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Complete and On-Time: The Key to Mitigating Retail Margin Risk and Ensuring Brand Protection
Richard Wilhjelm, Compliance Networks (reprinted with permission)

In my previous article dated May 9th, we discussed the concept of retail margin risk and the 5 critical steps supply chain professionals could take to mitigate it. Retail margin risk, by definition, is the potential permanent loss of margin due to internal and external performance related events. A major contributing factor to lost margin opportunities is the persistent out-of-stocks (OOS) that plague the retail industry. As part of an ongoing series, we will examine each of the 5 steps retailers can take to mitigate risks beginning with one of the most crucial, complete and on-time delivery.

On Time and Complete
A good exercise for a supply chain professional is to walk over to their favorite merchant and ask the key question, "in order to ensure merchandise plan execution (or hit your margin number), what matters most to you?" Nine out of ten times the merchant response will be on-time and complete. Merchants can live with poorly stacked pallets, funny looking cartons, non-existent shrink wrap and improperly placed labels as long as correct merchandise is there in a timely matter. While the previously mentioned failures can affect overall supply performance and add avoidable costs, none with the intensity and impact as on-time and complete. Why? Because in today's promotionally driven omni-channel enhanced marketplace, nothing impacts the customer more than an empty peg hook. And most especially an empty peg hook that was previously advertised as being full. As Camille Fratanduono, Assistant Vice President for Pricing and Replenishment for Pep Boys stated in a recent SCD broadcast, "in stock is no longer a luxury in our business, it's a necessity!" And the potential downside isn't just the temporary loss of margin to the retailer; it is also an incalculable damage to the retailer's brand.

I recently came to the revelation my Wi-Fi starved home needed an upgrade. My three daughters and their countless devices have brought my once proud home network to its knees and we have too many dead spots. The solution I identified (right or wrong), was a Wi-Fi range extender. After careful deliberations and countless reviews, I decided on a particular make and model and identified two national retailers who stock the product. While Amazon offered a predictable price and delivery solution for me, I want the product now! After searching both websites for availability, I came upon two unique responses. While retailer A's response was "We have it, come on by", retailer B's response was simply "limited stock" with the store location and telephone number. Limited stock is not confidence inspiring and, like most men, I don't like to ask for directions or call retail stores. A quick glance at both retailers' websites not only told me which retailer confidently understands their fill rates and purchase order lifecycles, but where I should spend my valuable time and money. I suspect I'm not alone. And when "I want it now" remains the traditional retailer's most strategic weapon against Amazon and other e-commerce sites, retailers can ill afford to self impose damage to their valuable brand.

The Solution
Look out your office door, there is a line stretched a mile and a half down the road of software vendors and other service providers who have just the solution for you. Better forecasting, replenishment, and allocation, improved transportation times, more EDI transaction sets ("we already have your data") and RFID all claim to have the silver bullet - but do they? At the end of the day, the retailers who best understand their vendors' fill rates, purchase order lifecycles and overall supply chain performance and can share this valuable information with all stakeholders (merchants, replenishment and vendors) are in the best position to mitigate margin risk and protect the brand. This may be information you already have contained in your core execution systems. And while it would be helpful if this exercise resulted in your vendors improving their overall performance, it's not a requirement for you to improve your internal performance. What is a requirement is that you better understand when and where your vendor is going to fail. How do you get this valuable information? Like most of life's questions, it's all in the data. An objective view of past results is the best indicator of future performance and will likely provide you with the information you are looking for.

Which Fill Rate Do I Measure?
As you have probably observed, fill rate means different things to different people. While tracking on-time seems to be fairly straightforward, how retailers measure fill rate seems to be all over the map. Different ways retailers measure fill rate include by vendor and department. Some are concerned with their vendors initial fill rate while others are looking at total fill rate but still want to minimize the number of vendor shipments. To other retailers, how their vendors fill them in relation to their posted ship windows is critically important as supply chain professionals look to smooth their receipts and minimize their labor expense. A key metric I like is how does my vendor fill me during my season? While their performance may be stellar in June, show me how they performed during the last quarter of the year for the previous 3 years, when their performance counts the most.

Which fill rate is best for your organization? It depends on your corporate strategy and is largely dictated by your industry segment. Auto parts stores have different requirements and nuances than department stores and fashion retailers. Replenishable items act and behave differently than fast fashion items and have different performance thresholds and expectations. When it comes to measuring fill rates, one size does not fit all.

Summary
At the recent NRF Global Supply Chain Summit in Dallas, keynote speaker Jim Tomkins eloquently described supply chain as "the vehicle that allows you to deliver the corporate strategy to the marketplace." Certainly a big component of that vehicle is a clear and visible path to your vendor's complete and on-time performance. Not only is it important for the supply chain professional to understand this key performance data, but to also share this information with all stakeholders (merchants, replenishment & vendors) as well. The predictable result will be a higher performing supply chain that minimizes lost margin opportunities and protects the retailer's valuable brand hyper-competitive marketplace.

Next Topic: Monitor & Reduce the Purchase Order Lifecycle


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.

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