Expert Insight: Guest Contribution
By Evelyn Hum and Ray Marciano
Date: Feb. 18, 2009

Supply Chain Perspective: The Retail Supply Chain Network of the Future


Multi-Channel World Means Retail Supply Chains Must Rapidly Evolve to Optimize Inventories and Support Complex Logistics Flows

In the first part of this series, we looked at how high-performance retailers are unifying
operations and collaborating internally across functional silos to speed trend-right merchandise to market. (See Accelerating Integrated Supply Chain Performance.).

In part 2 of this four-part series, we expand on that concept by examining the Supply Chain Network of the future.

The life of a Supply Chain professional was so much easier a generation ago when everyone shopped at the mall.  You knew where you had to go to get what you wanted, and there was only one place to go to get it. 

Al Gore hadn’t invented the Internet and Wal-Mart wasn’t WAL-MART, so your competition was generally well-known and predictable. No surprise then that the supply chains of the past were constructed to service the predictability of one-channel operations.

But…the shopper of the 21st Century demands more. If her local retailer doesn’t have the item she wants, she'll drive to a nearby competitor, or call one of the dozens of catalog retailers. Even easier, she’ll go online while sitting by the fire in the comfort of her home. If it doesn’t fit, no worries. The online retailer offers free shipping and no hassle returns.

In response, retailers became “multi-channel,” creating work-arounds to handle the new demands. While this was workable initially, problems ensued as volumes grew. 

Retailers began to feel like George Jetson on his automatic dog walker screaming, “Stop this crazy thing!” With networks out of balance, shipments were often late, orders were missed, customer complaints grew and costs steadily rose.

Lead With Inventory Strategy

Retailers face a daunting challenge in retooling their supply chains to successfully service complex, multi-channel operations featuring increasingly localized store assortments. 

Tackling this challenge requires a bit of “backwards thinking.” Retailers must first determine the optimal inventory strategy for each item in their assortment and only then configure network infrastructure to support these complex flows.

If not well orchestrated, independent actions taken by people in different departments can combine to create a “perfect storm” - where inventory spirals out of control, choking the network and impacting service and bottom line performance. In many cases, it’s very hard to see the incremental inventory creep until it’s too late to react - forcing business unit managers to ask, "How did we get this bad?"

The supply chain of the future is designed on the foundation of a comprehensive, enterprise-wide inventory strategy in which representatives of key functional areas come together to critically evaluate all factors impacting inventory performance. In developing this inventory strategy, a number of questions are answered related to how the intersection of demand variability and volume relate to optimal flow path.  For example, in the diagram below, companies will probably want a different inventory strategy for an item in the upper left quadrant as opposed to those in the lower right quadrant. 

The answers to these questions will require a great deal of interaction across departments. Issues related to source of supply, transportation pipeline, product packaging, service strategy and other factors are evaluated by a team including Merchandising, Product Development and Sourcing, Distribution and Transportation, Store Operations and IT. Using the diagram above as the basis for discussion, for example, an inventory strategy might be for items in the upper left to be replenished as full cases directly from the vendor due to the high volumes and consistent demand, while a better option for an item in the lower right may be an assortment picked specifically for that store based on sales.

The resulting inventory strategy paves the way for the tactical development and execution of an inventory optimization plan incorporating a number of key elements, as shown in the chart below.

6 Areas Impacting Executing Inventory Optimization




Implementing the Right Supply Chain Network

As recently as the early 90’s, most retail DCs received bulk merchandise from vendors and did all the store break-down and processing in cavernous, labor-filled facilities that delayed store shipment and added significant cost.

Those days are over, with retailers driving vendors to ship “floor ready” merchandise that is predominantly cross-docked through more mechanized and efficient retail DCs.  But even as the retailer’s DC has become more efficient, it has stayed focused predominantly on optimizing the single flow from vendor through DC to store.

The next horizon in supply chain network design will require retailers to rethink infrastructure that is capable of supporting a combination of flows required to best support a comprehensive, enterprise-wide inventory strategy. These flows include:

  • DC Bypass – Vendor shipment directly to customer (store or individual)
  • Cross Dock -  Dock-to-dock handling of pre-allocated “floor ready” receipts
  • DC Hold & Flow – Initial store set is cross docked with replenishment held at DC
  • Replenishment – All merchandise is received and held in the DC for pull-based store replenishment.

These are just the most obvious flows. Including the decisions a retailer must make about in-house vs. outsourced operations for each channel, you begin to see the complexity of designing a supply chain network in today’s environment.

To illustrate the impact of re-evaluating inventory strategy, KSA's work with one retailer resulted in replacing a traditional DC process with DC Bypass for a critical category of merchandise.  This retailer cut its source-to-store time by more than 50% by implementing a new flow allowing merchandise to travel from a vendor’s overseas plant, directly to the retailer’s store. This pipeline reduction drove significant inventory savings while allowing the merchant additional time to ensure that product being designed and manufactured represents the best fit with current customer demands.

One size does not fit all!  Examining all products across various selling channels and multiple scenarios will determine the configuration of the best supply chain for a retailer.  Retailers need to maximize savings across the company, and work towards a shared set of metrics. Overall, a well-designed, multi-flow network holds the promise of delivering significant cost savings while supporting tangible top-line growth.


Today’s increasingly competitive, multi-channel retail world calls for a radically new strategy for evaluating supply chain network design. 

Retailers must abandon past practices which look to optimize the number and placement of facilities within traditional networks where domestic DCs touch all merchandise moving to stores.

The network of the future is built on the strong foundation of a well crafted inventory strategy.  That strategy is executed at a very granular level (SKU/category), which will likely drive very different operating processes for key merchandise categories.

Starting with inventory first will drive significant savings while pointing the way to the combination of existing and new flows which are created to provide efficient and cost effective paths for each category of merchandise and channel of distribution.

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profile About the Authors

Evelyn Hum specializes in productivity improvement and pay for performance at global consulting firm, Kurt Salmon Associates.

Ray Marciano works with logistics executives in distribution centers from design to start-up at global consulting firm, Kurt Salmon Associates.


Hum and Marciano Say:

The next horizon in supply chain network design will require retailers to rethink infrastructure that is capable of supporting a combination of flows required to best support a comprehensive, enterprise-wide inventory strategy.

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