The supply chain champions

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Well-stocked shelves with minimal inventory, low transportation costs, fewer people needed in warehouses, stores and management – this is not a vision of the future, but rather the result of excellent supply chain management. Some successful retailers are already using this approach today – their shelves are better filled than those of their competitors, and at a lower cost, too. How do they do it? A new study takes a behind-the-scenes look at businesses with excellent supply chains

The Seminar for Supply Chain Management and Management Science at the University of Cologne and management consultants McKinsey & Company have studied success factors for supply chain management in European retail. Interviews of executives were conducted in order to measure and evaluate the supply chain performance of leading retailers and inquired about, or directly observed, their approaches to supply chain management. Experts were asked for their opinions about current supply chain trends.

A total of 33 retailers of fast-moving consumer goods from four European countries took part in the study. The companies involved earn a quarter of total European retail revenues in their drugstores, supermarkets, and department stores. Based on this pool of representative data we set out to draw a realistic picture of retail supply chains in Europe.

Examining the supply chain performance of all the retailers who participated in our study reveals that six companies earn a top ranking both for service and for keeping supply costs low. We call these six companies ‘supply chain champions’ and refer to the others as ‘followers.’

Five issues currently have high priority for both champions and followers. The champions, however, are ahead of the game: they are already implementing the solutions they have identified. The followers, in contrast, tend to get bogged down in the details and tend to spend a lot of time discussing the latest trends. The champions are doers: they concentrate on improving their core processes. In other words, they do not have a knowledge advantage, but rather an implementation advantage.

Inefficient store processes are usually to blame when shoppers find themselves in front of empty shelves (with full cartons piling up in the warehouse), or when customers complain about the lack of service personnel. In these cases, so-called ‘lean retailing’ can provide the key to greater efficiency. Just as lean manufacturing does in the car industry, lean retailing creates simple, cost-effective processes to deliver exactly those items customers want to buy, without wasting resources in the process. Retailers only earn the revenues they are looking for when customers get what they want.

The shelf-stocking process is a key element of in-store logistics. Shoppers are only interested in whether or not the products are on the shelves; time-consuming procedures to sort and transport them beforehand are, from the customers’ point of view, a waste of time, since they raise costs without contributing to customer value. Retail champions have recognized this problem and have simplified and accelerated the shelfstocking process.

Reduced stocking time
As a result, shelves are no longer stocked during store hours – a process that ties up a high number of personnel just when they are most needed to help customers – but instead, are filled prior to the store opening. A champion hypermarket has furthermore shortened  the average distance walked per stocked product from 20 to two meters by creating clear standards for the stocking process. In addition, large, heavy rolling containers have been replaced by small, mobile plastic bins, and the employeespresort the items by shelf location. The result: stocking time is reduced by around 70 per cent – freeing up time to invest in better customer service.

But better store processes alone cannot keep customers completely satisfied.

Personnel must be stationed so that employees are available when and where shoppers need them. Clear rules, such as ‘during the key business times every employee helps the customers,’ can help, as can simple tools such as frequency profiles depicting the flow of shoppers over the day.

Today, retailers are increasingly taking over logistical tasks that once were the responsibility of the manufacturer, by deciding for themselves how stores should be supplied. Retailers are increasingly picking up goods directly at the site where they are manufactured or packed (factorygate logistics) – at the manufacturers’ production sites, ports of entry or warehouses where the goods are collected from several sources. At present, retailers are picking up less than one-tenth of their merchandise, but this figure is expected to approach one-quarter by 2010.

Our study shows that retailers already control 77 per cent of deliveries to their stores – and they plan to raise this figure to 83 per cent in the next five years. The role of factory-gate logistics in supplying central warehouses or cross-docking sites will increase by around 150 per cent in the European grocery and drugstore trade by 2010. As early as 2001, Tesco had made the first foray into factory-gate logistics with a pilot project for frozen foods, and now consistently applies this strategy to other groups of products. The results have been extremely promising so far. Punctuality of deliveries to the central warehouse has been raised by around 20 per cent and truck space utilization is up 10 per cent. Champions see a further opportunity to increase supply chain efficiency using a cross-docking approach. However, cross-docking demands a high degree of logistical competence from manufacturers and retailers and a willingness to cooperate with one another.

Relationships between manufacturers and retailers, which were often strained in the past, have improved markedly in recent years – the ‘Ice Age’ of dealings between the parties seems to be over. According to the study, there are barely any retailers remaining that categorically refuse to cooperate with manufacturers. Electronic Data Interchange (EDI) has become the standard and almost all retailers are already collaborating with their suppliers or have begun initiatives to foster cooperation at various stages of the supply chain. The retailers’ basic message is: cooperation with manufacturers leads to efficiency improvements that would not be achievable working alone.

Top managers of some commercial companies, however, have reported more sobering results. Broadly applied, ‘one-size-fitsall’ implementations of comprehensive cooperative projects usually remain stuck in the planning stage. While the champions are convinced that manufacturers and retailers have shared interests when it comes to operations, they doubt the usefulness of long-term strategic cooperative projects. As a consequence, they limit their efforts to areas of cooperation that actually create value, perform exact calculations before investing in the collaboration, and regularly monitor their success.

One area in which champions work very closely with manufacturers is the exchange of data. The champions place orders over EDI with 63 per cent of their suppliers, while the followers do the same with only 35 per cent of theirs. Nearly two-thirds of the champions regularly exchange key figures, such as shelf availability, with manufacturers, compared to only one-third of followers.

A series of leading retailers in the UK, including Tesco, have also begun working with suppliers to change the packaging of products so that the goods can make their way to stores and onto the shelves with minimal effort. Examples include roll pallets and cartons that, once the cover is removed, can be placed directly in the shelves and serve as displays conveying brand and product information.

In contrast, champions feel that collaboration on long-term projects which require more resources without offering calculable performance gains make less sense. Successful retailers are particularly skeptical of complex cooperative projects such as Collaborative Planning, Forecasting and Replenishment (CPFR), a hot topic during the last few years in publications and at conferences. In CPFR, manufacturers and retailers use a nine-step process to develop joint sales planning. Production, delivery, inventory, and marketing are then coordinated based on these projections. Many retailers find the CPFR concept too formalized. They prefer simple instances of mutual planning that achieve a lot, to complex projects that cost a lot.

Measured performance
Champions also distinguish themselves from followers by the consistency with which they measure their suppliers’ performance. The information and performance data they gather are used to bargain with manufacturers. Some champions go even further: 40 per cent of them use financial sanctions as a means to improve performance, compared with only five per cent of followers who do so. This gap is clearly indicative of the impact of using financial sanctions in a targeted way.

‘Not too much, but not too little, neither too early nor too late…’ The proper planning and management of replenishment also has a decisive effect on customer satisfaction – and on whether or not inventory and logistics costs remain competitive. Some supply chain champions are already managing the flow of goods based on demand. In planning, they make intensive use of existing data – especially of daily sales figures. Furthermore, they clearly distinguish between standard articles and promotional items in managing the supply chain.

Regularly priced coffee, for example, exhibits a relatively constant and reliably predictable demand. Champions set up automatic replenishment for such standard articles, in which an IT system orders the amount derived from the difference between the current supply on hand and a preset target inventory. Using this method prevents inventories and sales from getting increasingly out of sync due to the fact that store employees overestimate the fluctuations in demand. Automatic replenishment is standard for the champions, who use it for ordering more than 80 per cent of their volume. Followers order only about half of their merchandise automatically.

Promotional articles present a special challenge to supply chain management: Although no one can know for sure in advance how shoppers will respond to the promotion, the quantity ordered must correspond to the actual demand as closely as possible in order to avoid both shelf gaps and overstocks.

Unlike the case of standard products, then, these challenges require a longer view. Successful retailers develop well-foundedprojections of demand. Order volume is determined based on data for similar promotions as well as on information on demographics and purchasing behavior. Test sales can help check planning regarding the amount of goods ordered and the price. The German retailer Tchibo, for example, has perfected the successive delivery of promotional goods – non-food specials are part of the company’s day-to-day business. Before each weekly promotion begins, stores are sent an initial supply of the promotional items; during the week the daily sales, which are captured at the till, are used to compile a rolling short-term projection of demand. Additional goods are then shipped in 36-hour cycles based on demand.

Supply chain management can only achieve top form if the entire organizational infrastructure is in order. Supply chain management often seems to be just a means to an end and is rarely the focus of top management. During the last few years, the champions in our study have already begun to integrate the various steps in the supply chain and to bundle them into a single area of responsibility, in order to optimally control the flow of products and information from the manufacturer to the store shelves. This approach is also reflected in their own company organization: within these companies, supply chain management is an acknowledged organizational entity on the  same level as purchasing and sales.

Klaus Behrenbeck, Jörn Küpper, Karl-Hendrik Magnus, and Ulrich Thonemann are consultants with McKinsey.


The Supply Chain of the Future

We asked executives and supply  chain managers how excellent supply chains will look in the year 2010.

Supplier management. A variety of agreements with numerous mid-sized manufacturers are a thing of the past. The excellent supply chain of the future has only small and large suppliers. Dealing with the large suppliers will achieve the muchcelebrated, but today rarely realised ideal of reciprocal transparency – to the benefit of both partners. For small suppliers, standardised agreements will increasingly take the place of individual contracts and regulations.

Inbound logistics. The volume of deliveries managed by retailers is continually growing. The share of volume that finds its way to stores as a result of factory-gate logistics will grow from today’s figure of nine per cent to 23 per cent by 2010.

Cross-docking/storage and store supply. Top retailers will continue to develop and expand cross-docking; the share of transshipment points controlled by retailers will grow. The growing importance of factory-gate logistics will lead to a more frequent implementation of ‘merge-in-transit’ processes, i.e, a further variation of cross-docking: shipments from various manufacturer locations are no longer collected in the manufacturer’s central warehouse, but rather packaged in storeready form at the retailer’s own cross-docking sites.

Receiving at stores. Electronic data streaming will be further developed so that the flow of goods becomes more transparent. Just like the delivery date itself, the composition of the next shipment is known in advance, because the data for all shipments have already been fed into the retailer’s system via an electronic dispatch notice. Those responsible for in-store logistics know exactly when to expect the individual deliveries. As a consequence, they can assign personnel accordingly and set priorities for stocking the shelves.

Replenishment processes and shelf management. Daily sales data are increasingly influential here. Retailers will continue to work with their most important industry partners to improve the arrangements of their shelves, and logistical considerations will play a greater role in this effort. In the shelf layout of the future, the number of packaged units allowed for in the shelves will correspond to the anticipated sales over a certain number of days.

Merchandise planning processes and inventory management. Retailers will order a larger share of the goods they carry fully automatically. By 2010, ordering procedures for standard merchandise will have come to terms with new merchandise planning modules for inventory control systems. Inventory management for promotional merchandise will also improve significantly, with greater reliance on statistically based calculations rather than intuition.

RFID. Radio Frequency Identification (RFID) will remain a relevant theme in the coming years. RFID chips will eventually replace today’s barcodes. At present, however, problems reading the chips are still common, chips and readers are relatively expensive, and the question of who will pay for the chips – the retailer or the manufacturer – has not been settled. Furthermore, the most significant improvements in supply chain performance are only achievable when the RFID chips are applied to each individual unit of merchandise. While participants in our study aspire to an RFID share of 54 percent of pallets and 32 percent of bulk packaging, they anticipate a figure for individual units of only six per cent. Therefore, the skepticism of many retailers regarding the potential of RFID for the middle term seems to be justified.

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