Retail Supply Chain Management

Retail

Supply Chain

ManageMent

AU9052.indb 1 10/20/07 2:16:43 PM

Series on Resource Management

Rightsizing Inventory

by Joseph L. Aiello

ISBN: 0-8493-8515-6

Integral Logistics Management: Operations and

Supply Chain Management in Comprehensive

Value-Added Networks, Third Edition

by Paul Schönsleben

ISBN: 1-4200-5194-6

Supply Chain Cost Control Using Activity￾Based Management

Sameer Kumar and Matthew Zander

ISBN: 0-8493-8215-7

Financial Models and Tools for Managing

Lean Manufacturing

Sameer Kumar and David Meade

ISBN: 0-8493-9185-7

RFID in the Supply Chain

Judith M. Myerson

ISBN: 0-8493-3018-1

Handbook of Supply Chain Management,

Second Edition

by James B. Ayers

ISBN: 0-8493-3160-9

The Portal to Lean Production: Principles

& Practices for Doing More With Less

by John Nicholas and Avi Soni

ISBN: 0-8493-5031-X

Supply Market Intelligence: A Managerial

Handbook for Building Sourcing Strategies

by Robert Handfield

ISBN: 0-8493-2789-X

The Small Manufacturer’s Toolkit: A Guide

to Selecting the Techniques and Systems to

Help You Win

by Steve Novak

ISBN: 0-8493-2883-7

Velocity Management in Logistics and

Distribution: Lessons from the Military

to Secure the Speed of Business

by Joseph L. Walden

ISBN: 0-8493-2859-4

Supply Chain for Liquids: Out of the Box

Approaches to Liquid Logistics

by Wally Klatch

ISBN: 0-8493-2853-5

Supply Chain Architecture: A Blueprint

for Networking the Flow of Material,

Information, and Cash

by William T. Walker

ISBN: 1-57444-357-7

ERP: Tools, Techniques, and Applications

for Integrating the Supply Chain

by Carol A. Ptak with Eli Schragenheim

ISBN: 1-57444-358-5

Introduction to e-Supply Chain Management:

Engaging Technology to Build

Market-Winning Business Partnerships

by David C. Ross

ISBN: 1-57444-324-0

Supply Chain Networks and

Business Process Orientation

by Kevin P. McCormack and

William C. Johnson with William T. Walker

ISBN: 1-57444-327-5

Collaborative Manufacturing: Using

Real-Time Information to Support the

Supply Chain

by Michael McClellan

ISBN: 1-57444-341-0

The Supply Chain Manager’s Problem-Solver:

Maximizing the Value of Collaboration

and Technology

by Charles C. Poirier

ISBN: 1-57444-335-6

Lean Performance ERP Project Management:

Implementing the Virtual Supply Chain

by Brian J. Carroll

ISBN: 1-57444-309-7

Integrated Learning for ERP Success:

A Learning Requirements Planning Approach

by Karl M. Kapp, with William F. Latham and

Hester N. Ford-Latham

ISBN: 1-57444-296-1

Basics of Supply Chain Management

by Lawrence D. Fredendall and Ed Hill

ISBN: 1-57444-120-5

Lean Manufacturing: Tools, Techniques,

and How to Use Them

by William M. Feld

ISBN: 1-57444-297-X

Back to Basics: Your Guide to

Manufacturing Excellence

by Steven A. Melnyk and

R.T. Chris Christensen

ISBN: 1-57444-279-1

Enterprise Resource Planning and Beyond:

Integrating Your Entire Organization

by Gary A. Langenwalter

ISBN: 1-57444-260-0

ISBN: 0-8493-8515-6

AU9052.indb 2 10/20/07 2:16:43 PM

New York London

Retail

Supply Chain

ManageMent

James B. Ayers

CGR Management Consultants

Playa del Rey, California

Mary Ann Odegaard

Michael G. Foster School of Business

University of Washington, Seattle

AU9052.indb 3 10/20/07 2:16:43 PM

Auerbach Publications

Taylor & Francis Group

6000 Broken Sound Parkway NW, Suite 300

Boca Raton, FL 33487‑2742

© 2008 by Taylor & Francis Group, LLC

Auerbach is an imprint of Taylor & Francis Group, an Informa business

No claim to original U.S. Government works

Printed in the United States of America on acid‑free paper

10 9 8 7 6 5 4 3 2 1

International Standard Book Number‑13: 978‑0‑8493‑9052‑4 (Hardcover)

This book contains information obtained from authentic and highly regarded sources. Reprinted

material is quoted with permission, and sources are indicated. A wide variety of references are

listed. Reasonable efforts have been made to publish reliable data and information, but the author

and the publisher cannot assume responsibility for the validity of all materials or for the conse‑

quences of their use.

No part of this book may be reprinted, reproduced, transmitted, or utilized in any form by any

electronic, mechanical, or other means, now known or hereafter invented, including photocopying,

microfilming, and recording, or in any information storage or retrieval system, without written

permission from the publishers.

For permission to photocopy or use material electronically from this work, please access www.

copyright.com (http://www.copyright.com/) or contact the Copyright Clearance Center, Inc. (CCC)

222 Rosewood Drive, Danvers, MA 01923, 978‑750‑8400. CCC is a not‑for‑profit organization that

provides licenses and registration for a variety of users. For organizations that have been granted a

photocopy license by the CCC, a separate system of payment has been arranged.

Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and

are used only for identification and explanation without intent to infringe.

Library of Congress Cataloging‑in‑Publication Data

Ayers, James B.

Retail supply chain management / James B. Ayers, Mary Ann Odegaard.

p. cm.

Includes bibliographical references and index.

ISBN 978‑0‑8493‑9052‑4 (hardback : alk. paper)

1. Business logistics. 2. Retail trade‑‑Management. 3. Industrial

procurement‑‑Management. I. Odegaard, Mary Ann. II. Title.

HD38.5.H86 2006

658.8’700687‑‑dc22 2007019863

Visit the Taylor & Francis Web site at

http://www.taylorandfrancis.com

and the Auerbach Web site at

http://www.auerbach‑publications.com

AU9052.indb 4 10/20/07 2:16:43 PM

To the men and women in the retail supply chain—designing,

manufacturing, and delivering products that enrich our lives.

AU9052.indb 5 10/20/07 2:16:44 PM

AU9052.indb 6 10/20/07 2:16:44 PM

vii

Contents

Preface............................................................................................................xv

Acknowledgments........................................................................................xvii

About the Authors.........................................................................................xix

Section 1 The Retail Supply Chain

1 Defining the Retail Supply Chain...........................................................3

1.1 More Than Stores ...............................................................................4

1.2 Defining the Terms: Supply Chain and Supply Chain

Management.......................................................................................7

1.3 The Importance of Customer Segments............................................11

1.4 Adding Value Along the Chain.........................................................11

Endnotes....................................................................................................12

2 Success in a Retail Business...................................................................13

2.1 Financial Statements and Analysis....................................................13

2.1.1 Retail Income Statements......................................................14

2.1.2 Retail Balance Sheets ............................................................17

2.1.3 Financial Analysis .................................................................18

2.2 Merchandise Replenishment and Budgeting.....................................21

2.2.1 The Importance of Replenishment Models in Retail

Supply Chains.......................................................................21

2.2.2 Merchandise Types—Staple versus Fashion ..........................22

2.2.2.1 Staple or Functional Products ...............................22

2.2.2.2 Fashion or Innovative Products.............................23

2.2.2.3 Merchandise Budget: An Example........................24

2.2.2.4 Merchandise Replenishment Model ......................26

2.2.2.5 Merchandise Budget Follow-Up............................27

2.3 Preparing a Merchandise Budget......................................................28

2.4 Summary..........................................................................................32

Endnotes....................................................................................................33

AU9052.indb 7 10/20/07 2:16:44 PM

viii n  Contents

3 Types of Retail Supply Chain Businesses..............................................35

3.1 Supply Chain Component Data .......................................................36

3.2 Retail Supply Chains in the United States........................................38

3.3 Selected Supply Chain Company Returns........................................39

3.4 Summary..........................................................................................45

Endnotes................................................................................................... 46

4 A Changing World: Moving Toward Comparative Advantage.............47

4.1 Primer on Comparative Advantage...................................................48

4.2 Concept of Distance.........................................................................50

4.3 Applying the Framework ..................................................................52

4.3.1 Revenue.................................................................................56

4.3.2 Workforce Costs....................................................................58

4.3.3 Fixed Costs............................................................................58

4.3.4 Purchased Item Costs............................................................58

4.4 Summary..........................................................................................58

Endnotes....................................................................................................59

5 Corporate Social Responsibility, Sustainability, and the

Retail Industry......................................................................................61

5.1 CSR at Retailers ...............................................................................63

5.2 CSR Link to Strategy........................................................................65

5.2.1 Link between CSR and Competitive Advantage ...................68

5.2.2 Private Companies and Social Issues .....................................70

5.3 Framework for Classifying CSR Activities........................................71

5.4 Boots Ltd.—CSR/Financial Report Convergence............................71

5.5 Summary..........................................................................................75

Endnotes....................................................................................................75

Section 2 Forces Shaping the Retail

Supply Chain Environment

6 Drivers of Retail Supply Chain Change................................................79

6.1 Drivers Are Important......................................................................79

6.2 Innovation Driver.............................................................................81

6.3 Extended Product Design.................................................................85

6.4 Globalization....................................................................................87

6.5 Flexibility Imperative—the Ultimate Capability ..............................88

6.5.1 Management Mindset...........................................................88

6.5.2 Defining Needed Flexibility..................................................89

6.6 Process-Centered Management.........................................................92

AU9052.indb 8 10/20/07 2:16:45 PM

Contents  n ix

6.7 Collaboration....................................................................................93

6.7.1 Definitions of Collaboration .................................................95

6.7.2 Stage 3 (Multicompany) SCM ..............................................95

6.8 Know Your Drivers...........................................................................96

Endnotes....................................................................................................97

7 Paths to the Customer...........................................................................99

7.1 Meeting Market Needs—Dimensions..............................................99

7.2 Procter & Gamble Case Study........................................................102

7.3 Role of Specifications......................................................................104

7.4 Nature of Demand .........................................................................105

7.5 Quality Function Deployment (QFD) Tool....................................110

7.5.1 QFD Overview ...................................................................110

7.5.2 Supply Chain QFD Example ..............................................113

7.6 Summary........................................................................................116

Endnotes..................................................................................................116

8 Supply Chain Risk..............................................................................117

8.1 Location/Trading-Partner Selection Risks...................................... 119

8.2 External Supply Chain Production/Logistics Risks ........................122

8.3 Internal Supply Chain Production/Logistics Risks.........................122

8.4 Supply Chain Risk—Summary ......................................................123

Endnotes..................................................................................................123

9 Retail Supply Chain Metrics...............................................................125

9.1 Metrics Problems............................................................................126

9.2 Alignment with Strategy.................................................................128

9.3 Definitions of Supply Chain Success ..............................................132

9.4 Mid-Tier and Ground-Level Metrics ..............................................133

9.4.1 Service Metrics....................................................................136

9.4.2 Operating Metrics...............................................................137

9.4.3 Financial Metrics ................................................................138

9.5 Supply Chain Metrics—Summary .................................................141

Endnotes..................................................................................................141

10 Meeting the Needs of Supply Chain Decision Makers........................143

10.1 New Decisions at Herman Miller...................................................143

10.2 Proactive Decision Making.............................................................147

10.3 Applications for Information Technology .......................................149

10.4 Assessing the Need for Information................................................158

10.5 Meeting Decision-Maker Needs—Summary..................................159

Endnotes..................................................................................................159

AU9052.indb 9 10/20/07 2:16:45 PM

x n  Contents

Section 3 Retail Strategy and Supply Chains

11 Product Types—Value to the Customer..............................................163

11.1 The Product Life Cycle...................................................................165

11.2 Innovative and Functional Products ...............................................167

11.3 Market Mediation Costs.................................................................168

11.4 Customer Value and Product Types—Summary ............................171

Endnotes..................................................................................................171

12 Businesses Inside the Business............................................................173

12.1 The Conventional Chain ................................................................174

12.2 Market Segments............................................................................174

12.3 Spheres—Modules for Supply Chain Design..................................175

12.4 Summary—Businesses Inside the Business.....................................179

Endnotes..................................................................................................179

13 Activity Systems and Process Definition.............................................181

13.1 Activity System—the IKEA Example.............................................182

13.1.1 Make Choices, Develop Themes..........................................183

13.1.2 Define Activities..................................................................184

13.1.3 Draw Links .........................................................................185

13.2 Enabling Spheres and Supply Chain Processes................................186

13.3 Defining Processes..........................................................................187

13.4 Activity Systems and Process Definition—Summary .....................190

Endnotes..................................................................................................190

14 Retail Supply Chain Management—Skills Required.........................191

14.1 Five Tasks for SCM Excellence.......................................................192

14.2 Assessing Retail SCM Skills ...........................................................192

14.3 Summary—SCM Skills..................................................................198

Endnotes..................................................................................................198

Section 4 Retail Supply Chain Process Improvement

15 Organizing to Improve Retail Supply Chain Performance.................201

15.1 West Marine Case...........................................................................203

15.1.1 West Marine As-Is.............................................................. 204

15.1.2 Evaluation of the As-Is ........................................................205

15.1.3 Destination (To-Be) ............................................................205

15.1.4 Barriers to Success...............................................................210

15.1.5 Pathway to Change .............................................................211

15.2 Continuous Improvement Cycles....................................................216

15.2.1 PDCA in a Retail Supply Chain..........................................216

15.2.2 DMAIC..............................................................................216

15.2.3 CPFR Model.......................................................................217

AU9052.indb 10 10/20/07 2:16:46 PM

Contents  n xi

15.3 S&OP Process and Functional Roles..............................................218

15.5 Organizing to Improve Performance—Summary.......................... 220

Endnotes................................................................................................. 220

16 Collaboration with Supply Chain Partners.........................................221

16.1 Supply Chain Roles ....................................................................... 222

16.1.1 Fewer but Broader.............................................................. 222

16.1.2 Collaboration Landscape.....................................................224

16.2 Core Competency...........................................................................227

16.3 Partnerships Vocabulary .................................................................229

16.3.1 Partnership Purpose............................................................229

16.3.2 Partnership Direction..........................................................231

16.3.3 Partnership Choice..............................................................231

16.4 Organizing a Partnership................................................................232

16.5 Partner Collaboration—Summary .................................................235

Endnotes..................................................................................................236

17 The Demand-Driven Supply Chain.....................................................237

17.1 Vision for the Demand-Driven Supply Chain.................................237

17.1.1 Documenting the Current Situation ...................................241

17.1.2 Product Types .................................................................... 244

17.1.3 Barriers to the Demand-Driven Supply Chain ....................245

17.1.4 The To-Be and Potential To-Be Demand Driven ............... 246

17.2 The Path from Forecast-Driven to Demand-Driven

Supply Chain ..................................................................................250

17.2.1 Continuous Improvement Model for the Demand￾Driven Supply Chain ..........................................................250

17.2.2 The 3C Alternative to MRPII..............................................251

17.3 Demand-Driven Tools and Techniques ..........................................254

17.3.1 Operating Improvements ....................................................255

17.3.1.1 Lean Supply Chain Approaches...........................255

17.3.1.2 Constraint Management .....................................257

17.3.1.3 Quality Improvements ........................................257

17.3.1.4 Design for Commonality ....................................262

17.3.2 Management Improvements................................................263

17.3.2.1 Synchronization and Fixed-Interval Planning .....263

17.3.2.2 Simplification..................................................... 264

17.4 Sponsoring the Demand-Driven Supply Chain ............................. 264

17.5 Demand-Driven Supply Chain—Summary ...................................265

Endnotes................................................................................................. 266

18 Product Tracking Along Retail Supply Chains...................................267

18.1 Low-Tech Retailing ....................................................................... 268

18.2 Beyond Basic Bar Codes.................................................................270

AU9052.indb 11 10/20/07 2:16:46 PM

xii n  Contents

18.3 Radio Frequency Identification.......................................................273

18.3.1 The Retail Application ........................................................273

18.3.2 Active RFID........................................................................275

18.3.3 RFID Applications..............................................................275

18.4 Tracking in Transit.........................................................................278

18.5 The Future of Product Tracking..................................................... 280

18.5.1 Case Study for RFID Application ...................................... 280

18.5.2 A Future RTLS System .......................................................281

18.6 Summary........................................................................................282

Endnotes..................................................................................................283

Section 5 Achieving Financial Success

in the Retail Supply Chain

19 Understanding Supply Chain Costs....................................................287

19.1 Barriers to Cost Visibility .............................................................. 288

19.1.1 Understanding Costs Is Complicated................................. 288

19.1.2 Partners Must Share Information........................................289

19.1.3 ABC Needs a “Makeover” ...................................................289

19.2 Goal: Activity-Based Costing by Product .......................................291

19.2.1 The Starting Point (I-A) ......................................................292

19.2.2 Department Costs with Capital Recovery (II-B) .................293

19.2.3 Multicompany Process Cost (III-C)................................... 300

19.2.3.1 Set Process Boundaries........................................303

19.2.3.2 Document Process Flow......................................303

19.2.3.3 Decide What Cost Categories to Include ............303

19.2.3.4 Assign Costs to Process Steps ............................. 304

19.2.3.5 Analyze Findings................................................ 304

19.3 Activity-Based Costs by Product (IV-D).........................................305

19.3.1 Gather Product Line Information .......................................305

19.3.2 Adjust Unit Costs and Volumes Through Engineering

Studies ................................................................................305

19.3.3 Calculate Product Line Profitability ....................................307

19.4 Understanding Costs—Summary ..................................................312

Endnotes..................................................................................................312

20 Barriers to Addressing Root Causes for Cost......................................313

20.1 Root Causes for Supply Chain Cost ...............................................313

20.2 No Focus........................................................................................314

20.2.1 Project Management Basics.................................................317

20.2.2 Team Building ....................................................................317

20.3 Confusion.......................................................................................318

AU9052.indb 12 10/20/07 2:16:46 PM

Contents  n xiii

20.3.1 Promoting SCM..................................................................319

20.3.2 Graduated Approach ...........................................................319

20.4 Motivators ......................................................................................319

20.4.1 Measures.............................................................................320

20.4.2 Flexibility Defined ..............................................................320

20.5 Boundaries......................................................................................321

20.5.1 Divide and Conquer............................................................322

20.5.2 Multicompany Participation................................................322

20.6 Rigidity ..........................................................................................323

20.6.1 Mindset Changes ................................................................324

20.6.2 Changing the Project ..........................................................324

20.7 Barriers to Cost Reduction—Summary..........................................325

Endnotes..................................................................................................325

21 Multicompany Collaboration to Reduce Costs—Who, What,

AND How............................................................................................327

21.1 Case Study—Frozen and Refrigerated Foods “Cold Chain” ...........328

21.2 Recognize Root Causes...................................................................329

21.3 Types of Collaboration ...................................................................330

21.4 Who—Rationalizing the Customer/Supplier Base..........................332

21.5 What and How—Pursuing Partnership Opportunities ..................339

21.5.1 Type A: One-Way Data Exchange Collaboration ................339

21.5.2 Type B: Two-Way Data Exchange Collaboration ............... 340

21.5.3 Cooperative Collaboration ..................................................341

21.5.4 Cognitive Collaboration..................................................... 342

21.6 Multicompany Collaboration to Reduce Cost—Summary............ 343

Endnotes................................................................................................. 343

22 Retail Return Loops............................................................................345

22.1 GENCO Case Study—the Rise of the Return Loop ......................345

22.2 Types of Returns............................................................................ 346

22.3 Opportunities in Returns .............................................................. 348

22.3.1 Reduced Returns................................................................ 348

22.3.2 Improved Customer Service................................................350

22.3.3 Collaboration with Partners ................................................350

22.3.4 Customer Feedback.............................................................351

22.3.5 Material Source...................................................................351

22.3.6 Environmental Mitigation...................................................351

22.3.7 Additional Business.............................................................352

22.3.8 Cash-to-Cash Cycle Reduction ...........................................352

22.3.9 Process Standardization.......................................................352

22.4 Return Loops—Summary..............................................................353

Endnotes..................................................................................................353

AU9052.indb 13 10/20/07 2:16:47 PM

xiv n  Contents

Glossary.......................................................................................................355

Bibliography.................................................................................................401

Index............................................................................................................415

AU9052.indb 14 10/20/07 2:16:47 PM