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Chapter-13 Supply Chain Management

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identification and explanation, without an intention to infringe.


Contents

Chapter 13 Supply Chain Management .................................................................................... 4
13.1 Supply Chain Management ............................................................................................. 5
13.2 Concept of Supply Chain Management ........................................................................... 5
13.3 Need for Supply Chain Management ............................................................................... 6
13.4 Evolution of Supply Chain Management .......................................................................... 7
13.5 Issues Involved in Developing the Supply Chain Framework ........................................... 8
13.6 Supply Chain Integration ................................................................................................ 9
13.6.1 Retail Market Characteristics: ................................................................................... 9
13.6.2 The Lead Time Gap ................................................................................................. 11
13.7 Innovation in Supply Chain Management ....................................................................... 11
13.7.1 Cross Docking .......................................................................................................... 11
13. 7.2 Collaborative Planning, Forecasting and Replenishment (CPFR) ............................ 11
13.8 Retail Logistics ............................................................................................................... 12
13.9 Reverse Logistics An Emerging Trend ......................................................................... 13
Summary: ............................................................................................................................. 14




























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Chapter 13 Supply Chain Management

Introduction
This chapter will help associates to understand the importance of the supply chain in retail. It
also tells about the new developments in supply chain and helps associates to come with
innovative ways to serve the client.

Learning Objectives
After reading this chapter you will know:
Why supply chain is important
New methods to improve the chain
Different methods in supply chain
































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13.1 Supply Chain Management
The business of retail has been defined as one that makes goods available to the consumer,
when and where he/she wants them. In order to be able to service the customers
requirements, the retailer needs to understand their preferences, to identify the right products
and their manufacturers, to locate the wholesale or retail stock points, as the case may be, and
to make arrangements for the right quantity to be available.
While this appears to be simple, it is one of the most complex aspects of retailing. We can easily
see the degree of complexity by taking the example of a local department store. A typical
department store has a number of departments, such as apparel, gifts, cosmetics, kitchenware,
appliances and electronics. Take one such department, such as apparel; this will have sections
for men, women and children. Each of these sections will have sub- sections for casual wear;
formal clothes, accessories, etc. Further each category in each sub section will have different
designs, colours and sizes. We now see that put together it represents a very large number of
items. This is further complicated by the involvement of merchandisers, buyers, stores, finance
and other functionaries in the department store.
The department store, in all probability, has at least a hundred suppliers. Some of these could
be manufacturers, some of them agents and other distributors. The challenge of managing a
continuous supply of goods from all these different entities is managing the supply chain.
We start this chapter by understanding the need of supply chain management for a retailer.
This is followed by a brief discussion on the evolution of the concept and innovations in this
field. The concept of retail logistics and reverse logistics are then examined.
13.2 Concept of Supply Chain Management
A supply chain is a network of facilities and distribution options that performs the following
functions:
Procurement of materials
Transformation of these materials into intermediate and finished products,
Distribution of these products to the customers.
Supply chain management ensures smooth and efficient flow, from raw material to finished
goods in to the hand of the consumers. It is a concept which has increasingly replaced the
traditional fragmented management approaches to buying, storing and moving goods. Supply
chains exist in both service and manufacturing organizations, although the complexity of the
chain may vary greatly from industry to industry and from firm to firm. It aims to integrate
activities across the entire merchandise flow, to achieve quick response in supplying products
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and services to the customers who need them. By doing this the production time can be set
close to selling period, achieving better prediction of selling targets.
It is difficult to put down the value of the supply chain industry. However it is estimated that the
global market size of the supply chain and logistics industry, is US$ 3 trillion, which is significant
chunk of global domestic gross product.
The estimated market size for supply chains globally includes aspects like trucking,
warehousing, inventory costs, transaction costs and administration costs for these key
elements. The importance of supply chain management in India can be gauged from fact that
logistics cost constitutes 10 12 percent of our GDP. It is estimated that over Rs1, 00,000 crore
of the total capital, is tied up in inventories in the industrial sector. This is close to 22 percent of
the aggregate industry sales.
13.3 Need for Supply Chain Management
Not long ago, retail stores existed to cater to the needs of the local markets. When one needed
bread and eggs, one visited grocery stores. To buy the garments, one simply, either bought
fabric and had it tailored or bought what was available in the market. Buying for the retail
organization was a much simpler task then. It meant dealing with a few products and a limited
number of suppliers. What existed at that time was a simple supply chain, as illustrated below.
Managing this was fairly simple and easy for the retailer.
However, as markets expanded and retailers business grew, the number of products offered by
the retailer, also increased. While the number of suppliers increased, there was also an
increased pressure on margins. Retailers needed to think of ways of cutting costs. In order to be
able to cut down on costs, it was necessary to integrate the complete supply chain.
Supply chain management today, links demand management, resource management, and
supply management and hence plays an important role in retailing.
Today retailers operate in a dynamic world. Customers buying habits are constantly changing
and competitors are continually adding and improving their product offerings. Demand
changes mean a shorter life cycle for the companys products and inventory. The cost of
holding inventory may restrict the company from providing a reasonably priced product, as
funds are tied up in inventory. The number of suppliers of an organization may vary from a few
hundreds to thousands, depending on the range of products offered to the consumer. Sourcing,
vendor management and logistics play a major role in getting the right products to the right
place, at the right time and the right condition. The second reason partially, is the increased
national and international competition. Customers have multiple sources to choose from, to
satisfy their demands: locating the product throughout the distribution channel for maximum
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customer accessibility, at a minimum cost, becomes crucial. The third reason is the increasing
pressure on the profit margins earned. Companies are becoming aware that they need to look
at the whole picture and not at the functional excellence of individual departments alone.
Lastly, it is a technology driven world. Advances in technology enable companies to get sales,
inventory and production data, across various locations not only within the country, but also
internationally. Information is the key enabler of supply chain management.
13.4 Evolution of Supply Chain Management
In the 70s and the early 80s, as the cost pressures started building up, most organizations
started to take a look in their operations, to see where they could cut costs. Initially, the focus
was on optimizing the levels of raw material, work- in progress and finished goods stored.
Depending on the industry characteristics, different organizations started focusing on
achieving efficiencies in different areas, such as procurement, logistics, manufacturing,
operations, etc.
Out of these initiatives emerged various models for production and operations control and
management, such as Just In Time (JIT) inventory management model, the total quality
management (TQM) model, etc.
JIT is an inventory strategy that strives to improve a businesss return on investment by
reducing in-process inventory and associated carrying costs. To meet JIT objectives, the
process relies on signals of Kanban between different points in the process, which tell
production when to make the next part. Kanban are usually tickets but can be simple visual
signals, such as the presence or absence of a part on a shelf.
TQM is a management philosophy that seeks to integrate all organizational functions
(marketing, finance, design, engineering, and production, customer service, etc.) to focus on
meeting customer needs and other organizational objectives.
These models focused on various components of the supply chain, in isolation. Each one of
them was oriented towards optimization of a sub part of the system. However, soon,
organizations realized the need for taking an integrated look at the entire chain. From this
emerged the discipline now commonly referred to as supply chain management.
Early beginners of the supply chain management initiative can be traced to the apparel industry
in USA. The textile industry in the USA faced intense competition in the 1980s. The industry
leaders came together and formed the crafted with pride in the USA council, in 1984. They
commissioned a study on the supply chain analysis. This study found that the delivery time for
apparel supply chain, from raw material, to the final consumer, was 66 week long, 40 weeks of
which were spent in warehouses or transit. The long supply chain had resulted in major losses
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to the industry, due to the need for financing the inventory and the lack of the right product in
the right place, at the right time.
In order to overcome the problem, the strategy of Quick Response (QR) was developed. The
basic premise of quick response is to share information. Retailers and suppliers work together
to respond more quickly to the consumer needs, by sharing information. The installation of the
Point of Sale (POS) scanning systems and sharing of data through Electronic Data Interchange
(EDI) became the new standard of the industry. The industry also adopted the Universal
Product Code (UPC). QR incorporates marketing information on promotions planned, discounts
and forecasts into the manufacturing and distribution plan. It increases the product availability
and lowers inventory investments. It also helps in reducing logistics expenses. With QR
systems, retailers can negotiate a direct store delivery system, in which the vendors supply
floor ready merchandise to each store, rather than to the distribution centre (DC). The cost of
the DC and transportation thus is eliminated.
The success of QR initiative prompted a group of grocery industry leaders in the USA, to create
a joint industry task force, called Efficient Consumer Response (ECR) working groups. This
group primarily, worked on identifying opportunities to make the supply chain more
competitive in grocery retailing. Studies commissioned by this group revealed that by
expediting the quick and accurate flow of information up the supply chain, ECR enabled
distributors and suppliers to anticipate future demand far more accurately than the current
system. A little change in the technology was required to improve the performance, besides
further development of the EDI and POS systems.
13.5 Issues Involved in Developing the Supply Chain Framework

A useful framework for analyzing the issues involved in developing a supply chain can be
represented as a pyramid. This framework is depicted below.
At the strategic level, the retailer can focus on service level required to support unique value
proposition that the retailer has developed. The retailer can then evolve appropriate channels
and networks, to achieve the uniqueness desired.
The next, structural level, allows the retailer to identify the suppliers and stock points and to
develop an appropriate transportation model. The extent of outsourcing is also determined at
this level.
At the functional level, the operational details are worked out. This includes developing policies
and procedures around the facilities and the equipment to be deployed, implementing
information systems to support the operations and ensuring the right organizational and
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training inputs. The constructs developed using any framework, must be successful
implementation usually requires a programmed approach to ensure that the implementation is
effective and the goals are achieved.
13.6 Supply Chain Integration
As stated earlier, supply chain management links, demand management, resource
management and supply management. Let us understand this in terms of retail organization. In
a typical retail organization, the marketing team or department would be the one looking at the
sales data, working on targets and looking at the ways to meet these targets. The
merchandising and design team would work on getting the best price for the materials required
for manufacturing the product so as to fulfil the customers needs, while the purchase
department would work on getting the best price for the materials required to manufacture the
product. The aim of each department would be different and while they may individually excel,
the organization as a whole, would benefit only when they share a common approach and the
information is shared between departments, suppliers and vendors.
The nature of the industry that the retail organization operates in also influences the supply
chain and logistics decisions. Nowhere is this more apparent in the apparel and grocery
industries.
13.6.1 Retail Market Characteristics:
Retail markets in these industries typically exhibit the following characteristics:
1. Short Life Cycles: Many products in these sectors have a short life cycle. In many cases,
the product may have been created to capture the mood of the moment; consequently,
the time period in which it is saleable is likely to be short and seasonal. Similarly due to
the perishable nature of the products in the grocery business the shelf life is short.
2. High Volatility: Demand for these products is rarely stable or linear. It may be influenced
by the vagaries of weather, movies, TV shows or indirectly, by advertising.
3. Low Predictability: Due to the volatility of demand it is extremely difficult to forecast,
with any accuracy.
4. High Impulse Purchase: Many buying decisions for these products are based on impulse
and occur at the point of purchase.
5. Conventional wisdom holds that the way to cope with uncertainty is to improve the
quality of forecasts. However, as this may not always be possible, ways must be found
to reduce the reliance on forecasts and focus on lead time reduction. Shorter lead
time mean, by definition, that the forecasting horizon is shorter hence the risk of error
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is lower. There are three critical lead times that must be managed by organizations that
seek to compete successfully in the retail business.
6. Time To Market: The time that it takes the business to recognize a market
opportunity, translate this into a product or service and to bring it to the market.
7. Time TO Serve: The time that it takes to capture a customers order and to deliver
the product to the retail customers satisfaction.
8. Time To React: The time that it takes to adjust the output of the business, in
response to the volatile demand.

Some of these concepts are explained in detail below:
Time To Market
In the shorter life cycle markets, being able to spot trends quickly and to translate them into
products in the shop, has become a pre requisite for success. Companies that are slow to
market, miss out on a sale opportunity that may not be repeated. An example of this would be a
style of clothing that may become popular. If the retailer is fast to spot the trend and procure
the goods for the store, it would definitely be beneficial for the organization. On the other
hand, trends can be spotted by looking at the changing consumer habits, like the need for pre
cooked meals has prompted a few Indian companies to enter this field and retail ready to
eat meals.

Time TO Serve
Traditionally, in retail, orders from the retailers had to be placed on the suppliers many months
in advance. This may give rise to the risk of obsolescence and high stock outs, as well as an
increased cost of inventory. The lead time was long, not necessarily due to the process of
manufacturing, shipping and transit, but due to the excessive documentation required at each
stage.

Time To React
Ideally, in any market, a company would want to meet a customers requirements at the time
and place that the customer needs them. The challenge for any business in the fashion market
is the ability to perceive real demand. Real demand is what the customers are buying or
requesting for. Because most supply chains are driven by orders, which themselves are driven
by forecasts and inventory replenishments, individual parties in that chain will have no real
visibility of the final market place. Inventory hides the demand.
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13.6.2 The Lead Time Gap
The fundamental problem that faces many companies is, that the time that it takes to source
the materials, convert them into products and move them into the marketplace is invariably
longer than the time the customer is prepared to wait. This difference between what might be
called the logistics pipeline and the customers order cycle is termed the lead time gap. The
challenge for logistics management is to find ways to reduce, if not close the gap.
Successful companies in retail, seem not only to be able to capture the imagination of the
consumer with their products, but are also often, characterized by their agility. Many
organizations have found that it is possible to make significant improvements by adopting a
twin strategy of simultaneously reducing the logistics lead time and capturing information
sooner, on actual customer demand.
13.7 Innovation in Supply Chain Management
13.7.1 Cross Docking
Cross Docking is a function of the warehouse or distribution centres (DC), which was introduced
by Wal-Mart. Cross Docking is a system in which the vendors ship merchandise to a distribution
centre, pre-packed in quantities required by each store. The merchandise is delivered to one
side of the DC, for delivery to the shipping dock, thus, the expression cross docking. The DCs
are equipped with miles faster guided conveyor belts that read the UPCs on the incoming cases
and direct them to the right truck for their onward journey. These DCs are less costly than the
traditional DCs because there is little or no storage required and the processing is minimal.
13. 7.2 Collaborative Planning, Forecasting and Replenishment (CPFR)
Collaborative Planning, Forecasting and Replenishment (CPFR), is one of the hottest buzzwords
in the chain context. By aligning the forecasts of a retailer and the vendor, CPFR offers the
opportunity to increase in-stock positions, gross margins and sales, while reducing inventory
investments and stock-outs.
CPFR is business practice that reduces inventory costs, while improving product availability
across the supply chain. The process begins with an agreement between the trading partners,
to share information with each other and to collaborate on planning, with the ultimate goal of
delivering products based on true market demand. The business partners share forecasts,
results and data over the internet. CPFR technology analyzes the data, and if the forecasts do
not match, it notifies the planners at both the companies. The two then work together to
resolve these exceptions. The final plan is agreed to by both, describes whats going to be sold
and how it will be merchandised and promoted.
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The function of supply chain management is perhaps the most important function of a retail
organization. Indian retail organizations still lack supply chain sophistication. However with
organized retailing set to grow in India, and the increase in competition in each sector, efficient
management of the supply chain is bound to become a necessity.
13.8 Retail Logistics
An integral part of supply chain management is Logistics Management. The main objective of
logistics management is to reduce inventory- holding costs and improve profits.
The word logistics is derived from the French word loger which means to quarter and supply
troops. In the last decade, there have been several well-published logistics exercises,
internationally. The Gulf War of 1991 was on e of the largest, since World War II.
Many international retailers have built their success on logistical prowess. Speedy restocking of
goods, elimination of poor sellers and promotion of successes, also contribute to a clear sales
advantage. Logistics entail more than mere trucking and distribution of goods. For without
good information about sales and insight into customer needs, the finest distribution centre
and transport capabilities are likely to send the wrong products, at the wrong place, at the
wrong time. Effective logistics therefore, needs an efficient information system, as well as good
transport, distribution centre and store handling capabilities.
A single recipe for success does not exist. A logistics system has to be built to suit the needs to
the organization, keeping in mind the kind of products that the company retails and the
competition prevailing. Fashion retailer may need to focus on speed, discount retailers on cost.
The needs of each are different.
Retail logistics is the organized process of managing the flow of merchandise, from the source
of supply to the customer. Thus, it incorporates the following functions:
Physically, moving the goods from one place to another, where the location may be a
distribution centre, warehouse, store or manufacturer.
Stocking the goods at locations needed, in the quantities needed.

13.8.1 The Management of the Entire Process
Good logistics cut costs, speed, and work and improves customer service. A logistics strategy
can either be a pull strategy or a push strategy. A pull logistics strategy has orders for
merchandise being generated, at the store level, on the basis of the demand data captured by
the POS terminals. A push logistics strategy has the merchandise allocated to stores, based on
the historical demand and the inventory position of the store and the warehouse.
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As retail operations become more complex and the flow of information within the organization
is established, more retailers are now moving towards the pull strategy. At the heart of the
logistics is the Distribution Centre (DC). It serves several functions, from coordinating the
inbound transportation, receiving, checking, storing and cross docking to coordinating the
outbound transportation.
The method used for handling logistics largely depends on the nature of the industry and the
number of outlets that the organization has in each city, state or region. Food World, a grocery
retail chain in India, works on hub and spoke system.

Figure 1: Hub and Spoke model (Source: http://ostpxweb.dot.gov)
The hub is the distribution centre, which it develops in each city. The hub services all shops in
that particular city.
On the other hand a department store, like the Shoppers Stop, may find that it is not feasible
to develop and maintain a distribution centre in each city, as it would have one or at the most
two shops in every city. In such a case, a regional distribution centre may be developed. Some
retail organizations in India, like Globus, have outsourced their needs for logistics and
distribution.
13.9 Reverse Logistics An Emerging Trend
At the simplest level, the disposition of returned goods consists of junking them or giving them
away. But with more sophisticated systems and processes, returned goods can be put back into
the inventory, sold at liquidation centres, or broken service. How companies handle product
returns can also be a competitive differentiator. It is a new area to exploit for increased
efficiencies.
However, handling reverse logistics is not easy. Specifically, designed software is needed for
this purpose. Many third party service providers, such as Federal Express Worldwide Logistics,
GenCorp Distribution System, and UPS Worldwide Logistics, use customized systems to usher
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customers returned products to a central recovery centre, where they are stored for parts,
reconditioned or junked.
Summary:

Supply chain management ensures smooth and efficient flow, from raw material to
finished goods in to the hand of the consumers.
In India can be gauged from fact that logistics cost constitutes 10 12 percent of our
GDP.
Logistics play a major role in getting the right products to the right place, at the right
time and the right condition.
Retail markets in these industries typically exhibit the following characteristics
Short Life Cycles, High Volatility, Low Predictability, High Impulse Purchase
There are three critical lead times that must be managed by organizations
Time To Market, Time TO Serve, Time To React
The difference between what might be called the logistics pipeline and the
customers order cycle, is termed the lead time gap
Cross Docking was introduced by Wal-Mart
Collaborative Planning, Forecasting and Replenishment (CPFR) offers the opportunity
to increase in-stock positions, gross margins and sales, while reducing inventory
investments and stock-outs.