SEPTEMBER 2016 An Inflection Point in the Retail Supply Chain? By Dan Gilmore, Editor, Supply Chain Digest rates (measured different ways, but usually at the total cases level) had to be at least 80% of the PO, and shipments were supposed to In a recent column, I argued that a significant amount of variability arrive (or maybe even just be shipped) within as much as a 10-day on the supply side has long been accepted by retailers. There window - neither exactly tight tolerances. are a variety of aspects to this variability, and the dynamics vary between retail sectors for sure, but the two primary areas of supplier I compare that to a visit I paid to an Ohio auto parts manufacturer a variability are naturally enough on-time delivery and fill rates. few years ago. When the Ford Motor Co. inbound truck stopped to pick up the order from that supplier (multiple orders from different I’ll be back to those two areas in a second, but will also note there vendors were on the same truck), if the parts weren’t ready for is also a lot of variability in other areas as well, in everything from loading, the truck simply pulled out (at high speed) and headed to correct price ticketing (more of a “soft goods” thing) to advanced the next stop or onto the assembly plant. The supplier that wasn’t ship notice accuracy - the latter very important to most large and ready had to find a way to expedite getting the parts to the factory even medium-size retailers. on-time at their own expense. Do that more than a few times and The key point is that compared with manufacturing, retailers have you would simply be replaced. traditionally lived with a lot more variability on the supply side Let’s just say there hasn’t been that type of thinking in the retail than manufacturers ever could. When I was working directly with supply chain. Rather, retailers have simply put up with a significant consumer goods companies, many retailers were requiring that fill - continued pg. 2 - Industry News Round Up Compliance Networks Corner: Gartner’s Rating of Top Retail Supply Chains Is Supply Chain 2.0 Almost Here? The analysts at Gartner recently released their top 10 retail Richard Wilhjelm, VP, Sales & Business Development supply chains for 2016, a subset, if you will, of the top 25 supply Compliance Networks chain list released as usual in May. Surveying the retail landscape of 2016 and beyond, I am The criteria for the rankings this year were as follows: reminded of that iconic verse sung by Stephen Stills of Buffalo Gartner starts with the Fortune 500 list of top US companies Springfield in the late 1960s. by revenue and the Forbes global 2000 list that basically does “There is something happening here, What it is ain’t exactly the same thing on a worldwide basis. It then eliminates a lot of clear.” those companies because they do not much operate what most think of as a real physical supply chain - companies in banking, Grammar aside, many of the senior retail executives I work with insurance, software, etc. believe we are going through a period of rapid change or even a paradigm shift. When asked to define it, the common response is What’s more, the minimum revenue to be included in the final that while many have a hard time fully articulating it, they know evaluation list was an amazing $12 billion. major change is occurring. From that master list, companies are ranked based on the Retail is Changing following: There are plenty of signs that change is abound in the retail • A group of financial metrics (Return on assets, inventory sector. We have witnessed continued earnings pressure amongst turns, and revenue growth): 40% the traditional retail stalwarts and in some cases bankruptcy. • “Peer Ratings” by other supply chain professionals: 25% Consumer buying trends are shifting from stores to on-line as - continued pg. 3 - - continued pg. 2 - www.compliancenetworks.com Your Firstwww.scdigest.com Stop for Supply Chain Information An Inflection Point in the Retail Supply Chain? (continued) amount of supply variability. They order 10,000 items from vendor However, I also think it is very fair to say that there simply has not A, and then find out how many that vendor actually shipped when been a “reduce supply variability” mindset on the part of the majority the ASN is sent. Then if the fill rate is short, the retailer has to redo of retailers. It has simply been the way it’s been for a long time. And its store allocations based on what it now hopes is actually arriving most retailers have consoled themselves with the “chargeback” to (which may or may not be consistent with the ASN). vendors - fines for missing fill rates or late deliveries or bad ASNs - as a substitute of sorts for reducing variability. The reality is few Some may say that it is simply inevitable that variability will be retailers actually measure variability, even if they do give vendors a high given the thousands of vendors a retailer may have, from huge grade on things like on-time. to mom and pops. Others may note that soft goods, with all the variables (style, color, size), present some special challenges, and But are things changing? I say Yes, and point to moves this year by they are right there to an extent. And no question, retailers have a large regional grocery chain, Target, and Walmart to support that caused much of their own supplier variability by “Bullwhip type” thesis. I will discuss those developments right here in the October order patterns. Finally, over the years, there has in fact been some issue of the Retail Vendor Performance Management bulletin. tightening in the fill rate and on-time requirements. Compliance Networks Corner: Is Supply Chain 2.0 Almost Here? (continued) the time-pressed consumer opts for price and convenience over the What’s Next? in-store experience. In addition to Amazon, new competitive forces fueled by private equity are emerging by leveraging technology, In the face of decreasing topline growth and increasing competition, smart phones and social media. It’s no wonder that shifts in where have traditional retailers turned to increase bottom line consumer spending and behavior are viewed as one of the top profitability? Understandably, supply chain. While merchandising, disruptions in PwC’s 2016 Global CEO Survey. assortment and the “customer experience” may have defined the playing field in the past, going forward inventory speed, execution So what does this mean to supply chain? The short answer is: and visibility are also successful components to a profitable retail buckle your seat belts! In the past, most retailers competed solely enterprise. Customers’ expectations of price and service have on merchandising, assortment and the customer experience. A changed forcing supply chains to evolve as well. “buy it and they will come” mentality permeated retail buying organizations, fueled by top line growth. But then two major events Leading retailers such as Home Depot, Walmart and Target have all occurred that I believe has changed retail forever, (1) the Great made public announcements placing additional demands on their Recession and (2) the rise of ecommerce. Not only have these two supply chain performance. All expect their stakeholders (vendors, events changed retail as we know it, but supply chains as well. supply chain and merchants) to provide a higher level of service to their distribution centers while reducing inventory values along The Numbers the way. In a recent Wall Street Journal article, a senior executive at Home Depot was quoted as telling store managers to “get A clear victim of the Great Recession was top line retail growth. comfortable with days of supply, not weeks.” Quite simply, where Since unemployment peaked at 10% in October of 2009, consumers once only merchandise teams competed from retailer to retailer, now flocked in droves from the traditional department stores (Nordstrom supply chain teams must as well. & Macy’s) to the off price retailers (TJ Maxx & Burlington Stores) and Amazon. While the unemployment rate has recovered to 5%, In the quest to grow bottom line profits and remain relevant against the the consumer remains not only price sensitive but equally time ecommerce pure plays, traditional retailers have identified a common constrained in the face of modest growth and stagnant wages. challenge to their objectives: supply chain variability. Supply chain variability adds avoidable costs, reduces speed, impairs execution To add additional angst to the traditional department store retailer’s and increases capital requirements to fund unnecessary safety stock woes, Amazon has decided it wants in on apparel in a big way. inventory. In addition to being a competitive disadvantage, supply Already the biggest clothing seller online, Amazon is “expected chain variability reduces the key metric ROIC (return on invested to triple its share of the U.S. apparel market over the next five capital) on which many senior executives receive bonuses. years,” according to Bloomberg. In an April 2016 Morgan Stanley survey, the top reason consumers gave for shopping on Amazon While I profess not to know what Supply Chain 2.0 fully looks like, was interestingly: “ease and convenience”. Shelly Banjo from I am reasonably confident we all must up our game to meet the new Bloomberg recently noted that “The sexiest part of Amazon’s challenges that lay ahead. fashion push was not the clothes on its site but its logistics.” Your First Stop for Supply Chain Information - pg. 2 - Learn More & Subscribe Today at www.scdigest.com/retail_vendor_performance.php Industry News Round Up (continued) • Ratings by Gartner analysts: 25% Consider the town of Magnum, OK, population 3000.