SUPPLY CHAIN IS CENTRAL TO MULTICHANNEL SUCCESS WITH A NEED FOR REAL-TIME INVENTORY VISIBILITY, FLEXIBLE FULFILMENT OPTIONS AND NEAR-SOURCING. BUT, WRITES PENELOPE ODY, IT’S A DAUNTING PROSPECT FOR MANY.
Time was when the supply chain was the Cinderella of retail departments. It was rare to find supply-chain representation at board level. Responsibility was often lumped together with IT and regarded by the ‘real’ retailers – working in trading departments such as store operations, merchandisers, or buyers – as little more than a service function.
Today the story is very different. A study, Supply Chain Strategy in the Boardroom – the Reality, by consultants Solving Efeso and Cranfield School of Management found that in around three-quarters of the businesses questioned, the senior supply chain executive was now a board member. While improving the status of supply-chain executives may be straightforward, transforming the supply chain to cope with multichannel demands is quite another matter.
Retailers rarely replace supply-chain systems, and many major chains are currently using technology designed for a time when ecommerce was in its infancy. Martec’s IT in Retail 2013 Report analysed the IT systems of 150 leading UK retailers, and suggests that the average age of retail logistics and supply-chain technology is 10.8 years – the second highest of any systems category studied, with the average age for replacement calculated at 12 years, the highest for any category.
“Supply chain is coming onto the board agenda,” says Andy Murden, business development manager at transportation management systems developer Kewill, “and there is a realisation that it has to be synchronised across the channels with one or at most two platforms and with real-time updates. Currently, companies are tending to patch up their existing systems as best they can, but certainly over the next five years as systems become due for replacement we should see some significant changes and increased capabilities.”
WORKING IN REAL TIME
In a multichannel supply chain, real-time is essential as Alek Adamski, partner at consultants Kurt Salmon , agrees: “So many retailers are still working with old legacy systems that cannot give real-time information and for me that is key – it is vital.”
John Lewis has already bitten the bullet with a £369 million investment in its supply chain planned between now and 2020. Termed Programme Q, the investment includes a second distribution centre at the Magna Park site in Milton Keynes.
“A critical element in planning future supply-chain needs is that the facts we base our plans on today will have changed in five years time,” says operations director Dino Rocos. “Therefore we need to maintain agility with a modular approach.”
Deliveries also need to be flexible and although John Lewis currently uses three carriers for the 9.5 million smaller parcels it despatches annually – it has its own two-man distribution fleet for larger consignments – Rocos admits to being “uncomfortable about our reliance on the carrier network”. An in-house one-man delivery fleet is certainly on the cards for the future.
As Rocos points out, in 2000 John Lewis’ online sales were £21 million a year – the equivalent of half a department store. Today that figure is £1 billion and accounts for 27 per cent of the company’s trade: by 2020 it expects online to have risen to 40 per cent. John Lewis’ first distribution centre (DC) at Magna Park opened four years ago with 650,000 square feet; today it provides 900,000 square feet and similar growth is expected for the second unit scheduled to open in 2015. This expansion is not just for online business but to cope with the chain’s growing number of department stores as well. “We’re investing serious money in supply chain and our larger DCs reflect the scale of our growth,” says Rocos. “We need to be able to access a piece of stock anywhere in the business to support our customers – however they choose to interact with us.”
Complementing the DC investment – and designed to provide that vital real-time stock information – is planned investment in new ERP systems, probably from Oracle and to be implemented next year, and investment in item-level RFID in branches. “You really need stock accuracy for online fulfilment,” adds Rocos.
LOCATION, LOCATION, LOCATION
Understanding where stock is located – stores, DCs, regional warehouses, cross-dock, supplier or wherever – and how quickly and from where it can most cost-effectively be despatched to meet a customer order, is central to successful and profitable multichannel fulfilment. That means not just fully integrated inventory data but updates in real-time to ensure that goods really are ‘available to promise’, as well as integration with retail systems – both EPoS and web – so that everyone has the correct information available at all times.
Having an integrated system is, however, just the start. A greater problem for many is accuracy. “In-store inventory accuracy is not generally that good,” says Steve Leng, retail merchandising and supply chain solutions leader for UK and Ireland with IBM , “so retailers are reluctant to embed that data into their supply-chain systems. If you don’t have stock visibility you can’t promise to fulfil customer orders. To improve store accuracy you need IT investment and better processes, but transformational change is difficult – so for some RFID is back on the agenda.”
RFID IN RETAIL
RFID has been around for at least 30 years, periodically hitting the retail headlines as the next ‘big thing’ but few pilots have progressed to roll-out. Now, a number of fashion retailers are experimenting with combined RFID and security tags which just might prove cost-effective. “There is a real business case for RFID as part of a real-time supply-chain model,” says Leng, “but the jury is out – retailers have been burnt in the past by RFID projects so some are reluctant to try again.”
Alison Wiltshire, global retail propositions director with BT Global Services is more optimistic: “Retail is the fastest-growing sector for RFID after government and livestock,” she says, “and we’re already seeing a lot of interest from fashion, apparel and luxury retailers in using RFID, also from some of the larger department stores and for high velocity items or where they are difficult to count. In the US, Bloomingdales has enterprise-wide use of RFID while here Marks & Spencer is starting to tag all sorts of items – not just apparel. We expect to see more large-scale RFID roll-outs during the first quarter of 2014.”
Item-level RFID tagging means that goods can be tracked wherever they happen to be within the supply chain – from racks at the DC to dressing a mannequin in the front window – so accurate ‘available to promise’ commitments can be made.
Without RFID greater discipline is needed for regular in-store stock checks to maintain accuracy. As Leng points out this is “transformational” change – persuading store ops that using sales staff for supply-chain activities is essential while encouraging sales associates to prioritise such jobs.
Craig Sears-Black, UK managing director at Manhattan Associates , tells of retailer Ann Inc, owner of the Ann Taylor and Loft brands, which has implemented real-time visibility systems across its 1,500 US stores. Minimum store safety stock levels for every SKU had to be established, allowing anything above that to be available to promise for online orders with highly disciplined regular stock checks to ensure accuracy. “Historically retailers worked on batch updates for store stock levels but if you are selling online and fulfilling from store you can’t do that,” he says. “When the supply chain meets the store you need people and process change, and it becomes an HR and skills issue.”
Ensuring stock accuracy is thus not just a matter for the supply-chain director but can involve IT in introducing task-management systems or RFID, store ops in changing processes, and HR in retraining programmes: multi-disciplinary requirements that need board-level support and backing to be implemented successfully.
“Larger retailers are starting to think strategically and end departmental silos,” says James Lovell, Smarter Commerce solution consultant Europe at IBM. “The culture in retail is finally beginning to change and boards are starting to see that organisational barriers have to be broken down.”
Such cultural change demands strategic direction and has to be on the board agenda for any multichannel business. Also high on the list has to be a true understanding of the total cost to serve involved in multichannel fulfilment, as well as the financial implications of offering click and collect or drive-through.
Studies by Kurt Salmon for individual retail clients suggest that some could be losing 10-20 per cent on each sale. “We’ve not found that many as high as 20 per cent,” says Alek Adamski, “but there are a few where such sales are severely loss-making. Most retailers assume their online business is profitable but in many cases it is quite the reverse.”
THE COST OF FULFILMENT
Fulfilment services such as click and collect already come in many flavours and finding a cost-effective option is essentials. Some leave it all to store staff, others send individual pre-packaged orders from DCs overnight. Most DCs are, however, designed purely for bulk picking – hence the practice of allocating stock to a separate ecommerce warehouse set up for single picks. “We’re working with several retailers streamlining their DCs to become more efficient,” says Manhattan’s Sears-Black, “with many wanting to include single and bulk picking from a single stock pool at one site.”
There are challenges further back along the supply pipeline too. Most established online retailers regard international growth as vital – and that raises the question of how to fulfil these overseas orders. “Retailers need to be able to split inbound supplies,” says Sears-Black. “Rather than ship everything to the UK and then send it back out again, should they develop regional hubs so that stocks go from the far east direct to them?”
Do that and you need high-level quality assurance at source, as well as good planning and allocation systems so that the merchandise ends up in the most convenient place. TXT, which works with pureplays such as ASOS , is already reporting growing interest in more sophisticated planning systems from online retailers. “Initially they were more interested in in-season planning, but now pre-season is becoming important,” says Mark Stone, COO, planning for EMEA at TXT. “In the internet world retailers need to react quickly. Customers want goods immediately – so [retailers] need to keep resources close to home. They need to build specific plans for each channel as activity varies and you can’t apply the same merchandise plan to all of them. If you don’t plan how can you react?”
PREDICTING FUTURE NEEDS
Predictive systems, such as TXT’s tools, can provide rapid insights into likely sales very soon after a new line has been launched, so helping to adapt plans in real-time to ensure that the stock is available where it needs to be. “We’re seeing more interest in local DCs,” adds Stone, “and companies are running replenishment programmes several times a week to ensure that stocks are shipped to where they will most be needed.”
Such local DCs may be dedicated regional warehouses, a larger branch acting as a stock portal for the area, or even a dark stores, a failing outlet transformed into a mini-warehouse providing back-up stock and managing local click-and-collect or ship-from-store consignments. Near-sourcing, too, is on many agenda with high-profile names such as Jaeger already announcing that it plans to bring part of its production back to the UK and Europe, to cut lead-times and give greater flexibility.
At a time when customers are shopping anywhere, everywhere and whenever they choose – and expecting instant delivery as well – supply-chain activities can no longer be dismissed as back-office service functions: they are key not just to multichannel strategy but for its success.
SPEAKING FROM EXPERIENCE
“The store is strategically important in the multichannel environment but retailers need to think about it in a different way – they need to manage the store as part of the distribution centre.”
Steve Leng, retail merchandising and supply chain solutions leader, UK and Ireland, IBM
“Some carriers are in a financially precarious position and some are not moving forward as we would like, so we’re looking to do one-man deliveries with our own fleet and expect to bring these shipments in-house in time.”
Dino Rocos, operations director, John Lewis
FINANCES OF DELIVERY
“In the early days home delivery was seen as a loss leader, especially in grocery. There was a land grab for market share so retailers were prepared to swallow the losses. As the number of shoppers grows, so home delivery becomes even more uneconomic. French supermarkets have taken to drive-through collection, mainly because they didn’t want to lose money on home delivery, but how much do they lose by reducing the contact customers actually have with the store?”
Alek Adamski, partner, Kurt Salmon