Thursday, September 17, 2009

What is Your Play?

As retailers move through their business life-cycles, from growth to maturity, their capabilities need to change as well. Early years mark exciting product assortments, differentiation, and innovative niches driving the top-line. Business grows, expands, store-counts go up, and the competition in the segment heats up. As the competition catches up and the business-segment matures, the top-line growth plateaus. To sustain the business, the focus must change from top-line to the bottom-line. For the retailer, this means new skills must be learnt, new functional capabilities must be built, new competitive advantages must be created or else the business must perish.

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The initial years for most retailers are focused on the merchandising functions where the product excitement is the main focus. With hyper-competition and super-thin margins, every new retailer must bring to the table some excitement through products: some amount of differentiation or niche segmentation, simply to get into the game. If the excitement catches on, the retailer is soon on its path to growth. Consider Toys R Us that brought the niche of having a whole super-store like a big warehouse dedicated entirely to the toys or The Home Depot that brought the builder-like warehouse-store formats to the consumers or the Target that promised “pay less expect more” unlike the Wal-mart that simply promised “always low prices”. Each of these retailers had to create a segment and create excitement with their assortment when they started. During these early years, merchandising rules.

But success has its downside: if the retailer becomes successful, the completion quickly catches up. Differentiation blurs, niche becomes crowded, growth slows, and the top-line levels-off.

That is time when the successful retailers separate themselves from the run-of-the-mill. These are the retailers who understood the other half of the retail story: supply chain management and invested in creating supply chains that would provide with the power to stay and still make money when the product excitement wears off, the differentiators become common-place, and niches are over-crowded.

The splendor of glitzy new products on the store shelf must be supported by the sleek sinew supply chain capabilities. Successful retailers understand the two foundations of retail: merchandising and supply chain. Here is a quick overview of the two most critical retail processes.

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Merchandising

Merchandising truly defines retail. It is what makes a retailer unique and provides the “niche”. It provides the retailer its “identity”. Wal-mart shoppers know they will get lowest prices, and they don’t necessarily expect the service or variety. Upscale retailers like Neiman Marcus on the other hand are “identified” more with their chic image & differentiated product offerings.

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

Merchandise financial planning process helps the retailer create their plans for revenue targets and the budgets for inventories, margins, promotions, and clearance. 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, through regional and product hierarchies. Alternately, the process may support a bottom up planning for this function and then reconcile the top-down numbers with these numbers.

Next the assortment plans are created. Assortment plans match the products with the locations to 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 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 product-assortments are aligned with the budgets and sales 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 comes in.

Supply Chain

Supply chains enable the retailers to get the right products to the right place at the right time. Supply chain processes extend from demand and supply management to inventories and distribution to the stores. By directly controlling the stocking and distribution operations, these processes establish the cost basis and directly affect the profitability of the retailer.

Efficient supply chains can reduce costs in all areas such as inventories, transportation, and warehousing. After the cost of merchandise, the supply chain costs are the biggest costs for a retailer. Even a small savings on these costs can mean millions of dollars directly going to 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 processes cover network planning, demand planning, supply planning, logistics, and distribution operations.

Supply chain network planning helps in optimally locating the distribution hubs for stocking and distribution of products to the stores and customers. A well designed network will reduce the replenishment lead-time and the distribution costs of products in the stores.

Demand planning is the science of forecasting future demand that must be replenished at each of the warehouses and stores. The forecasting process uses sales history and other user inputs to model seasonality, planned promotions, expected weather patterns, and price; all of which may affect demand. It produces a sales forecast and considers the existing inventory to determine the actual demand that must be replenished through purchasing new product.

Supply planning processes typically cover 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, existing inventories, and other parameters such as minimum order quantity constraints. Purchasing is the day-to-day purchase order life-cycle management, ordering, receiving, and settlement of vendor invoices (also known as purchase to pay, or order to settlement cycle).

Logistics is typically transportation management and refers to consolidating orders and creating shipments for the inbound and outbound orders. It consists of load optimization, route optimization, carrier selection, tracking and tracing the shipments, and carrier freight management functions.

Warehousing processes add the capabilities for receiving, stocking, inventory management, cross-docking, staging, order fulfillment, packing, shipping, and inventory reconciliation at the warehouses.

The scope of supply chain functions primarily covers all aspects of inventory and distribution costs. Most aspects of supply chain are 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 manage profitable growth and optimizing the supply chain provides the key to manage it.

Summary

To successfully transition from a newbie start-up to a stable, mature, and profitable business, retailers must grasp both, the merchandising and the supply chain functions. They must develop capabilities that would not only keep their products fresh and customers excited, but also run their operations smoothly and efficiently to survive and grow profitably.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

© Vivek Sehgal, 2009, All Rights Reserved.

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