All retailers want to understand the impact of supply chain efficiency on their margins and competitiveness. They all want to reduce inventory, unlock value and improve on-shelf availability, while cutting markdowns.
Most major multiples are experiencing increased margin pressure and the effects of economic downturn. Some are seeking to increase their market share through product differentiation and exploiting new sales opportunities overseas. Competition is intensifying, as buyers jostle to gain margin advantage by seeking out new sourcing territories.
As retailers reach out across the world to sell and buy, supply chains are getting longer. This, in turn, increases logistics costs, complexity and, ultimately, risk.
At the same time, consumer expectations are growing worldwide and product lifecycles are getting shorter, leading to higher turnover of stock. Yet longer supply chains make it more difficult to respond quickly to changes in customer demand.
Globalisation is consequently creating a critical need for efficient international supply systems. And the most pressing supply chain issue for retailers is achieving a balance between availability and inventory that meets the demands of their chosen business model and buying criteria.
By creating supply chains that more closely match demand to production, retailers can tap into a well of efficiency savings and service level improvements. The key here is integration – using technology to join up the links in the chain to provide visibility of demand, supply and progress across, and between, every element.
In the past, independent decisions on sourcing and logistics merely moved the cost to another part of the supply chain. But by considering an integrated solution – domestic warehousing and transport, combined with remote procurement and international logistics, for instance – retailers have the opportunity to gain real competitive advantage.
Traditionally, retailers have sourced products for delivery to the destination country under the ‘delivered duty paid’ (DDP) method. But more and more are now sourcing directly under ‘free on board’ (FOB) or ‘factory gate pricing’ (FGP) terms. While DDP eliminates some complications and reduces perceived risks, the method conceals inefficiencies. By taking control of the merchandise earlier in the process, retailers can generate substantial savings.
Direct product sourcing has also been shown to cut design-to-delivery cycle times, creating more agile supply chains that respond better to fluctuations in consumer demand. And quality control processes can be implemented closer to source – further reducing errors, delays and again eliminating unnecessary costs.
The rationale here is incontrovertible – direct sourcing hasbeen shown to deliver reductions in product costs of between 10 and 20 per cent.
However, the natural inclination of any supply chain that embodies direct sourcing is to increase downstream assets. The outsourcing specialist’s role is to work with retailers to reverse this – reducing dwell-times/inventories, product handling and value-adding operations at the downstream DC, in an effort to cut costs, ease pressure on resources and increase the life of expensive assets.
Major supply chain specialists have invested in the development of structures, systems and solutions that manage purchase orders and vendors in the country of origin, where they can act as the eyes and ears of the retailer – ensuring that vendors meet timing, quantity, quality and any other compliance requirements.
By consolidating goods offshore, specialists can minimise the number of containers in the supply chain, cutting movement and handling costs, demurrage charges and environmental tariffs. The approach also offers more effective customs brokerage, with pre-booked items reducing clearance delays.
Leading specialists are able to use their local experience and global know-how to help customers deal with complex duty and VAT regimes, or to ease the load completely by taking on trading requirements in their entirety.
Identifying opportunities
Experienced outsourcing partners can certainly help. But retailers must allow the partner access to apply intellect to their business. The process starts with obtaining operational and sales data – historic or planned – then analysing, modelling and mapping every element of the existing solution, identifying opportunities for improvements. And, don’t forget, it is not necessarily just cost that drives the retailer’s business model; other influences – service level, first to market, innovation, etc. – must also be considered alongside the value chain analysis.
Significantly, however, by carefully mapping the existing solution the specialist can – often for the very first time – identify its real costs and true impact on the business.
The contractor will then be in a position to identify where the retailer’s supply chain may be developed or enhanced, and will offer technologies to provide greater visibility and control. It can ensure the retailer has the necessary real-time order and supply chain information to allow it, and its supply chain, to react more quickly and effectively to unexpected events.
Major players like Exel link individual supply chain elements together using proprietary visibility and management reporting tools, offering efficient end-to-end inventory management at SKU level, and providing access to collaborative planning, forecasting and replenishment (CPFR), product procurement, product flow management, and similar services.
The ultimate goal is to work closely with retailers to implement a long-term phased programme of integrated activity designed to reduce costs and improve service.
Leading supply chain management specialists tend to focus on four key areas where value can be added: reducing logistics costs at origin, reducing product costs, increasing sales responsiveness, and reducing destination logistics costs. Looking briefly at each of these in turn…
Firstly, optimising logistics costs at origin. These are reduced through planning and managing purchase orders to optimise the consolidation/non-consolidation mix, by selecting the most appropriate international movement mode and service level to suit product demand at destination, and by perhaps optimising the port of export (FOB point) against the point of manufacture. Although most China-sourced products, for example, are made in South China, a large percentage of them are still shipped through Hong Kong – adding time and cost to the in-country delivery of product to port.
Secondly, cutting product costs by setting up and using sophisticated ‘cost-toserve’ or ‘landed-cost’ models that incorporate every element – including, for example, warehousing and demurrage costs, duty, cash costs and markdowns. Such models can help buyers recognise the true financial impact of their decisions, giving them a complete picture of their business behaviour. The specialist should also be able to provide support ‘on the ground’ in the country of origin.
Thirdly, matching sales responsiveness to demand by using state-of-the-art technology to increase visibility at both SKU and purchase order levels, and by providing buying teams with early warning of supply chain issues. The best specialists will offer ‘control tower’ type systems and implanted managers to monitor, measure and correct supply chain problems.
And fourthly, reducing destination logistics costs by using order and shipment visibility tools to optimise DC intake resources and operating windows. Appropriate goods may also be picked to store or store-shelf at origin, by-passing the DC or warehouse in the destination country. Visibility tools are used to focus on operational consistency, reducing the requirement to hold downstream stocks while maintaining on-shelf availability.
As an extra point, leading suppliers have the ability to manage the retailer’s supply chain as a single entity, keeping in mind its impacts on cash-flow, inventory, availability, etc, and the business P&L.
To be successful, outsourcing support at this kind of rarefied level requires a very strong partnership and the establishment of common goals. It needs a supply chain partner with global scale and an international network, willing to invest in the resources necessary to manage the development of its customers’ supply chains and help them achieve the ideal balance between availability and inventory.
However, the account team must be afforded the freedom to work across the retailer’s business, researching/analysing, developing and implementing effective solutions. These can vary from achieving better equipment utilisation and undertaking quality control/pre-retailing at origin, to working more closely with buyers and merchandisers – helping them to understand the full downstream supply chain implications of their purchasing decisions.
Will it ever happen?
As demonstrated, the specialist outsourcing support sector certainly has the technology and capability to do everything from sourcing products in China to delivering them to the retail outlet in Cologne or Colchester. So is the opening statement ever likely to happen?
The simple answer is that it depends on where retailers draw the line between core and non-core business. But the fact remains that leading specialist contractors are already heavily involved in forecasting demand, sourcing product, assembling, co-packing, pricing, consolidating, shipping/airfreighting and delivering merchandise directly to the store shelf or rail.
By taking an intelligent, analytical approach to retailers’ end-to-end supply chains, the best outsourcing partners can offer integrated solutions that improve availability, reduce markdowns and unlock substantial value – in our experience by as much as a fifth of total supply chain costs.
The trend is clear, and over the next two years logistics and supply chain management companies will get more deeply involved in the end-to-end product supply chain. The number of strategic partnerships between major retailers and the larger supply chain operators will rise as both increasingly focus on their core business.
Mick Jones is divisional director of Exel’s international supply chain group, which specialises in the development and management of customers’ end-to-end supply chains. mick.jones@exel.com
