Improving Retail Supply Chain Planning |
By Ray Whitley
Detailed merchandise plans developed by the inventory management (merchandise planning & allocation) team should be the starting point of any retail supply chain planning process. This article reveals an improvement opportunity in the crucial budgeting and planning process of many retail supply chain organizations and examines approaches to capitalize on that opportunity and improve dramatically the process of supply chain planning.
CURRENT STATE:
The functional areas of distribution, inbound logistics, and outbound transportation rely on good supply chain volume plans (units or cartons to be processed) as a starting point to build a budget and then to organize and orchestrate resources (e.g., capital, people, 3rd party providers) to handle the planned volume.
Without a really good idea of what to expect in terms of supply chain volume from the merchants or inventory management teams (who often report up to the chief merchant), distribution and logistics teams take it upon themselves to develop company unit volume plans. This process of estimating supply chain volume is done as a necessary evil to provide a starting point from which to build an annual budget.
As distribution and logistics teams are oftentimes geographically distant from the corporate office, they tend to be hazy on the details of go-forward merchandise strategies. Left to their own devices, the supply chain team plans volumes based on last year actual volumes employing a scaling factor if overall business increases or decreases are projected. A nod is given to planned product mix changes by scaling volumes (by type) up or down depending on high-level insight from the merchant teams.
Once these supply chain volume plans are developed, the meticulous process of converting planned unit volumes to budget dollars ensues. First the annual budgeted volumes are developed before the planned year begins. During the planned year the supply chain team re-forecasts unit volumes based on trend and any anecdotal evidence they can obtain from the merchant and merchandise planning teams. Supply chain resources are initially deployed based on the annual budget. In-season forecasts take precedence as the company marches through the year.
THE PROBLEM:
As the supply chain team created inventory volume plans and forecasts are inaccurate, sub-optimal use of DC space, DC labor, and container and truck utilization result in unnecessary expense for the company. To the extent actual supply chain volumes exceed projected supply chain volumes, customer service suffers as products are hung up in the supply chain network (worst case) or rushed through the network thereby increasing DC costs (overtime) and potentially incurring significant incremental costs to expedite product. Moreover, secondary effects like miss picks result in incremental transportation costs and data integrity degradation.
THE OPPORTUNITY:
Much of this can be alleviated through better upfront supply chain volume planning. The problem lies in the inability of the supply chain team to internally project volumes accurately. This is not due to a lack of analytical ability or facility with modern forecasting methods. It comes down to a form of information asymmetry. In many retailers the supply chain teams simply do not possess access to what is planned by the business in terms of product purchasing and allocation of inventory to the stores. However, they are expected to process and move the very real inventory receipts and allocations expeditiously and in a fiscally responsible manner.
Detailed volume plans for the business do exist. The unit plans exist, or can easily be derived from existing data. They are buried in the merchandise planning process. In this process sales, gross margin, inventory levels, and receipts are planned in detail. The merchandise planning process is usually performed in a merchandise planning system, but many retailers still conduct merchandise planning in turbo-charged Excel spreadsheets. Getting complete access to the merchandise plans and converting the merchandise plan volume numbers into a format useful to the supply chain team will improve supply chain planning accuracy enabling a smoother flow of goods through the supply chain network.
IMPROVE INBOUND PLANNING:
For the inbound logistics side of the supply chain, the first step is to obtain the planned monthly receipts directly out of the merchandise plans. It is important that the receipt plans are pulled and then converted at the right level for the supply chain teams. The right level for the supply chain depends on product characteristics. If the company's product offering isn't diverse, then the merchandise plans can be converted into one large bucket of estimated units. To the extent the product offering is diverse, the product merchandise plans can be divided into smaller buckets based on similar characteristics affecting processing from a distribution/logistics perspective (e.g., conveyable, electronics, hard goods, perishables, etc.). The resultant data should be receipt units by (selected) bucket, by month for the year.
If product dimensions (i.e., height, length, width) are available for all SKUs, one can calculate the cubic feet or "CUBE" of the receipts. This provides a good base for the inbound logistics team to budget inbound container volume more accurately and to negotiate more confidently with inbound carriers. This inbound receipts data is particularly valuable to the distribution team in their efforts to plan capacity and labor in the DCs. Merchandise plans are dynamic so once the year has begun, the latest merchandise receipt plans should be converted and then used to update the supply chain forecast at least once every month.
IMPROVE OUTBOUND PLANNING:
Improving the outbound (DC to store) planning process is trickier. A subgroup of the merchandise planning team (i.e., allocators) usually controls the size and timing of product movement from the DC to the stores. Theoretically, estimated store allocations can be derived mathematically by factoring in sales volumes in the stores, optimal inventory levels in the stores, available DC inventory, and replenishment cycle times. In practice I have not come across any retailer that projects store allocation volume with a high degree of accuracy. There are a number of reasons for this but I think trying to forecast what an allocator is going to do as they react to ever-changing business conditions will always prove more difficult than forecasting the (purchase order date-driven) inbound side.
My recommendation at the total company level -- if DC and store inventory is not planned separately -- is to get the overall company inventory unit plan by month, obtain a historical DC/store split by month to calculate "planned" store level inventories beginning of month (BOM). Subtract the current month's BOM inventory from the following month's inventory level and add current month's sales unit plan to arrive at an estimate of how many units will need to be allocated, processed in the DC, and transported to the stores in the current month to be in the stores by the beginning of next month.
This simple methodology can also be applied to derive outbound units at a level lower than overall company (e.g., conveyable vs. non-conveyable, perishable, fragile, heavy, etc.) to aid in estimating DC labor for picking and shipping. If product dimensions are available, the outbound units can be converted to cubic feet enabling more accurate projections of outbound trailers. With little input from the inventory management team, the supply chain team can update monthly sales units projections to reforecast their monthly allocation unit estimates as the year progresses. Note: Case pack and pre-pack logic can also be factored in to arrive at estimated packages that will be processed and transported to the stores each month.
SYSTEM APPROACH FOR OUTBOUND PLANNING:
Another approach to improving outbound planning requires input from the allocators in the inventory management team and a user-friendly tool or system allowing each allocator to manually adjust monthly allocation estimates based on their individual thought process as they employ allocation strategies that may have a significant effect on the supply chain teams. This tool could be a spreadsheet loaded with previously developed merchandise plans converted to units and organized in the merchandise hierarchy structure. Using the straightforward methodology outlined earlier, allocation units by month, by type can be calculated as a starting point. For the annual budget, each allocator can adjust the estimated allocation unit volumes up or down based on their planned individual allocation strategies by month within their merchandise hierarchy. The final allocation estimates are automatically converted and organized into the unit buckets important to the supply chain team (e.g., conveyable, hard goods, perishables, hard-to-handle, etc.). Every month, the allocators can reforecast their allocation numbers as sales roll in and different allocation strategies emerge. The supply chain team can wait for the re-forecasted allocation numbers before they in turn adjust their supply chain volume plans, labor plans, and expense forecasts.
IMPROVE DC CAPACITY PLANNING:
At this point DC inbound and outbound unit volumes by month and by type are known. Attaching height, length, and width dimensions of the units will enable one to calculate the CUBE of the product buckets enabling better labor planning within the four walls of the DC.
Knowing the inbound CUBE, and the outbound CUBE and factoring in the DC on-hand CUBE enables a DC team to estimate DC storage capacity needs for the planning horizon (1 year). This is critical where the DC is estimated to be at or close to storage capacity in any given time period. Similar to inbound and outbound forecasting, the DC capacity forecasts can be updated monthly as the new merchandise planning numbers are updated.
Throughout the year, should storage capacity approach 85% to 90% in any month, the DC team should work cross-functionally to move purchase orders forward or backward, bring in more labor, cancel purchase orders, modify purchase orders, arrange for DC offsites for any spillover, convince the stores to hold more inventory, or employ some combination of these tactics to avoid locking up the DC in a classic bottleneck situation.
To sum up, leveraging a retailer's merchandise plans can provide the perfect starting point to develop better supply chain plans. Either developing a process to convert the detailed merchandise plans and forecasts to a format useful to the supply chain teams or integrating both processes and planning tools used by the two functional areas will enable a retailer to solve this problem and ultimately garner the benefits associated with better planning in the supply chain.
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About the Author:
Ray Whitley is the owner of Shibumi Consulting, LLC, a management consultancy focused on improving the supply chain and inventory management areas for retail companies specifically through leveraging data and analytics in innovative ways. Altogether, Ray has worked in the retail industry for over 20 years. Most recently, Ray transformed the supply chain and inventory management areas for Cost Plus, Inc. as their Senior Vice President, Supply Chain. Prior to that, Ray was Vice President, Supply Chain Optimization and Store Operations for Williams-Sonoma, Inc. where he drove numerous change initiatives in the supply chain and inventory management areas. Ray possesses previous industry experience at Gap, Inc., Mervyns, The Clothestime, and Robinsons/May Department Stores. Additionally, Ray spent several years as a retail industry focused management consultant at Ernst & Young, LLP and PricewaterhouseCoopers, LLP.
Ray has a B.A. from University of California at Berkeley, and an MBA from Indiana University at Bloomington. He can be reached by email at whitley_ray@yahoo.com. |
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| July 2010 |
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