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Retail Margin Risk: 5 Critical Supply Chain Steps to Ensure Merchandise Plan Execution
Systematically Identifying and Eliminating Supply Chain Performance Related Issues Can Help Retailers Mitigate Events that Put Margin at Risk
Richard Wilhjelm, Compliance Networks (reprinted with permission)
Every year, retailers spend hundreds of millions of dollars to create the perfect merchandising plan. Industry demographics are measured and focus groups created in an attempt to define the desired customer. Once the perfect customer and corresponding products are identified, sophisticated forecasting, planning and allocation systems are utilized to construct complex merchandise plans to achieve specific margin objectives.
Unfortunately the results, particularly during promotional or seasonal events, are often missed margin opportunities combined with damage to the retailer's valuable brand because of out-of-stocks (OOS) at the shelf. While in-store execution issues often lead to OOS, the culprit is just as often chain performance. In truth, the retailer's margin was in jeopardy from the beginning due to unforeseen but predictable supply chain risk factors.
The penalty for retailers is high, but is also segment dependent, because consumers react differently to an OOS depending on the product category. But in total, North American retailers lost some $89 billion in sales in 2011, according to research released last year by IHL Group, which specializes in the topic.
Margin risk, from a retail perspective, is defined as the potential permanent loss of margin due to internal and external related performance related events. Performance events can be internal, changed or late purchase orders or external, late or incomplete shipments and poor ASN accuracy. In either the case, the margin opportunity may be lost for that fiscal period or may not return at all until next year.
Margin Has a Shelf Life
Retailers are coming to the realization that like their products, margin has a shelf life. In the past, the consumer was patient mainly due in part to the fact their options were limited. If an advertised product was not in stock, often the consumer would take their rain check and return in 2 or 3 weeks when the product was back in stock. The need for expensive safety stock was not required and the margin opportunity was preserved, the best of both worlds for the retailer. But today's consumer has more options. Whether it is increased competition from traditional brick and mortar companies with an Omni-channel offering or pure e-commerce plays like Amazon, or even mobile commerce, the consumer no longer has to be patient. He or she has options and more increasingly are demonstrating the capacity to exercise them.
Opportunity for Supply Chain
A common question we often hear is how supply chain can be viewed as less of a cost center and more of a margin contributor. Within most retailers there exists a tension between the merchant and supply chain teams. Merchants are perceived to be higher in the enterprise hierarchy because they are the generators of gross margin while supply chain executives are often portrayed as "cost of doing business." But with the new dynamic in the industry and an emphasis on speed and execution, supply chain executives play an ever increasing role in merchandise plan execution and overall retailer profitability. By maintaining proper fill rates, ensuring on-time deliveries, demanding ASN accuracy and minimizing trouble shipments, the retail supply chain executive can influence the overall performance of the supply chain and mitigating both internal and external factors that put margin at risk.
Five Critical Steps Supply Chain Steps to Ensure Merchandise Plan Execution
Where does the supply chain executive start in their quest to influence margin performance? While opinions will vary where the best place to start is, most will agree the desired outcome is a more predictable and consistent supply chain. In the presence of variability, there will be safety stock to mitigate margin risk. By eliminating the variability and providing merchant teams with actual performance related information, retailers can drive down their overall safety stock and improve profitability.
The following are five steps supply chain executives can take to ensure merchandise plan execution:
Step One - Focus on On-time Deliveries and Fill Rate (increase sales) - The velocity and cadence of promotional events in the retail industry is greater than ever before. Ensuring orders are complete and on-time is critical to most merchants and fundamental in reducing margin risk.
Step Two - Monitor & Reduce the Purchase Order Lifecycle (reduce supply chain days) - Continuously monitor the purchase order lifecycle for opportunities. A shorter purchase order lifecycle is more responsive to demand signals, less prone to out-of-stocks and requires less working capital to fund.
Step Three - Monitor ASN Accuracy Religiously - Poor ASN accuracy can doom inventory integrity leading to poor merchandise plan execution. While it's important to audit vendors for accuracy, it is also important to focus valuable audit resources on the lower performing vendors versus the higher performing vendors.
Step Four - Monitor Transportation Performance - Ensure vendors are adhering to the routing guide for transportation requirements. The selection of a wrong carrier can result in additional supply chain days while multiple shipments during the same week can accelerate transportation expenses.
Step Five - Over Communicate With Your Vendor Trading Partners - Provide vendors 24/7 access to key performance data. Immediately alert vendors to past supply chain failures, or if possible, alert them to upcoming execution opportunities. Over communicating performance data to key trading partners will result in visibility for all parties involved.
The value of merchandise plan execution is critical to any retailer's margin objectives. By systematically identifying and eliminating supply chain performance related issues, retailers can mitigate those events that put margin at risk. In a recovering economy where working capital still remains constrained, the supply chain professional who can run a predictable and consistent supply chain, influence margin performance, and increase operating cash flow will be invaluable.
Richard Wilhjelm currently serves as VP, Sales & Business Development for Compliance Networks, a supply chain performance improvement solution provider. Richard has over 25 years of sales and marketing experience in the supply chain software industry. His skills in sales management and field operations have yielded tangible results within recognized companies such as Logility, Inc., JD Edwards World Solutions Company and Prophet 21, Inc. Richard received his Bachelor of Science degree in Finance from the University of Florida and currently resides in Weston, FL with his wife and three daughters. For more information, please visit www.compliancenetworks.com.