Supply chain management links demand management, resource management and supply chain management. Let us understand this in terms of a retail organization. In a typical retail organization, the marketing team or department would be the one at sales data, working on targets and ways to meet these targets. The merchandising and design team would work on designing products to fulfill the customer needs, which the purchase department would work on, getting the best price for the materials required to manufacture the product. The aim of each department would be different and while they may individually excel, he organization as a whole would benefit only when they share a common approach and information. This creates the need for an integrated supply chain where information is shared between departments, suppliers and vendors.
The nature of the industry that the retail organization operates in also influences supply chain and logistics decisions. Nowhere is this more apparel a grocery industry. Retail markets in these industries typically exhibit the following characteristics:
Short Life cycles
Many products in those sectors have a short life cycle. In many cases the product may have been created to capture the mood of the moment, consequently the time period in which it is saleable is likely to be short and seasonal. Similarly, due to the perishable nature of the products in the grocery business the shelf life is short.
Demand for these products is rarely stable or linear. It may be influenced by the vagaries of weather movies, TV shows or indirectly by advertising.
Due to the volatility of demand, it is extremely difficult to forecast with any accuracy.
High Impulse Purchase
Many buying decisions for these products are based on impulse and at the point of purchase.
Conventional wisdom holds that the way to cope with uncertainty is to improve the quality of forecasts. However, as this may not always be possible, hence ways must be found to reduce the reliance on forecasts and focus on lead time reduction. Shorter lead times mean, by definition that the forecasting horizon is shorter – hence the risk of error is lower. There are three critical lead times that must be managed by organizations that seek to compete successfully in the retail business:
1) Time to market: How long does it take the business to recognize a market opportunity and translate this into a product or service and to bring it to the market?
2) Time to serve: How long does it take to capture a customer’s order and to deliver the product to the retail customer’s satisfaction?
3) Time to react: How long does it take to adjust the output of the business in response to the volatile demand?
Time to market
In the shorter life cycle markets, being able to spot trends quickly and to translate them into products in the shop has become a pre-requisite for success. Companies that are slow to market, miss out on a sales opportunity that may not be repeated. An example of this would be a style of clothing that may be becoming popular. If the retailer is fast to spot he trend and procure the goods for the store it definitely would be beneficial tot eh organization. On the other hand trends can be spotted by looking at changing consumer habits like the need for pre-cooked meals has prompted a few Indian corporates to enter this field and retail pre-cooked, ready to eat meals.
Time to serve
Traditionally in retail orders from retailers had to be placed on suppliers many months in advance. This gives rise to the risk of obsolescence and high stock outs as well as increased cost of inventory. The lead time may be long, not necessarily due to the process of manufacturing and shipping and transit period, but due to excessive documentation at each stage.
Time to react
Ideally, in any market, a company would want to meet a customer’s requirement at the time and place that the customer needs them. The challenge for any business in this fashion market is the ability to see real demand. Real demand is what the customers are buying or requesting for. Because most supply chains or driven by orders which themselves are driven by forecasts and inventory replenishments individual parties in the chain will have no real visibility of the final market place. Inventory hides demand.
The lead time gap
Successful companies in retail seem to be able not only to capture the imagination of he consumer with their products but are often characterized by their agility. Many organizations have found that it is possible to make significant improvements by adopting a twin strategy of simultaneously reducing the logistics lead time and capturing information sooner, on actual customer demand.