When Gavin Chappell, Supply Chain Director of Walmartowned UK supermarket Asda, tried to explain the pressures he faces in his job, he cited former US Defense Secretary Donald Rumsfeld’s famous remark about known knowns, known unknowns and unknown unknowns.
The known unknowns, Chappell suggested, included the retail climate and the performance of individual promotions. The unknown unknowns in retail supply chains were troubling: true vendor production capacities and overall stability. The other unknown unknown he could have identified was the likelihood of a natural disaster like the Japanese tsunami. Chappell also said forecasting, traditionally a known known, was in danger of becoming a known unknown: “Forecasts are getting worse, not better. And they will continue to get worse.”
To illustrate how unpredictable consumer demand had become, Chappell revealed that in April 2011, soft drink sales at one Asda store had been twice as high as a store only 10 miles away.
As the abundance of knowns and unknowns suggests, these are troubled times for supply chains. The uncertainty is compounded by intense change and a growing sense that existing models aren’t up to the job, particularly in retail. A 2011 report by KPMG, Supply Chain Complexity: Managing Constant Change, interviewed leading supply chain directors. It concluded that many supply chains were incapable of keeping pace with change.
Andrew Underwood, KPMG’s Head of the UK Supply Chain practice and a partner in the UK firm, says: “The developments in the global economy, the need to become aware of risk, the drive for sustainability and the requirement to deliver what the customer wants on the shelf all mean retailers need to look further down their supply chain and make sure they understand it all properly.”
Underwood says basic priorities have changed. “Many directors of retail supply chains have been focused only on cost and getting the chain as lean as possible, but it can’t be so lean you don’t have flexibility when something goes wrong.”
Sahir Anand, who analyzes technology and process management in retail for Aberdeen Group, says: “The traditional supply chain needs internal and external transformation and overhaul.”
The best-performing retailers are already finalizing plans to transform their supply chains over the next five years so they are aligned to economic reality, can manage escalating cost pressures and are flexible enough to meet increasingly unpredictable consumer demand. But whether your company has begun the transformation process or not, there are four key considerations you should factor into your thinking.
Risk is almost certainly more complex than you think
“You have to accept that risk avoidance is a cost – whose cost across the partners within the supply chain is an emotive debate,” says Underwood. Spreading your demand may mean you don’t enjoy all the benefits of volume purchasing. The good news is that boardroom appetite for risk is changing: leaders are coming to accept they need a risk response program.”
Anand says retailers must gauge risk more effectively: “An ever-expanding network of suppliers, inflationary pressures and low-cost global sourcing requirements have all led to increased supply chain risk. Retailers and suppliers find it difficult to predict risks, but they need to model them.”
By modeling risk, retailers can clarify some of the unknown unknowns. The tsunamis of 2004 and 2011 showed how global and elaborate retail supply chains had become. In some cases, companies believed their suppliers wouldn’t be disrupted, only to discover the real origin of their products lay somewhere else: the company they had been dealing with was just a link in a chain.
Cost management is also a key part of risk. Aberdeen Group research suggests that one in three retailers is afflicted by increasing supply chain volatility. And this is driving up costs. “Supply chain volatility is due to several factors, such as increasing lead times, too much (or too little) pipeline inventory, crosschannel demand growth, manufacturing delays, quality non-compliance and other sourcing inconsistencies such as sourcing shifts,” says Anand.
Sustainability will only become more important
The retail supply chain’s carbon footprint is constantly being scrutinized. The issues are not always as simple as the headlines suggest. It might sound environmentally absurd to fly roses to the UK from Kenya when so many are grown in the Netherlands. Yet retailer J Sainsbury’s eco-audit found that the carbon footprint for Kenyan roses was 4.5 times lower than for Dutch roses. The yield of roses in Kenya was twice as high, and the packaging they were transported in was more robust, reducing waste.
Many retailers have acted decisively, prompted by the realization that there is a win-win here: they can improve their image and reduce costs.
By introducing a responsible sourcing and procurement plan which includes every stage of the retail supply chain – from sourcing to waste management and end-of-life recycling programs – retailers can justifiably position themselves as green and provide detailed consumer information to back up their claims.
Technology can help here. There is an array of enabling technologies which can automate business processes, integrate cross-functional process components and effectively identify, quantify, track and report key sustainability drivers, actions and outcomes. This effectively retrofits efficiency into retailers’ assets, optimizing the performance of products.
But sometimes the best ideas are the simplest, and come with a bolted-on business case: Best Buy has been building the ability to handle end-of-life white goods in its US stores for several years. It has constructed an efficient, well-optimized system that can make the low-margin business of reusing, refurbishing or recycling electronic items pay off. In 2011, it unveiled a Buy Back program that pays consumers for obsolete products, and doesn’t send them to landfill. The result: enhanced green credentials and the chance to resell items to cash-strapped consumers (opening a whole new segment). And, of course, customers visiting Best Buy to dump old products are far more likely to look for a replacement in store…
Cutting costs may mean investing
In their continual quest to slash costs, retailers have turned to two predictable solutions: outsourcing and technology. Outsourcing – either to 3PL companies who manage everything beyond transport or lead logistics providers (4PLs) who integrate every company in the supply chain – has tempted many. Underwood says: “There’s always a risk if you outsource, but there is a cost/benefit rationale and there are good 3/4PLs out there whose data can be checked.”
Sometimes, technology can make a basic difference. Underwood says: “There are opportunities for retailers to leverage technology to a greater degree. They know the technology is there, but until recently it’s just not been affordable enough to put in place.” The food industry has world-class expertise in tracing and tracking produce. Yet Aberdeen’s research suggests that one in four of the best-performing retailers cannot easily see, across the enterprise, how much stock they are holding and where that stock is.
Too many retailers were content to update their technology piecemeal. Not any more. Many are consolidating legacy supply chain technology across geographies, removing the ongoing cost of ownership and the difficulty of integrating with more up-to-date software, which handles e-procurement and visibility management, for example. Of course, this comes at a cost, with investment increasing in business intelligence technology for supply chain reporting and performance management, collaborative forecasting, planning replenishment and supplier scorecards.
Three of the world’s biggest FMCG companies – Kraft, Procter & Gamble and Unilever – have turned to demand sensing products which use pattern recognition to analyze data and help them get a better steer on forecasting. Unilever expects to reduce forecast error by 25%: the type of result that suggests major software investments could pay off.
There is no short cut to gauging consumer demand
Deciding what consumers will want, when and why has never been more difficult. Underwood says: “Since the turn of the century, consumer demand has been increasingly volatile. The globalized marketplace and the rapid adoption of the internet has created new demands on companies and their supply chains.
New distribution models and increased competition from online rivals have forced retailers to become more responsive to the needs of their customers and seek new levels of flexibility in supply chains.”
Retailers are looking to increase flexibility by running distribution centers seven days a week, exploring new transport options, requiring an order placed one day to be fulfilled the next, and asking suppliers to manufacture for agility, placing less emphasis on capacity utilization and more on lean, short runs.
Compared to other industries in the KPMG survey, retail performed relatively weakly when it came to managing inventory and working capital in its supply chain. Some retailers hope to make dramatic cost gains by having suppliers hold stocks further down the supply chain or implementing vendor-managed inventory, where a supplier guarantees to hold a certain level of stock.
The only way to build supply chains that can withstand volatility is, Underwood suggests, to develop collaborative processes and networks with other companies in the supply chain, or turn to logistics providers who can supplement your network. The KPMG survey suggested retailers have some catching up to do – the industry is poor at information-sharing and collaboration.
The scale and volume of challenges facing the retail supply chain director seems head-spinning. But Underwood believes they should find boards receptive to their problems: “There is now an appetite for their plans. If there isn’t, they need to make sure their case is heard.” Only then will unknown unknowns be matters for the military, not retailers.