World of Retailing

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Session 2

• World of Retailing SCM

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What is Retailing?

• Retailing a set of business activities that
  adds value to the products and services sold to
  consumers for their personal or family use.

A retailer is a business that sells products
and/or services to consumers for personal or
family use.
James Darell/Getty Images
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The Distribution Channel
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Examples of Retailers

• Retailers
• Kohls, Macys, Wendys, Amazon.com, Jiffy
  Lube, AMC Theaters, American Eagle Outfitter,
  Kroger
• Firms that are retailers and wholesalers that
  sell to other business as well as consumers
• Office Depot, The Home Depot, United Airlines,
  Bank of America, Costco

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Manufacturing, Wholesaling and Retailing

• Vertical Integration firm performs more than
  one set of activities
• Ex retailer invests in wholesaling or
  manufacturing
• Backward Integration retailer performs some
  distribution and manufacturing activities
• Ex JCPenney sells Arizona jeans (Private Label)
• Forward Integration manufacturers undertake
  retailing activities
• Ex Ralph Lauren operates its own stores

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How Retailers Add Value

• Break Bulk
• -Buy it in quantities customers want
• Hold Inventory
• -Buy it at a convenient place when you
• want it
• Provide Assortment
• -Buy other products at the same time
• Offer Services
• -See it before you buy, get credit, layaway

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How Retailers Add Value

• The value of the product and service
• increases as the retailer performs functions.

Bicycle can be bought on credit or put on layaway
Bicycle is featured on floor display
Bicycle is offered in convenient locations in
quantities of one
Bicycle is developed in several styles
Bicycle is developed at manufacturer
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Worlds Largest Retailers
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Nature of Retail Industry is Changing
To Todays Retailer
Mom and Pop Store
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Retailing is a High Tech Industry

• Selling Merchandise over the Internet
• Using Internet to manage supply chains
• Analyze POS data to tailor assortments to stores
• Computer systems for merchandise planning

Ryan McVay/Getty Images
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Globalization of Retailing
Source Merchandise From Around the
World Wal-Mart Operates in U.S., China, Mexico,
UK, Germany Carrefour has Stores in 25 Countries
Don Farrall/Getty Images
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Comparison of Distribution Channels Across the
Globe
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SCM drives RETAIL
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Retailing Strategy
Retail Market Strategy
Financial Strategy
Site Location
SCM Information Systems
Retail Locations
Organizational Structure and HR Management
Customer Relationship Management
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Supply Chain Management

• Supply chain management is the delivery of
  economic value to customers through management of
  the flow of physical goods and associated info
  from vendors to customers

Ryan McVay/Getty Images
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Strategic Importance of Supply Chain Management

• Opportunity to Reduce Costs
• Transportation Costs
• Inventory Holding Costs
• Provide Value to Customers by Making the Right
  Merchandise is in the Right Place at the Right
  Time
• Fewer Stockouts
• Greater Assortment with Less Inventory
• Improved ROI

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Improve Return on Investment
Return on assets Net profit margin x Asset
turnover Net profit Net profit x Net
sales Total assets Net sales Total assets
Efficient Supply Chain Management ? Higher Asset
Turnover
Same Sales Using Less Inventory
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Illustration of Supply Chain
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Benefits of Efficient Supply Chain Management

• Fewer stockouts merchandise will be
  available when the customer wants them
• Tailoring assortments the right merchandise
  is available at the right store
• Customers respond to the convenience as
  evidenced by increased sales

Ryan McVay/Getty Images
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High Return on Investment

• An efficient supply chain can improve a
  retailers ROI
• Increases sales customers are offered more
  attractive assortments
• Net profit is improved by increasing gross margin
  and lowering expenses
• Inventory levels are lower, lower investment and
  total assets are lower with asset turnover higher

PhotoLink/Getty Images
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Wal-Marts Sustainable Advantage

• Wal-Marts success is its information and
  supply chain management systems. Why are
  competitors lagging behind?

The software is unavailable elsewhere and is
constantly updated and improved
Wal-Mart made a substantial investment in
developing its systems and has the scale
economies to justify it.
Ryan McVay/Getty Images
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Minimizing Stockouts
Stores need to place orders with distribution
centers in a timely fashion
Make sure merchandise in stockrooms is on the
shelves
Distribution Centers need to send right quantities
Buyers place orders at the right time with vendors
Royalty-Free/CORBIS
Managers need to provide enough lead time for
deliveries
Forecast demand accurately
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Information and Merchandise Flow
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Information Flow
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Flow of Merchandise

• Efficient supply chain would know the customer
• Store would advertise to these customers
• Buyers would purchase more of this wine
• Distribution center would be prepared to
  distribute the wine

PhotoLink/Getty Images
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Information Flow
1. When customer makes apurchase, sales
associatescans UPC code or RFID chip on
merchandise and customer credit card/loyalty card

Steve Cole/Getty Images

• 2. Information about purchase is transmitted
  from POS terminal to the buyer/planner
• 3. Information about purchases are
  aggregated by buyer/planner and sent to
  distribution center and vendor to ship merchandise

StockTrek/Getty Images
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Information Flow
4. Buyer/planner communicates withvendor and
places a purchase orderto re-supply stores.
5. Buyer/planner notifies distributioncenter
about incoming orders andhow they are to be
distributed to stores
PhotoLink/Getty Images

• 6. Store managers inform distribution center
  about receipt of merchandise and coordinate
  deliveries

David Buffington/Getty Images
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Data Warehousing
Data warehousing is the coordinated and
periodic copying of data from various sources,
both inside and outside the enterprise, into an
environment ready for analytical and
informational processing Wal-Mart makes good
use of its data warehouse. It should. Experts
estimate that it is second in size only to that
of the U.S. government
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Electronic Data Interchange

• EDI is the computer-to-computer exchange of
  business documents between retailers and vendors
• Merchandise sales
• Inventory On Hand
• Orders
• Advanced shipping notices
• Receipt of merchandise
• Invoices for payment

Royalty-Free/CORBIS
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EDI Security

• There are implications of security failures
  (loss of data, loss of public confidence), but
  retailers have security policy objectives

Authentication system assures person on other
end of session is who it claims to
be Authorization - that person has permission to
carry out request Integrity info arriving is
the same that was sent
Ryan McVay/Getty Images
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Benefits of EDI

• Reduces cycle time inventory turnover is higher
• Improves overall quality of communications
  through better record-keeping
• Information can be easily analyzed

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Advantages of Using a Distribution Center

• Effects of forecast error for individual stores
  are minimized
• Enables retailers to carry less merchandise in
  the store
• Easier to avoid running out of stock
• Retail store space is more expensive than space
  at the distribution center

Ryan McVay/Getty Images
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Logistics Strategy

• Pull Supply ChainMerchandise shipped to
  stores based on sales and inventory levels in the
  stores

Push Supply ChainMerchandise shipped to the
stores based on forecasted sales rate
(c) Brand X Pictures/PunchStock
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Merchandise Flow
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Activities Performed by Distribution Center

• Managing inbound transportation
• Receiving and checking merchandise
• Storing or cross docking merchandise
• Preparing merchandise for the sales floor
• Ticketing and marking
• Putting on hangers
• Shipping merchandise to stores
• Managing outbound transportation

Ryan McVay/Getty Images
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Who Can Use DCs?

• Retailers selling non-perishable merchandise
• Retailers offering merchandise that has highly
  uncertain demand like apparel
• Retailers selling merchandise that needs to be
  replenished frequently
• Retailers that carry a large number of items
  shipped in broken case quantities like drug
  stores
• Retailers with many outlets

Ryan McVay/Getty Images
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Crossdocking
Ryan McVay/Getty Images
Merchandise flows directly from the vendors
trucks through the retailers distribution center
and is loaded on the trucks going to the
retailers stores without being stored in the
distribution center
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Bull-Whip Effect

• An uncoordinated channel of built up inventory
  when retailers and vendors do not coordinate
  their supply chain activities

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What Causes a Bull-Whip Effect?

• Delays in transmitting orders and receiving
  merchandise
• Over-reacting to shortage
• Ordering in batches rather than generating a
  number of small orders

Chad Baker / Ryan McVay/Getty Images
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Retailers and Vendors Work Together
By working together they can reduce the level of
inventory in the chain and reduce the number of
stockouts.

• Use EDI
• Exchange information to reduce need for backup
  inventory, improve sales forecasts and production
  efficiency
• Vendor manage inventory
• Collaborative planning, forecasting and
  replacement

PhotoDisc/Getty Images
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Initial Efforts at Coordinating Vendor and
Retailer Supply Chain

• Efficient Consumer Response (ECR) Food
  Retailing
• Quick Response (QR) - Apparel

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FMCG Goods Manufacturers

• Promotions gt Advertising
• consumer promotions - coupons
• trade deals
• Why?
• Short-Term Orientation
• Competitive Reaction
• Power of Supermarkets

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Efficient Consumer Response

• Trade Promotions gt Forward Buying gt Extremely
  Uneven Production
• Motivation for Packaged Goods Mfrg
• Stop Price Promotion, Forward Buying
• Level Out Demand
• Motivation for Supermarkets
• Rise of Warehouse Clubs/Discount Store
• Use of EDLP Pricing
• Need to Become More Efficient
• Excessive Inventory - 30 Billion

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Response by Manufacturers

• PG - Reduce Consumer Promotion
• Increase Advertising
• Build Brand Image, Loyalty
• Reduce Price Sensitivity
• Every Day Whole Price - No Trade Promotions

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Mfg-Distributor/Retailer Fashion, Clothing
Quick Response Consumer

• Inherently Unpredictable Demand
• Old Solution - Over Buyer and Markdown
• Quick Response
• Provide Initial Assortment
• Forecast Sales for Intermediate Form
• Monitor Early Sales
• Make Final Assortment

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Vendors and Retailers Working Together

• Inherent Conflict
• Motivating Collaborative Solutions
• Mutual Idiosyncratic Investment Credible
  Commitments Schilling (NATO Troop)
• Need Safe Guards
• Trust vs. Contracts

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Vendor Managed Inventory
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Radio Frequency Identification

• Radio Frequency Identification (RFID) allows
  an object or a person to be identified at a
  distance using radio waves.
• Reduces warehouse and distribution labor costs
• Reduces point of sale labor costs
• Inventory savings by reducing inventory errors
• Reduces theft products can be tracked
• Reduces out of stock conditions

(c) Digital Vision/PunchStock
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Why the Hesitation with RFID?

• RFID is expensive the return on investment is
  low
• It still only makes sense to put tags on pallets,
  cartons, expensive merchandise or high theft
  items
• RFID generates more data than what can be
  currently processed

Jeff Maloney/Getty Images