Retail Supply Chain Challenges

June 2, 2012

What is Supply Chain Management?

Supply Chain Management (SCM) is the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption.

Simply put, supply chain management within the retail sector involves the flow of goods from origin (the vendor) to the hands of the end customer.  In a retail setting, this chain consists of 4 critical points; the vendor, the distribution center, the store level, and the end customer.

Supply Chain Management for Retailers

Retail SCM is a complex system; it requires information input and the flow of information between all points of the chain.  It needs to include an understanding of customer needs, store inventory levels, distribution center’s capacities, and vendor requirements.  It is essential that a fine balance exists between all critical points of the supply chain in order to minimize costs, avoid stock outs, and meet ever changing customer demands.  Retail SCM gets complicated further because this understanding needs to be obtained for all the SKU’s in a store (a typical store can carry upwards of thousands of different SKU’s), it needs to be tailored to each individual product in terms of season, business cycle, and other fluctuations, it has to be further refined to each individual store, and most importantly, it needs to be reflective of customer demands.

The Bullwhip Effect

The bullwhip effect comes from ordering and holding too much inventory.  The bullwhip effect happens when there are inconsistencies in demand that get magnified as the information moves backwards in the chain.  The information gets magnified due to incomplete information for each party within the chain, which results in a higher inventory order to respond to all parties’ needs.  Increased inventory levels can result from a variety of sources:

  • Increasing unit costs – retailers will order large amounts in order to get a product at a lower cost
  • Inflated orders due to expected customer demand
  • Vendor requirements – minimum orders or higher lead times can result in a higher than needed order
  • Use of Demand Forecasting – optimal inventory levels are maintained due to uncertain customer demand

Managing the Bullwhip Effect

In order to effectively manage the bullwhip effect to minimize the costs associated with holding excess inventory, the following methods should be done:

  • Reduce the level of uncertainty – this can be achieved with centralizing demand planning.  The information should be in real time and kept up to date
  • Reduce the level of variability – this can be achieved by maintaining consistent pricing so that variability is based on customer demand and not based on promotional sale prices
  • Reduce lead times – this can be achieved by using electronic data interchange
  • Strategic partnerships – this can result in sharing of crucial information so that inventory is better managed within the supply chain

How are Retailers Dealing with their Supply Chain?

Retailers need to closely scrutinize all facets of their supply chain, but most importantly, retailers need to ensure that their data is integrated and being driven accurately.  This involves ensuring that derived metrics are reflective of actual needs, it needs to address current business processes and practices, and that staff is knowledgeable about available resources and tools.  Actions that can be taken to better manage a supply chain are as follows:

  • Collaborative efforts, including planning, forecasting, and replenishment
    • This involves working with independent companies/vendors to jointly plan and execute on the supply chain.  Ideally, this should result in holding lower amounts of inventory throughout the chain, better anticipation of customer demands, and absolute fulfillment of customer demand.
    • Working with an independent company can better a supply chain by reducing lead times, auto replenish points in the supply chain, or a reduction of inventory throughout the chain
    • Buying Optimization
      • This involves maximizing on bulk purchases, lowering administrative costs, and better managing groups of vendors
      • Buying activities, policies, and practices need to be streamlined
      • Integrating Technology
        • There are several tools and technologies that are being introduced to better equip a retailer with visibility into all critical points of the supply chain
        • Data Synchronization
          • Synchronization allows data to be accurate and up to date, and more importantly, it is information that can be shared among a variety of staff and potentially vendors
          • Synchronization allows for reconciliation of purchase orders and invoicing.  If efforts are collaborative, it can also allow for repurchasing
          • Increasing Visibility at all points of the Supply Chain
            • Increased visibility gives the retailer better insight into the supply chain as a whole to identify bottlenecks and other inefficiencies.  Tools and technologies have been introduced so that all the supply chain can be seen as a whole

Conclusion

As retailers become increasingly global, the management of supply chains needs to be closely reviewed and scrutinized.  There is a fine balance of all critical points involved in a supply chain.  That balance is governed by the accuracy of information, the flow of information within the supply chain, and responsiveness to the information.  Mismanagement of supply chains can be costly mistakes, resulting in inaccurate forecasting, lost sale opportunities, bottlenecks in operations, and unmet customer demands.