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Traverse Systems Corner: Supply Chain - Cost Center or Margin Contributor?

By: Richard Wilhjelm, VP Sales and Marketing, Traverse Systems

Feb. 27, 2020

As I work with many senior supply chain executives, a common question I hear is: how can we be viewed more as margin contributor and less as a cost center?

The question isn’t surprising given the current economic environment. While as a whole the economy is performing extraordinarily well, at least until the coronavirus crisis, there are underlying challenges that many retailers, wholesalers and consumer goods companies face, including intense competition, the growing dominance of Amazon, labor shortages, and continued uncertainty surrounding tariffs and sourcing strategies. 

It is easy to see why many senior financial executives remain cautious about future profit forecasts.

In the highly dynamic times, what’s the role that supply chain plays and how do we shift the conversation from cost center to margin contributor?

Traverse Systems Says...

The days of the long, slow, low cost supply chains are no longer sustainable for most industries.

The Past

I think it’s safe to say that in the past supply chain’s role was to get the product from point A to point B as quickly and – more importantly – as economically as possible. Most retail organizations – particularly merchant organizations – believed that “if you buy it, they will come.” With money being cheap, the path to profitability was simply a factor of opening as many stores as possible, stocking them with as much inventory as you could, and letting top line growth lead the way.

Meanwhile, wholesale distribution organizations were rallying to a similar cry: “if you stock it, they will come.” The idea was that you beat the competition by stocking more lines than they did, as all customers seemed to care about are price and service levels.

For both retailers and wholesale distributors, supply chain’s marching orders were similar: get it there quick and get in there cheap.   You were measured by cost as a percent of sales. Supply chains were architected around how senior executives were incentivized, resulting in long, slow, and typically unresponsive supply chains.

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So how did we get to where we are now? We again saw record store closings in 2019, while digitally native vertical brands are popping up all over the place and many are experiencing strong growth.

Does that mean retail as we know it is dying? Far from it. Retail sales overall were solid last year, even f many individual retailers are hurting.

The wholesale distribution space, we are witnessing organizations configuring their operations to offer more retail-like fulfillment capabilities to their customers. Apparel brands are bypassing retailers altogether by opening their own stores and by selling directly to consumers on exchanges like Amazon and Walmart. Retail isn’t going away; in my opinion, it’s fragmenting as the traditional lines of retail are being blurred by other providers.

So, what has changed and how did we get here? While there are a multitude of explanations from technology to competition to the well-publicized Amazon effect, at the end of the day I think it comes down to the fact that consumers’ expectations and consumer behavior has changed.

The Future

Today’s fast fashion is a perfect example of changing consumer behavior and demand. The typical fast fashion retailer’s products are relatively inexpensive and they change their assortment frequently.

With lower price points, the consumer, typically a younger demographic, can change their style frequently and not break the bank. The impact to supply chain, however, is dramatic. In the fast fashion example, the typical lead time from idea to shelf went from 6+ months down to 3 weeks, according to research from IHL Group.

Fast fashion isn’t alone, as all supply chains are seeing pressure to compress lead times. The days of the long, slow, low cost supply chains are no longer sustainable for most industries. At one end of the supply chain, you have consumers demanding products cheaper and faster than ever before across multiple platforms. At the other end, lower price points combined with rising transportation costs and the end of cheap money are leading to the potential erosion of profits. I believe therein lies the opportunity for supply chain.

The Opportunity

With the days of the long, slow, cheap supply chains coming to an end, supply chain professionals are suddenly thrust into the spotlight to perform what seems – on appearance alone – to be impossible. They must not only improve service levels while reducing costs but also contribute to top line revenue growth through in-store and in-stock availability. Gone are the days when procurement and merchant organizations alone competed for market share. Nowadays, supply chain organizations are also sales enablers in a fierce battle for consumers’ hearts and wallets.

 They are fighting the fight by ensuring stock is on-time and complete. And while there are countless tools to improve  visibility, execution and inventory integrity, at the end of the day it will be incumbent upon the supply chain professional to traverse across these various systems to produce the winning combination of speed, low cost and higher margins. And now I insert the requisite cliché, “within every challenge lies opportunity.”

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