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.