Progressive Grocer - April 2013

Progressive GrocerEfficient & Responsive

An efficient supply chain helps lower the unit cost of each item sold, while a responsive supply chain has the ability to adapt to changing customer requirements and avoid non-moving stock

Designing your supply chain to keep customers happy, while you make money

There is no industry that is as close to the customer as retail. In India, that means this industry has faced the brunt of the change, or more accurately the transformation, in the market place. As India evolves from a producer-driven economy to a consumer driven economy, there have been huge and rapid changes in customer disposable incomes, shopper expectations, cost structures and supply side constraints. While store locations and merchandising are the highly visible part of retail operations, supply chain design and execution are equally critical in ensuring survival, relevance and profitability.

Efficient and responsive

Recently, we at CGN had conducted a survey among senior executives of retailers, both brick and mortar and e-retailers, to understand the challenges they face. They highlighted issues that are not uncommon in an emerging industry, and it was clear that supply chain design and implementation would be critical in creating a responsive and profitable business.

Being all things to all customers, is no easy job

In the scramble for business volumes, most retailers are seeking to address as wide a profile of customers as possible. Footfalls and on-line purchase numbers are crucial to gauge business health. This leads to an increased diversity of expectations at the store in terms of range, availability, service and freshness. This in turn places a variety of demands on the supply chain. We seek 100 percent availability to avoid lost sales on the shelf; the widest possible range to suit everyone who walks in, and superior freshness of the product in a country where customers search the backs of shelves for fresher products.

Location is everything, but prime locations have killer cost structures that squeeze margins

Real estate costs put immense pressures on the business, especially for value offerings. This cost is compounded by the need to complement utility services like back-up electricity and water that are relatively cheap in other countries. Retailers end up squeezing in over 4,000 skus into 2,000-2,500 sqft of space, leading to a need to generate higher revenues per square foot.

Talent operates a revolving door

A complex problem is made more difficult by the scarcity of talent. A new, fast growing industry always faces a talent crunch. Retailing is no exception. Attrition rates are high, training expensive, and the work has yet to gain a patina of professionalism to attract good people at the lower levels.

Should we design a responsive supply chain or an efficient one?

Meeting the demands of shoppers requires a responsive supply chain; one that ensures fill rates even when demand patterns change at short notice. On the other hand, high fixed costs require that the supply chain be efficient, to increase margins by lowering purchasing price, reducing inventory and optimising transportation costs. The challenges seem to define conflicting expectations from the supply chain: do we design a responsive supply chain or an efficient one? In reality, both deal with costs, though they do so at different levels.

An efficient supply chain helps to lower the unit cost of each item sold – a very attractive proposition for a retailer in a value-driven market. However, a responsive supply chain addresses two other problems: the ability to adapt to changing customer requirements and the avoidance of non-moving stock that has to be seriously discounted. Which type of supply chain design should a retailer choose? In our view, the answer should be “both”.

Design a differentiated supply chain

Every retailer knows that there are differing demand patterns across the range offered. There are steady demand runners and less frequently demanded range extenders. Supply side design should reflect the demand side variation. So, if there are differing demand patterns, there should be differentiated supply patterns. Typically, there would be 2 or 3 different supply chains that should be put in place, even for a small retailer, with clearly differentiated patterns of planning and fulfilment. This helps to reduce cost for fast moving items, by using lean principles, and at the same time reducing risk on slower moving items, by using principles of responsiveness.

The supply side design is dependent on the demand pattern and not on store size or format. So, it is perfectly possible, if unlikely, to have a single supply chain for a large format store, but it is much more likely that a small store will need multiple supply chain designs. In fact, given space restrictions, fine tuning fulfillment through supply chain differentiation will be much more beneficial in a small store.

Simplify supply chain processes for easy understanding and increased compliance

Increasing the number of different supply chain designs will increase the operational complexity. It is then important to codify these systems into simple rules that encapsulate the critical design principles. They should be simple enough that people with little experience can effectively ensure on-shelf availability and avoid damage or loss. Simplification of processes will also free up time and attention that can be spent on providing better service or in merchandising. However, simple processes should not be simplistic processes. The right balance requires well thought out process design, incorporating the core principles that need to be addressed.

Keep an eye on your demand with strong analytics inputs

While the concept is simple, the devil lies in the details. Having a sound understanding of the demand is the starting point.

Today, most retailers have strong IT transaction systems and some also have an analytics cell; but analytics is an emerging field, just as retail is. The field faces the same problems of talent shortage and, with notable exceptions, the quality of analytics most retailers employ are weak. It would be preferable to tap into a burgeoning eco-system of analytics start-ups who can offer quality services at lower cost.

Good analytics coupled with a strong fulfillment capability will allow retailers to identify and capture high margin sales by micro segmentation of shoppers. Application of this is steadily increasing in the country. Micro segmentation gives a better understanding of the shopper; allows for better design of layout and offers; and finally ensures better inputs for reliable fulfilment.

The other key need for capable analytics inputs is to know when your system is going to break, before it breaks. By monitoring demand patterns, it is possible to see when an sku is becoming stable in demand, meaning it is time to shift it from a responsive model to a cheaper efficient model, providing you with increased margin. Or, if demand is getting choppy, to shift the other way and avoid stockouts or write-offs.

Retailing in India is going through an exciting phase and, as the field matures, the relative importance of supply chain effectiveness has been gaining ground. Getting the design right and rigorously implementing it on ground can make all the difference.

The author is Partner & Managing Director – Indian Operations, CGN & Associates India Pvt Ltd