Retail Supply Chain Management: A Guide

Like any supply chain, retail 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 the consumer directly, and the customer really is king. So everything in the retailer’s supply chain strategy needs to be focused on the customer and, of course, the shareholders.

What is Retail Supply Chain Management?

Retail supply chain management is the process of planning, executing, and controlling the flow of goods, services, and information from raw materials to end customers. This process is a fundamental part of any retail company, and is crucial to its success, as it allows them to respond to changing customer demands, reduce costs, and increase profitability.

A well-managed retail supply chain can be a competitive advantage. By optimising supply chain processes, retailers can offer more products, more product availability, and shorter lead times.

Effective retail supply chain management also helps to manage inventory levels, reduce waste, and ultimately improve customer satisfaction. In a competitive market, these can make all the difference to a retailer’s performance and reputation.

You may be asking – okay, but what makes retail supply chains so different from those of other businesses? Well, that depends on the type of retailer we’re talking about. This is 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 promotional activity, a broad supplier base, and maybe some long supply lead times if there is a high degree of import activity.

Managing global supply chains adds to these complexities, as retailers must navigate demand uncertainty, vulnerability to disruptions, and the need for strong supplier relationships. What all this means is that the retailer’s supply chain needs to be very flexible, responsive, and low-cost if the market sector is highly competitive.

Customer Value Requirements

In terms of customer value, there’s a mix of things that customers 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 – is, of course, a given.
• Availability – is probably one of the key customer expectations, particularly for advertised or 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 our customer value cocktail. Then there are the emotional aspects, such as in-store look and feel. So for those managing the retail supply chain, delivering this cocktail of customer needs is the key to success, but doing it at the lowest possible cost.

Leveraging retail expertise is crucial in managing the retail supply chain effectively, ensuring the right products are delivered at the right time to the right locations.

Retail Supply Chain Costs

If we consider a generic retail supply chain, broken down into the main areas of cost, it looks like this:

These costs will vary by company and sector and are just an example. By far the biggest cost is the Cost of Goods, or COGS, which is often 60–70% of total sales. That’s why retailers place so much focus on buying well – it’s where they can make the 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 2–7% of sales. These costs are part of the broader logistics services that ensure products are delivered to the right location at the right time.

Then we have the retailers’ own internal logistics operations, including warehouse management and delivery to the retail stores. Typically this is in the range of 3–5% of sales. Effective warehouse management affects various elements such as inventory control, order fulfilment, and overall operational efficiency.

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 the retail floor. This is typically 3–6% 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 2–6% of sales, this is the cost of a lost sale and lost customer loyalty through poor on-shelf or on-floor availability.

The Importance of End-to-End Thinking

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 than the end game of service and cost.

For example, buying in large quantities from suppliers to get a lower unit cost. But what is 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 on receipt. That is, pushing all the stock out to 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 and 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-sales stores. Again, this can lead to a higher level of markdowns 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 very different approaches may be needed to meet the needs of different value streams.

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.

Retail Supply Chain Challenges & Limitations

Managing a retail supply chain is a big job with multiple stakeholders to deal with: suppliers, manufacturers, distributors, retailers, and customers. The truth is that although it’s a necessity, retailers face many challenges in this complicated process.

Demand Uncertainty

One of the biggest challenges that retailers have to deal with is forecasting customer demand, which can be tricky in certain industries. Sometimes, this can lead to stockouts or overstocking, and the uncertainty from this impacts inventory planning, which can result in lost sales or excess carrying costs. This is why retailers need to develop advanced forecasting methods.

Supply Chain Disruptions

Another tough aspect of supply chains for retailers is that they are prone to disruptions like natural disasters, supplier insolvency, and transportation delays, which can impact the entire supply chain. These unexpected events can cause significant operational headaches and highlight the need for contingency plans.

Supplier Relationships

Building and maintaining relationships with suppliers is another big part of ensuring your retail supply chain runs smoothly and works to get goods delivered on time, ensuring that they’re cost-effective too. This involves selecting the right vendor, negotiating contracts, and ongoing communication to maintain quality and meet delivery expectations.

Logistics Management

Logistics and transportation are crucial components in ensuring that goods reach customers promptly and efficiently. This involves optimising delivery routes to minimise travel time and reduce shipping costs, which can significantly impact the overall operational costs.

Managing these processes requires careful coordination and management of transportation systems and real-time inventory tracking to ensure that products are handled properly throughout the supply chain.

Retail Supply Chain Management Strategies To Get Ahead

The good news is that despite the limitations, there are things that you can do to beat the competition. To manage the retail supply chain, try these approaches:

Demand Forecasting and Inventory Management Systems

Demand forecasting and inventory management are essential for retailers. This is because having optimal stock levels will allow you to meet customer demand efficiently without accruing additional, unnecessary costs. If you’re not doing it already, it’s useful to start leveraging real-time inventory data, as retailers can enhance their forecast accuracy and inventory planning by doing so.

Build Supplier Relationships

Build relationships with suppliers to ensure that you get goods on time, enabling you to beat out the competition when it comes to last-mile delivery. Building better relationships with your suppliers can also help you to keep the supply chain running smoothly without any hitches.

Partner with a 3PL

If you don’t have the ability to maintain a positive relationship with your supplier directly, it could be worth looking at partnering with a third-party logistics provider (3PL), as they can significantly enhance the efficiency and flexibility of retail supply chains.

By outsourcing logistics services, you can then focus on the core business objectives you need to meet, whilst letting the 3PL deal with advanced warehouse management, transportation, and distribution centre operations.

Transportation Management Systems

Transportation Management Systems (TMS) give you the ability to leverage advanced technologies like real-time tracking. By doing this, retailers can gain better visibility into their shipment’s status, which then allows for proactive management of any potential delays or disruptions.

If you need help with managing your logistics networks, coordinating between multiple carriers, and ensuring that transportation aligns with broader supply chain objectives, then a TMS can help.

Omnichannel Retailing

Omnichannel retailing integrates various shopping channels like online, in-store, or through a mobile app. Consumers expect to interact with brands across multiple touchpoints – especially in the modern day – and they also expect to have a consistent experience with brands, regardless of the channel they choose.

Retailers who successfully implement omnichannel strategies can enhance customer satisfaction. Much of this is done by providing a cohesive and integrated shopping experience, as well as personalising the experience for customers.

Enhancing Supply Chain Visibility and Analytics

It’s important that you gain transparency and improve supply chain visibility and analytics to manage the supply chain better. This means that you need advanced analytics and real-time data if you want to gain deep insights into every stage of the supply chain, from raw materials to end consumers. By doing this, retailers can overcome the challenges and achieve supply chain excellence and better performance and customer satisfaction.