Supply Chain Management

What you’ll learn to do: Explore the use of information systems to manage the supply chain

We will explore how retail businesses leverage technology to manage the supply chain. What is a supply chain? How can retailers have the right products at the right place at the right time to maximize sales? How does supply chain management impact the bottom line? What happens when retailers and vendors establish cooperative relationships?

The supply chain is the entire sequence of activities involved in taking natural resources and raw materials and turning them into a product for the consumer. It includes all the actions, organizations, materials, systems, people, and information involved in that process.

Retailers, like all business-to-consumer organizations, aim to match and maximize demand with supply. This means that the right products need to be in the right place in the right quantities at the right time. Given the millions of products sold daily by large retailers, SCM systems ensure replenishment inventory is being received on time at retail distribution centers and warehouses. By effectively managing supply chains, retailers can realize their sales goals.

In the earliest days of the automobile, Henry Ford made a decision to own or control the full supply chain—from the mines that provided the ore to the factories that made the glass. Raw materials—iron ore, coal, and rubber, all from Ford-owned mines and plantations—came in through one set of gates at the plant while finished cars rolled out the other. Today it is exceptionally rare for a company to try to own all the raw materials for a physical product. Even software products use preexisting software frameworks and code.

The Flow of Goods

Based on the type of retailer, supply chains can range from simple to complex. For example, Mom or Dad supplying fresh pitchers of lemonade to the children’s corner drink stand would represent a small-scale supply chain (of course the lemons and water had to come from somewhere, but for the sake of argument let’s keep this one simple).

For a national electronics retailer, the supply chain would obviously be more complex. Starting with the vendor, component parts would be sourced in various countries depending on price, quality and availability. Those components would then be shipped to other countries for assembly, quality inspection and packaging. From there the finished product could be transported via ship, air, and land to the retailer’s receiving/distribution centers for further handling and ultimately, distribution to stores or direct to the consumer.

This example itself is very simple as there is much complexity beneath the surface. The vendor and the retailer must have a strong working relationship in order to plan, execute and finance the anticipated consumer demand as partners. The retailer must be responsible for identifying the correct product for its consumer customer in the first place. Retailers must forecast the sales potential for these products, along with marketing, promotion and appropriate distribution of the product. The vendor has to manage all phases of the product lifecycle from design to manufacture to transportation all “just in time.”

Every product is different and may have a different supply chain strategy. As products are manufactured, they “move” from raw materials or components to finished goods. At some point in that process, RFID or other identification means are implemented to monitor where the product is in its manufacturing lifecycle. The movement through the supply chain process continues when products are aggregated for shipment where they can be tracked during the transportation leg of the supply chain.

Zara is a large international retailer with 6,900 stores in 86 countries. While many large U.S retailers like JC Penney, Sears and Toys ‘R Us are closing stores, Zara is opening an average of 400 new stores a year over the past five years. The key to Zara’s success is their agility due to a finely-tuned supply chain. Incredibly, the company designs, manufactures, and distributes fashion products within 2 weeks from the time they appear on the catwalk. Zara does commit 15–25% of its inventory prior to the design season and fills in another 25% at the start of the season, but an amazing 50% of its clothes are designed and manufactured in season. Zara must closely manages every aspect of the supply chain in order to execute so quickly.

Sales and Information Systems

Given the definition of a supply chain and some brief examples, one can imagine how difficult it must be to manage all of the moving parts of the process. Supply Chain Management systems (SCM) have been developed to help organizations do exactly that. A good SCM system ensures that the right inventory is in the right place to meet anticipated demand. This serves to maximize sales potential and drive profitability as the retailer’s investment is returned.

One of the most important factors in a retailer’s profit picture is inventory turnover. Before operating expenses, payroll, and other costs are factored into a P/L statement, the retailer profit model is founded on three basic components: cost of goods, sale price of goods, and inventory turnover. If a product is purchased by the retailer for $10 dollars and sold to the consumer for $20 dollars, the gross margin for one sales transaction would be $10 dollars. Turnover represents how many times that transaction takes place. If the retailer’s inventory is in the right place at the right time, turnover is increased and more gross margin dollars are generated.

In addition to the enormous importance of inventory turnover, a good SCM system can also help drive efficiency throughout the product lifecycle, reducing costs and time-to-market. With the metrics that these systems provide, managers can make better decisions as to who/where are the best sources of supply, how much lead time is needed to ensure on-time delivery, what are the best transportation methods, etc.

Supplier and Retailer Coordination

Vendors and retailers can coordinate their efforts in several ways. They can coordinate in planning sales and inventory levels, as well as in planning promotions and by sharing real-time sales data.

Retailers have a variety of methods to plan their business. One of the most common is to predict future sales based on prior years’ performance. Through the use of “sales history”, a retailer has an empirical basis on which to plan future expected revenue. Once revenue is estimated, the business can then plan several important other factors in order to execute their business plan. How much inventory will be needed to achieve the expected sales? What marketing/promotional support should be in place to support the planned sales?

It is easy to see that having close vendor partnerships is crucial for successful retail performance, since suppliers will need to have their products available for the retailers to sell. Often, retailers will solicit vendor support for key promotions as both will benefit from successful mutual marketing campaigns with increased business.

With cooperative planning, both retailer and vendor will realize not only predictable revenue, but revenue that maximizes profit due to efficiencies and economies of scale. Consumers will also benefit due to the same factors- more product quality due to better sourcing, lower costs due to larger buys, etc.