Retail is a tough business, and it’s about to get a lot tougher. This Christmas is widely expected to be extremely chilly on the high street, especially in the UK where consumers are weaning themselves off the highly intoxicating mixture of easily accessible cheap credit and rising house prices. Now the house price party is over, the hangover is likely to have a protracted impact on retail spending.
But, in addition, there are other dangers for the retail sector. Online shopping is growing significantly and is predicted by Forrester Research to expand from e172bn in 2005 to e329bn in 2010 – a 14 per cent compound annual growth rate over the next five years. With more consumers, especially in the computer savvy younger age groups, turning to their PCs for retail therapy, traditional bricks and mortar retailers are facing the prospect of fewer feet on the pavement combined with shoppers who are better informed, thriftier and only tempted by an eyewatering bargain.
The pressure is on for retail to deliver the best value in a highly demanding environment. And the supply chain is where this battle will be fought.
Impact of global sourcing
Global sourcing is having a tremendous impact on the cost of manufactured goods. The opening up of China, the Indian sub continent and East Europe has enabled retailers to access products that are both high quality and low cost.
However, as Neil Ashworth, director of supply chain at Woolworths points out, ‘As you move things further and further off shore then complexity increases… with the length and complexity of the supply chain now, we need to plan well ahead.’
The earlier you can put product into manufacture the cheaper it is. It’s a plate spinning act, a series of play-offs, and as circumstances change you have to react – an example being hurricanes affecting the price of fuel.’
Woolworths have been into international sourcing ‘for a good number of years’. In total volume of merchandise (excluding ‘Entertainment’), 35-40 per cent is sourced off shore and, according to Ashworth, that figure is growing.
But ensuring high on-shelf availability is a challenge with extended supply chains, as Carrefour found with some goods sourced from China. In response to product shortages of 10 per cent in stores, Carrefour has developed consolidation centres for private label products, with the supplier owning the inventory. According to Xavier Hua, group suppliers interface, Carrefour – speaking at the CIES Supply Chain Conference held in Barcelona earlier this month – the results included 100 per cent on-time delivery to stores, an increase in case fill-rates from 60 to 99 per cent, and a fall in stock levels from 55 to less than 20 days.
Hua explained how Europe’s largest retailer is maximising shelf availability by moving from stock management to flow management. Among the different processes contributing to supply-chain efficiency, Carrefour has identified pooling and consolidation as having the most potential. In France the company has introduced ‘VMI pooling’ with two suppliers (Henkel and Vania) to combine deliveries from their common distribution centre to Carrefour’s regional distribution centre. The programme has apparently led to a 20 per cent fall in stock levels at the distribution centre and an increase in full-truck rate from 79 to 98 per cent.
At the end of the day it’s the ‘total customer experience’ that counts in retailing. Fine, the product has to be what the customer wants and, of course, must be available on the shelf, but the overall buying experience needs to exceed the customer’s expectations – and that includes helpful and friendly staff, a good returns policy, and efficient IT that gives high visibility of stock availability in the chain.
‘Visibility for inbound goods is extremely important for retailers – especially with sourcing off-shore’, explains Ron Kubera, senior vp of consumer goods and European operations, Manugistics. And he is quick to point out that, ‘We are the only one [software vendor]with demand planning integrated with a shelf replenishment function’. Ensuring that you succeed in getting the highest exposure for items with the highest margins is the name of the game.
‘85 per cent of Sears’ products turn less that one item per month – so, why do you want store level replenishment on that? The point is, the margin management issue is the most important aspect for a retailer… and without having optimised store replenishment you can get lost sales,’ says Kubera.
Highlighting the impact that a move to global sourcing can have on inventory levels, Kubera recounted a recent conversation, ‘A retail client said to us “your software is not working, our inventory is through the roof and we don’t know why”. So I asked, what’s changed? “Well we are getting more from offshore” – I said, well that’s what’s causing it.’ Sourcing from overseas certainly adds to complexity and can result in large amounts of inventory clogging the supply chain – efficient planning and a ‘glass pipeline’are essential.
Problems start here
But getting the product to Europe can be the start of your problems. This summer the protectionist manoeuvres of the EC in reinstating Quotas for imported items of apparel from China caused consternation in the retail sector as goods pilled up at the docks. Some e1.3bn of textile imports were held up at European ports for a number of weeks while the politicians devised a short-term patch-up to the problem by borrowing from next year’s quotas. When politicians interfere with ‘free trade’ it only serves to frustrate manufacturers and retailers, and certainly works against the best interests of the consumer.
Regardless of regulations and red-tape, buyers for retail chains are well adapt to circumventing quotas, passing goods on to countries outside the quota restrictions for, say a set of buttons or a minor finishing operation. In particular, quite a number are shifting production to the Indian subcontinent, as Woolworth’s Ashworth concurs ‘We have increased our supply from the Indian sub continent in the last year due to the response of some of our suppliers in that part of the world.’ He asserts, ‘We will not be impacted in any way by the China quotas situation.’
Retail magnate, Philip Green, seemed to derive a fair degree of satisfaction in telling the press that he had foreseen the China quotas problem and had taken the decision to source from India some time back. Now that is the sort of ‘vision’ we all need, but unfortunately, I don’t think you can buy it in a software package.
Moving on to the grocery sector of retailing, research just released from the UK Institute of Grocery Distribution (IGD) suggests food and grocery suppliers are not out for a fast buck when entering into a global trading relationship with an international retailer. Nearly three quarters (72 per cent – up from 54 per cent last year) of suppliers surveyed said they are happy to have relationships on a world-wide scale despite the majority (55 per cent) of them not perceiving any direct financial benefit.
A bigger impact
‘There are many softer benefits to global account management that will have a much bigger impact in the longer term,’ said Joanne Denney-Finch, Chief Executive of IGD. ‘Our research has shown a huge shift in attitudes over the last three years with suppliers becoming much more open to trading globally with the multi-nationals.
‘With less than half of them reporting financial benefits, but still saying that they are feeling very positive about the relationship, it is clear that it’s not just about the money. There are benefits that will be played out in the future as both retailer and supplier reap the rewards of closer business planning, sharing best practice, and more efficient negotiations.’
It appears global or regional pricing is included much more often in negotiations, as retailers may find it easier to compare prices across different markets and countries due to increasing price transparency. As 41 per cent of suppliers are including global or regional pricing in their negotiations, compared to 1 3 per cent in 2004, there must be something in this.
Perhaps the greatest cyclical challenge for retail is the Christmas peak in demand. Feedback form a workshop I ran on ‘managing Christmas peak volumes’, held as part of the Logistics & Supply Chain Forum on the Aurora this year, offers some interesting insights. One manager from a leading retailer points out, ‘You don’t start selling Christmas stock until mid November at the earliest, yet it looks odd if you haven’t got your Christmas goods on show in early autumn. It’s a perceptual thing, and marketing people insist on it.’ The dilemma facing fashion retail chains in particular is: ‘do we push stock out or hold it back and push out on demand.’
Overall, it is considered desirable to encourage consumers to buy early, using discounts, in order to secure early sales and smooth the peaks – hence, the arrival of the modern phenomena of the ‘one-day flash sale’ in the lead up to Christmas. But competition among retailers on these special sales events is leading to diminished margins and increased pressures on the supply chain.
There appears to be considerable differences between retailers on the percentage of extra stockheld over the Christmas period to that held over the weeks leading up to and after Christmas. One said there was only 25 per cent extra stock held over the Christmas period, however, another indicated that the figure was above 50 per cent. And a leading catalogue company pointed out that Christmas peak stock was on average four times the normal levels and on some products can be 10 times. With such variances it is clear to see the wisdom in one major retailer’s comment, ‘Our business success is determined by our forecast accuracy.’
One participant offered an intriguing insight into male buying habits. Apparently, ‘40 per cent of men do their Christmas shopping [for their Wife’s or partner’s gift]in the last two days before Christmas,’ which all adds to that dreadful spike. Interestingly, it is common to see 50 per cent discounts on items on the 24th December – so perhaps men have the right idea!
One of the biggest problems encountered by retailers in the lead-up to Christmas is with finding drivers. There is an obvious shortage of drivers in this period. A large number of Polish drivers are now being used. One retailer at the Workshop suggested, ‘I would gear people to annualised hours… in some parts of the country drivers are fine on this, but in the midlands a driver can walk out and into another job tomorrow – they can be difficult’.
Another involved in the Workshop outlined two further problems facing logistics operations at Christmas, ‘When you have a peak, you hit a constraint – it could be space or it could be labour. Labour can flex, but you need a large pool of labour. However, space is probably our most difficult problem, together with fielding returns.’
Third party operators are often used for extra peak period space requirements. However, putting operations out to a third party operator can create its own issues, ‘the more engineered your processes are the more difficult it is to transfer this knowledge and practice to a 3pl operation.’
With all the challenges facing retail – the take-up of RFID being one, not mentioned here – the most significant is the transformation of the supply chain from a supplier-driven process to a retail driven environment. Only then will the customer be best served and shareholder value maximised.