Retail: More of the Same and Something New

By Brian Hudock, Partner, and Jeff Rose, Principal, Tompkins Associates

Retailing saw soaring growth throughout the 1990s. Big fish kept getting bigger, gobbling up minnows or spawning more and more new stores. Small operations sometimes felt like they were trapped in a shark-attack scene from the movie "Jaws."

Then came the new millennium and economic storms in the retailing ocean. Consumer spending slackened. Stock prices fell. Did the sharks dive deep and hide?
No way. The big fish are still feeding. But, a parallel trend in retailing is for the major operations to look inside for ways they can squeeze costs out of their supply chains at the same time they keep up their growth strategies.

There is no doubt that this decade belongs to the big just like the last one did. The winners are still the organizations that can draw customers with low prices and generate profits from small margins on huge volumes. Nonetheless, recent economic conditions are challenging the industry's ability to keep up ever-increasing profitability. Compounding those concerns are the debt burden many companies incurred in the 90s when they were building infrastructure to support a period of steady sales growth.

Help Starts at Home

Looking inward, the retail industry is implementing a number of best practices to trim costs. They are investing in technology to streamline their supply chains, forming closer relationships with supply chain partners, and leveraging the Internet to manage purchases, shipments, and to sell. Stores are focusing on core strengths, utilizing third parties to handle non-core functions. Inventory deployment and inventory reduction strategies are being implemented, and organizations are consolidating operations into facilities with more automation.

More stores have brought more complex distribution networks. Retailers have opportunities to go after distribution efficiency, and the best practices are not just for the giants. As Tompkins consultants explain across the country, every supply chain needs to be synthesizing itself, changing from hard links into a stream of information and material focused on the end-consumer so everyone can win.

Investment in Operations Technology (WMS/TMS)

In principle, the paperless supply chain simply implies that all product movement is tracked electronically rather than through the old-fashioned paper and phone trail. This eliminates the traditional problems such as product recognition, order confirmation, lost shipments, duplicate data entry and picking accuracy. It increases tracking capabilities and reduces overall labor requirements and training on both ends.

In this world, information flows continuously, just like material does. On-line and even real-time information systems are replacing batch legacy systems. As the number of physical transactions increases within and between supply chain partners, there are more information transactions. In this age of information, we are going to see perhaps the greatest change in distribution with respect to information flow.

Companies are using warehouse management systems (WMS) to maximize space, labor and equipment management, to increase customer satisfaction through accuracy and completeness, and to reduce costs. Transportation management systems (TMS) help them reduce cost for both fleet management and carrier contracting and improve customer satisfaction.

Dance with Your Supply Chain Partners

To reduce supply chain costs, retailers must form strategic partnerships with members along the supply chain and everyone has to be in step. It is commonplace today to walk into a retailer's corporate office and find supply chain partners assigned to that account and working on site doing things such as import management, inventory management, transportation management, event planning and joint marketing.

One example is the relationship between Rite Aid Corp. and Penske Truck leasing. In a Rite Aid distribution center (DC), the transportation department is mostly individuals from Penske, which owns the fleet, manages the assets and manages outbound transportation operations for several Rite Aid DCs. An outsider could not tell which folks were Penske and which were Rite Aid, as this is a true partnership rather than one company simply providing service to another. Penske drivers go through Rite Aid's orientation for new employees and attend Rite Aid University courses alongside their Rite Aid partners.

Historically, retailers equated eliminating costs with negotiating a good buy. In reality, though, costs were just redistributed because a good deal on one product today might well mean a higher price on something else tomorrow. Suppliers are not trying to lose money any more than the store is. In this kind of outdated deal-making, cost is passed on one way or another to the end consumer and satisfaction is lower, not higher.

In today's marketplace, successful supply chain partnerships find ways to truly eliminate supply chain costs and share the benefits among themselves and with the end consumer.
Here are some of the keys to establishing supply chain partnerships that work:

• Information sharing
• Truly defined and agreed-upon supply chain goals and objectives
• Trust of partners and belief in the partnership
• Cost reduction initiatives that have No Boundaries-they are good for everyone if they are good for anyone because all the partners look to the supply chain's success, not just their own

The Information Goal: Shooting for "nothing but 'net"

Being able to have the right product in the right place when faced with unpredictable demand and global supply chains cannot be done manually. Information must be instantaneous and accessible to all the partners in the supply chain to minimize inventory all along the line.

The goal is to move products through the chain faster so everyone needs to hold less inventory-ideally zero if retailers with stockpiles of inventory in stores could convert to the Dell computers model. However, this begins with information, and retailers and suppliers need to share information that will allow the manufacturing partners and supplier partners to make plans in line with the retailer's near-term needs. The retailers have to share actual point-of-sale data, forecasts and promotion plans. Information, is what allows manufacturers to build to order, suppliers to plan for actual retailer demand, and retailers to maintain or even improve customer satisfaction without someone in the line having to build excessive inventory.

It will be a win-win all the way around if the supply chain partners can achieve the goals listed above. Like all best practices, the broad practice has subsidiary steps to help retailers and suppliers get there:

• Improve information systems and systems integration to enable and/or enhance information sharing. Enterprise resource planning and warehouse and transportation management systems need to communicate within each organization and between organizations.
• Improved inventory management practices. This requires evaluating lead-times and service level goals, looking at ordering practices and, again, finding and using the best technology and equipment.
• Enhanced inventory deployment strategies. Centralize slow movers, and high-cost/low-cube items. Regionalize fast movers and low-cost/high-cube items.
• Set up preferred carriers with standing appointments to ensure shortest possible times in transit for the merchandise.
• Refine store delivery frequencies. See what schedule will get the best balance of customer service, higher sales and lowest cost.
• Pull more inventory to the stores, including seasonal and promotional merchandise, to ensure the product is getting to where it is actually selling.

No one should sneeze at the business of electronic markets, either. Reluctance to enter e-commerce probably will not bode well for any type of industry, big or small, global or domestic, and retail is very visibly in need of being on that bandwagon. Look at the biggest retailers, add "dot-com" to their names in your Web browser and hit "go." They are there.

Whether customers are actually ordering on-line or shopping for product and price comparison before they drive to a store, retailers need to be available on everyone's desktop.

Let Someone Else Do It Better or Cheaper

The giant retailers already understand that they can do better if they stick to what they do best, and smaller retailers are going to reach the same conclusion. Third-party warehousing has grown with the decision by some companies to return to their core competencies and the refusal of others to build more space to store peak inventory. In the future, the need to leverage capital and increase service levels will feed third-party growth, and retailers will be among the organizations driving it. As the market continues to grow and third-party warehouses set the technology and automation standards for all warehouses, more and more small and medium retailers will join the major players in deciding they must use these services to compete effectively.

Many will conclude that outsourcing is the only way they can reach another level in their core business with little or no capital investment. For the core business, there are other steps to take.

Fewer Facilities, More Automation

Retailing has seen and will continue to see fewer distribution centers with greater individual mass. For some companies, that will be the result of attrition. For others, consolidation will be due to strategic decision-making. Either way, the industry consolidation that occurred in the 90s has left several big retailers with less-than-optimal distribution networks, and that will drive distribution consolidation in this decade. We will see fewer operations of greater scope and efficiency. One aspect of that will be greater and greater use of crossdocking to speed material through rather than into the DC.

Consolidated facilities will be handling ever-increasing volumes, and the answer will not be to simply add labor. The continued increased use of automation such as conveyors to move small totes and cases across long distances and to sort to the appropriate re-packing station or loading dock will increase. There will be more automated picking equipment such as A-frames and dispensers, improving throughput capacity at existing DCs without requiring additional space. Automation will also continue to replace humans for heavy lifting, non-value-added movement of goods, and in limited-access areas of the warehouse.

Humans will be part of the answer, however. As we have learned, a computer can think logically and adapt to pre-defined changes in requirements, but only the human mind can operate efficiently during the chaos of system glitch.

All that taken together seems like a big order. As we said at the outset, though there is an approach that ties it all up. The giants are coming to understand it. Tompkins understands that it is the future of retailing success. We call it distribution synthesis.

It is an important step in achieving supply chain excellence. Excellence comes by moving from business as usual through building collaboration among supply chain partners to the ability to carry out synthesize the supply chain. The Tompkins process for getting there is well-defined and achievable, from understanding customer satisfaction as the driving force through developing alternatives based on your situation through a well-thought-out process of deciding what solution is best for you.

You needn't fear the sharks. You can swim with them. It is, after all, a very big ocean.

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