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

Distribution ChannelPPT 1-4

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Examples of Retailers

Retailers: Kohl’s, Macy’s, Wendy’s,

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 is developed at manufacturer

Bicycle is developed in several styles

Bicycle is offered in convenient locations in quantities of one

Bicycle is featured on floor display

Bicycle can be bought on credit or

put on layaway

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World’s Largest Retailers

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Nature of Retail Industry is Changing

Mom and Pop Store

To Today’s Retailer

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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

SCM drives RETAIL1-13

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Retailing Strategy

Retail Market Strategy

Financial Strategy Site Location

SCM &Information Systems

Retail Locations

Customer Relationship Management

Organizational Structure and HR 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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Return on assets = Net profit margin x Asset turnover

Net profit = Net profit x Net sales

Total assets Net sales Total assets

Improve Return on Investment

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

High Return on Investment

An efficient supply chain can improve a retailer’s 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

Wal-Mart’s Sustainable Advantage

Wal-Mart’s success is its information and supply chain management systems. Why are competitor’s lagging behind?

Ryan McVay/Getty Images

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.

Minimizing Stockouts

Royalty-Free/CORBIS

Forecast demand accurately

Make sure merchandise in stockrooms is on the shelves

Buyers place orders at the right time with vendors

Stores need to place orders with distribution centers in a timely fashion

Distribution Centers need to send right quantities

Managers need to provide enough lead time for deliveries

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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

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

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

StockTrek/Getty Images

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Information Flow

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

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

David Buffington/Getty Images

PhotoLink/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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Royalty-Free/CORBIS

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

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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:

Ryan McVay/Getty Images

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

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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 DC’s?

• 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

Merchandise flows directly from the vendor’s trucks through the retailer’s distribution center and is loaded on the trucks going to the retailer’s stores without being stored in the distribution center

Ryan McVay/Getty Images

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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

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Retailers and Vendors Work Together

• 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

By working together they can reduce the level of inventory in the chain and reduce the number of stockouts.

10-41Initial 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 > Advertising– consumer promotions - coupons– trade deals

• Why?– Short-Term Orientation– Competitive Reaction– Power of Supermarkets

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Efficient Consumer Response

• Trade Promotions ==> Forward Buying ==> 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

• P&G - Reduce Consumer Promotion

• Increase Advertising– Build Brand Image, Loyalty– Reduce Price Sensitivity

• Every Day Whole Price - No Trade Promotions

10-45Mfg-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