, production schedules, and lead time information.

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CPFR
Common goals A single demand forecast developed collaboratively Collaborative Promotional planning & execution A single, shared data source Improved inventory management across entire Supply Chain Optimized replenishment strategies with joint ownership Process simplicity creates optimal framework for success

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Radio Frequency Identification (RFID)

Radio Frequency Identification (RFID) allows an object or a person to be identified at a distance using radio waves. Reduces warehouse and distribution labor costs Reduces point of sale labor costs Inventory savings by reducing inventory errors Reduces theft - products can be tracked Reduces out of stock conditions

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Why the Hesitation with RFID?

RFID is expensive - the return on investment is low It still only makes sense to put tags on pallets, cartons, expensive merchandise or high theft items RFID generates more data than what can be currently processed Consumers worry about privacy invasion
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