Retailers and consumer goods manufacturers like to talk about "moments of truth." Most famous are the two that Procter & Gamble defines as crucial to its entire business: the moment when a consumer stands in front of a store shelf and decides whether to buy a product and the moment when he or she uses the product and decides whether it meets expectations.
For these decision-making opportunities to ever occur, however, the supply chain must first deliver on its own moments of truth: Is the desired product on the shelf or store floor when the consumer comes in to shop? If so, did the product arrive within a time window and cost basis that allows it to be sold at a healthy margin?
Nailing these defining moments, which can separate winners from losers in the highly competitive retail market, is more challenging than ever, thanks to a changing consumer base that is far less predictable than in the past. "A significant demographic shift is occurring in the first world," says Chuck Kramer, vice president of retail at i2 Technologies, Dallas. "We are a much less homogeneous society than we have ever been before. There is a wider distribution of ethnicity, of wealth and of lifestyle, and that has made consumer taste much more of a moving target."
In addition, today's consumers are a demanding lot. They are tech-savvy, astute shoppers who expect an array of new and innovative products, an enjoyable shopping experience that includes transparent transactions across multiple channels, and everyday low prices. Otherwise known as the Wal-Mart effect, this last element drives companies to increasingly supply their stores from low-cost countries, resulting in much longer lead times and less predictability. It also turns up the pressure to contain supply chain costs and to maximize return from every inventory dollar.
"Return on inventory means one thing: getting the most profit out of every case of inventory that you put in front of the customer," says Danny Edsall, director of worldwide solutions for retail supply chain and merchandising at IBM, Armonk, N.Y. "The fundamental way you do that is by making sure you have the right product in front of the right customer. That's the biggest driver of returns."
Until recently, however, the emphasis at most companies has been on cost efficiency. "I don't think we are done lowering costs yet, but we are pushing the envelope on that," says Edsall. "We are already a long way up that slope and it becomes harder and harder to squeeze more out." What hasn't yet been done effectively, he says, is "really figuring out how to create a merchandising plan and assortment to make sure the right products are in front of the customer in the first place."
If a retailer has 500 stores they should not all be receiving the same mix of products, says Edsall. "You need to look at who actually shops that store-what are their preferences, their income, gender, racial makeup, even down to their interests-and get a customer-centric assortment that matches those details."
The work IBM and its partners are doing now is all about finding new ways to get deeper insight into what customers really want, he says. "It's about getting behind the demand patterns so can understand not just what a customer bought, but what he really wanted to buy. Then start using that to drive the supply chain."
The key is to use not only general demographic data provided by third-party services like Nielsen, but to proactively mine data from loyalty programs, customer surveys and previous buying history. "Some categories of retail businesses are very rich in that data, especially warehouse clubs that require memberships," Edsall says. "They know exactly what members have bought in the past. The thing is not to use this information just to create incentives to buy more, but to plan the entire supply chain around it." IBM Business Intelligence for Retail enables this type of analysis and is part of the company's comprehensive range of retail solutions.
Planning more tailored store assortments and executing with the right store allocations also will help reduce stock-outs, says Wayne Usie, senior vice president of retail at JDA Software, Scottsdale, Ariz. The fact that stock-outs overall remain in the 7 percent to 9 percent range-where they have been stuck for a decade-is "due to the fact that the needed assortment of products by location is not being delivered. To capture total potential sales, retailers must tailor their assortment mix to specific locations."
One example is JDA customer Kapp-Ahl, which recently implemented a number of JDA's retail solutions, including JDA Allocation. KappAhl is a leading Nordic fashion chain with about 270 stores in Sweden, Norway, Finland and Poland. After using the JDA solution, it improved the precision of its store-specific product mix by 20 percent, a figure verified by tracking how delivered sizes complied with local demand. Thanks to the improvements, the company expects to increase gross profit by 1.2 percent per year.
Similarly, Payless ShoeSource implemented a full range of retail solutions from i2, including those that support daily merchandise and assortment processes as well as allocation and replenishment execution. Optimizing assortments to its 4,572 stores enabled Payless to achieve better margins, which helped the company meet its financial goals. In addition, Payless reports that it has reduced aged inventory and markdowns, improved product flow and optimized case packs by store.
When tailoring assortments to individual stores is not practical or feasible, Kramer suggests that retailers group like stores and create assortments based on their common characteristics. "For that, you need a tool that will analyze the data and discover those logical groupings of stores, then feed that back to the buyers and allocators, who can add their art to the science," he says.
Last month i2 introduced a new solution called Store Grading to support this process. "This solution allows a retailer to go back to the benefits of the mom and pop store, but in a scaleable fashion," Kramer says. "It's another way i2 is pushing the envelope of advanced planning to help deliver customer centricity."
Another important store inventory driver is space allocation, says Edsall. "If the assortment is all about making sure you have the right product, the flip side is space, making sure you have the right quantity." Too often, he says, retailers allocate a certain amount of space to a product category, like women's skirts, and then buy to fill the space. "If we are talking about return on inventory, wouldn't it be better to find out how many people are coming into the stores that want skirts and what size and age they are?"
Edsall says one company with a solution to this problem is Galleria, a software developer based in the U.K. Galleria's space planning solution is able to turn out automated, store-specific planograms in seconds, so that even very large grocery chains that stock thousands of items can create planograms for each individual floor footprint rather than for generic small or big-box footprints, he explains.
"What Galleria does is very sensible," says Edsall. "It takes customer data and store sales data and creates a planogram for each individual shore based on the real size of the shelves, and also allocates the space according to the amount of sales each product can generate on that shelf in that store. In terms of ROI, that's a huge step forward because it allows retailers to optimize the amount of space and, therefore, the amount of inventory they send to each store to match the customer profile."
Here again, there is a positive impact on out-of-stocks because part of the space optimization equation is to look at such factors as which products need to be near each other to boost sales and what is the most efficient way to replenish, based on shelf space and case size. "The optimization equation goes through all of that to come up with the right balance of space allocation versus availability," says Edsall. "So, surprisingly enough, you get improvement in product availability at the same time as you reduce overall inventory."
Another version of segmentation aimed at improving inventory returns is focused on the product-understanding which products are driving demand and which are reacting to demand, says Chris Foulkes, co-founder and chief product officer at U.K.-based Eqos, a provider of on-demand solutions for the retail supply chain. He uses U.K. retailer Tesco, an Eqos customer, as an example. "Tesco knows that men's clothing lines typically are not fashion driven, so it is okay to produce these goods in China with a nine-month lead time. Women's fashions, however, often are very fashion driven. So Tesco may have a 'fast fashion' strategy for certain of those lines, perhaps having them produced in Turkey rather than China." This shorter lead time allows Tesco to react to changing demand patterns, Foulkes says. "Retailers have to change the way they break down categories and product ranges and make sure their sourcing strategies adapt to those changes."
This tactic also is being adopted for non-fashion lines to mitigate the impact of long lead times from Asia. "Even with the best of intentions, companies can end up with a sourcing strategy that looks to be very low-cost, but the savings are offset with expedited transportation costs in order to get the goods to market on time," says Jim Nelson, a partner in the supply chain operations practice of Accenture, New York. "A lot of our clients are balancing this by maintaining quick-response, domestic sourcing for 10 percent to 20 percent of their product line."
As retailers fine-tune their store assortments and space allocation, they also are working with suppliers to make better use of sell-through and other data to drive store replenishment and keep stock-outs to a minimum.
"From a technology perspective, I think we are just starting to leverage point-of-sale data effectively," says Karin Bursa, vice president of marketing at Logility, Atlanta. "Retailers are getting much more granular in the point-of-sale (POS) information they provide and are getting it to their suppliers quickly enough for it to be meaningful."
It's really all about visibility, she says. "If I have visibility and know what is moving and collaborate well with my customers on forecasting future demand, then we can really be exception-based in the way we work as partners." In addition to its Voyager planning suite, Logility provides a web-based solution that allows supply chain teams to collaborate internally and with customers on demand forecasts and promotion events.
Retalix, a software company based in Israel, uses POS data to provide an exception-based replenishment program for the grocery industry. The old way of managing replenishment, which still happens in many grocery environments, is for a manager to walk the aisles and make decisions about how much to order of each product, says Gil Roth, vice president of analytics and optimization solutions. Retalix replaces that with "sophisticated optimization algorithms" that use POS data, on-hand inventory figures and forecasted demand to automatically calculate replenishment orders. Physical shelf checks are required only on exceptions, which occur when products exhibit suspicious behavior, such as a noticeable drop in daily sales. "This way, instead of the store having to count many products every day manually, attention is focused on the products that have some irregularity," Roth says. "Maybe it is out of stock, even though the system doesn't reflect this or maybe the product on the shelf is damaged. Either way, the problem can be easily identified and solved without requiring a lot of labor."
CPG manufacturer Kimberly-Clark is using TrueDemand's Forecast and Replenishment Manager (FRM) to help predict when an out-of-stock will occur. The solution uses the latest point-of-sale data as well as other data, such as DC-to-store and store-to-floor movements to calculate when to replenish, explains Eric Peters, founder and CEO of TrueDemand, Los Gatos, Calif. Since Wal-Mart is one of Kimberly-Clark's biggest customers, this includes RFID data made available through Wal-Mart's RetailLink.
When K-C began piloting FRM in 2006, it quickly discovered that out-of-stocks were twice as great as the firm had previously believed. Peters says this is not unusual. "Out-of-stocks generally are understated, because most retailer reports don't make a distinction between what is in the back room and what is on the floor," he says. "So if there are nine units in the store, it is not counted as an out-of-stock, even if those units are sitting in the back room and not available for sale."
TrueDemand's experience with clients indicates that out-of-stocks are underreported by around 100 percent, he says. "That will vary by product and category, but there definitely is a significant understatement."
Kimberly-Clark has deployed FRM in 500 stores and hopes, by year end, to implement the system at all of the approximately 4,000 U.S. retail stores to which the company provides products, whether those stores are RFID-enabled or not.
K-C also is leading the industry in another critical area-making sure that promotional displays and products reach the store floor in a timely manner. This can have a big impact on inventory returns because industry statistics show that 15 percent to 40 percent of stores fail to move displays to the sales floor on time, missing critical promotional windows and the opportunity to increase sales.
Using a new solution from OATSystems, Waltham, Mass., Kimberly-Clark's third-party contract manufacturers apply RFID tags to promotional displays. Stores are provided with wearable, mobile readers that record when the promotions reach the backroom of the store and again when the displays reach the sales floor. When a display's tag is read, data is sent to Kimberly-Clark and the retailer and alerts are generated if displays fail to reach the sales floor on time. This ensures that promoted products are where customers expect them to be.
"OAT Mobile Tag is a cost-effective solution that allows us to focus our RFID tagging efforts where there is a clear value proposition for K-C and our customers," says Mike O'Shea, director of Auto-ID sensing technology at Kimberly-Clark.
Recent research published by The Wharton School of the University of Pennsylvania sheds interesting new light on the out-of-stock conundrum. The research shows that the reason for most out-of-stocks has nothing to do with the supply chain, but is due to poor store execution. "We learned that 72 percent of the root causes could be found in the store," says Daniel Corsten, one of the researchers and vice director of the Kuehne-Institute for Logistics at the University of St. Gallen in Switzerland. "It doesn't take long to figure out that the best place to start to correct the problem should be within the store."
One traditional supply chain execution company, RedPrairie, Waukesha, Wis., is jumping on that opportunity and extending its solutions into the store. "At RedPrairie, we believe the supply chain must start with the customer experience in the store and work backward," said CEO John Jazwiec at RedPrairie's recent user conference. "It's all about the store."
Last year RedPrairie acquired two companies to help develop solutions in this area: Blue Cube, a workforce management suite, and StorePerform, a leader in store execution management. RedPrairie has combined these solutions to form what it calls "the first end-to-end workforce optimization solution for retail."
Sears says the solution has helped it improve performance at its full-line stores. "RedPrairie's workforce management suite gives us a truer picture of our labor requirements, allowing us to schedule in a way that enhances customer service and reduces costs," says Michael Buxton, vice president of store operations at Sears.
Wharton's research confirms the value of this approach. It found that a customer's perception of a store's in-stock position is driven not only by what is on the shelf, but by how well the customer rates employee knowledge about the store and the products they are looking to purchase. It found that retailers could significantly increase sales by either adding or simply reallocating employees. In some stores, Wharton researchers estimated that sales would leap $28 for every additional $1 in employee costs.
Keep It Fresh
Another way certain retailers are improving inventory return seems counter-intuitive-turn over product lines so frequently that they hardly have to be replenished.
"Because consumer tastes change so quickly and because we are now better at getting product to the shelf, seasonal turnovers have gone from an average of four to six times a year to double digits in many cases," says Gladys Lau, senior retail industry director at Oracle, Redwood Shores, Calif. "Frankly, a lot of these people want to be out of stock. They don't want to keep apparel on the shelf past when the next seasonal flow hits the store."
"Everybody wants to get to point where you don't really have replenishment on goods because then you sell through at your initial markup, which is a lot more profitable," says Sue Welch, founder and CEO of TradeStone Software, Gloucester, Mass. She says many of TradeStone's customers now have 16 seasons and are trying to add even more. "They are trying to retrain us as consumers," she says. "They want us to say, 'I had better buy it now because it may not be there if I wait for a sale.'"
John Brockwell, vice president of global supply chain management for JPMorgan Chase Vastera, Dulles, Va., says he also sees this strategy among a growing number of retailers. "They want to eliminate markdowns, so for some categories they will just order a certain amount and when it's gone, it's gone. They figure that will help them the next time because shoppers will know that items may sell out."
The rapid turnover of items also is designed to keep people coming back regularly, he says. "It's a little like the experience of the hunt. You want people who will keep returning to the store to see what is new."
Despite all efforts, however, markdowns will continue to be a fact of retail life. But technology, like Oracle's Retail Price Optimizer, is helping companies get smarter about how they mark down slow-moving products. "Price Optimizer helps the retailer identify not only what product should be marked down but when the product should be marked down," says Lau. These recommendations are based on the sell-through rate of an item and how long it has been on the shelf. Importantly, she says, the solution is able to work at an SKU level of detail. For example, one color of sweater may be selling well while another color is not. "In the past, we would have had to mark them all down because we would not have been able to identify which were selling and which were not. Now, we can pull only the ones that aren't selling and put them on the sale rack, while keeping the others at full price."
The need to keep stock fresh and interesting while maximizing margins has led many retailers into the world of private brands, where they design and manufacture, or outsource manufacture, of their own products.
According to an Accenture survey, a third of retailers earn at least 20 percent of their total revenue from private labels and that number is expected to reach two-thirds by 2009. Also by 2009, 63 percent of retail companies expect to be spending 10 percent of their marketing budget promoting private labels as opposed to the 35 percent that spent this much in 2005.
Clearly retailers see private labeling as a way to improve margins and gain competitive advantage, says Accenture's Nelson. "Most bring in private brands at a mid-price point, but I think the intention is to scale that up. If a retailer has great dynamics and information around its customer base and can design to their tastes, they have a very high likelihood of succeeding with private label strategies at a high price point," he says.
There is plenty of incentive to follow this strategy. Buying direct from a manufacturer and cutting out the middle man adds between 12 percent and 20 percent to the initial markup on a product, says Mark Burstein, vice president of PLM solutions at New Generation Computing, a Miami-based software company specializing in solutions for the apparel industry. In addition, he says, private labels establish brand identity and help build customer loyalty. "You can't buy an Armani Exchange item anywhere else."
Moreover, relying on private brands gives retailers more control over how goods flow to their stores, says Burstein. "Instead of just writing an order and hoping it gets there on time, these retailers are taking a lot more control of the entire supply chain."
In many cases that includes manufacturing and related processes. H-E-B, a large grocery chain in the Western U.S., provides one example. H-E-B makes 3,000 private label products in 11 plants for its grocery stores. To increase visibility and management of plant inventory used in production, it implemented a suite of solutions from Microsoft, Redmond, Wash. Some H-E-B plants had "boxes upon boxes filling the aisles and walkways," says Bob McCullough, group vice president of manufacturing at H-E-B. After real-time information became available from Microsoft Dynamics AX, one plant saw a 40 percent reduction in ingredient and packaging inventory.
Additionally, says McCullough, because previous manual processes were slow, they occasionally had led to out-of-code ingredients-and emergency replacement. "All these extra costs certainly didn't contribute to our bottom line," he notes. With improved materials management, ingredient availability improved and employees now can easily determine whether they have all the ingredients they need before scheduling a production run. Management of finished goods inventory also is better and, with it, freshness of delivered product, McCullough says. "For example, by leveraging efficiencies gained through Microsoft Dynamics AX, on-hand inventory in our ice cream plant has been reduced by over 50 percent. And, in the grocery business, freshness makes a huge impact on taste and customer satisfaction."
To meet the needs of these combination retailer/manufacturers, TradeStone Software has developed a solution that unites sourcing, global order management, and product lifecycle management. The convergence of these three delivers a unified buying process that enables retailers to shorten the cycle time for introduction of new products, says Welch. "We see retailers wanting to reduce that 12- to 15-month cycle down to three to six months and even less than three months, so they really need to streamline all the processes." Fit is one example. "When a private brand retailer designs a shirt, it has to design all the various points of measure on how it will be cut and sewn and tested for quality," she says. "Whereas before these could be defined loosely and refined during that long lead time, now they really need to be defined pretty precisely in the beginning so the fit will be right the first or second time. They simply can no longer afford to do three or four fits, because they lose two weeks each time."
If cycle times can be reduced, goods can be made nearer to their selling season, which would allow orders to better reflect actual demand. That also is the idea behind a new solution from i2, Cycle Time Optimization. "Retailers can use i2 CTO to become more customer-centric by making assortment decisions closer to the selling season and keeping their private label products in sync with the world's latest fashion trends," says Kramer. This can reduce risk in selection of style and quantity of purchase as well as reduce overall inventory risk, he says.
As retailers get more deeply involved in design and manufacturing, they are collaborating more with suppliers, both on private label and purchased goods.
"One of our tools that a number of retail customers use is Supplier Advantage, which not only helps them communicate demand to suppliers that are predominantly in Asia, but also gives them visibility to shipments," says Chad Collins, director of product strategy at HighJump Software, Eden Prairie, Minn. Once retailers have visibility, they can track and manage inbound inventory, he says. "The real power is when they use that visibility to drive the execution tasks that ensure the inventory gets to the right position in the supply chain," he says.
This often involves cross-docking, which continues to be an important method for speeding the movement of retail goods. "Our customers need to be able to look at an inbound shipment and immediately determine which stores need to receive those goods," says Collins. Best practice is to take the pallets or cases right from an inbound truck to multiple outbound trucks bound for retail locations."
Advanced retailers are going a step further and tying inbound visibility to allocation capabilities so they can dynamically reallocate inventory at the port of entry or deconsolidation center, says Scott Fenwick, director of product management at Manhattan Associates, Atlanta. "Weeks have passed since these inbound goods were shipped, so this is an opportunity for retailers to take another look at how they want to deploy that inventory based on more recent demand and supply information."
The search for better warehouse speed and productivity is ongoing, he says. "Manhattan is working with partners on combining a number of different technologies, like RFID, voice recognition and mobile computing-bringing these together to improve accuracy and make overall operations more efficient."
Such improvements, coupled with labor management technology, can have a huge impact on costs, says Collins. "Companies can see an additional 15 percent to 20 percent improvement in overall DC productivity once they implement a labor management solution in conjunction with automated WMS."
Another way retailers are reducing time and labor costs is to have the DC build "store-friendly deliveries," says John Naylor, a retail sales engineer at FKI Logistex, St. Louis, Mo. Small retailers and even some big-box stores have limited back room storage, he says. "They want the DC to build store-friendly loads that match their store departmentalization. So the DC may need to load one store zone on one pallet and another zone or aisle on another pallet and sequence them on the trailer so they can come off and go straight to the store floor in the most efficient way possible."
Menlo Worldwide is taking a lean approach to increasing warehouse productivity and inventory velocity for its customers. "The whole idea behind lean management is to reduce overall costs and increase the speed of products through the supply chain," says Jeffrey Rivera, director of operations at Menlo, a Con-way company based in San Mateo, Calif. Menlo develops continuous improvement road maps for its warehouses with goals laid out in six-month increments for reducing waste and improving performance. "Basically, we are trying to reduce the degree to which our clients have to rely on forecasting, which we know is always wrong," Rivera says. "We want to increase the speed through the supply chain to be able to pull and quickly replenish based on actual demand. That's what our customers want."
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