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.

[Click here to print or download this document.]

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.



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.


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.

Monday, September 14, 2009

Transportation Optimization: Under the Covers

Transportation has become quite popular in recent years. Automated transportation optimization solutions support the process in most large companies to create shipments for the inbound and outbound orders. What exactly happens in this optimization? Without going into the mathematical formulation and objective functions, here is a functional picture of what these solutions do.

Load Optimization: Load optimization creates the optimal loads for the standard trailer sizes. These could be optimized using the expected weight of the shipments or volume, depending on which one presents the loading constraint. The main objective of this part of optimization is simply to maximize the weight or volume capacity usage of the trailers for the shipments built. The constraints while deciding on load optimization are generally the dates and routes -- the solution must find orders that can travel together in the same window of time to successfully create optimized loads.

Route Optimization: Route optimization selects the best route to minimize the cost of transportation. This could be a route where the shipments can travel on long-haul rates for the longest part of the route or where the route is a combination of multi-modal transportation options so that the longest leg of the shipments travel on rail. The constraints for this step can be existence of rate-contracts, availability of routes, and so on for the solution to select optimal routes.

Resource Optimization: Resource optimization finally selects the carrier and the equipment that the shipments will travel on. The objective here may be to minimize the cost or simply ensure reliable pick-up & delivery dates. Constraints that play into this step are availability of valid carrier contracts & capacities on selected routes.

While the steps here provide a functional understanding of the process, different vendor solutions may implement them differently or simultaneously. In fact, best solutions are those that have the ability to model all three cases simultaneously so that the output is globally optimized which simply means that instead of trying to create best loads first only to find that no available equipment can actually carry them on required dates, these solutions consider all constraints simultaneously to produce results that are feasible and optimized for the orders.

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.

Tuesday, September 8, 2009

Freight Bills: Auto-pay or Match-pay?

Freight consists of a substantial cost of distribution operations. It is generally true for most industries, but especially true for retailers since they tend to distribution-intensive. As shipments are completed, the freight invoices start arriving. Freight invoices can have a lot of components such as the long haul rate, short-haul rate, fuel surcharges, and accessorial charges that may cover everything from waiting time, to tarp-covers due to bad weather. Therefore, processing freight invoices manually to ensure their accuracy can have substantial costs.

That is where an automated freight audit and verification process kicks in. These processes are generally supported by transportation management applications and ensure that the freight invoices are verified against actual shipments and their statuses, and that the invoices have been computed using the correct shipping rates, fuel surcharge rates, and accessorial charges according to the agreed contract between the shipper and the carrier.

The freight payment process has two general variations used in the industry. Match pay refers to the process of paying for shipments after receiving the invoices from the carrier, and matching them up against authorized/referenced shipments. Auto pay is the process where the shipper chooses to pay immediately on completion of a shipment, after obtaining a proof of delivery from the carrier that may come as a final shipment status message. Both of these variations are supported by many solutions offering the functionality. Both depend on the system's ability to estimate what the freight charges, verify that hauling rates, fuel surcharge, and accessorial charges are compliant with the contract. Both allow the shipper to define limits on the difference between estimated and actual invoice amounts within which the invoices are automatically approved for payment.

These automated processes directly reduce the headcount required to manually verify and process each and every freight invoice. They also eliminate manual processing errors as well and support a transparent & on-time payment, fostering stronger partner relationships.

The process also provides an opportunity for managing any claims against the carrier for loss and/or damage during transit. This is a good place to execute freight cost allocations as well, if required. Freight is generally considered to be overhead that is allocated to the underlying cost centers to determine profitability of operations. For example, a retailer may allocate the cost of freight to the stores that are getting the shipments to account for the cost of freight. The cost allocation scenarios will differ among retailers, and depend on their cost accounting methods and the objectives for such allocations.

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.