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About the Author

Richard Wilhjelm

VP, Sales & Business Development
Compliance Networks


Richard Wilhjelm currently serves as VP, Sales & Business Development for Compliance Networks, a supply chain performance improvement solution provider. Richard has over 25 years of sales and marketing experience in the supply chain software industry. His skills in sales management and field operations have yielded tangible results within recognized companies such as Logility, Inc., JD Edwards World Solutions Company and Prophet 21, Inc. Richard received his Bachelor of Science degree in Finance from the University of Florida and currently resides in Weston, FL with his wife and three daughters.

For more information, please visit www.compliancenetworks.com.


Supply Chain Comment

By Richard Wilhjelm, VP Sales & Business Development, Compliance Networks

April 18, 2013



Retail Margin Risk: 5 Critical Supply Chain Steps to Ensure Merchandise Plan Execution

Systematically Identifying and Eliminating Supply Chain Performance Related Issues Can Help Retailers Mitigate Events that Put Margin at Risk



Every year, retailers spend hundreds of millions of dollars to create the perfect merchandising plan. Industry demographics are measured and focus groups created in an attempt to define the desired customer. Once the perfect customer and corresponding products are identified, sophisticated forecasting, planning and allocation systems are utilized to construct complex merchandise plans to achieve specific margin objectives.

Unfortunately the results, particularly during promotional or seasonal events, are often missed margin opportunities combined with damage to the retailer’s valuable brand because of out-of-stocks (OOS) at the shelf. While in-store execution issues often lead to OOS, the culprit is just as often chain performance. In truth, the retailer’s margin was in jeopardy from the beginning due to unforeseen but predictable supply chain risk factors.

The penalty for retailers is high, but is also segment dependent, because consumers react differently to an OOS depending on the product category. But in total, North American retailers lost some $89 billion in sales in 2011, according to research released last year by IHL Group, which specializes in the topic.

Wilhjelm Says:

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Where does the supply chain executive start in their quest to influence margin performance? While opinions will vary where the best place to start is, most will agree the desired outcome is a more predictable and consistent supply chain.
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Margin Risk

Margin risk, from a retail perspective, is defined as the potential permanent loss of margin due to internal and external related performance related events. Performance events can be internal, changed or late purchase orders or external, late or incomplete shipments and poor ASN accuracy. In either the case, the margin opportunity may be lost for that fiscal period or may not return at all until next year.

Margin Has a Shelf Life

Retailers are coming to the realization that like their products, margin has a shelf life. In the past, the consumer was patient mainly due in part to the fact their options were limited. If an advertised product was not in stock, often the consumer would take their rain check and return in 2 or 3 weeks when the product was back in stock. The need for expensive safety stock was not required and the margin opportunity was preserved, the best of both worlds for the retailer. But today’s consumer has more options. Whether it is increased competition from traditional brick and mortar companies with an Omni- channel offering or pure e-commerce plays like Amazon, or even mobile commerce, the consumer no longer has to be patient. He or she has options and more increasingly are demonstrating the capacity to exercise them.

Opportunity for Supply Chain

A common question we often hear is how supply chain can be viewed as less of a cost center and more of a margin contributor. Within most retailers there exists a tension between the merchant and supply chain teams. Merchants are perceived to be higher in the enterprise hierarchy because they are the generators of gross margin while supply chain executives are often portrayed as “cost of doing business”. But with the new dynamic in the industry and an emphasis on speed and execution, supply chain executives play an ever increasing role in merchandise plan execution and overall retailer profitability. By maintaining proper fill rates, ensuring on-time deliveries, demanding ASN accuracy and minimizing trouble shipments, the retail supply chain executive can influence the overall performance of the supply chain and mitigating both internal and external factors that put margin at risk.

Five Critical Steps Supply Chain Steps to Ensure Merchandise Plan Execution

Where does the supply chain executive start in their quest to influence margin performance? While opinions will vary where the best place to start is, most will agree the desired outcome is a more predictable and consistent supply chain. In the presence of variability, there will be safety stock to mitigate margin risk. By eliminating the variability and providing merchant teams with actual performance related information, retailers can drive down their overall safety stock and improve profitability.

The following are five steps supply chain executives can take to ensure merchandise plan execution:

Step One – Focus on On-time Deliveries and Fill Rate (increase sales) – The velocity and cadence of promotional events in the retail industry is greater than ever before. Ensuring orders are complete an on-time are the critical to most merchants and are fundamental in reducing margin risk.

Step Two – Monitor & Reduce the Purchase Order Lifecycle (reduce supply chain days) - Continuously monitor the purchase order lifecycle for opportunities. A shorter purchase order lifecycle is more responsive to demand signals, less prone to out of stocks and requires less working capital to fund.

Step Three – Monitor ASN Accuracy Religiously – Poor ASN accuracy can doom inventory integrity leading to poor merchandise plan execution. While it’s important to audit vendors for accuracy, it is also important to focus valuable audit resources on the lower performing vendors versus the higher performing vendors.

Step Four – Monitor Transportation Performance – Ensure vendors are adhering to the routing guide for transportation requirements. The selection of a wrong carrier can result in additional supply chain days while multiple shipments during the same week can accelerate transportation expenses.

Step Five – Over Communicate With Your Vendor Trading Partners – Provide vendors 24/7 access to key performance data. Immediately alert vendors to past supply chain failures, or if possible, alert them to upcoming execution opportunities. Over communicating performance data to key trading partners will result in visibility for all parties involved.


Summary

The value of merchandise plan execution is critical to any retailer’s margin objectives. By systematically identifying and eliminating supply chain performance related issues, retailers can mitigate those events that put margin at risk. In a recovering economy where working capital still remains constrained, the supply chain professional who can run a predictable and consistent supply chain, influence margin performance, and increase operating cash flow will be invaluable.



Agree or Disagree with Our Expert's Perspective? Let Us Know Your Thoughts at the Feedback section below.

Recent Feedback

Of course this sort of "Vertical Integration" makes total sense.  Why would any large company not want to control, and squeeze efficiencies from all parts of its supply chain.  However we have seen many failed attempts in the past, think Ford River Rouge – perhaps companies get too atomic to control effectively - but most of those failures occurred before we had the real-time visibility to monitor everything globally that we have today with the internet.

 

Time will tell.  My bet is that regulators in the various countries will provide Amazon with too much pain to allow them to achieve their grand vision.  Competitors will be urging regulators to deny various options, and unless all of the pieces are in place from source to consumer the Tower of Amazon's Bable may collapse.  Or maybe the genius team at Amazon will simple make a variant of the plan succeed.


Steve Murray
NA
NA
Feb, 22 2016

As someone who works for Amazon Global Logistics, I won't comment on the specifics in the Bloomberg article but what I will comment on is this: Amazon is committed to providing customers, regardless of their geographic location, with exceptional value, selection, and experience.

What we have identified within Amazon is that without an optimized end-to-end global supply chain ecosystem, and flawless logistics execution, we simply cannot meet our goals. Individuals who are passionate about all aspects of supply chain management, logistics, retail, and technology innovation, and who have a desire to make history, should explore career opportunities at Amazon. The challenges we have before us are enormous but for our Sellers, customers, and associates, the challenges will be overcome.


Brittain Ladd
Amazon Global Logistics
Amazon
Feb, 22 2016

I communicated to Amazon a while ago the following:

- It takes me less than 60 seconds to make a purchase on Amazon's site.

- UPS lost several times my packages and he took me almost 15 minutes to call C.S. and fix the delivery's problem.

In conclusion, Amazon can invest and innovate innovative solutions because Amazon desires to add value to the customer; unfortunately, a partner in the supply chain can make this investment look like pouring water in the sand. I believe that UPS can create a business division that can handle only Amazon's orders. It is an opportunity for UPS and others to jump on this new opportunity.

 


Nathan Kattari
NA
NA
Feb, 22 2016

Good article!


Susan Rider
NA
NA
Feb, 22 2016

What you describe is the DHL model minus the aircraft, trucks, IT solutions, Track and Trace capability, and human resources. They will be an intermediary outsourcing that is the guts of the operation. Understanding Brazilian customs rules with its 23 states different and often conflicting VAT rules, the Russian corruption processes, the Indian infrastructure problems, etc. should make for fun regional meetings.


Michael Canon
Principal
Catalytic Logistics, LLC
Feb, 24 2016

As I have seen over the past few years, Amazon has come from a web site allowing people to buy and sell products to this multi-layer complex machine, it will be interesting to see this plan develop.

As history has shown several people and companies is that failure can and will happen, so go slow and plan for everything! If it fails it will be catastrophic... but if it works...! Look out! Remember back when people were admiring the Walmart way of buying products for their stores? That'll look like a corner store in comparison.


Brian Sabourin
Title
Company
Feb, 29 2016

I agree this is an interesting article. 

However, the manufacturer still is paying for the cost to serve his consumer. 

When you count the number of transportation and handling costs in the flow diagram you notice there are 9 of those that take profit out of your sku.  I still believe when the manufacturer wakes up and offers to fulfill all ecommerce orders for all sales channals from manufacturing they will eliminate 5 of the costs.  This will not only allow the manufacturer but also all sales channels to make a greater profit.

This is the lowest cost and fastest way to service their consumer.


Tom French
CEO
Supply Chain Coach, Inc
Mar, 18 2016

The rumors about what Amazon is up to have been going around for some time, and it all adds up. There are plenty of "smaller urban distribution facilities" available, from local industrial parks down to cheap, vacant general merchandise and grocery retail space. By maintaining inventories of Amazon's fastest-moving (most popular) items in these local facilities and bringing in a few (Amazon-owned) Kiva robots to streamline order picking, these little facilities are suddenly as space- and labor-efficient as large DCs, yet they can provide nearly instantaneous delivery. It's a very interestindg distribution model.


Steve Hopper
Principal
Inviscid Consulting
Mar, 25 2016

 This is an ambitious end to end global supply chain strategy by Amazon. Technology,innovation  and capability development will be the driving force to achieve successful execution.Businesses must embrace constant change and exploit complexity/uncertainty in the market place for sustainability and survival. With thie successful implementation of this project,  Amazon will be setting exciting future trend in customer service , order fulfillment,shipping and distribution across international borders.


Steve Ighorimoto
CEO
Erovie Nigeria Limited
Apr, 04 2016
 
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