By Brian Franks -- 7/1/2006
The discovery of DNA more than 50 years ago paved the way for understanding the foundational elements of life. And yet, it has taken another 50 years for scientists to completely map the human genome, allowing us to understand why each of us is a unique individual.
Similarly, the retail supply chain has its own set of foundational elements: merchandise planning, sourcing, logistics, and store operations. And each of these disciplines has its own set of “markers,” pointing the way to excellence. But success in today’s retail marketplace requires more than excellence within each discipline. Kurt Salmon Associates is finding that world-class supply chains are those that integrate these functions to create new capabilities.
In leading companies, it is becoming commonplace to find our planning, sourcing, distribution, and retail “scientists” developing new end-to-end approaches to dramatically improve inventory management, margins, speed to market, and markdowns. Shared metrics are increasingly prevalent, as are new supply chain-related roles and responsibilities.
This article will outline those markers of excellence, or leading practices, within each of the foundational building blocks and provide examples of companies that are using those practices to drive significant business benefits. It will also show how companies can begin to rewrite the rules and link their supply chain DNA to create supply chain excellence.
Many retailers expend significant time and energy on financial planning but fail to dedicate enough of a focus on the elements of merchandise planning that can drive significant business benefits. Yet elements of merchandise planning can have a direct and significant impact on the business. Merchants and planners, however, have historically been hampered by tools that have severely affected their ability to make effective business decisions in this area.
Visionary retailers are adopting merchandise-planning techniques that result in improved margins and lower inventory liability. Leading practices in merchandise planning include:
Conduct “conceptual” assortment planning. Prior to market or line adoption at the conceptual stage, merchants are communicating their vision of the product line through more structured assortment plans. Within this process, merchants are defining key criteria such as product attributes, pricing and cost targets, and assortment required to create consumer demand. In addition, leading retailers have developed processes to segment product based on expected lifecycles. Within those segments, they’re also ranking product to indicate its importance to the line and to drive buy quantities and service levels.
The most effective conceptual assortment plans are those communicated early in the selling season to sourcing, manufacturing (internal or external), and retail personnel. These early communications help them understand the business direction and begin their respective supply chain activities, such as booking raw materials or ensuring sufficient network capacity.
Tailor assortments to smaller store clusters. “Micromerchandising” has been a buzzword in retail for some time. Retailers are finally implementing this concept by tailoring assortments to clusters of stores with common attributes such as level of affluence, urban vs. suburban, ethnicity, and climate.
By assigning each store to a cluster, retailers can tailor product assortments and subsequent allocation activities to address the unique needs of different store locations. This practice will drive significant changes in supply chain operations, including an increase in store-specific flows, greater store pick-and-pack activity from vendors, and smaller unit packs.
Replace “gut feel analysis” with optimization engines. Merchants and planners are increasingly leveraging optimization technology and techniques to drive pricing, promotion, and markdown decisions as well as to determine inventory flow paths and strategies.
At several hard and soft goods retailers, planners are using optimization models to determine the most appropriate product flow paths (for example, replenishment, hold and flow, direct-to-store, or flow through) based on those products’ attributes. These attributes include vendor reliability, demand predictability, product cost, cube, and seasonality and some retailers are reviewing up to 15 to 20 different attributes.
Case Study:
Hbc’s challenge was to implement quick wins with a new merchandise planning process. It intended to develop this process for its newly formed Centralized Merchandising Group. The effort would focus on optimizing assortment and on developing a merchandise strategy that ties together product and financial plans.
A cross-functional team of merchants, planners, supply chain, technology, and training personnel was formed to implement the quick wins and plan for the full implementation. The team developed detailed training materials and business requirements for assortment planning and optimization tools, created planning calendars for each business, performed workload analysis to confirm organizational requirements, conducted training, and supported implementation of new processes.
Through these efforts, this team identified an inventory-reduction opportunity of several hundred million dollars, which would free cash flow and reduce carrying and handling costs. A plan was created to realize benefits within 12 months.
As part of this planning initiative, Hbc developed a robust assortment planning tool to assist buyers and planners with the preseason process, which begins with conceptual assortment and continues through creating a detailed assortment plan. The tool and process were piloted in areas across the business and subsequently rolled out based on market dates.
The initial pilot, which consisted of 10 percent of the business, was structured to yield $11 million in net inventory reduction and positive comparable store growth.
The activities performed by sourcing organizations, which represent the second DNA building block, have historically been tactical in nature. They have worked to identify and certify vendors, oversee the sample process, receive quotes, and track vendor orders with a focus on hitting margin targets. While often cordial and professional, relationships among sourcing organizations and vendors can break down and become antagonistic when supply chain strategy or execution fails.
Leading Practices
Leading companies are taking steps to make sourcing more strategic and collaborative. Sourcing organizations have become an integral part of a company’s ability to bring product to market. As retailers strive to become faster, more responsive, and more flexible while reducing costs, there is a real need for sourcing organizations to connect better to other areas of the supply chain, such as planning and logistics, as well as directly to vendor processes.
In addition, dramatic changes in the quota rules and the continuing improvement of functionality in product lifecycle management (PLM) and sourcing systems are rewriting the rules on sourcing. Leading practices in sourcing include:
Continuously consolidate the vendor base. Leaders consider vendor consolidation to be an integral part of their sourcing strategies (and not just a one-time occurrence). They are seeing real benefits such as reduced costs, improved responsiveness, and reduced delivery variances. These improvements can reduce product cost of goods sold (COGS) 5 to 20 percent and improve schedule attainment for better fill rates and on-time deliveries.
Another benefit of having fewer vendors is that retailers have more opportunities to form mixed product containers from ports of embarkation. Finally, retailers require less overall supply chain overhead to certify and manage a focused vendor base.
Collaborate with vendors that have the best factories. The post-quota world has retailers searching for the “best” factories while, at the same time, balancing country-of-origin opportunities. These best factories offer long-term advantages in cost and enhanced capabilities, and they are becoming extensions of retailers’ rapid-to-market processes.
Sourcing organizations want vendors that can provide responsive production capacity, order visibility, and other supporting functional skills such as technical product development and distribution. Factory vendors with these enhanced capabilities allow retailers to eliminate redundancies and provide accurate, actionable information. The most collaborative vendors and retailers are linking their systems to gain visibility into key activities and to sequence the flow of orders from raw materials through shipping.
Shift activities closer to manufacturing. Several retailers have moved supporting functions closer to the source of manufacture to reduce cycle times and costs. Some of the relocated supporting functions include technical specifications, quality assurance, samples management, inventory planning, and even some aspects of concept development and merchandise planning.
L.L. Bean is a multibillion dollar, multichannel vertical retailer of men’s, women’s, children’s, home, and outdoor products. Starting in 2004, the company initiated a three-year consolidation and collaboration initiative to go much deeper with select vendors and establish new supply rules for improved sourcing. It established an aggressive target to reduce COGS by 10 percent and lower customer prices. In addition, the company recognized the need to increase its product velocity and to build partnerships to do so.
L.L. Bean’s path to date can provide a useful approach for other companies interested in evolving the role of sourcing. Lessons learned include:
- Know your product’s true costs. You can’t identify the best factories if you can’t compare them to expected performance in their regions. L.L. Bean started the process by executing a costing model to establish benchmarks for the first dozen products it wanted to consolidate. It then shared the details of this analysis with its strategic vendors, providing the cost target goals needed to offer the best pricing for its customers. It is not sufficient to suggest arbitrary targets of “5-percent” cost reduction; reasonable improvement targets are based on justifiable analysis.
- Approach vendor relationships as a two-way street. As consolidation progressed into its second season and vendors witnessed increased volumes and the next level of cost targets, several vendors approached L.L. Bean with requests that the retailer improve its internal processes. The demand profile of orders coming to the vendors needed to change if the vendors were expected to hit the cost targets. Bean adopted the changes, realizing that the existing practices were, in fact, a hindrance to the process. It consolidated and resequenced orders, and together, the retailer and vendors were able to meet the next round of cost reductions.
- Develop trust with strategic vendors through results. L.L. Bean continued to share its product-positioning vision and objectives with its strategic vendors. The company approached vendors as true stakeholders. As time progressed, it became evident to vendors that L.L. Bean was indeed passing along the lower sourcing costs to its customers with lower price points for its products. This outcome was instrumental in building real partnership trust. Vendors may initially feel the benefits from a collaborative partnership are one-sided. It is up to the retailer to share its collaborative vision of a win-win situation for the retailer, its vendors, and the consumer.
To date, L.L. Bean has reduced its vendor base by more than 30 percent, and it expects to reach a 50-percent reduction by the end of 2008. The company is exceeding its milestone objectives in COGS reduction and is seeing on-time deliveries in the high 90-percent range. A byproduct of this work has been an improvement in quality. With fewer vendor partners, L.L. Bean has seen a dramatic reduction in product-defect levels. In addition, it is beginning to work with one of its vendors on a collaborative first-to-market initiative.
The third building block, logistics, has traditionally been seen as a cost center, supporting other elements of the “retail DNA” but not necessarily creating a competitive advantage. Today’s retail leaders, however, understand how to integrate the power of their logistics operations with the rest of the enterprise, leading to quantum enhancements in sales, margins, and customer service.
Leading Practices
World-class logistics operations not only are driving continuous improvements in productivity and inventory effectiveness but also are helping to drive overall business growth and improved margins. Leading practices in logistics include:
Leverage “new-age” software solutions. Leading retailers are implementing a wide array of supply chain software solutions that allow them to react better to increasingly available store-level inventory data and demand forecast data. Transportation management systems provide visibility of merchandise movements from vendor source to store shelf, dramatically improving inventory performance. Advanced warehouse management systems are supporting increasingly “smart” distribution operations, streamlining and prioritizing activities to ensure that the most critical transactions happen first. And the increasing prevalence of labor management systems supports implementation of comprehensive performance management programs that ensure the best return from the human elements of the supply chain.
Focus on flow. Leading retailers are questioning past distribution paradigms that favored a “one size fits all” merchandise flow path. Instead they are using new tools to evaluate the optimal flow path based on product characteristics and demand patterns, thereby realizing dramatic inventory reductions, labor savings, and increased speed to market.
Motivate and reward for success. The leaders have realized that success demands more than just plugging in the newest technology and assuming that excellence will follow. At the end of the day, it’s still the associates that make the technology tick. Accordingly, world-class logistics organizations are implementing comprehensive performance management programs focusing energy on training, measuring, motivating, and rewarding people for sustained excellence.
Case Studies: Ace Hardware and Big Lots
Ace Hardware and Big Lots represent excellent examples of retailers that constantly challenge the status quo. Both companies are finding creative ways to enhance supply chain productivity not only inside the silo of traditional distribution functions but also through increasing cross-functional integration and collaboration with merchandising, sourcing and procurement, store operations, and IT.
Ace Hardware recently completed a comprehensive strategic evaluation of its supply chain network. This evaluation focused on defining and implementing the optimal merchandise flow path for each of its 600-plus product categories. The evaluation pointed to an opportunity to convert a significant percentage of volume from traditional distribution center (DC) replenishment to “flow through” operations. This change would reduce inventory in selected categories by 25 percent or more while also significantly reducing DC labor and space requirements.
The implementation of increased flow through, coupled with a parallel distribution network optimization, will allow Ace to extend the life of its current DCs. By doing so, it will defer the need to construct a new facility and will create fully realized annual savings of $20 million.
Concurrent with the merchandise flow evaluation, Ace has completed a comprehensive review of its technology applications. The focus here is to ensure the alignment of its enterprise and point solutions with the needs of its unique customer base. The resulting roadmap for technology development calls for a variety of initiatives from consolidation of redundant applications to development of new and creative retail replenishment tools. Combined, these initiatives are expected to deliver annual savings in excess of $5 million.
Discount retailer Big Lots also understands how to get the most out of its investment in distribution infrastructure. Over the past 10 years, the company has doubled the size of its distribution network; it currently operates five large regional DCs and two national furniture facilities. These facilities are strategically located to efficiently service its store base.
To drive consistent service and competitive logistics costs, Big Lots’ Logistics Group, in partnership with its world-class training department, has implemented a comprehensive engineered standards and associate incentive program. Called the P.O.W.E.R. (Performing Outstanding Work Earns Rewards) Program, it has been put in place across the five regional DCs and one of the furniture DCs. Through the program, Big Lots has improved direct labor productivity across the entire network by 40 percent, while providing its average associate the opportunity to earn an additional 15 percent of base pay.
The work that Big Lots has done in its flagship
The savings generated through this comprehensive retrofit were expected to pay for the project in three years. In actuality, it only took one and a half years. The project is on target for a 57-percent internal rate of return (IRR). As a result, Big Lots’ Logistics Group not only improved productivity but also helped support future business growth by enabling its flagship DC to support significantly more stores —and in the process, defer the need for costly capacity expansion.
Traditionally when we discuss the key elements of the supply chain, we think primarily of the heavy lifting performed by distribution and logistics operations. Much less often do we hear about the last 100 feet of merchandise movement and the presentation processes performed at the store. But it is in the last 100 feet that a retailer makes money. It is here—by delivering against a service promise—that a retailer keeps customers coming back.
With the proper tools, a retailer can plan and execute the unloading of trucks, unpacking and preparing of stock, managing of backrooms, and refilling of merchandise fixtures with a great deal of accuracy and efficiency. And for general and consumable merchant/operators, timing, accuracy, and speed of inventory movement from door to floor has become a competitive advantage. After all, if it’s not on the floor, what are the chances you will sell it?
Leading Practices
Forward-thinking executives are focused on developing an integrated approach that recognizes the linkages among stores, planning, manufacturing, and distribution inside and outside of their organizations. They have recognized the critical importance of the last 100 feet and have developed specific operational best practices using integrated relationships. Leading practices for retail merchandise operations include:
Balance inventory to demand. In-store inventory levels that are balanced to consumer demand turn more quickly, require less handling, and are sold at higher margin and profit levels. Retailers can create this balance by developing accurate allocation, replenishment, and promotional plans based on each retail location’s unique demand curves. Although seemingly similar, each retail location has unique supply and demand characteristics shaped by the demographic it serves. These differences are expressed in the what, when, and where of consumer shopping patterns. Analysis of these patterns provides the key to unlocking and managing inventory with a high degree of accuracy.
Gain visibility into inbound deliveries. A common issue for retail stores is a lack of advance notification about the frequency, quantity, and content of arriving shipments. Gaining visibility into such details provides the retailer with greater insight and opportunity. For example, it allows a store operator to schedule labor resources more effectively and prepare the store for new arrivals. For all retailers, improved visibility allows greater inventory control. Greater control produces two benefits. For the retailer, it allows them to focus more on the consumer and drive sales. For the consumer, increased visibility translates into a more “shopable” store.
Apply consistency across the store base. A major challenge for all retailers is scaling best practices across a large population of stores. For many retailers, store counts range from 500 to 5,000. To optimize network sales and profitability in this type of environment, stores need to execute consistent processes and operating practices. Establishing a permanent, corporate-based store operations group can help sustain consistent performance through:
- Designing and piloting best practices for the entire supply chain.
- Developing comprehensive rollout processes to implement changes.
- Reinforcing and measuring results through reporting visibility and controls.
- Providing remedial correction to cure best practice issues.
Case Study: Discount Department Store
A nationwide apparel and home goods retailer recently piloted and is currently implementing an integrated store-operations program across its locations. The program includes the following elements:
- In-store communication of timely, accurate, and actionable information regarding the content and disposition of inventory.
- In-store tools to better plan, organize, measure, and manage merchandise and labor resources.
- Consistent management oversight, performance measurement, and controls.
- Ongoing execution of best practices developed centrally by a permanent store operations group, using rollout process and change management toolkits that are combined with ongoing reinforcement.
When the implementation across the store network is complete, all retail store locations will share characteristics that will ensure consistency of execution. This consistency will optimize overall organizational growth and profitability.
The retailer has focused on improving consistency in three areas in its stores: inventory flow and replenishment, performance management, and backroom reorganization.
To improve flow and replenishment, the retailer is increasing visibility in the supply chain. This increased visibility drives the timing, location, and accountability for merchandise receiving, processing, and stocking. The retailer is also better utilizing tools for sell-through reporting, carton labeling, and location identification to plan the replenishment of sold-down merchandise from new receipts and back stock.
To improve performance management, the retailer is using: 1) automated tools to forecast and balance workload to labor availability; 2) short interval coaching and productivity management techniques to increase workforce efficiency and effectiveness; and 3) automated productivity measurement and reporting to provide more timely and actionable response.
Finally the retailer is using industrial engineering techniques to help its stores make more effective and efficient use of backroom and processing floor space, equipment, and shelving. Labor efficiency and increased merchandise velocity to floor is being driven by plan-o-grams for the placement and adjacency of merchandise on shelves and in hanging rails. Similarly, improved maintenance and accountability for the condition of the backroom supports accurate and timely inventory replenishment to reduce out-of-stock conditions.
Through this integrated program, the retailer achieved the following: increased velocity of merchandise from the back door of the store to the floor fixture; enhanced in-stock, on-shelf inventory condition at the style, color, size, and SKU levels; and lower in-store merchandise handling costs.
These leading practices and case studies provide a glimpse into how companies are taking a core supply chain building block function and using it to drive real value across the business. But it is no longer just about how well a supply chain function performs. It is becoming more about how each functional area interacts to drive end-to-end supply chain excellence. The leaders have adopted a number of techniques to achieve the necessary interaction. Two techniques that have proven particularly successful involve building “end-to-end” teams and implementing a supply chain dashboard for key performance metrics.
Build End-to-End Teams. Companies whose supply chains yield the greatest results approach the “supply chain” in the broadest terms, which means assigning staff to be responsible for bringing product from concept to store shelf. Several retail leaders have created project-focused teams that cover the end-to-end supply chain and have aligned their objectives to achieve significant business results. Here are some success stories:
- A department store brings together planning, logistics, and sourcing to execute “push and pull.” Through this technique, the retailer breaks out the overall buy quantity for an item into an initial “push” for setup across all stores, a series of replenishment “pulls” based on selling season trends, and a final “push” to mark the end of the product’s lifecycle. This approach improved margins on key items by 9 percent for this retailer.
- A billion-dollar specialty retailer formed a team of planning, distribution, and retail executives and created an integrated plan to improve turns across the business by 50 percent.
- A multichannel retailer brings together leaders from merchandising, planning, supply chain, and distribution to create cross-dock capabilities to support a doubling of store growth.
It is doubtful these initiatives would have yielded the same results under the traditional model in which each function optimizes for its own area.
Implement Supply Chain Dashboards. Just as scientists rely on electron microscopes when working with DNA, retailers require a means to gain low-level visibility into their end-to-end supply chain operations. Increasingly, the leaders are gaining this visibility via a performance dashboard. Their objective is to turn raw data into knowledge, then into action, and ultimately into results.
A dashboard is a reporting tool that displays key (not all) performance metrics to enable retailers to quickly and easily see how their business is performing and where things are breaking down. The tool should include a combination of operational and financial metrics that spans the broader supply chain.
To be effective, this core set of metrics should be shared across the supply chain. Examples include “guest in stock” (product actually on the floor and in a saleable location) and total supply chain costs. These are metrics that everyone—within planning, sourcing, logistics, and store operations—can rally around and have an affect on.
Retailers should expect to face challenges as they move down the path of implementing shared metrics and functions discover they are out of their comfort zones. For example, most retailers are not accustomed to capturing total supply chain costs. They are used to measuring DC costs, transportation costs, or retail-handling costs instead of end-to-end supply chain costs. It’s important to overcome this mind-set, however, because alignment around metrics is a requirement for significant improvements to margin, inventory, and other key business drivers.
It took genetic scientists 50 years to fully understand how to leverage the discovery of the building blocks of DNA. In today’s marketplace, the building bocks of supply chain success are increasingly available to retailers. These building blocks enable retailers to create and sustain operations in which functions are integrated across the enterprise and are focused on the efficient movement of merchandise from vendor source to the store shelf.
Leading retailers are venturing outside the silos of functional excellence to embrace the new concept of cross-functional, enterprisewide excellence. The challenge lies in discovering the combination of foundational building blocks that defines the equation for excellence in your business. Doing so will help you discover and unleash your own unique retail DNA.
Author’s note: The author wishes to acknowledge the following individuals at KSA for their contributions to this article: Curt Clark, manufacturing specialist and Karl Bjornson, retail operations specialist.
IT Matters...A Lot
The goal of the S&OP study was to survey a wide variety of large and mid-size companies to identify successful strategies for sales and operations planning. One of the key findings was that most enterprises have some sort of S&OP process to align demand and supply. In fact, more than 70 percent of respondents to Aberdeen’s survey indicated that they are actively engaged in enhancing their existing S&OP capabilities. As shown in Exhibit 1, a significant number of participants revealed that they expect an enhanced S&OP program to significantly improve operational performance across the value chain, from sales to procurement. These respondents are motivated to improve their S&OP process by a combination of decreased business growth, diminishing profit margins, and competitive pressures. 
The results of the Aberdeen research demonstrate that improving S&OP practices drives gains in key performance areas across the value chain—in sales and marketing, distribution, manufacturing, and procurement. There is an explicit and clear relationship between the quality of an S&OP program and actual business performance (Exhibit 2). Enterprises that leverage S&OP best practices significantly outperform companies that are S&OP laggards. These findings hold true across companies of all sizes and industries.
An effective S&OP program can substantially improve a company’s ability to plan and take orders for customized products and services—at the same time allowing the organization to focus on the most profitable and strategic customers and products.