The New Year poses more opportunities for retailers to grow profits by shrinking costs, and taking a fresh look at the supply chain can provide the surest avenues to enhanced bottom lines. Chain Store Age talked with Ryder Supply Chain Solutions’ Chris Merritt about supply chain trends and methods for strategically reducing expense.
What do you see as overriding trends in retail supply chain?
As many retailers strive for organic growth, they have looked to their supply chain as a source of funding. Retailers follow a typical cycle to grow organically: reduce costs in the supply chain; re-deploy cost savings into revenue-growing activities, such as opening new stores or improving their online purchasing capabilities. These increase sales, which results in increased supply chain volume, which creates opportunities to reduce supply chain costs, triggering the cycle to restart.
The relative importance of the components of the supply chain is shifting. Broadly, domestic transportation costs, distribution facility costs and benefit costs are becoming more important compared with labor availability and higher job complexity.
To keep the organic growth cycle spinning, retailers will have to take a fresh look at the supply chain in light of the changing cost environment.
How has the retail supply chain changed over the last few years?
Domestic supply chain components have traditionally focused on the centralization and automation of distribution processes. This strategy was valid when high debt leverage allowed capital to be allocated to the supply chain, and when longer training curves due to increased job complexity created a net reduction in fully loaded labor costs.
The environment is changing, causing erosion in the value of this strategy. Debt leverage has come down, causing a reassessment of the use of capital. Full-time employee benefits are on a path to drive up costs.
Several other factors also affect the cost of centralized distribution centers and transportation networks: fuel cost increases, labor costs and high unemployment rates. Therefore, only having a small number of national DCs no longer offers all of the advantages retailers used to enjoy. Companies are moving away from centralized DCs and are, instead, increasing the number of smaller, strategically located regional DCs that better serve retail stores. Contrary to what many think, this strategy actually reduces costs.
What are some specific strategies that retailers can employ to leverage their distribution networks to benefit their bottom lines?
Evaluate increasing the number of DCs by replacing large automated facilities with less complicated, smaller facilities located in more spots closer to final delivery destination. Another strategy is to relocate DCs every four to six years to be closer to any new retail stores that open in order to reduce network transportation costs. So as retailers add stores and their customers change, their DCs should change to better supply the stores.
When it comes to the international aspect of the supply chain, there are a number of improvements that have increased visibility and speed to market, such as electronic filing, which decreases customers’ clearance times, and PO Management, which increases supply chain visibility by allowing you to track where your PO is at all times. Visibility is very important, since you need to be able to take immediate action when your product is not moving as expected.
What should retailers expect in 2012 and on into 2013 in terms of supply chain challenges and opportunities?
One of the major challenges retailers will continue to face throughout 2012 and 2013 is that consumer demand is fickle. Therefore, it is challenging to have the right inventory in the right place at the right time in order to support the consumer who is willing to spend.
Many opportunities exist for retailers to continue to evolve their supply chain network in order to leverage the changing cost environment. By finding ways to reduce costs, they can continue to leverage the capital to drive the organic growth cycle.