ET Retail: Retail supply chain planning and optimization
The objective of the retail supply chain is to make the right product available at the right place and at the right time. Too little product results in lost sales opportunity, while too much product locks cash and results in lost opportunity for other products at other locations.
Mandar Amdekar Head-Engineering & Technology-Supply Chain, Tesco Bengaluru
The retail industry is highly competitive. This can be attributed to the wide assortment of specialty and branded products in the fashion, electronics and entertainment category. Further, as we move from the “want” to the “need” end of the spectrum, it is more due to the price competition for commodity, grocery and general merchandise products. Product lifecycle is a key determinant in how we plan and flow the products through the supply chain. This article will generally discuss longer lifecycle products from a supply chain perspective and how good supply chain planning and optimization – or lack thereof – can make or break the retail business. It will also discuss short lifecycle products to an extent.
The objective of the retail supply chain is to make the right product available at the right place and at the right time. Too little product results in lost sales opportunity, while too much product locks cash and results in lost opportunity for other products at other locations. This translates into having high availability - while reducing stockholding as the two main (and competing) objectives for any supply chain as it can have significant impact on top-line sales as well as the bottom-line margin.
The above objectives should make it clear that the foundation for a great supply chain begins with an accurate model that forecasts sales, and anticipating effects on sales due to price, promotion, weather and other correlated variables. Accurate book-keeping of stock is critical as it maintains flow from suppliers to depots to stores, and checks the sales, transfers and occurrence of waste. Planning and ordering function for short lifecycle products, and corresponding replenishment function for longer lifecycle products, depend upon the sales forecast and stock position. Finally, logistics planning and scheduling is how stock is physically moved from one location to another.
Business constraints on the supply chain that are designed with an intention to make the process optimal – for example, only a particular single depot can supply to a given store, or only one fulfilment center can fulfil online orders, can counter-intuitively over-constrain the network and result in inefficiencies. These constraints are often designed with normal use-cases in mind. However, the supply chain cannot react quickly enough in abnormal situations such as a supplier being unable to deliver sufficient stock, truck breakdowns, or sudden demand spikes that need to be managed. The ability to respond and react to the changing circumstances or challenges requires thoughtful software modeling of the supply chain, as well as minimizing of constraints that leave the software capability open to varying business scenarios that may or may not ever be played out. This way, the business innovation is not constrained or stifled due to the lack of software capability. Optimization of individual processes versus global optimization needs to be balanced at the right level, since global optimization leads to a monolithic model, and too much modularity leads to a globally sub-optimal solution. In addition, the solution needs to be scalable and responsive to the volume demands that the supply chain transactions impose on it – which implies focus on non-functional requirements.
Supply chain planning for shorter lifecycle products typically happens weeks or months in advance. Forecasting tends to be less accurate since the forecast is generated much before execution takes place, and there is little to no room to react to any change. There is dependency on manual decision making for financial, assortment and allocation planning of the short lifecycle merchandise. Forecasting, ordering, book-keeping and logistics are typically treated in isolation due to the relatively longer lead times. One way to get more accurate planning and optimization is to make an assumption about the forecast of the new product being equal to the product’s predecessor, e.g. forecast of TVs is the same and will carry forward where the new models will take over from the previous model; fashion merchandise and accessories may be slightly more difficult to the heterogeneous mix from one season to the next.
There is far greater opportunity to react and respond to changing situations for long lifecycle products for forecasting, ordering, book-keeping and logistics, since these systems are planning and optimizing constantly. The lines between these are sometimes blurred to generate a globally optimized solution. At Tesco, this cycle for planning a single day is repeated over a moving 3-week horizon until there is an opportunity for the forecast and order to be as accurate as possible.
In summary, a retail supply chain’s success hinges upon the following capabilities:
•Good forecasting model
•Accurate stock book-keeping
•Accurate ordering and replenishment
•Ability to quickly react to business situations
•System scalability and responsiveness
Does your supply chain planning live up to these expectations? What other factors do you think make or break a retail supply chain?