Segmentation Strategies for Managing Retail Supply Chains
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Segmentation Strategies for Managing Retail Supply Chains By Catherine G. Liang M.S. Management Science and Engineering, Stanford, 2003 B.S. Management Science and Engineering, Stanford, 2002 Submitted to the MIT Sloan School of Management and the Department of Engineering Systems Division ARCHIVES in partial fulfillment of the requirements for the degrees of MASSACHUSETS INSTITUTE Master of Business Administration OFTECHNOLOGY and Master of Science in Engineering Systems Division In conjunction with the Leaders for Global Operations at the LIBRARIES Massachusetts Institute of Technology June, 2011 © 2011, Catherine G. Liang. All Rights Reserved. The author hereby grants MIT permission to reproduce and to distribute publicly copies of this thesis document in whole or in Dart in any medium now known or hereafter created. Signature of Author _ MIT Sloan School of iyianggement, Lngineering Svstetn----- May 7,2011 Certified by_ Jonathan L. Byrnes, \hsis Advisor Senior Lecturer, Centrl for Transportation & Logistics, MIT Certified b 3 David Simchi-Levi, Thesis Advisor _ Professor of Civil and Environmental Engineering and Engineering Systems, Co-Director of LGO and SDM Programs. MIT Certified by_ Donald Rosenfield;Thesis Reader Director of Leaders for Global Operations Program, TV Accepted by Nancy Leveson, Graduate Committee Chairman Department of Engineering Systems Accepted by Debbie Berechman, Executive Director of Mastefs Program MIT Sloan School of Management This page is intentionally left blank iN Segmentation Strategies for Managing Retail Supply Chains By Catherine G. Liang Submitted to the MIT Sloan School of Management and Department of Engineering Systems on May 7, 2011 in partial fulfillment of the Requirements for the Degrees of Master of Business Administration and Master of Science in Engineering Systems Abstract High-technology manufacturing companies often face rapid price decline and capacity constraints. Especially in the retail side of the business where the supply chain is much longer and revenue is sometimes not recognized until the sell-through point, optimizing inventory positioning is critical. No longer is a one-size-fits-all approach sufficient; in order to perform optimally, manufacturers should categorize their retailers, stores, and products, and tailor their strategy for each accordingly. This work shows how to use metrics such as gross margin return on inventory investment, models and tools such as assortment, promotional risk, supply chain, and replenishment segmentation to drive improvements in inventory performance and recommends ways to apply them in different retail chains. In particular, three retailer types - discount retailers, specialty retailers, and convenience retailers are discussed. Thesis Supervisor: Jonathan L. Byrnes Senior Lecturer, Center for Transportation & Logistics, MIT Thesis Supervisor: David Simchi-Levi Professor of Civil and Environmental Engineering and Engineering Systems, MIT Thesis Reader: Don Rosenfield Senior Lecturer, MIT Sloan School of Management This page is intentionallyleft blank Acknowledgements The author wishes to acknowledge the Leadersfor Global OperationsProgram at MIT for its support of this work and classmates Emily Edwards, Donovan Collins, andKarla Krause for their enthusiasm. She would also like to thank Manish Bhatia, Bill Berg, John Sharkey, Ryan Inouye, Kris Wilburn, and Lisa Pham at SanDisk Corporation for their guidance, mentorship andfriendship. Finally, she would like to thank her husband, Mark, for his insight, encouragement, and loving support. This page is intentionally left blank Table of Contents Abstract........................................................................................................................---.-.....---.. 3 1 Introduction........................................................................................................................... 11 1.1 Project Statem ent ............................................................................................................. 11 1.2 Project M otivation ........................................................................................................ 11 1.3 Goals ................................................................................................................................ 12 1.4 Hypothesis........................................................................................................................ 13 1.5 Sum m ary of Results...................................................................................................... 13 1.6 Structure of Discussion.................................................................................................. 16 2 Background ...............................................................................................................---......... 17 2.1 Flash M em ory Industry.................................................................................................. 17 2.2 Flash M em ory Technology ........................................................................................... 17 2.3 M oore's Law .................................................................................................................... 18 2.4 Capacity ........................................................................................................................... 18 2.5 Pricing .............................................................................................................................. 19 2.6 Dem and............................................................................................................................ 20 2.7 Supply .............................................................................................................................. 21 2.8 M anufacturing Process.................................................................................................. 23 3 SanDisk .................................................................................................................................. 24 3.1 Products............................................................................................................................ 24 3.2 Custom ers ........................................................................................................................ 25 3.3 Culture.............................................................................................................................. 25 3.4 Discussion........................................................................................................................ 25 4 Literature Review ................................................................................................................. 28 4.1 Dem and Driven Excellence ........................................................................................... 28 4.2 Dealing with Uncertainty............................................................................................. 33 4.3 Supply Chain Design .................................................................................................... 37 5 Creating Strategic Alignm ent ........................................................................................... 42 5.1 Gross M argin Return on Inventory Investm ent ........................................................... 42 5.2 Applications ..................................................................................................................... 43 5.3 Shortcom ings ................................................................................................................... 45 6 Marketing Management and Supply Chain Levers ...................................................... 47 6.1 Product and Place............................................................................................................. 47 6.2 Price and Prom otion....................................................................................................... 50 6.3 Profitability ...................................................................................................................... 55 7 M anaging Retail Supply Chains at SanDisk .................................................................. 56 7.1 Approach.......................................................................................................................... 56 7.2 GM ROII........................................................................................................................... 59 7.3 Key M etrics...................................................................................................................... 63 7.4 A ssortm ent ....................................................................................................................... 66 7.5 Prom otion M anagem ent................................................................................................ 75 7.6 Supply Chain Design .................................................................................................... 81 7.7 Replenishm ent.................................................................................................................. 85 7.8 Application to Different Types of Retailers.................................................................. 90 7.9 Summ ary.......................................................................................................................... 95 8 Conclusion ............................................................................................................................