Retail Book Chap10

CHAPTER 10: INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT INSTRUCTOR NOTES

ANNOTATED OUTLINE I.

Creating Strategic Advantage Through Supply Chain Management and Information Systems

See PPT 10-3, PPT 10-4

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It is the retailer’s responsibility to gauge customers’ wants and needs and work with the other members of the supply chain – distributors, vendors and transportation companies – to make sure the merchandise that customers want is available when they want it.

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In a simplified supply chain, manufacturers ship merchandise either to a distribution center operated by a retailer or they shop directly to stores.

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Supply chain management is the integration of business processes from end user through original suppliers that provides products, service and information that add value to customers.1

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Retailers have increasingly taken a leadership position in their respective supply chains. As a result of their position in the supply chain, retailers are in the unique position to collect customer purchase information customer by customer, transaction by transaction. This information can be shared with suppliers to plan production, promotions, deliveries, assortments, and inventory levels. See PPT 10-7 and 10-10 for summaries of the benefits of supply chain management.

A. Improved Product Availability

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PPT 10-6 illustrates the components of a typical supply chain.

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An efficient supply chain has two benefits for customers: (1) fewer stockouts and (2) assortments of merchandise that customers want, where they want it. These benefits translate into greater sales, higher inventory turns, and lower markdowns for retailers.

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A stockout occurs when an SKU that a

The Global Supply Chain Forum, Douglas M. Lambert, Director, The Ohio State University .

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customer wants is not available. •

Another benefit provided by information systems that support supply chains is making sure the right merchandise is available at the right store.

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Retailers use sophisticated statistical methods to analyze sales transaction data and adjust store assortments on a wide range of merchandise on the basis of customer demand characteristic’s of the store’s local market.

B. Higher Return on Investment •

One measure of retailing performance is the ability to generate a target return on investment (ROI).

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Net profit margin is improved by increasing the gross margin and lowering expenses.

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An information system coordinating the buying staffs and vendors could allow the retailer to take advantage of special buying opportunities and obtain items at a lower cost, thus improving the gross margin.

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Retailers can lower operating expenses by coordinating deliveries, thus cutting transportation expenses.

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Sophisticated inventory management systems can allow the retailer to carry relatively little backup inventory to stay in stock.

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See PPT 10-5, PPT 10-8

Wal-Mart’s sustainable advantage through supply chain management is summarized in PPT 10-9.

C. Strategic Advantage •

Not all retailers can develop a competitive advantage from their information and supply chain systems. Achieving this advantage requires a substantial financial investment as well as the coordinated effort of employees and functional areas throughout the company.

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When retailers do develop a competitive advantage from these systems, as Wal-Mart has, the advantage is sustainable – it is very difficult for competitors to duplicate. See PPT 10-11 for an overview of Information and Merchandise Flows.

II. Information Flows • •

The flow of information is complex in a retail environment. As the transaction takes place, the merchandise UPC code is scanned and a sales receipt is generated for the customer. Purchase information is recorded in the POS terminal and sent to the buyer/planner. The planner uses this information to plan additional purchases and make markdown decisions.

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The sales transaction data are also sent to the distribution center. When the store inventory drops to a specified level, more merchandise is shipped to the store and the shipment information is sent to the retailer’s computer system so the planner knows the inventory level left in the distribution center.

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When the inventory drops to a specified level, the planner communicates with the vendor regarding the purchase order for the merchandise. At this point they often negotiate shipping dates and terms of purchase.

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The planner communicates with the distribution center to coordinate deliveries from the vendor and to the stores, check inventory status, and so on.

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See PPT 10-12. Walk through the diagram step by step.

See PPT 10-14 and 10-15 describe the Information Flow process.

A. Data Warehousing See PPT 10-16

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A data warehouse is the coordinated and periodic copying of data from various sources, both inside and outside the enterprise, into an environment ready for analytical and informational processing.2

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Analysts from various levels of the retail operation extract information from the data warehouse for making marketing decisions about development and replenishing merchandise assortments.

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Data warehouses also contain information about customers, which is used to target promotions and group products together in stores.

Ask students what would they like to know about their customers? How would they use that information?

Ask students why one major drug store retailer decided to put beer next to diapers. Because a market-basket analysis showed that guys were “sent” to the store at night to buy diapers and ended up buying beer.

B. Electronic Data Interchange •

See PPT 10-17 Electronic Data Interchange (EDI) is the computer-to-computer exchange of business Ask students if they were buyers at the retail store, documents from retailer to vendor, and back. what information would they like to have from the vendor. In addition to sales data, purchase orders, invoices and data about returned merchandise are transmitted from retailer to vendor.

1. Standards •

Two data transmission standards are used in the retail industry. The Uniform Communication Standard (UCS) is used in the grocery sector and the Voluntary Interindustry Commerce Standard (VCIS) is used in the general merchandise retailing sector.

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EDI relies on the development and use of transmission standards to facilitate information exchanges about advanced shipping notices, on-hand inventory status, and vendor promotions among a variety of other pieces of information.

2. Transmission Systems Consider a large retail chain with over 500 stores 2

Alan R. Simon, Data Warehousing for Dummies, Foster City, CA: IDG Books Worldwide, 1997, p. 12.

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spread in 10 countries. Comment on how intranets could provide better coordination of activities across the entire organization.

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In larger retail firms, communications among employees within a company are done through an intranet.

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Intranets are secure communication systems, employing Internet technology, that take place within one company. Using intranets, buyers can communicate and coordinate with store and distribution center personnel.

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EDI transmissions between retailers and vendors occur over the Internet through extranets.

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An extranet is a collaborative network that uses Internet technology to link businesses with their suppliers, customers, or other businesses. Extranets are typically private and secure in that they can be accessed only by certain parties.

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An extranet is generally an extension of a company's intranet, modified to allow access by specified external users. See PPT 10-18

3. Security •

Because the Internet is a publicly accessible network, its use to communicate internally and externally with vendors and customers raises security issues.

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Some of the potential implications of security failures besides the most obvious and devastating one, loss of revenue from customers, are the loss of business data essential to conducting business; disputes with partners, suppliers, distributors, customers; loss of public confidence; and bad publicity.

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To help control the changing information environment, retailers need to develop a corporate security policy. A security policy is a set of rules that apply to activities in the computer and communications resources that belong to an organization.

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The security policy should meet the 278

Ask students if they were in charge of setting up the security policy, what rules they would include.

following objectives: 1. Authentication. The system should be able to assure or verify that the person or computer at the other end of the session really is what it claims to be. 2. Authorization. The system should be able to assure that the person or computer at the other end of the session has permission to carry out the request. 3. Integrity. The system should be able to assure that the arriving information is the same as that sent. This means that the data are protected from unauthorized changes or tampering (data integrity). See PPT 10-19

4. Benefits of EDI •

The use of EDI provides three main benefits to retailers and their vendors:

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First, EDI reduces cycle time (the time between the decision to place an order and the receipt of the merchandise).

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Second, EDI improves the overall quality of communications through better recordkeeping and fewer human errors.

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Third, the data transmitted by EDI are in a computer readable format that can be easily analyzed and used for a variety of tasks. See PPT 10-21 for a summary of characteristics of push and pull supply chains.

C. Push and Pull Supply Chains •

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In a pull supply chain, orders for merchandise are generated at the store level on the basis of sales data captured by POS terminals. The demand for an item pulls it through the supply chain. In a push supply chain, merchandise is allocated to the store on the basis of forecast demand. A forecast is developed and specific quantities of merchandise are shipped to distribution centers and stores at predetermined time intervals.

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Ask students: “All other things held equal, which retailer is more sophisticated , one using a pull or a push logistics system?”

III. The Physical Flow of Merchandise -Logistics

See PPT 10-22

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Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements.

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Merchandise flows from:

1. Vendor to distribution center 2. Distribution center to stores 3. Alternatively, from vendor directly to stores. •

Sometimes merchandise is temporarily stored at the distribution center; other times it is immediately prepared to be shipped to individual stores. This preparation may include breaking shipping cartons into smaller quantities that can be more readily utilized by the individual stores (breaking bulk), as well as tagging merchandise with price tags or stickers, UPC codes, and the store's label. The advantages of using a Distribution Center are summarized in PPT 10-20

A. Distribution Centers versus Direct Store Delivery •

Retailers can use a distribution center or direct store delivery, depending on merchandise characteristics and the nature of demand.

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To determine which distribution system – distribution centers or direct store delivery is better, the retailer must consider the total cost associated with each alternative versus the customer service criterion of having the right merchandise at the store when the customer wants to buy it.

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Advantages of using a distribution center are: (1) more accurate sales forecasts, (2) the retailer’s ability to carry less merchandise in the individual stores, which results in less 280

inventory investment system-wide, (3) easier to avoid running out of stock or having too much stock, and (4) since distribution centers are better equipped to prepare merchandise for sale, it is more costeffective to store merchandise and get it ready for sale than in individual stores. •

Distribution centers are not viable for all retailers. If a retailer has only a few outlets, then the expense of a distribution center is probably unwarranted. Also, if many outlets are concentrated in metropolitan areas, then the merchandise can be consolidated and delivered by the vendor to all the stores in one area. In some cases, it is quicker to get merchandise to stores by avoiding the extra step of using a distribution center. This is particularly important for perishable goods (meat and produce), high-fashion items, or fads since shelf life is limited.

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What type of retailer should use a distribution center? Retailers with wildly fluctuating demand at a store level, stores that require frequent replenishment, stores that carry a relatively large number of items or order in less than full-case quantities, and retailers with a large number of outlets that are not geographically concentrated within a metropolitan area would all benefit from using a distribution center.

Ask students if they have ever bought a refrigerator from a big retailer like Sears. Remind them that they were asked if they wanted a left or right handed refrigerator, and that the refrigerator was delivered from a distribution center. Why? The retailer was practicing the "Principle of Postponement". That is, the retailer did not put the handle on the refrigerator until it was about to be delivered. Also, all inventories were stored in a central location. In this way, the total amount of inventory could be reduced because the retailer does not have to stock both left and right handed refrigerators, and there need not be any inventory stored at individual stores.

Ask students to name stores that should use distribution centers and those who should not.

IV. The Distribution Center •

The distribution center performs several functions, which might include coordinating inbound transportation, receiving, checking, storing and crossdocking, getting merchandise "floor-ready," filling orders, and coordinating outbound transportation.

See PPT 10-24

A. Activities Managed by Distribution Centers 1. Management of Inbound Transportation •

See PPT 10-23 for the activities performed by a distribution center.

Buyers and their staffs get more involved in coordinating the physical flow of merchandise to the stores.

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The Dispatcher is the person who coordinates deliveries to the distribution center.

2. Receiving and Checking •

Receiving refers to the process of recording the receipt of merchandise as it arrives at a distribution center.

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Checking is the process of going through the goods upon receipt to make sure they arrived undamaged and that the merchandise ordered was the actual merchandise received.

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Many distribution systems using electronic data interchange are designed to minimize, if not eliminate labor-intensive and timeconsuming processes.

3. Storing and Crossdocking See PPT 10-25

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There are three types of distribution centers (DC): a traditional, a crossdocking, and a combination of the two.

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The traditional distribution center is a warehouse in which merchandise is unloaded from trucks and placed on racks or shelves for storage. When the merchandise is needed in the stores, the items are picked up, stored in a bin, transported via a conveyor system or other material handling equipment to a staging area where it is consolidated and made ready for shipment to stores.

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A cross docking distribution center is one in which vendors ship merchandise prepackaged in the quantity required for each store. The merchandise already contains price tags and theft detection tags, and in the case of apparel, it is on hangers.

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Cross docking distribution centers are less costly than traditional centers because there is little or no storage required, processing at the distribution center is minimal, and the centers can be much smaller than traditional 282

Ask students what they think an ideal crossdocking distribution center would look like. Draw it on the board. Draw a long skinny rectangle with bays on both sides, one for incoming freight, the other for outgoing freight, and no storage space in between.

centers. •

Merchandise characteristics typically dictate the optimal type of distribution center to use. The primary consideration is the amount of volume that each store can use on a particular shipment.

4. Getting Merchandise Floor-Ready •

Floor-ready merchandise is merchandise that's ready to be placed on the selling floor. Getting merchandise floor-ready entails ticketing, marking, and, in the case of apparel, placing garments on hangers.

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Ticketing and marking refers to making price and identification tags and placing them on the merchandise.

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It is more efficient for a retailer to perform these activities at a DC than in the stores because they are time-consuming and messy.

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An even better approach from the retailer's perspective is to get vendors to ship the merchandise floor-ready, thus totally eliminating this expensive, time-consuming process. Having floor-ready merchandise benefits the retailer because the cost of making the merchandise floor-ready is passed on to vendors.

5. Preparing to Ship Merchandise to a Store •

After receiving the store order, the computer at a distribution center creates a pick ticket, a document that tells the order filler how much of each item to get from the storage area.

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The pick ticket is printed in warehouse location sequence so the order fillers don’t waste time crisscrossing the distribution center looking for merchandise. The computer knows which items are out of stock so it doesn’t even print them on the pick ticket.

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Ask students if they think retailers are asking too much of their vendors in making them provide floor-ready merchandise. Ask students if they have ever been in a store that was cluttered with merchandise being ticketed and all the salespeople were too busy to wait on customers because they were busy checking in and marking merchandise. Point out inefficiencies of such a system.

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Order fillers take the merchandise to as staging area where an electronic sorter routes the merchandise to the bay with the truck going to the store. 6. Management of Outbound Transportation

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The management of outbound transportation from distribution center to stores has become increasingly complex as chain stores expand. Centers may use a sophisticated routing and scheduling computer system. This system considers the rate of sales in the store, road conditions, and transportation operating constraints to develop the most efficient routes possible. As a result, stores are provided with an accurate estimated time of arrival and vehicle utilization is maximized. B. Reverse Logistics Ask students what percentage of merchandise they return to either catalog or Internet retailers. Have them discuss both excellent and poor return experiences.

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Reverse logistics is the flow back of merchandise through the channel, from the customer to the store, distribution center, and vendor, for customer returns.

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Reverse logistics can be a serious problem. PPT 10-26 illustrates the Reverse Logistics The more fashion-forward the item, the process. more likely it is to be returned. Items may be damaged, and without the original shipping carton, thus causing special handling needs. Transportation costs can be high because items are shipped back in small quantities.

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Outsourcing is obtaining a service from outside the company that had previously been done by the firm itself. C. Logistics for Fulfilling Catalog and Internet Orders

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Fulfilling Internet orders from customers is very different than distributing merchandise to stores.

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Internet retailers have outbound shipments averaging 1.8 items per order that are

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Ask students, “If you were a bricks and mortar retailer going into the Internet space, would you integrate your logistics system, or create a separate system for the Internet?”

shipped to addresses all over the world. •

Some retailers have a fully integrated information system, whereby distribution to stores and to customers ordering through a website or catalog are handled by the same information system. Yet they use different DCs to service store and Internet and catalog customers.

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Other retailers use one distribution center for catalog, stores, and Internet orders. Catalog and web orders are treated identically but separated from the store-based distribution system. D. Outsourcing Logistics

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To streamline their operations and make more productive use of their assets and personnel, retailers are constantly looking to outsource logistical functions if those functions can be performed better or less expensively by third-party logistics companies.

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Third party logistics companies are firms that facilitate the movement of merchandise from manufacturer to retailer, but are independently owned.

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Specifically, they provide transportation, warehousing, consolidation of orders, and documentation. 1. Transportation

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Retailers must choose their shippers carefully and demand reliable, customized services. A retailer’s lead time and the variation in lead time is determined by the chosen transportation company.

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Also, many retailers are finding that the added cost of airfreight is worth the benefit of getting merchandise into stores more quickly.

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Some retailers mix modes of transportation in order to reduce overall cost and time

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delays. 2. Warehousing •

To meet increasing stringent demands retailers are placing on their vendors to meet specific delivery times for floor-ready merchandise, many vendors must store merchandise closer to their retail customers.

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Rather than owning these warehouses themselves, the vendors typically use public warehouses that are owned and operated by a third party. 3. Freight Forwarder

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Freight forwarders are companies that purchase transport services. They then consolidate small shipments from a number of shippers into large shipments that move at a lower freight rate. 4. Integrated Third-Party Logistics Services

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Traditional definitions distinguishing between transportation, warehousing, and freight forwarding, have become blurred in recent years.

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Some of the best transportation firms, for example, now provide public warehousing and freight forwarding. The same diversification strategy is being used by the other types of third-party logistics providers.

V. Collaboration Between Retailers and Vendors in Supply Chain Management •

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Retailers’ and vendors’ objectives for supply chain management are to make sure that merchandise is available in the stores when customers want it and to accomplish this task with the minimum investment in inventory and costs. Supply chain efficiency dramatically improves when vendors and retailers share information and work together.

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Ask students to discuss the risks associated with the bullwhip effect. Who is harmed most by its occurrence? The retailer? The vendor? The consumer?

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By collaborating, vendors can plan their purchases of raw materials and production process to match the retailer’s merchandise needs.

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Excess inventory buildup, referred to as the bullwhip effect, often takes place in uncoordinated channels. This effect is caused by: (1) delays in transmitting orders and receiving merchandise, (2) overreacting to shortages, and (3) ordering in batches.

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PPT 10-27 and 10-28 illustrates the Bullwhip Effect.

Four approaches for coordinating supply chain activities are: (1) using EDI, (2) exchanging information, (3) using vendormanaged inventory and (4) employing collaborative planning. For an overview of the development of retailer and vendor relationships, see PPT 10-29 through PPT 10-35.

A. Using EDI •

The use of EDI to transmit purchase order information reduces the time it takes for retailers to place orders and for vendors to acknowledge the receipt of orders and communicate delivery information about those orders.

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EDI additionally facilitates the implementation of the other collaborative approaches discussed below. B. Sharing Information •

Sharing sales data with vendors is an important first step in improving supply chain efficiency.

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Better information sharing will allow vendors to respond more precisely to sales increases and decreases. See PPT 10-36

C. Vendor-Managed Inventory •

Vendor-managed inventory is an approach to improving supply chain efficiency in which the vendor is responsible for maintaining inventory levels at the retailer’s individual stores and/or distribution centers.

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In a VMI system, the vendor replenishes 287

inventories in quantities that meet the retailer’s immediate demand, reducing stockouts with minimal inventory. •

VMI can reduce both vendor’s and retailer’s costs.

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Although a more advanced level of collaboration than simply using EDI and sharing information, VMI has limitations, such as limited awareness of actions the retailer may be taking to increase sales of specific products or categories. D. Collaborative Planning, Forecast and Replenishment

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Collaborative planning, forecast and replenishment (CPFR), pioneered by Walmart and Procter & Gamble in 1987, is a more advanced form of retailer-vendor collaboration that involves sharing proprietary information such as business strategies, promotion plans, new product developments and introductions, production schedules and lead time information. In its current form, CPFR is a nine-step process that enhances the coordination of all trading parties in a supply chain. See PPT 10-37

VI. Radio Frequency Identification (RFID) •

Radio frequency identification (RFID) is a technology that allows an object or person to be identified at a distance using radio waves.

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The RFID technology has advantages over traditional bar codes, including the ability to hold more data and update data stored on the device.

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RFID enables accurate, real-time tracking of every product item from manufacturer to retail check-out.

A. Benefits of RFID •

Discuss the advantages of RFID. Ask students if they foresee any disadvantages. What are the risks

RFID has several demonstrated benefits including: (1) reduced labor costs for

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warehouse and distribution, (2) reduced labor costs at point-of-sale, (3) inventory savings, (4) reduced theft, and (5) reduced out-of-stock conditions.

or downsides of these systems?

These impediments are summarized in PPT 10-38.

B. Impediments to the Adoption of RFID •

High costs are the major obstacle to the adoption of RFID systems.

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In addition, RFID generates more information than can be efficiently processed, making it even more difficult to justify its costs.

VII. Summary

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ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1.

Retail system acronyms include VMI, EDI, CPFR and RFID. How are these terms related to one another? Each of these terms describes a system designed to enhance the efficiency of supply chain management. VMI, vendor-managed inventory, seeks to improve supply chain efficiency by assigning the vendor to maintain inventory levels in the retailer’s stores. These systems are typically based on electronic data interchange (EDI). An EDI is an exchange of data between two or more computers. In most cases, the vendor’s and retailer’s computers “talk to each other” and exchange data on ordering, inventory levels, delivery dates, and sales. CPFR (collaborative planning, forecast and replenishment) is a system of integrated information sharing between retailers and their vendors including such information as forecasts, strategies and promotion plans. Collaborative supply chain management relationships are designed to reduce the lead-time for receiving merchandise, thereby lowering inventory investment, improving customer service levels and reducing distribution expenses. RFID stands for Radio Frequency Identification, the next generation of inventory tracking and identification.

2.

Explain how an efficient supply chain management system can increase a retailer's level of product availability and decrease its inventory investment. By eliminating the need for paper transactions, an efficient supply chain management system reduces lead-time. Shorter lead-time reduces the need for safety stock because the shorter the lead-time, the easier it is to forecast demand, and therefore, less inventory is needed to hold as safety stock. In short, since the retailer can make purchase commitments closer to the time of sale, inventory investment is reduced. Finally, an efficient supply chain management system also can reduce distribution expenses by allowing the retailer to negotiate a direct store delivery system in which the vendors deliver to each store rather than the distribution center, and also prepare the merchandise for sale with services such as price labeling.

3.

This chapter has presented trends in logistics and information systems that benefit retailers. How do vendors benefit from these trends? Vendors benefit from collaboration in supply chain management just as retailers do. As vendors share the retailer’s goals of providing merchandise to customers where and when they want it, with minimum cost, collaborations to improve the flow of information and merchandise benefit both of these supply chain members. When working collaboratively with a retailer, the vendor can better plan their purchases of raw materials and production process to provide the optimal merchandise flow, eliminating potential for a bullwhip effect of excess inventory buildup to take place. Additionally, vendors also benefits from enhanced information flows in collaborative relationships allowing them to respond to retailers’ needs more precisely and rapidly.

4.

Evaluate the options retailers have for dealing with returned merchandise. Returned merchandise is a necessary evil for retailers. On one hand, they should provide the option to customers for returning merchandise – no questions asked – so as to provide the better customer service and gain/sustain competitive advantages. On the other hand, returns are costly, complex and handling them takes time away from other store functions. Moreover items may be damaged, may not have the original shipping carton or packaging and therefore more time, effort

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and costs are involved in handling these. Transportation costs are also high since the items are shipped back to the DCs or vendors in smaller quantities. There are several options for retailers who do not wish to send back the merchandise and incur higher costs. One option is to move a portion of the returned merchandise, especially those in good sales condition, to the Internet. For example, Sears sells a portion of its returns though Internet auctions on eBay.com after a third party distribution facilitator, Genco Distribution Systems, collects the merchandise to be auctioned from Sears, inspects it, and following criteria set by Sears, lists the items on eBay without identifying the Sears brand name. After the auction, Genco packs and ships the merchandise to the consumer winning the bid. Another option is to place the return – again, in somewhat saleable condition – at the back of the store and offer it as a "clearance" or "sale" item. Care should be taken to ensure that consumers are informed that the products are indeed returned merchandise. A third option for the retailer is to negotiate early in the ordering process with vendors, especially for merchandise that is quite new or quite suspect in terms of consumer demand for it. In these cases, the retailers could ask for a longer payment period or obtain the merchandise on consignment from the vendor. Also, provisions could be added in the contract negotiations for the vendor to pick up returns directly from the store.

5.

Why haven't more fashion retailers adopted an integrated supply chain system similar to Zara's? Zara's integrated supply chain management system depends on two major factors for its success. The first is the technological connections between the sales floor and the design center in Spain. Such technology requires higher capital investments and employee training. The second is the fact that Zara's is vertically-integrated- it controls the entire design, production and sales process. Zara's integrated supply chain management system is particularly beneficial to Zara’s, since it sells high fashion products. For retailers selling conventional products or products that stay in fashion for a longer time, such coordination between sales and design may not be needed. Also, most retailers are not as vertically-integrated as Zara's. For a conventional retailer, the added cost of collecting consumer information on design issues and transferring them to vendors may not be worth the effort – most retailers would rather let vendors/manufacturers take care of consumer demands/trends through their own marketing research systems. Moreover, the production processes for most products may gain from the added margins obtained in small lot production as in fashion clothing. On the contrary, most manufacturers may seek economies of scale and therefore make design changes to products and retooling changes to production processes only infrequently. Such design and manufacturing changes are done easily for clothing manufacturers, as in the case of Zara's, since the design and production processes here are based on a work-station flow model (rather than assembly line) and are quite labor intensive.

6.

Explain the differences between pull and push supply chains. A pull distribution strategy is when orders for merchandise are generated at the store level on the basis of demand data captured by point of sale (POS) terminals. A push distribution strategy is

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when merchandise is allocated to the stores based on historical demand, the inventory position at the distribution center, as well as the needs of the stores. The pull strategy decreases the likelihood of being overstocked or out-of-stock, and the stores may order merchandise based on the needs of their customers. Although it is effective, retailers with less sophisticated forecasting and information systems usually cannot use pull distribution. A push strategy also benefits retailers that have less desirable merchandise, but still must be sold.

7.

Why is global logistics much more complicated than domestic logistics? Global distribution is much more difficult than domestic distribution. Often, there are trade barriers such as regulation of transportation, additional documentation, and clearing of customs. In some countries, there are transportation regulations on the number of hours a truck driver can work, or restrictions on hours when deliveries can be made. There is also the issue of diversity of languages, which affects advertising, packaging, and distribution. Retailers must always be aware of the legal and political environment of the countries in which they operate, because sudden reversals in government could take place without notice.

8.

Consumers have five key reactions to stockouts: buy the item at another store (31 percent), substitute a different brand (26 percent), substitute same brand (19 percent), delay purchase (15 percent), or do not purchase the item (9 percent). Consider your own purchasing behavior and describe how various categories of merchandise would result in different reactions to a stockout. A stockout occurs when an SKU a consumer wants is not available. Students answers will vary widely here. This question allows for discussion of factors such as brand loyalty, and shopping behavior in gauging response to stockout situations. Consider the different impacts of convenience shopping, comparison and specialty shopping to determine likely responses. For instance, explore the consumer’s reaction to a 7-Eleven being out of milk on a quick stop versus Best Buy being out of a popular DVD-R model, available at several other consumer electronics retailers and on-line, on a planned shopping trip.

9.

Abandoned purchases as a result of stockouts can mean millions of dollars a year in lost sales. How are retailers and manufacturers using technology to reduce stockouts and improve sales? Retailers are turning to investments in information technology and supply chain managements systems to help reduce stockouts. Some retailers are turning to CPFR systems to share high levels of information with vendors to anticipate changes in product offerings, promotions and business strategies aimed at better managing and maintaining product availability.

10.

In the past, manufacturers dominated the relationship between vendors and retailers. Today, retailers have more leverage, and both parties are investing in and seeing the benefits of a more trusting relationship with two-way communication. How has the emergence of mega formats, mergers and acquisitions, and technology enabled this shift to greater cooperating between retailers and manufacturers?

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Manufacturers’ dominance of the retailer-manufacturer relationship was based in large part on control of, and access to, information. Today’s retailer, especially larger retailers and national chains, have invested in and cultivated their own highly developed information management systems. Given the size of prominent retailers in today’s marketplace, in combination with the amounts of consumers and purchase data they maintain, higher levels of cooperation between retailers and manufacturers have become much more commonplace. Both parties recognize the value of collaboration in serving customers by providing the right product at the right place and the right time.

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ADDITIONAL ASSIGNMENTS AND EXERCISES Exercise 10-1 Retail Supply Chain – Reading Assignment Minding the Store

Read the article listed below and answer the questions. Be prepared to discuss in class. Nelson, Emily and Ann Zimmerman. “Minding the Store: Kimberly-Clark Keeps Costco in Diapers.” Wall Street Journal, September 7, 2000.

1. What are some of the advantages of close cooperation between retailers and product suppliers as seen in the Costco and Kimberly-Clark scenario? Retailers Suppliers Consumers

2. What has changed in retailing to allow vendor-managed inventory of the supply chain? Technologies Business Strategies

3. List the unique problems that can be solved with a vendor-managed inventory system?

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Exercise 10-1 with Answers Retail Supply Chain – Reading Assignment Minding the Store Read the article listed below and answer the questions. Be prepared to discuss in class. Nelson, Emily and Ann Zimmerman. “Minding the Store: Kimberly-Clark Keeps Costco in Diapers.” Wall Street Journal, September 7, 2000.

1. What are some of the advantages of close cooperation between retailers and product suppliers as seen in the Costco and Kimberly-Clark scenario? Retailers -

Less costs for warehousing and inventory management

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Needs only a two-week supply of merchandise on hand vs. one month

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Avoids stockouts

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Improved sales and profits

Suppliers -

Able to replenish stock more efficiently than retailer

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Competitive advantage

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May become the exclusive national brand at retail

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Have detailed information on sales trend from the retailer

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Able to cut cost through efficiencies in the supply chain

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Improved sales and profits

Consumers -

Able to find desired merchandise

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Lower prices at the cash register

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Greater customer satisfaction

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2. What has changed in retailing to allow vendor-managed inventory of the supply chain?

Technologies -

Information technology - computer inventory systems that help to keep inventory low and avoid stock outs

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Databases to manage the stock at a large number of stores at once and data warehousing

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EDI – Electronic data interchange such as electronic invoicing and transferring of funds

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Automated replenishment systems

Business Strategies -

Establishing trust to share sales and inventory data between the retailer and the supplier

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Two-way communication

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Retailers and suppliers being equal partners

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The parties being interested in each other’s welfare

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Understanding each other business

3. List the unique problems that can be solved with a vendor-managed inventory system? -

Avoid stock outs

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Tailor orders to match customer demand by neighborhood

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Meet special delivery time requests

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Coordinate the shipping function with demand

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Resolve complaints in the logistics of deliveries, example: contact the drive in route

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