The new retail supply chain
The retail supply chain now extends all the way to the retail shelf. So does the software that gets inventory there.
By Bob Trebilcock, Editor at Large -- Modern Materials Handling, 11/1/2006
Out of stock. Those may be the three most important words in the retail supply chain today.
"Avoiding out of stocks is the number one problem our retail customers are trying to address," says Steve Simmerman, vice president of marketing and business development for Swisslog (757-820-3400). "If product isn't on their shelves, customers will buy it somewhere else."
In fact, avoiding out of stocks is driving many of the supply chain execution projects by leading retailers. For proof, look no further than RFID.
"Our retail customers tell us the biggest value they expect to get from RFID isn't learning that product arrived at the store or even that it sold," says David Landau, senior director of retail solutions for Manhattan Associates (770-955-7070). "It's to tell them that product moved from the backroom onto the floor when it was supposed to."
That's because the simplest way to improve top line sales is to eliminate out of stocks. What's more, the easiest way to improve bottom line profits is to reduce the number of markdowns caused by having too much of the wrong inventory.
To make that happen, the supply chain execution systems that previously ran warehouses and distribution centers are reaching beyond the DC shelf to the store shelf.
"Retailers are aggressively trying to connect the dots between the points of customer interaction and the events that lead up to a sale," says Robert Garf, research director of retail for AMR Research (617-542-6600). "That includes tying together everything from merchandising activities to activities in the distribution center."
New strategy
Such new thinking represents a change in the relationship between the DC and the store. "Warehouses and stores have traditionally been autonomous," says Bruce Bowen, vice president of sales for Aldata (404-355-3220). "Now, they want DCs to be responsive to the stores."
In the old way of doing things, retailers replenished warehouses based on predetermined reorder points after inventory was shipped out of the warehouse (see diagram). "What you really need to do is bring in the items you need to support the store based on promotions, seasonality and what's selling," says Bowen. "Retailers are trying to get to the point where consumer demand in the stores is driving the replenishment activities in the warehouse."
Investments in distribution centers over the years have paid off. The best DCs using a warehouse management system (WMS) are often operating with 99% accuracy and order fulfillment rates.
The problem is that those products aren't making it to the shelves. "The out of stock rate at stores is about 8%, and it hasn't improved for the past 10 years," says Eric Peters, CEO of TrueDemand (408-399-1924). "That means that if a big box retailer stocks 100,000 different items, 8,000 items are empty every day."
What that says is that better DC operations will only get a retailer so far. "What we need today isn't better warehouse management systems," says Peters. "It's to get a better view of real demand, using point-of-sale data, RFID and bar code data, movement signals in the distribution center and external factors like promotions and seasonality."
The idea is to take the wealth of information now available at the store level and use that to calculate a replenishment plan. That plan can take into consideration pricing and promotion information as well as on-hand inventory levels in the store and the distribution center. It also includes visibility into in-transit inventory coming from a manufacturing plant or already in route from the DC to a store.
"We've had all of this information for years," says Ron Riggin, senior vice president of technology for RedPrairie (262-317-2000). "What we haven't had are the tools to correlate that information and then drive execution."
To Riggin, the store, not the warehouse is the next frontier for the supply chain. "If I already have a warehouse management system, optimizing my DC gives me incremental improvement," says Riggin. "But if I can use consumer demand from the store to figure out my inventory levels and share that with my suppliers, I might not even need that DC."
Demand driven
What that means is becoming demand driven. "The idea behind the demand-driven network is simple," says Swisslog's Simmerman. "If I buy a tube of toothpaste, that sale creates a demand signal that triggers replenishment of that tube."
That's the theory. In reality, AMR Research found that it typically takes two weeks or more for that signal to get from a store to another system. "To become demand driven, retailers need to break down the walls between the store, the distribution center and manufacturers," says Garf.
That's why it's not just retailers that want the information: So do manufacturers who are planning what to make in their plants. "Until about 18 months ago, most manufacturers thought their customer was the retailer," says Peters. "What's emerging is that the consumer is as important a customer to the manufacturer as is the retailer."
"At the end of the day, everyone wants to know the true demand at the retail shelf for their product," Peters adds.
Executing the plan
Once a retailer captures real-time demand, all the components of an integrated supply chain execution system can come into play, based on the kind of supply chain a retailer wants to operate.
"Quality, cost and service are the three legs of the supply chain," Manhattan's Landau says. "As a retailer, you have to figure out which one of those legs you hang your hat on. Then, you can use the supply chain execution tools to figure out what kind of balance you want."
When solutions are integrated, the retailer can balance inventory carrying costs, order fulfillment costs and transportation costs to meet the retailer's strategy. The next step is to use those systems to link to activities in the store. As an example, a beverage salesman visiting a grocery store may discover that a particular wine is selling well and that the retailer is willing to provide more shelf space for it.
Today, not much happens with that information until the salesman returns to the office.
"With integrated software tools, the salesman can access the warehouse management system and view the inventory for that wine while he's in the store," says Joe Blauert, chief operating officer for HighJump Software (800-328-3271). "If inventory is available, he can not only reserve the inventory, he can place an order in the WMS so that someone is picking and packing the wine for the next truck going to that store."
Knowing what orders have to be picked in the warehouse and what's selling in the store also can be used to match the labor supply to the demand – not only in the DC but also in the store. "At the end of the day, we're using consumer demand to optimize the inventory levels in the stores and to optimize labor, inventory, warehouse and transportation resources in the warehouse," says RedPrairie's Riggin.
Moving to the demand-driven supply chain will take time, but the tools are now in place to make that a reality. "This is not going to happen overnight," says Riggin. "But if people start thinking about what's happening at their customer's customer and how they can help their suppliers' supplier, they'll all be better at the end of the day."
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