Lesson 7
Supply Chain Management
Objective: after reading this lesson, you will be able to understand
What is supply chain management and its importance, the importance of information in supply chain, the physical distribution system, new trends in SCM.
Structure:
7.1. Meaning and Importance
7.2. The flow of information
7.3. The Physical distribution
7.3.1.The distribution centre
7.3.2 Determining the distribution system – Distribution center vs. Direct store
7.3.3. What type of retailer should use a distribution center?
7.4. New trends in Supply Chain Management:
7.5. Summary
7.6. Key Terms
7.7. Questions
7.8. References
7.1. Meaning and Importance
Supply chain management is the integration of business processes from end user through original suppliers that provides products, services, and information that add value for customers.
Retailers may be the most important link in the supply chain. They connect customers with the vendors who provide the merchandise. It is the retailers responsibility to gauge customers wants and needs and work with the other members of the supply chain wholesalers, manufacturers, transportation companies, and so on – to make sure the merchandised customer want is available when they want it. Retailers have increasingly taken a leadership position in their respective supply chains. Not only does size generate power, but knowledge about their customers plays a vital role as well. As a result of their position in the supply chain, retailers are in the unique position to collect purchase information customer by customer, transaction by transaction. This information can be shared with suppliers to plan production, promotions, deliveries, assortments, and inventory levels.
Improved Product Availability
An efficient supply chain has two benefits for customers (1) fewer stock outs and (2) assortments of merchandise that customers want, where they want it. These benefits translate into greater sales, higher inventory turns, and lower mark downs for retailers.
Improved Return on Investment
One measure of retailing performance is the ability to generate a target return on investment (ROI)
An efficient supply chain and information system can increase net profit and net sales, while at the same time reducing total assets. Net sales can increase by providing customers with better assortments. Net profit can increase by either raising gross margin or lowering expenses. Its inventory management system, which is directly linked to the vendor’s computer, is so sophisticated that the retailer needs to carry relatively little backup inventory to stay in stock. Thus, since inventory investment, is low, the total assets are also low, and inventory turns are high. In sum, there’s untapped opportunity for many retailers to improve their performance through better supply chain management.
7.2. The flow of information
The flow of information is complex in a retail environment. The key concepts involved in the information are Data Warehousing, Electronic data interchange, and security.
Data Warehousing
Purchase data collected at the point of sales goes into a huge database known as a data warehouse. A data warehouse is the coordinated and periodic copying of data from various sources, both inside and outside the enterprise, into an environment ready for analytical and informational processing. The information stores in the data warehouse are accessible on several dimensions and levels. Analysts from various levels of the retail operation extract information form the data warehouse for making a plethora of marketing decisions about developing and replenishing merchandise assortments. Data warehouses also contain detailed information about customers, which is used to target promotions and group products a together in stores.
Electronic Data Interchange
Electronic data interchange (EDI) is the computer-to computer exchange of business documents form retailer to vendor, and back. In addition to sales data, purchase orders, invoices, and data about returned merchandise are transmitted form retailer to vendor.
Many retailers now require vendors to provide notification of delivers before they take place. An advanced shipping notice is electronic documents received by the retailers computer form a suppler in advance of a shipment. It tells the retailer exactly what to expect in the shipment. If accurate, the retailer can dispense with opening cartons and checking in merchandise. Information about on-hand inventory status, vendor promotions, and cost changes can be transmitted for vendor to retailer too, or in the case of vendor-affixed price tickets from retailer to vendor as will. It’s also possible to exchange information about purchase order changes, order status, retail prices, and transportation routings. There are varieties of way in which EDI data can be transmitted: proprietary systems and web-based systems, which include intranets and extranets.
Security
Successful multi channel retailers must build security into their business processes so that their customers will be assured that their personal information will be private and secure. The Internet has heightened security problems. Multi channel retailers are now open to the world all the time. Some of the potential implications of security failures besides the most obvious and devastating one, loss of revenue from customers, are the loss of business data essential to conducting business; disputes with partners, suppliers, distributors, customers; loss of public confidence and bad publicity.
Security has become a more intense challenge in recent years because, as a result of electronic retiling, suppliers, customers, and prospective new clients all need some form of access. Also, the control, of retail information is slipping from a centralized information technology orientation to the functional areas of the business such as buying and distribution. To help control this changing information environment, retailers need to develop a corporate security policy. A security policy is a set of rules that apply to activities in the computer and communications resources that belong to an organization. Although security policies cover theft and the security of individuals and property, we will limit out discussion here to network security.
The security policy should meet the following objectives:
Authentication: the system should be able to assure or verify that the person or computer at the other end of the session really is what it claims to be.
Authorization: The system should be able to assure that the person or computer at the other end of the session has permission to carry out the request.
Integrity: the system should be able to assure that the arriving information is the same as that sent. This means that the data are protected from unauthorized changes or tampering (data integrity).
7.3. The Physical distribution:
Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customers’ requirements. Supply chain management includes logistics, but it is a more comprehensive and strategic concept tht includes customer relationship management, inventory management and vendor relations. For example, supply chain management would be involved in new-product development because logistics considerations may affect the profitability of anew product.
The key issues in logistics have been involved in :
- Merchandise flows from vendor to distribution center.
- Merchandise flows from distribution centre to stores.
- Alternatively, merchandise flow from directly vendor to stores
Some times merchandise is temporarily stored at the distribution center; other times its immediately prepared to be shipped to individual stores. This preparation may include breaking shipping cartons into smaller quantities that can be more readily utilized by the individual stores, as well as tagging merchandise with price tags or stickers, UPC codes, and the store’s label. A UPC code-the black-and –white bar code printed on the package of products.
7.3.1.The distribution centre:
The distribution centre performs several functions like coordinating inbound transportation, receiving, checking, storing and cross docking, getting merchandise “floor-ready”, filing orders, and coordinating outbound transportation.
Management of Inbound Transportation: Inbound transportation refers the merchandise flow from vendor to distribution centre. Traditionally, buyers have worked with vendors to determine merchandise assortments, pricing, promotions, and the terms of purchase such as discounts to take for early payment. Now, however, buyers and their staffs get much more involved in coordinating the physical flow of merchandise to the stores. The dispatcher coordinates the deliveries to the distribution centre. The dispatcher also reassigns the delivery times of trucks, if they caught in unnatural situations. Although many manufacturers pay transportation expenses, some retailers negotiate with their vendors to absorb this expense. These retailers believe they can lower net merchandise cost and better control merchandise flow if they negotiate directly with truck companies and consolidate shipments form many vendors.
Receiving and checking: Receiving refers to the process of recording the receipt of merchandise as it arrives at a distribution center. Checking is the process of going through the goods upon receipt to make sure they arrived undamaged and that the merchandise ordered was the merchandise received.
Checking merchandise was a very labor-intensive and time consuming process but in modern days many distribution systems using electronic data interchange are designed to minimize the process.
Storing and Crossdocking: there are three types of distribution centers, a traditional, a crossdocking, and combination of two.
The traditional distribution centre is a warehouse in which merchandise is unloaded from trucks and placed on racks or shelves for storage. When the merchandise is needed in the stores, a person goes to the rack, picks up the item, and places it in a bin. The merchandise is transported via a conveyor system or other material handling equipment to a staging area where it is consolidated and made ready for shipment to stores.
Crossdocking distribution center, is one in which vendors which merchandise prepackaged in the quantity required for each store. The merchandise already contains price tags and theft detection tags, and in the case of some apparel, it is on hangers. Since the merchandise is ready for sale, ti goes to a staging area rather than into storage. When all the merchandise going to a a particular store is in the staging area, it is loaded onto a truck and away it goes. Crossdocking distribution centers are less costly tan traditional centers because there is little or no storage required, processing at the distribution centre is minimal, and the centers can be much smaller than traditional centers.
Merchandise characteristics typically dictate the optimal type of distribution center to use. The primary consideration is the amount of volume that each store can use on a particular shipment. Most retailers have a mix of products and therefore use a combination traditional and crossdocking Distribution Centers (DCs).
Getting Merchandise Floor-Ready: Floor-ready merchandise is merchandise that’s ready to be placed on the selling floor. Getting merchandise floor ready entails ticketing, marking, and, in the case of apparel, placing garments on hangers. Ticketing and marking refers to making price and identification labels and placing them on the merchandise. It is more efficient for a retailer to perform these activities at a DC than in the stores because they are time consuming and messy. Getting merchandise floor-ready in stores can clog aisles and divert sales peoples’ attention from their customers.
Having floor-ready merchandise benefits the retailer because the cost of making the merchandise floor-ready is passed on to vendors. Large retailers like Wall mart and Big bazar develop their own systems to meet their customers demands. Some smaller vendors, however, have decided it is too costly to provide floor ready merchandise and instead concentrate on smaller specialty stores.
Shipping merchandise to stores: the process of shipping of an order is as follows. The point-of-sale terminals in retail store record each purchase. Data are transmitted to buyers and their staffs so they may formulate replenishment orders for all the items in the store. The order for the retail store transmits to the distribution center. At the distribution center a pick ticket (a document that tells the order filler how much of each item to get from the storage area) will be created. The pick ticket is printed in warehouse location sequence so the order fillers don’t waste the time crisscrossing the distribution center looking for merchandise. The computer knows which items are out of stock so it does not even print them on the pick ticket. Order fillers put the merchandise on conveyers that take the merchandise to a staging area where an electronic sorter routes the merchandise to the bay with the truck going to the distribution center.
The above process is called as Pull logistic strategy, in which orders for merchandise are generated at the store level on the basis of demand data captured by point-of-sale terminals. An alternative and less sophisticated strategy is knows as a push logistics strategy, in which merchandise is allocated to stores on the basis of historical demand, the inventory position at the distribution center, and the stores’ need. Although generally more desirable, pull logistics are not used by all retailers. Since it is harder to forecast sales for each store than for a distribution center, retailers with less sophisticated forecasting and information systems typically use push strategy.
Management of outbound transportation: the management of out bound transportation from distribution center to stores has become increasingly complex as chain stores expand. To handle the complex transportation problem, the distribution centres use a sophisticated routing and scheduling computer system. This system considers the rate of sales in the store, road conditions, and transportation operating constraints to develop the most efficient routes possible. As a result, stores are provided with an accurate estimated time of arrival and vehicle utilization is maximized.
Reverse logistics: Reverse logistics is a flow back of merchandise through the channel, from the customer to the store, distribution center, and vendor, for customer returns. Reverse logistics can be serious problem for distribution center. Reverse logistics systems have never been simple or inexpensive. The items maybe damaged, and without the original shipping carton, thus causing special handling needs. Transportation costs can be high because items are shipped back in small quantities. Retailer and their vendors usually with returns to vendors would just disappear.
7.3.2.Determining the distribution system – Distribution center vs. Direct store:
To determine the distribution system retailer must consider the total cost associated with each alternative versus the customer service criterion of having the right merchandise at the store when the customer wants to buy it. The advantages of Distribution Centre are as follows.
More accurate sales forecasts are possible when the retailer does a combined forecast for all stores that draw from a distribution center rather than doing a forecast for each other.
Distribution centers enable the retailer to carry less merchandise in the individual stores, resulting in lower inventory investment system wide. If the stores get frequent deliveries from the distribution center, they need to carry relatively little extra merchandise as backup stock.
It is easier to avoid running out of stock or having too much stock in any particular store since merchandise is ordered from the distribution center as needed.
Retail space is typically much more expensive than space at a distribution center, and distribution centers are better equipped than stores to prepare merchandise for sale. As a result, many retailers find it cost-effective to store merchandise and get it ready for sale at a distribution center rather than in individual stores.
But distribution centers are not viable for all retailers. If a retailer has only a few outlets, then the expense of a distribution center is probably unwarranted. Also, if many outlets are concentrated in metropolitan areas, then merchandise can be consolidated and delivered by the vendor to all the stores in one area. In some cases, it is quicker to get merchandise to stores by avoiding the extra step of shipping to a distribution center. This is particularly important for perish able goods (meat and produce), high-fashion items, or fads since shelf life is limited.
7.3.3. What type of retailer should use a distribution center?
Retailers with wildly fluctuating demand for specific items at the store level, like CDs, since more accurate sales forecasts are possible when demand from many stores is aggregated at distribution centers.
Stores that require frequent replenishment, like grocery stores, because of direct store delivery system would require stores to spend too much time receiving and processing orders from many vendors. There would not be enough hours in the day to process that many trucks.
Stores that carry a relatively large number of items that are shipped to stores in less than full-case quantities.
Retailers with a large number of outlets that are not geographically concentrated with I metropolitan area but are within 150 to 200 miles of a distribution centre.
7.4. New trends in Supply Chain Management:
Now a day it is witnessed that the recent development in the supply chain management are offering tremendous efficiencies in the performances of retail stores. They are firstly; the most important development in supply chain management is the advent of quick response delivery systems. Second is logistics of electronic retailing and finally out sourcing.
Quick response delivery systems(QR):
Quick response delivery systems are inventory management systems designed to reduce the retailers lead time for receiving merchandise, thereby lowering inventory investment, improving customer service levels, and reducing logistics expenses. QR is the integrating link between the information and the merchandise flows.
The origins of the present QR systems were derived from just-in-time initiatives undertaken by manufacturers and adapted for retailing. QR is part of the efficient consumer response (ECR) initiatives undertaken by packaged goods manufacturers and food and drugstore retailers. The systems used for coordinating sales forecasts between retailer and vendors are referred to as CPFR. EDI facilitates the exchange of data between retailer and vendors.
Originally, quick response delivery systems seemed better suited to basic items, such as underwear, paper towels, or toothpaste, than to high fashion. By its nature, fashion dictates being able to quickly adjust to the chagrining seasons as well as to new colors and styles. Thus, quick response is as important in managing fashion inventories as in managing basic-item inventories. Fashion retailers need to determine what’s selling and what is not selling.
The logistics of Electronic Retailing:
Fulfilling Internet orders from customers is very different than distributing merchandise to stores. Retailers with stores are concerned with moving a large amount of merchandise from distribution centers to individual stores. These distribution centers typically have automated material-handling equipment and warehouse-management software linked to store POS terminals. Internet retailers, on the other hand, have outbound shipments averaging 1.8 times per order that are shipped o address all over the world.
Outsourcing:
To streamline their operations and make more productive use of their assets and personnel, retailers are constantly looking to outsource logistical functions if those functions can be performed better or less expensively by third-party logistics companies.
Third party logistics companies: these are firms that facilitate the movement of merchandise from manufacturer to retailer but are independently owned. Specifically, they provide transportations, warehousing, consolidation of orders and documentation.
Transportation: Retailers must choose their shippers carefully and demand reliable, customized services. After all, to a large extent, the retailer’s lead time and the variation in lead time are determined by the chosen transportation company. Also, many retailers are finding that it is worth the added cost of airfreight to get merchandise into stores quicker. It is also easier for independent transportation companies to contract for full trucks on the return trip than it is for the retailer. By arranging a productive round-trip, they can offer their services at a lower cost than most retailers can do it themselves. Some retailers mix modes of transportation to reduce overall cost and time delays.
Warehousing: to meet the increasingly stringent demands retailers are placing on their vendors to meet specific delivery times for floor-ready merchandise, many vendors must store merchandise close to their retail customers. Rather than owing these warehouses themselves, vendors typically use public warehouses that are owned and operated by a third party. By using public warehouses, vendors can provide their retailers with the level of service demanded without having to invest in warehousing facilities.
Freight Forwarders: Freight forwarders are companies that purchase transport services. They then consolidate small shipments from a number of shippers into large shipments that move at a lower freight rate. These companies offer shippers lower rates than the shippers could obtain directly from transportation companies because small shipments generally cost more per pound to transport than large shipments.
Integrated third-party logistics services: traditional definitions distinguishing between transportation, warehousing, and freight forwarding have become blurred in recent years. Some of the best transportation firms, for example, now provide public warehousing and freight forwarding. The same diversification strategy is being used by the other types of third-party logistics providers. Retailers are finding this one-stop shopping quite useful.
7.5. Summary
Supply chain management is the integration of business processes form end used thought original suppliers that provides products, services, and information that add value for customers. Retailers may be the most important link in the supply chain. They connect customers with the vendors who provide the merchandise. Supply chain management provides befits like Improved Product Availability, Improved Return on Investment. The flow of information is complex in a retail environment. The key concepts involved in the information are Data Warehousing, Electronic data interchange, and security. Supply chain management includes logistics, but it is a more comprehensive and strategic concept that includes customer relationship management, inventory management and vendor relations. For example, supply chain management would be involved in new-product development because logistics considerations may affect the profitability of anew product. The key issues in logistics have been involved in, Merchandise flows from vendor to distribution center, Merchandise flows from distribution centre to stores. Alternatively, merchandise flow from directly vendor to stores. The distribution centre performs several functions like coordinating inbound transportation, receiving, checking, storing and cross docking, getting merchandise “floor-ready”, filing orders, and coordinating outbound transportation. Now a day it is witnessed that the recent development in the supply chain management are offering tremendous efficiencies in the performances of retail stores. They are firstly; the most important development in supply chain management is the advent of quick response delivery systems. Second is logistics of electronic retailing and finally out sourcing.
7.6. Key Terms:
Supply Management: Supply chain management is the integration of business processes form end used thought original suppliers that provides products, services, and information that add value for customers.
Data Warehouse: the coordinated and periodic copying of data from various sources, both inside and outside the enterprise, into an environment ready for analystical and informational processing. It contains all of the data the firm has collected about its customers and is the foundation for subsequent CRM activities.
Electronic Data Interchange (EDI): the computer to computer exchange of business documents from retailer to vendor, and back.
Physical distribution: Physical distribution is the process of delivering the product to the marketing channels and consumers.
distribution centre: A warehouse that receives merchandise from multiple vendors and distributes it to multiple stores.
Crossdocking: a warehouse process in which merchandise is delivered to one side of the facility by vendors, is unloaded, and is immediately reloaded onto trucks that deliver merchandise to the stores.
pick ticket: a document that tells the order filler how much of each item to get from the storage area
Pull logistic strategy: a strategy which order for merchandise are generated at the store level on the basis of demand data captured by point-of-sale terminals.
push logistics strategy: a strategy in which merchandise is allocated to stores based on historical demand, the inventory position at the distribution center, as well as the stores’ needs.
Reverse logistics: A flow back of merchandise through the channel, from the customer to the store, distribution center, and vendor, for customer returns.
Quick response delivery systems: system designed to reduce the lead time for receiving merchandise, therby lowering inventory investment, improving customer service levels, and reducing distribution expenses; also knows as a just in time inventory management system.
Electronic Retailing: A retail format in which the retailers communicate with customers and offer products and services for sale over the internet.
Outsourcing: obtaining a service from outside the company that had previously been done by the firm itself.
7.7. Questions:
- Describe supply chain management and explain its benefits
- What is information? What are important considerations of the information in supply chain management?
- Explain the new trends of supply chain management.
- Explain the physical distribution and its components.
- How do you determine the distribution system and what type of retailer can get the benefits from distribution center?
7.8. References:
Michael Levy, Barton A Weitz; Retail management; Fifth Edition; Tata Mc Graw-Hill Publishing Company Limited.
Barry Berman, Joel R. Evans; Retail management; Eighth Edition; Pearson Education Asia.
