MAZYAR KOTWAL, Senior Manager – Advisory Services, KPMG Mumbai.—
The right products at the right place at the right time in the right quantity. These are critical to meet market demands and capture sales, more so important for retailers. But to get at all the `rights’, you must pay attention to supply chain and logistics, says Mazyar Kotwal, Senior Manager – Advisory Services, KPMG Mumbai.
“Providing customers the right products and services all the time can be a complex, asset-heavy process fraught with inefficiencies, waste and duplicate efforts,” he frets.
Mazyar is a chartered accountant, and an MBA from the Indian School of Business with over 12 years of professional experience. His areas of expertise include risk-based internal audits; business process improvement; process modelling; business risk assessment; risk controls reviews; controls strengthening/ redesign. He has cross industry experience covering retail, FMCG, manufacturing, media, power, oil and gas.
Here, Mazyar speaks about a few critical areas that organised retail has to focus on, with some interesting examples that pepper the discussion.
On supply chain challenges
An organisation’s supply chain initiatives are dependent on the investments in facilities (warehousing and transport) and information technology, geographical distribution of outlets as well as the scale of operations and the number of SKUs traded.
The traditional supply chain was a partially informed push/pipeline model with single direction information flow. This is rapidly transforming into a fully informed network model with bi-directional information flow. The main advantage is better inventory management, quicker and more accurate sales forecasts.
Design of a supply chain
While designing its supply chain, an organisation should keep in mind the following objectives:
Reduce transport costs: Backhaul, cross-docking, ex-factory gate, weekend ordering and deliveries, milk runs, pick to store/pick by line, direct dispatch to distribution centre/retail outlet are some of the delivery options which may be considered. Generally, the fewer the touch points, the lower the cost of distribution.
Improve customer service: Do this through priority/early launches over the general market, mitigate stock-outs through scientific forecasts, provide self-checkout facilities and customised SKUs (for example, a 125 gm pack when the regular size is 100 gm for the same price).
Improve utilisation of people and other resources: Upgrade delivery formats — palletisation makes handling of products easier at the distribution centre. Shelf delivery packaging from the vendor makes for easy handling at the retail store and is attractive to the consumer. Similarly, bar-coding of products by the supplier.
Change to be able to compete: Think RFID — it will change the way inventory is managed. Also consider telemarketing, Web sales, different format stores. Look at express 24/7 outlet vs a hypermarket of the same chain – Coop in Switzerland has large supermarkets which operate regular hours and smaller outlets which operate extended hours
Reduce inventory holding costs: Reduce lag time from vendor to store shelf, go in for scientific sales forecasting, holding minimum required inventory, consignment sales where possible (especially high-value products such as jewellery and watches). This also mitigates the risk of shrinkage and obsolescence.
Vendor managed inventory/customer replenishment service helps control stock levels and place orders based on sales and minimum/maximum stock levels. Collaborative forecasting with the suppliers help manage production quantities thus reducing the stock-holding period.
Technology: Effective use of technology helps manage and track inventory effectively. It also helps coordinate with suppliers and could slash lead times, reduce stock outs and tell management the exact whereabouts of the SKUs. Advance shipping notifications from suppliers give us prior intimation of dispatches helping plan for receipt, storage and onward transfer. E-pods provide electronic proof of receipt of goods at our distribution centres. Universal bar-coding norms simplify the inventory management and sales procedure. Web ordering helps simplify the ordering process.
Electronic data interchange (EDI) help place orders electronically and define delivery schedules
Each supply chain initiative has a cost attached to it and a resultant benefit. It is good idea to map each initiative on a graph, with costs on the X-axis and benefits on the Y-axis. The most favourable alternatives or the low-hanging fruit as they say should be pursued first.
On inventory management
A retailer should ideally operate with JIT inventory levels and at the same time not have any back orders. The only way to do this is to be able to replenish their stock at a moment’s notice. This results in suppliers’ inventories shooting up. The question is, does the retailer have enough clout to push the suppliers to hold more inventory. Here it is also important to understand what is the most economical re-order quantity? Does it make economic sense for the retailer to order fewer cases more often?
Smaller order quantities would result in lower inventory at the retailer. This could require the vendor to produce in smaller batches or hold more inventory. Key to the success of an agile supply chain is the speed and flexibility with which these activities can be accomplished and the realisation that customer needs and customer satisfaction are the very reasons for the network itself to exist. Achieving agility starts with the physical flow of parts, from the point of supply, through the factory, and shipment through agile distribution channels. The main logistics and SCM KPI to measure supply chain agility in the supply chain should be inventory turns.
Thirty per cent of shrinkage is caused by customers. Shrinkage is not only theft, it is damages and unforeseen price losses. When a slack employee forgets to change the price point and you get it for that low price – that is shrinkage. When a child opens a package or breaks something that is rendered un-sellable or at a reduced price – that is shrinkage.
Seventy per cent of the shrinkage is caused by employees. Employees hide merchandise and carry it out without paying for it. And they have greater opportunity to do so. Cashiers have to be watched very closely, for a lot of shrinkage happens under their watch. It is common for a friend to come through their line knowing of the lower priced labels. Or they might palm something small, as a pack of gum, and scan that instead.
Management has its share of thieves, too. They aren’t likely to shoplift, but they may help a friend with price-switching or returns. Or they may load a truck at the back door and tell upper-management, “What microwave ovens?” However, a lot of management theft is through paperwork. They make a bogus return and pocket the refund when no one is looking. Some can get really greedy and stupid. Take the store manager who “returned” a grandfather clock every two weeks for six months. A corporate auditor finally noticed the unusual activity of such a big-ticket item and alerted the inventory squad. They also pored over the transactions logs and noted that they were happening while the store was not open for business. He was fired and that is shrinkage.
Wal-Mart management won’t tolerate shrinkage — loss, theft, and damage of inventory — and adds that not keeping an eye on that is a way for Wal-Mart managers “to get fired real fast.” Wal-Mart aims to keep shrinkage at around 1 per cent, while other retailers typically settle for between 3 and 5 per cent. Similarly, Wal-Mart, which relies on word-of-mouth promotion, spends 0.5 per cent of sales on advertising, roughly one-quarter of what K-mart and Sears each spend.
Sales across States attract a 3 per cent CST (Central Sales Tax). The CST cannot be set-off against other taxes to be paid. All intra-State sales (every retail sale is generally intra-State) attract VAT (generally 4 per cent or 12.5 per cent).
Transfer of stocks from factory to a depot in another State does not attract CST/VAT. VAT paid by retailers to wholesalers/manufactures in the same State can be set off against VAT collected from end-consumers and deposited with the revenue authorities.
Therefore, purchasing the same product inter-State vs intra-State would have a price impact of 4 per cent. Accordingly, where a manufacturer is located in another State, it may be prudent to purchase from his warehouse in the home State.
Author: D. Murali
Article Dated: 12/04/2007
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