Tuesday, March 4, 2008

Pillars of Retail: Supply Chain and Merchandising

Retail is a complex industry to manage. Between the unpredictable seasons, finicky customers, and a volatile economy it presents a worthy challenge. Two foundational business capabilities in Merchandising, and Supply Chain determine a Retailer’s ability to compete. Merchandising gets the Customers, and Supply Chain gets the Products…

At the highest level, it is a simple concept. Buy, Distribute, and Sell. And as long as you can do that profitably, you are in business. That is where the rub is – profitably – an average departmental retail store can have tens of thousands of items to start with. Add to that the number of stores, formats, customer demographics, seasons, fashions, competitor across the road, weather, economy and you have a pretty hairy problem. The sheer number of independent variables that a retailer must contend with, in planning and executing is mind boggling.

However, understanding the two key processes in merchandising and supply chain can make or break a retailer. Building functional capabilities in these areas to flexibly address business needs can give a retailer competitive edge.

Get the Customer’s Attention: Merchandising

Merchandising truly defines Retail. It is what makes a retailer unique, and provides the “niche”. It provides the retailer its “identity”. Walmart shoppers know they will get lowest prices, but not necessarily the service, or variety. Upscale retailers like Neiman Marcus on the other hand are “identified” more with the chic image.

Merchandising has various sub-functions. It has a financial aspect and an assortment aspect.

Merchandise financial planning sets up a Retailer’s plans, for revenues, inventory levels, mark-ups, gross margins, promotions, clearance etc. Planned targets for sales, and inventory are set in this process, so are the budgets for promotions, clearance, and marketing. These plans can be started at the top, and trickle down the organization, regional and product hierarchies. Some companies may also do a bottom up planning for this function and then reconcile the top-down numbers with the bottoms-up numbers.

Next the assortment plans are created. Assortment plans determine what will be sold where. Assortments may vary from store to store based on demographics, competition, weather, fashions, and new products. These plans typically start with the evaluation of the existing product and assortment portfolios, and establish the new assortments for the planning period. These assortment plans are then reconciled with the merchandising plans to make sure that the assortments can actually meet the financial budgets, and projections. These assortment plans are typically available at regional, store cluster, product class and sometimes at item levels.

Further down, the assortment plans then generate the macro and micro space planning. Macro space planning constrains the planning process based on logistics, distribution, and storage constraints in the supply chain. Micro space planning creates planograms that determine the product presentation in the stores, presentation quantities, and other displays.

Merchandise planning is primarily the top-line play for a retailer. This is the most important function in the growth stage for any retailer. Its importance does not diminish for mature retailers, though the strategy for mature companies normally shifts from top-line growth to bottom-line improvement; and therefore, cost control becomes more important than growing the top line. And that is where Supply Chain becomes important.

Get the Right Products at the Right Place at the Right Time: Supply Chain

Supply chain capabilities define the cost basis, and hence directly affect the competitiveness of a retailer. Supply chain efficiencies cut costs all around; inventories, transportation, warehousing. After the cost of merchandise, these (supply chain) costs are the biggest costs for a retailer. Even a small savings on these costs can mean millions of dollars directly going into the bottom line for most retailers. The good news is that unlike the cost of the merchandise, the supply chain costs are directly controllable by the retailer through better planning, optimization, and execution.

Supply chain typically covers the network planning, demand planning, supply planning, logistics, and distribution operations.

The stocking and selling locations together with the supply locations (vendor’s shipping points) make the supply chain network. The supply chain network planning helps in optimally locating the distribution hubs, and supply points within a retailer’s network of facilities. The network evaluation can result in facility relocations, and generally executed yearly, or sometimes less frequently.

Demand planning is the science of projecting future demand that must be replenished at each of the stocking, and selling locations. Sales history is required, and other inputs may allow modeling of seasonal demand, promotions, weather, and price changes. It produces a sales forecast, and accounts for inventory to determine the actual demand.

Supply planning typically covers sourcing, vendor management, inventory planning, replenishment planning, and purchase management. Sourcing establishes the process for finding and selecting vendors that the corporation will deal with. There may be supply contracts and relationship guidelines that are part of the process. Vendor management refers to on-going relationship management, and vendor performance evaluation. Inventory planning determines how much to stock to meet a desired service level, at selling locations, and at stocking locations. Replenishment planning establishes the purchase quantities, typically derived from the projected demand, inventories, and ordering/stocking parameters such as minimum order constraints. Purchasing is the day-to-day purchase order life-cycle management, expediting, analysis, and settlement (also known as purchase to pay, or order to settlement cycle).

Next two areas of supply chain refer to the movement and stocking of goods along the supply lines. Logistics is typically transportation management, and refers to consolidating orders, load optimization, route optimization, carrier selection, tracking and tracing capabilities, and carrier freight management. Warehousing then adds the capabilities for receiving, stocking, pallet/case breaking; cross-docking, staging, packing, shipping, and inventory reconciliation.

The scope of supply chain functions primarily covers all aspects of costs related to inventory levels, stocking, and movement costs. Almost all aspects of supply chain can be modeled using mathematical algorithms, and standard packaged solutions allow these costs to be optimized without sacrificing the service levels. Hence the supply chain management directly plays to the bottom-line for a retailer. As retailers mature, the focus shifts from the revenues growth to cost-containment to continue profitable growth; and optimizing the supply chain provides the key to efficient operations.


  1. Great article and very helpful.

    Thanks a lot for your kind words and help

  2. Thank you for well written article on basics ... which helped me understand