Why are Retail Supply Chains different? Rob O’Byrne explains some of the dynamics involved.
“Like any Supply Chain, Retails Supply Chains have their own unique challenges. They’re different from the supply chains you might see in industrial companies or wholesaling companies and they have very different dynamics.
The Retail Supply Chain is dealing with consumer directly and the customer really is ‘king.’ So everything in the retailer’s supply chains strategy needs to focus on the customer and, of course, on their shareholders, that goes without saying.
So what makes Retail Supply Chains so different?
Well that of course depends on the type of retailer we’re talking about, because the needs of hardware retailers will vary from those of a fashion retailer. But in general terms, retailers need to deal with very broad product ranges, ranges that change, perhaps by season, possibly high levels of promotion activity, a broad supplier base, maybe some long supply lead times if there’s a high degree of importing. What all this means is that the retailer’s supply chain needs to be flexible, responsive and low cost if the market sector is highly competitive.
In terms of Customer Value, there’s a bit of a cocktail that customer are looking for:
PRICE: This needs to be competitive.
RANGE: Can be very important, say in a hardware retailer where the customer expects a one-stop shop for all their needs.
SERVICE: Customers will quickly go elsewhere if service is consistently poor.
QUALITY: Well, that’s a given.
AVAILABILITY: Is probably one of the key customer expectations, particularly for advertised and promotional products.
CONVENIENCE: Is also a key component.
BRAND: Can be important depending on the retail sector.
FASHION: Can play a key role.
These are the ingredients of a customer value cocktail. Then there’s the emotional aspects such as in-store look and feel. So for those managing the retail supply chain, delivering this cocktail of customer need is the key to success but doing it at a lowest possible cost.
If we look at a generic retail supply chain, broken down into the main areas of cost, it looks like this (refer to video for image). These costs will of course vary by company and sector and they’re just an example.
By far, the biggest cost is the cost of goods, or COGS, often 60 to 70% of total sales. That’s why retailers place so much focus on buying well, it’s where they can get their biggest gains.
Next, we have the inbound logistics costs. These are the costs associated with getting product into the retailer’s distribution network from suppliers. Typically, this is about 2 to 7% of sales.
Then we have the retailer’s own internal logistics operations, operating warehouses and delivery to the retail stores. Typically, this is in the range of 3 to 5% of sales.
Then we have in store logistics. This is all the product handling that takes place at the back dock, the stock room and replenishing stock out on to the retail floor. This is typically 3 to 6% of sales and can be the largest part of the store labour cost.
Finally, and one that people often forget, we have the opportunity cost, often in the range of 2 to 6% of sales. This is the cost of the lost sale and lost customer loyalty through poor on shelf and on floor availability.
So for the retail supply chain in particular, improving service and reducing cost is all about trade-offs and taking an end-to-end view of the supply chain. Many retailers take their eye off the ball by focusing too much on specific functions rather on the end game of service and cost.
For example, buying in large quantities from suppliers to get a lower unit cost. But what’s the end-to-end impact? COGS will go down but inventory levels will go up. Handling costs may go up and we might face a higher level of markdowns as we try to sell through all the stock.
As another trade-off example, we might adopt a policy of allocating all stock and receipt, that is pushing all the stock out into the retail stores rather than allowing them to request it. This reduces warehouse costs and reduces inventory holding but it pushes stock levels higher at the retail stores, increases store handling costs, it can also reduce stock availability as stock levels will vary all over the store network and some stock will get stranded at lower sale stores. And again, this can lead to higher levels of markdown to clear the stock.
So for those managing the retail supply chain, things can often be more complicated than in other industry sectors. The dynamics and trade-offs can be different and depending on the particular retail sector and product range, a number of different approaches may need to be taken with different value streams. That’s the topic of another short video you might want to look at.
In summary, retail supply chains are different. They need to be very focused on the customer’s needs and on reducing costs. But most importantly, they need to be managed from an end-to-end perspective, so as not to sub optimise any one function.”
