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Retail-Centric Supply Chains: Lean Merchandise Management

A lean approach in retail allows a company to reduce costs, increase efficiency, shorten execution time, decrease waste, increase profitability and lower inventories.

The following article is excerpted from Lean Retail and Wholesale (McGraw-Hill, 2014), and is used with permission.

 

The application of a lean approach in retail allows a company to reduce costs, increase efficiency, shorten execution time, decrease waste, increase profitability and lower inventories. It also contributes to greater customer satisfaction, improved product quality and increased staff morale.

When applying lean to merchandise management, we need to think about the simplification and standardization of work, moving the supply chain process from a demand push to a customer pull form of replenishment, and removing bottlenecks that limit overall capacity and throughput in the supply chain.

 

Acquisition

In the retail industry, the acquisition process is primarily handled by a buyer, who selects what items will be stocked in a store, based on a forecast using a process that focuses on minimizing forecast variance and uses a collaborative approach. The retail buyer tends to work closely with designers and sales representatives, and to attend trade fairs and visit wholesale showrooms and fashion shows to understand short- and long-term trends. In the case of a smaller retailer, the buyer may have broader responsibilities, including sales and promotion, as opposed to a larger retail chain, where there are more levels of management, including trainee buyers, assistant buyers, senior buyers, buying managers and buying directors.

A buyer, depending on his or her level in the organization, can have roles and responsibilities that include a wide array of activities ranging from buying and merchandising to other areas such as merchandise presentation, advertising, shortage control, and staff development and training.

 

Lean Buying

We will now discuss buying from a lean perspective while focusing on the negotiation process with vendors with regard to prices and margins, favorable terms, discounts, and transportation allowances. In general, a retailer will either buy product from a national brand manufacturer (or wholesaler) or develop its own private-label brands. In the case of buying products, they are usually bought either from existing “regular” suppliers or from new suppliers that the retailer has never used before.

The types of suppliers besides direct from the manufacturer include full-service wholesalers that perform many services for retailers, including shipping, storing, credit and information; limited-service wholesalers that provide less in the way of retail services but have lower prices; and agents and brokers, who don’t take title to the goods, but instead act as intermediaries.

The actual buying decision may be made as often as five or six times per year for fashion items and less frequently for staple merchandise.

The process of buying national brands will typically include meeting with vendors to discuss the vendor’s merchandise performance during the previous season, reviewing the vendor’s merchandise offering for the coming season, and then returning to their offices to discuss this information with the buying team before negotiating with vendors.

 

Negotiation

Negotiating with vendors involves two-way communication designed to reach an agreement when the two parties have both shared and conflicting interests.

Negotiation Issues

Negotiation issues in retail may include:

• Maximizing price and gross margin, as we all want to buy at the lowest price in order to have the highest margin. Some factors that help in this are:

◦ Margin guarantees—The vendor guarantees a specific sales price. If a product has to be marked down, the vendor agrees to give the retailer markdown money.

◦ Slotting allowances—Retailers may need to negotiate slotting fees or allowances, which are charges to stock a new item (viewed by many vendors as extortion).

• Additional markup opportunities, such as excess inventory from the manufacturer.

• Purchase terms modified to stretch out payments to the vendor, thereby improving the retailer’s cash flow.

• Buying merchandise that is exclusive to the retailer, so that it can differentiate itself.

• Advertising allowances offered by the supplier to help defray some of the retailer’s promotional costs.

• Transportation issues, which can include who pays the transportation as well as how much.

 

Negotiation Tips

There are many tips that help in a negotiation process. Some of the more important ones are:

Be prepared—Maybe the most important thing that a retailer (or anyone) can do is to be prepared and informed when going into negotiations. Learn as much about the supplier and its products as possible, such as its prices compared to those of the competition and the level of service it provides to its customers. Always set goals to know what you want and what you’ll settle for.

Be honest—Bluffing or lying can do more damage than good in the vendor negotiation process. Lying not only is unethical, but can be difficult to maintain. However, be careful not to give away your bargaining power, as you don’t need to reveal everything during a negotiation

Show your business’s potential—When you are meeting with a potential vendor for the first time, it’s a good idea to start the negotiation with some history about your retail business, including any future plans.

Incentives—In order to receive the best price, payment terms, advertising allowances, and even exclusivity from a vendor, you have to ask for it. Ask what incentives you qualify for and let the negotiations begin from there.

Competition—You can bring up the vendor’s competition in the negotiation process without disclosing any pricing or other confidential details.

Compromise—Just like the retailer, the vendor must make a profit. The relationship should be looked at as a collaborative process, not a “beat down.” So always try to consider the outcome for the supplier.

Consider the long term—Having a solid, trusting relationship with a supplier will help your business. You may even get more incentives from the vendor to maintain a long-term relationship.

Don’t rush the process—Salespeople tend to use pressure to close a deal. If this is the case, feel free to ask for time to consider and discuss the offer.

 

Processing the Order

Many medium and large retailers use computers to complete and process orders—often using electronic data interchange (EDI) and based upon Quick Response (QR) inventory planning—where each purchase is entered into a computer.

Smaller retailers write up and process orders manually, but thanks to innovations in technology in terms of functionality, accessibility and affordability, they may instead be able to place orders electronically.

EDI, and Extension Markup Language (XML) via the Internet, can reduce data entry errors and costs and also create other collaborative opportunities to increase sales and develop a long-term partnership with customers and suppliers.

 

Collaboration in Product Development and Design

As with the supply chain in general, retailers are looking for longer-term relationships with partners that involve collaboration, cooperation and trust in order to develop a “win-win” situation.

Examples of this include:

• Best Buy and Toshiba combined their shopper insights to create the first child-centric laptop, the Satellite L635 Kids’ PC, with unique attributes such as a fingerprint-resistant screen, a wipeable keyboard, and an Internet browser that was kid-relevant and secure.

• Walmart has partnered with General Electric to develop and market licensed GE-branded kitchen small appliances.

• Starbucks embraced a form of “open innovation” with the launch of its mystarbucksidea.com website, through which it has received more than 100,000 ideas so far for new products and services ranging from digital rewards to new coffee flavors to the little extras, like splash sticks to keep clothes clean.

While these are great examples of the acquisition process not being viewed as just about price, we always need to look at the process as a whole, so that we can identify opportunities to reduce our costs and improve efficiency while still ending up with a “win-win” situation that both parties can be happy about.

 

Merchandise and Assortment Planning Software

I have always believed that technology can enable only a good process. Going hand-in-hand with a lean retail organization, one needs a good merchandise and assortment planning software system. Luckily, advances in technology have made these types of systems affordable to retailers of all sizes.

Retailers need to make the connections between items, locations and suppliers, track purchase orders, monitor deal income, manage replenishment settings, execute pricing decisions, and aggregate transaction information into stock ledger reporting levels. As the central source of all information, merchandising solutions provide organizations with an accurate view of perpetual inventory and financial performance across their entire retail organization.

These systems may have a variety of functionality, including:

1. Merchandise financial planning—Used to manage financial targets and open-to-buy budgets.

2. Assortment and space planning—Automates the assortment planning process, creating more flexibility in planning in-depth assortments.

3. Price and markdown planning—Plans, forecasts and analyzes campaigns, promotions and events.

4. Allocation and replenishment—Improves order accuracy by helping to determine optimal demand-based allocation and replenishment needs.

 

Distribution Requirements Planning for Allocation and Replenishment

There is a particular software tool used by many manufacturers and distributors, known as distribution requirements planning (DRP), that deserves special mention. When used in conjunction with forecasting software, it has shown real promise in the allocation and replenishment process at the store level.

DRP calculates finished goods replenishment based on forecasted and actual demand at the end of the distribution system and is accumulated backward, netting inventory at each level to determine replenishment requirements at the subsequent level (which can be either a distribution center or a

production site).

There is a recent movement to use DRP as a replacement for current systems, which are more push in nature and base replenishments upon past shipments from the DC to the stores, ignoring current plans and events at stores.

According to a presentation given at the GS1 Connect 2012 meeting, some large retailers, in conjunction with their key suppliers, have implemented store-level DRP with great success, such as:

• Sony Canada (at its company stores and key retailers):

◦ Improved its store-level forecast accuracy by 30%.

◦ In-stock levels went from 87% to more than 95%.

◦ Supply chain inventory was reduced by 20%.

• Lowes and Black & Decker:

◦ Fill rate improved to 98% on a consistent basis.

◦ In-stock levels went from 92% to 98%.

◦ Forecast accuracy improved by 10%.

◦ There was a significant reduction in inventory.

• Sam’s Club and Kraft:

◦ Improved order forecasting by 7.7%.

◦ In-stock levels increased.

◦ Supply chain inventory decreased.

◦ Lower warehousing, transportation, and obsolescence costs.

This “family” of merchandise and assortment planning software tools can almost be considered a requirement for implementing collaborative tools such as QR, Efficient Consumer Response (ECR), CPFR and vendor-managed inventory (VMI), as the number of SKUs that retailers offer continues to expand and the retail supply chain becomes more complex.

At the end of the day, they are a wise investment to enable a lean merchandise planning process by improving collaboration and visibility both internally and externally with suppliers, partners and customers.

 

Paul Myerson has more than 30 years of experience in supply chain strategies, system and operations that have resulted in bottom-line improvements for companies such as General Electric, Unilever and Church & Dwight. He is currently professor of practice in supply chain management at Lehigh University and managing partner at Logistics Planning Associates LLC, a supply chain planning software and consulting business. He is also author of Lean Supply Chain and Logistics Management (McGraw-Hill, 2012), and writes “The Lean Supply Chain” blog for IndustryWeek.

 

 

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