Retail Supply Chains: Tackling Value Erosion
o Retail supply chains have traditionally been exceptionally porous in terms of unplanned financial losses and value dissipation. While the sources of value dissipation are many, in this post I’ll cover some major areas which I do not see as getting the requisite attention, such as most of the big Retailers lacking a unified (or panoramic) view of their systems, as also the new areas of risk exposure consequent to increasing the Global footprint, which can cause serious value erosion to occur for the big Retailers.
Retail Supply Chains: Then ...
o Back in the late twentieth century - in a bid to optimize costs - the preoccupation of the big retailers was more on issues such as short shipments and returns; shrinkage, damage, expiry; system errors and discrepancies; process standardization, re-engineering and re-sequencing to postpone differentiation (for instance, operations reversal of knitting and dyeing by Benetton in the nineties); foreign exchange arbitrage; establishing quality, process and planning concepts borrowed from Japanese manufacturers; distribution resource planning to ensure that the goods manufactured reach the retail shelves in the most cost-effective manner, and so on.
o Even as recently as early this century, retailers were more involved with closely scrutinizing lost sales and stock-outs due to inefficient usage of retail shelves, effectiveness of service levels, planning of ‘door-busting’ promos, Transportation Management Software, bar-code fraud, IP theft, cross-docking or pooling networks, seasonal planning, category management, reducing reverse logistics costs, as well as decisions on how much to vertically integrate (a la Zara and several other European companies). Other complications occupying mind-space included avoidance of reputational loss due to adverse publicity on account of unacceptable practices being uncovered at the workplace of their outsourced contractors - violations of basic rights of workers, environmentally unfriendly practices, regulatory non-compliance - or even activist pressure alleging usage of manipulative and socially irresponsible purchase practices imposed by some of the large brands on their vendors in low cost economies, whether in Ankara, Bangladesh, Chile, or Morocco!
o And of course, the complexity got truly challenging for most big retailers, when it came to complying with the socially responsible procurement and manufacturing practices, including complying with the legislation on the greening of supply chains - such as the EU legislation restricting hazardous substances (RoHS) that leach into our environment. (see my post on April 12th 2007on the rising Regulatory complexities in Global Trade).
o Today, of course we’ve come a long way: For instance postponement of differentiation to the last possible point has moved far ahead from the days of process re-sequencing by Benetton to the advanced models developed by Lectra (www.lectra.com) which has integrated technology elements into a solution that allows a customer in a boutique to step into a body-scanner booth, which captures the complete body measurements of the customer within 10 seconds. The customer can then select fabric, pattern, brand and other preferences, which the boutique owner then electronically transfers along with the body scan data to the appropriate vendor, enabling delivery of the custom-fitted garment to the customer within a pre-defined time frame!
o Despite such technological advances, however, retailers continue to face newer and more daunting challenges, such as getting new products faster to the market, accelerating product lifecycles, linking the production process to customer desires, engineering different supply chain configurations for new or innovative products (as opposed to the functional products), compliance with ‘green’ regulations, and using business intelligence to ‘close the loop’ from anticipating customer’s requirements to fulfillment to monitoring the post-sale feedback. Human rights and environmental issues too have become more complex to handle. Anti-sweatshop campaigners in the past used mass protests to mobilize public opinion and boycott the relevant products. Life was so simple for the retailers then! Now the company that takes the final product to the market will be held legally accountable - and possibly prosecuted - even for acts committed by its contracted outsourced vendors on the far ends of the globe!
o In line with the rapidly changing needs of the Retail industry, a plethora of contemporary solutions are available today, aimed at solving the broad categories of issues mentioned above. There is also tons of academic research providing us with a greater understanding of the increasingly complex reasons for value loss in Retail supply chains. However, hardly any of the currently available solutions have come even close to hermetically sealing all the major points of value dissipation in Retail supply chains!
Cross-Border Trade: Increased Risk Exposure
o I've detailed this in sufficient length in my two posts during April 2007. However, in brief, value erosion continues, and excess working capital remains locked within Retail supply chains, mainly due to the failure by most retailers to integrate and/or factor the following into their business plans:
1. Delays at the point where the goods cross International borders (leading to lost sales through stock-outs, higher obsolescence costs, maintenance of higher inventory levels, and longer cash-to-cash cycles)
2. Overpayment of Import Duties and Taxes (not taking advantage of exemptions or concessional rates due to multilateral and bilateral agreements between the country of origin and the country of import respectively)
3. Penalties due to non-compliance with Export or Import Controls (financial loss coupled with the political embarrassment from adverse publicity, along with possible black-listing by the Customs and other Government authorities)
4. Rising reverse logistics costs arising out of B2C sales over the internet to Africa, South America and Asia (due to the consumers not being accurately pre-informed of the actual landed cost of the product they are buying)!
Retail Supply Chain Management: Panoramic perspective missing
o Returning to where I started from, synching of data and visibility continue to be the biggest integration challenges for the big retailers today. One reason could be that they lack systems that would provide a unified view of the entire system. This is so because not just the retailers, but also their suppliers and vendors operate a patched together consolidation of legacy, ERP as well as Supply Chain management and Regulatory Compliance systems. This is truer when segments of the fulfillment process are outsourced to third parties who work in completely different business and technology environments.
o This disparity effectively makes a meaningful integration a virtual impossibility, and it becomes extremely difficult to calculate lead times or to provide timely forecasts of changes in demand or customer preferences. This severely inhibits the level of efficiencies that can be extracted from the entire system. Plus, no team is responsible for the overall view or big picture, as Technology, Finance, Compliance and Supply Chain teams tend to work only in their own compartments, with very limited interaction and visibility into - or knowledge of - each other’s domains.
o So it is hardly surprising that retailers have been a trifle slow in ratifying technology investments. Some of the reasons for this could be the lack of surety that the proposed solution is the right one for them, whether the proposed system will integrate easily with the infrastructure existing within their organization as well as with their supply chain partners, and most importantly, whether the solution will be able to accommodate the rapidly emerging future needs of their extended supply chain.
o Clearly, the realization seems to be seeping in that the answers to tackling value erosion doe not lie in just technology alone. Technology, combined with decision support and process optimization capabilities working in tandem, and when directed by a core team that is taking the broad picture and new areas of risk exposure into account: Certainly such an awesome combination will extract far greater bottom-line benefits out of Retail supply chains!
The next post will be up on June 25th 2007! Please keep writing in with your feedback at scm.primer@gmail.com
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