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, 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 promotional activity, a broad supplier base and maybe some long supply lead times if there is a high degree of importing. 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.
In terms of customer value, there’s a bit of a cocktail 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 1 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. The Brand can be important depending on the retail sector, and lastly Fashion can play a key role.
So 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. If we consider a generic Retail Supply Chain, broken down into the main areas of cost, it looks like this.
These costs will of course vary by company and sector and are are just an example. By far the biggest cost is the Cost of Goods or COGS. 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. Then we have the retailers own internal Logistics operations, operating warehouses and delivery to the retail stores. Typically this is in the range of 3-5% 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 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. And this is the cost of a lost sale and lost customer loyalty through poor On Shelf or 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 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 and 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. That’s the topic of a short video you might want to look at.
So 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.