The world of retail has always been competitive and fast moving – in the current climate, where few are making sustained headway on sales and margin, agility and demand responsiveness are at an even greater premium.
The world of retail has always been competitive and fast moving – in the current climate, where few are making sustained headway on sales and margin, agility and demand responsiveness are at an even greater premium. For me this is about supply chain performance where failure can threaten survival, and excellence can transform a company’s market position and financial performance.
The term supply chain is now as ubiquitous in both the press and government pronouncements, as in companies’ positioning and their organisation structures. However, the interpretation and scope of supply chain management by people and organisations is varied. Recent research by Cranfield, led by Professor Richard Wilding, found that the senior supply chain person in around 70% of companies had a place on the divisional or operating board. This is a position that has emerged from nothing in only the last ten years. However, the same research showed that the scope of responsibility varied greatly across the 238 manufacturing companies surveyed. Using the Plan, Source, Make, Deliver model, the research found that only 48% had responsibility for the combination of source, make and deliver; planning was not mentioned.
The essence of supply chain thinking is about improving the end-to-end processes within a business and with its suppliers and customers, to maximise sales and margin potential. So the reported fragmentation of responsibility is interesting. For me, supply chain management is about the integration of planning with sourcing, making and delivering. While the research was carried out mainly with manufacturers, the parallels with retail are strong, with supply chain now having a place on the board, but directors’ responsibilities are not consistently framed across the retail sector.
This doesn’t mean that supply chain people should call the shots across the business; that would drive a left brain and relatively uncreative retail world and spell potential disaster. Indeed boards, from my experience generally see supply chain as a source of risk and disruption and would not want to feel they were extending those risks. The well catalogued failures over the years have taken their toll and supply chain operations are perceived as having purely negative potential. Suppliers, warehouse operations and systems, parcel operators and others are all seen as potential pitfalls and points of cost with no upside at all.
This is because for most retailers the planning, buying and merchandising functions (right brained and creative) are not perceived and organised as ‘supply chain’ functions, regardless of organisational ownership. Of course the hard numerical (left brain) disciplines are hard to embed in these functions but this must be the strategic prize. The paradox is that the financial and reputational risk from lost sales, markdowns and disposals from the planning of flow control processes are worth typically more than double the entire cost of the physical distribution operations.
So retailers are damned if they don’t get the operations right, but they are doubly damned if their planning of buying and distribution is lacking. Buying and merchandising is central to retail supply chain management and the real challenge is to manage the tensions between left and right brain thinking to drive real customer value. By doing this well retailers could see a 5% improvement in like-for-likes and 2% to 3% in net margin. Most CEO’s would kill for that right now and they will need to think about their organisational dynamics afresh to get a new balance.
And retailers have the multichannel challenge, which is the major growth focus for most Boards. Multichannel is coming up on the rails so fast it will soon be the outright winner; the problem is that multichannel risks are driving in cost and margin erosion faster than the growth. Right now this is still ‘land grab’ time. Right brains have control and are rushing headlong – and while pursuit of growth is not wrong, it should be challenged if it comes at too great a cost. The fulfilment cost options need to be clearly understood and Boards will need a tighter grasp of the new operating system in order to make balanced long term choices. Again a consistent offer, well presented and executed by a trusted brand at a cost that does not erode margin too fast will be the future. Successful multichannel retailers will be judged by how little they have eroded value as they have embraced the new normal of e-retailing.
Going forward, Boards will need to recognise these twin realities and put in place processes to bring the left and right brain tensions to their table, well informed by real cost and net margin data. Only then will they make decisions that can protect the business from major surprises. It is both essential to survival and an opportunity for transformation.
- Prof. Alan Braithwaite, LCP Consulting and Cranfield School of Management – www.lcpconsulting.com