Retail Marketing
Supply Chain Management Efficient Consumer Response
NBS7030B
Retail Marketing & Management
Ratula Chakraborty
Professor of Business Management
Director MSc Programmes
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Lecture Outline
Introduction to Supply Chain Management (SCM)
Evolution of SCM
Distribution Systems – Warehousing and Transportation
Trends in Retail SCM: Centralisation, Quick Response (QR), Efficient Consumer Response (ECR)
Case Study: ECR in UK Grocery Supply Chain Management
Purpose: to consider how retail supply chains operate and how logistical systems support efficiency and continuous replenishment
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What is Supply Chain Management?
(8 min introduction lecture – Arizona State University)
http://www.youtube.com/watch?v=Mi1QBxVjZAw&feature=related
Raw Materials
Store
Warehouse
Factory
Consumer
1. Introduction to SCM
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Definitions
Logistics:
“Managing the flow of all materials and information required to fulfil a customer’s order.” (Institute of Logistics)
“A supply chain consists of the series of activities and organisations that materials move through on their journey from initial suppliers to final customers”. (Waters 2003)
Raw Materials
Store
Warehouse
Factory
Consumer
Introduction to SCM
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Introduction to SCM
5
Managing the supply chain
The
operation
“ Second-tier”
suppliers
“ First-tier”
suppliers
“ First-tier”
customers
“ Second-tier”
customers
Supply chain management
Materials management
Logistics
Physical Distribution
management
Purchasing and
Supply management
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Introduction to SCM
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Traditional food & drink industry supply chain
Raw materials suppliers
Processing plant
Packaging suppliers
Warehouse
Warehouse
Manufacture/ process
Third party warehouse
Cash ‘n’ carry
Finished goods storage
Retail centre warehouse
In-store stockroom
retailer
Intermediate store
Characteristics
A large number of participants
Many intermediate stages, often involving logistics processes
Long lead times – difficult to meet sensible service targets – high costs
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Introduction to SCM
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Traditional View of the Supply Chain
Key Characteristics:
A number of traders in the chain
Each is an unrelated business unit
Stock buffering at each stage
Broken information flow
Result:
Cost reduction sought by each company in isolation
Conflict between companies
Poor service and high cost are natural consequence
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Introduction to SCM
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Retailer Benefits of Supply Chain Efficiency
A more efficient supply chain will improve stock availability in the stores hence increasing sales
A more responsive supply chain = fewer buying mistakes - reducing residual stock and mark-downs
Less stock = less tied up capital
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Introduction to SCM
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Inventory: Stock days in Tesco 1970-2006
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Introduction to SCM
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Reasons for Reduced Inventory over Time
Better transportation
IT innovations and improvements
Improved forecasting skills
Improved inventory management and stock turnover rate
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Introduction to SCM
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Supply Chain Strategy
What distribution channel?
Where should the product be stored / warehoused? and how much?
Who manages this stock and how?
How should the stock be transported?
What information do we need, from where and how to communicate?
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The Supply Chain evolution
Demand Forecasting
Purchasing
Requirements Planning
Warehousing
Material handling
Industrial Packaging
Manufacturing Inventory
Production Planning
Finished Goods Inventory
Distribution Planning
Order Processing
Transportation
Customer Service
Materials
Management
Physical
Distribution
Supply Chain Management
FRAGMENTATION
1960
EVOLVING
INTEGRATION
1980
TOTAL
INTEGRATION
2000
Logistics
2. Evolution of SCM
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Evolution of SCM
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Retail Grocery Evolution
1970s
Early 80s
Late 80s
Early 90s
Stock
Velocity
Stage 1
Store control
Stage 2
Depot control
Stage 3
Head Office
Control
Stage 4
Just in Time
Stage 5
ECR
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Evolution of SCM
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Trends in Retail Logistics
1. Increased retailer control of secondary distribution
2. The development of composite distribution
- Centralisation of slower moving stock
- Establishment of ‘Common Stock Rooms’
3. Quick Response - facilitated by EDI and EPOS
4. Rationalisation of primary distribution system
5. Introduction of SCM and ECR
6. Reverse logistics and the return flow of packaging
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Role of the Warehouse / Distribution Centre
To act as intermediary between producers and consumers – linking supply with demand
To smooth the flow of product into stores
To facilitate order assembly
to break bulk
to create bulk
To take advantage of quantity discounts
To hold / store stock for short or long term
To prepare merchandise for selling in store
To allow cost trade offs with the transport system
3. Warehousing and Transport
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Warehousing and Transport
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Types and Functions of Warehouses
Types
Depots
Centralized Warehouses
Regional Distribution Centres (RDCs)
Bonded Warehouses
Composite Warehouses
Functions
Movement - receiving, transfer, order selection (picking), dispatch
Storage - temporary or semi permanent
Information transfer - on stock levels, throughput, locations etc.
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Warehousing and Transport
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Factors Affecting Warehouse Location
Fast moving goods (convenience) need to be close to consumption for quick replenishment
Slow moving products (e.g. comparison goods) can be stored centrally - NDC
Perishable / short shelf life – no storage but fast throughput = ‘cross docking’
Location of suppliers – if offshore, need for satellite central warehouse for sortation?
Stocking policy / system used
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Warehousing and Transport
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Stock Systems
When to re-order stock?
What and how much to re-order?
“Push” vs. “pull” stock management systems
Automatic replenishment vs. periodic review
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Warehousing and Transport
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Fixed Order Interval / Periodic Review System
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2
3
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5
1
2
3
4
5
1
2
3
4
5
0
1
2
400
300
200
0
100
Time (days)
Units
Reorder quantity
Level of inventory
Safety Stock
Zero stock in inventory (possible stockout)
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Warehousing and Transport
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Air
Road
Rail
Water
Modes of transport in a physical distribution system
Low Volume
High Volume
Low Value
High Value
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Warehousing and Transport
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Criteria for selecting mode of transport
Total Cost
Reliability
Accessibility
Transit Time
Capability / Flexibility
Security
Warehouse location and materials handling equipment used
The level of stock held and the response time
The packaging required
Transport mode impact
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4. Centralised Distribution
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Most large multiple (chain-store) retailers operate with centralised supply chain management
Suppliers deliver to a hub warehouse (regional distribution centre - RDC) from where products are sorted and delivered to stores
Continuous replenishment works through a demand-pull system based on recorded stores sales through “electronic point of sale” (EPOS”) (till scanner) data
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Centralised Distribution
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Waitrose Regional Distribution Centre in the Midlands
Kraft
Coventry
Nestle
Bardon
Sara Lee
Lutterworth
RDC
Waitrose
Store E
Head office
Branch order
Picking lists
EPOS data
Waitrose
Store A
Waitrose
Store B
Waitrose
Store C
Waitrose
Store D
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Centralised Distribution
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Advantages of Centralised Distribution
Increased store productivity - fewer, larger deliveries, less handling, space productivity
Lower stock levels - consolidation, more control, Just-In-Time (JIT) deliveries
Reduced costs - lower storage, administration, shrinkage
Improved quality – Quality control (QC), lower wastage, fresher products
Improved customer service - better product availability, wider product range
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Centralised Distribution
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Disadvantages of Centralised Distribution
Operational changes:
Investment in human and physical resources
implementation - loss of productivity
Inflexibility - contingency stock
New buying and distribution team
Loss of branch autonomy
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Questions for Discussion #1
On visiting a supermarket to buy your favourite product, what do you do when it is not available on the shelf? Do you (a) buy another similar product/brand instead; (b) postpone your purchase and decide to come back another time to the same retailer to see if it is back in stock; or (c) go to a rival store to buy the product?
How does supply chain efficiency help improve store operations and retailer performance?
Service it; sell it: Retailing & Supply Chain Management
(4 min lecture – Arizona State University)
http://www.youtube.com/watch?v=ZUO2EaJnb-w&feature=related
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Definitions of Just in Time (JIT)
“The arrival of raw materials and components at the exact moment they are required by the production process rather than being held in the warehouse”
Alan West
“An approach that ensures that the right quantities are purchased and made at the right time and quality and that there is no waste”
Christopher Voss
5. Quick Response
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Quick Response
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Elements of Quick Response (QR)
“Just as JIT works to reduce inventory investment for manufacturers by scheduling the delivery of products to assemble lines, QR does approximately the same thing for manufacturers, wholesalers and retailers.” Kenneth Ackerman
Time horizons
Information
Logistics
Manufacturing Operations
Supplier/ Manufacturer relationships
Philosophical/cultural change
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Quick Response
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Characteristics of Quick Response (QR)
Stock reduction
Shorter lead times
Real time information
Seamless integrated logistic networks
Partnership relationship
Commitment to Total Quality Management (TQM)
Example: Zara – “Fast Fashion”
https:// www.youtube.com/watch?v=qhCM0F81vEg (3 min)
http://www.youtube.com/watch?v=6mjZuHKeVwg (4 min)
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QR Example: Fast Fashion (#1)
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Fast Fashion Business Model
Example: Zara’s key interactions in bringing products to store
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QR Example: Fast Fashion (#2)
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Characteristics of Quick Response (QR)
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QR Example: Fast Fashion (#3)
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Characteristics of Quick Response (QR)
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QR Example: Fast Fashion (#4)
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Characteristics of Quick Response (QR)
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6. Efficient Consumer Response
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Efficient Consumer Response (ECR) seeks to deliver a fully integrated approach to supply chain management based on a collaborative approach between the retailer and its suppliers
ECR initiatives seek to develop win-win supply partnership that reduce costs to allow both retailer and supplier to increase profits
ECR embraces supply management with category management to increase market value by more effective in-store demand and supply management to optimise product category sales (especially in handling promotions and avoiding stock outs)
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Efficient Consumer Response
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Evolution of Efficient Consumer Response
JIT Manufacturing
QR Fashion Supply Chain
ECR Food Supply Chains
Efficient Consumer Response
“ A global movement in the grocery industry focusing on the total supply chain - suppliers manufacturers, wholesalers and retailers working closer together” ECR Europe
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Efficient Consumer Response
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ECR Goals
To take out of the supply chain all those costs that do not add to consumer value
To transform grocery supply chains from a “push” to a “pull” system
To produce efficiencies throughout the supply chain
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Efficient Consumer Response
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ECR Improvement Concepts
Category Management
Product Replenishment
Enabling Technologies
Establish
Infrastructure
Optimise
Introductions
Optimise
assortments
Optimise
Promotions
Integrated
Suppliers
Synchronised
production
Continuous
replenishment
Automated
store ordering
Electronic data
interchange
(EDI)
Electronic
fund
Transfer (EFT)
Item coding and
data-base
maintenance
Activity Based
Costing (ABC)
Reliable
Operations
Cross
docking
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7. Case Study: ECR in UK Grocery Supply
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Grocery Industry Supply Chain
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ECR in UK Grocery Supply
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Grocery Industry Supply Chain
Supply chain incorporates the following activities:
Warehousing
Transportation
Inventory Management
Systems Control
Supply chain activities are either managed “in-house” by grocery retailers and manufacturers, or “out-sourced” to third party logistics providers (3PL’s), such as DHL-Exel Supply Chain or Wincanton
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ECR in UK Grocery Supply
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Logistics for Different Foods
Logistics activities in food & grocery operate across temperature bands:
Ambient - canned foods, jars of coffee, bags of sugar
Produce - fruits and vegetables
Chill – dairy products and ready-meals
Frozen – various frozen goods
Warehouses (called “composite” distribution centres) and multi-temperature delivery vehicles provide continuous supply of fresh product into stores, ensuring strong on-shelf availability whilst minimising wastage
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ECR in UK Grocery Supply
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Fast Moving Consumer Goods (FMCG) Supply
Over 94% of stock is supplied via centralised distribution through a retail warehouse rather than direct from the supplier to store (Direct Store Delivery)
This is cost-effective, helps to reduce town centre congestion, and streamlines in-store operations
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ECR in UK Grocery Supply
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Percentage of Goods Distributed from a Central Depot, 1998-2008
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ECR in UK Grocery Supply
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Distribution Costs
The average distribution cost for retailers as a percentage of turnover is 4.7% (with a range of between 7.7% and 3.5% for the highest and lowest cost positions)
Warehousing contributes 55.7% and transport 43% of distribution costs with other central overhead costs make up the remainder
Retailers use a variety of transit materials to replenish stores, including pallets, roll cages, plastic crates and merchandisable units
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ECR in UK Grocery Supply
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Demand Planning & Forecasting
Need to predict future demand and align production and distribution capabilities to meet forecast demand
Requires the sharing of timely data, the accurate processing of that data, and agreement on joint business plans
The process consists of three parts:
Demand forecasting: The art in the process for creating a statement of projected, unconstrained, demand for a product or service over time
Demand planning: The science involved in restricting (or increasing) a forecast to reflect known constraints and associated impacts of capacity (production or logistics) or changing priorities or the impact of external events
Demand management: The creativity involved in influencing the demand by the addition (or cancellation) of activity, the increasing or reducing of price, the rationing or allocation of stock, etc.
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ECR in UK Grocery Supply
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On-Shelf Availability
ECR Availability Survey - tracks 200 products in 160 stores across 5 retailers (Sainsbury's, Waitrose, Tesco, Morrisons and Asda) across 8 different categories
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Questions for Discussion #2
Apart from keeping costs down, what other efficiency objectives might retailers seek to achieve through supply chain management?
Identify a product that might present particular challenges for retail logistical systems. How might these challenges be tackled?
Why is Efficient Consumer Response particularly well suited to large grocery multiple retailers operating an automated replenishment system but less well-suited to smaller retailers , particularly those selling highly seasonal products?
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References
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Varley, R. and Rafiq, M. (2004), Principles of Retail Management, Palgrave MacMillan.
Berman, B. and Evans, J.R. (2010), Retail Management: A Strategic Approach, 11th edition, Prentice-Hall.
Useful websites
ECR UK – http://www.igd.com/Research/Supply-chain/ECR-UK /
Fast Fashion - http://en.wikipedia.org/wiki/Fast_fashion
Thank You!
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1970198219942006
Year
Stock days