Chain of Thought

Supermarkets Must Take Stock of Supply & Demand Chains

What's wrong with America's Supermarkets? The Wall Street Journal asked that question in this morning's edition. In attempting to answer it, the paper focused on how big-box retailers like Walmart are taking customers away by offering cheap groceries as a loss leader. And what are grocery chains doing to fight back? Many are cutting back on staff. Earlier this year Supervalu announced layoffs of up to 2,500 store-level jobs at its Albertsons supermarkets in California and Nevada.

Is that wise when out-of-stocks are among the biggest customer-losing situations in grocery stores? I put that question to Richard Miskewicz, managing director of PwC Retail and Consumer, and an industry analyst. He said it's not only unwise, but it's missing the point.

“The retailers need to figure a way to better tap into their consumer and understand their needs and preferences,” he said. “That has to drive their assortment planning. Yes, the biggest issue for the retailers now is in store labor. It's still not uncommon to have product sitting in the back room and nothing on the shelf.”

In fact according to his research, 5-10% out-of-stock is typical at the retail level, depending on the category. The problem isn't too much labor, it's too much inventory in the wrong places throughout the extended supply chain—and a poor handle on what consumers want. But supply chain management and logistics weren't mentioned in the WSJ report. Neither was the effort by many retailers to get their suppliers' help ensuring their shelves are full of the right products. That's not easy. Understanding and forecasting consumer demand is still very challenging for many CPG companies.

The ones that do the best job manage multiple supply streams for their customers, depending on each customer's cost sensitivity. A low-cost scenario could mean the retailer orders full pallet loads and full truckloads direct from the manufacturer, and allows adequate lead time, with no order changes. At the other end of the spectrum are the more agile and flexible supply chains where a manufacturer could provide a mixed truckload, even some mixed store ready pallets shipped from a forward DC, under a short lead time (24-48 hours). Of course that comes at a premium price.

“Retailers are asking for that flexibility,” Miskewicz says. “But the retailers also need to figure a way to better tap into the consumer and understand their needs and preferences and have that drive their assortment planning.”

Many CPG manufacturers with well tuned supply chains are integrating their supply chains with those of their retailer customers, collecting demand signals from the retail level and even feeding that information to their own suppliers to make them more efficient as well. That's the new competitive advantage in light of the challenges at the retail level. That, in turn, will drive the development of flexible manufacturing processes, allowing CPG companies to quickly adapt and produce new product.

So rather than asking what's wrong with supermarkets, the focus should be on what's right with their supply chains and with the CPG manufacturers gearing up to get them back on the right track.

Related Editorial:

Top Performers Master Demand and Supply Chains

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