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Does the Supply Chain Make the Store?

The link between retail success and efficiency
Supply Chain Solutions

There’s a fifteenth-century English proverb that states “clothes make the man” to highlight the link between what one wears and his (or her) status. Similarly, it is conceivable to suggest that “supply chains make the store” to recognize the growing importance of transportation, warehousing, and inventory management to a retailer’s success.

Could such a bold claim be true or is it just hyperbole? Before you roll your eyes and claim the latter to be true, think about the links between a fundamentally strong supply chain and a retailer’s ability to effectively serve customers. A store’s produce department depends heavily on the fresh produce supply chain to support timely flows of high demand product in excellent condition.

Yet, the store is not a passive entity that waits patiently on the supply chain to produce manna from heaven. The store has critical information, makes key decisions, and executes daily operations that should drive supply chain activity. Hence, the two groups must align their processes to ensure on-shelf availability of highly desired fresh fruits and vegetables to satisfy consumer demand.

Alignment and success come from a collaborative environment where a partnership approach supplants the adversarial shipper versus buyer mentality. According to Dan Gilmore, editor-in-chief of Supply Chain Digest, supply chain collaboration (SCC) requires companies to go beyond simple transaction integration and cooperation to joint planning, process redesign across trading partner interactions, and the sharing of risks and rewards. Achieving Gilmore’s vision of SCC is not easy, but it is well worth the effort. A properly established initiative will reduce out-of-stocks by 4.4 percent and supply chain costs by 5.4 percent, according to a 2014 McKinsey & Company study.

Successful SCC is based upon three building blocks: cohesive goals, rich information, and reliable fulfillment. To understand these SCC building blocks, industry experts from the supplier, third-party logistics, and retailer communities shared their thoughts about how “supply chains (and SCC) make the store.”

Cohesive Goals
One of the primary challenges to supply chain success is a tradition of functional silos and internal focus that exists within most organizations. This leads to narrow goals and performance metrics that prioritize individual activities rather than collective outcomes.

For example, seeking to minimize delivery costs by using rail delivery will reduce cost per hundredweight, but may lead to higher inventory costs due to shipment size and greater shrink from slower transit time. Instead of sub-optimizing delivery costs, the collective goal of shippers and retailers should be to ensure on-shelf availability balanced with low shrinkage rates and total logistics cost control.

Getting to this level of goal cohesion is not simple and cannot be achieved with an “us versus them” mentality. It requires a willingness to help one another and invest time in building strong relationships according to Chuck Olsen, chief executive officer of the Chuck Olsen Company in Visalia, CA, and a 50-year produce industry veteran. “It’s up to us as a supplier to help our customers move more product, make more money, reduce shrink, and to teach them how to keep the cold chain going.”

Olsen acknowledges that buyers may find it faster to communicate via email and EDI [electronic data interchange], but notes the importance of human connections. Spending time on the phone and having face-to-face communication are very valuable for building relationships.

It is also necessary to move beyond a broad collaboration strategy and specify the focus of the SCC initiative. Time must be invested in developing a front-end agreement between parties. This helps to clarify roles, ensure fairness, and promote commitment. Likewise, the agreement will bolster confidence in SCC.

“Mutual respect and trust are needed for a truly effective relationship,” confirms Mike Graham, senior vice president of supply chain operations for Meijer, Inc., a 200-plus discount chain based in Grand Rapids, MI. “There should be an agreement on the goals and responsibilities of each party.”

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There’s a fifteenth-century English proverb that states “clothes make the man” to highlight the link between what one wears and his (or her) status. Similarly, it is conceivable to suggest that “supply chains make the store” to recognize the growing importance of transportation, warehousing, and inventory management to a retailer’s success.

Could such a bold claim be true or is it just hyperbole? Before you roll your eyes and claim the latter to be true, think about the links between a fundamentally strong supply chain and a retailer’s ability to effectively serve customers. A store’s produce department depends heavily on the fresh produce supply chain to support timely flows of high demand product in excellent condition.

Yet, the store is not a passive entity that waits patiently on the supply chain to produce manna from heaven. The store has critical information, makes key decisions, and executes daily operations that should drive supply chain activity. Hence, the two groups must align their processes to ensure on-shelf availability of highly desired fresh fruits and vegetables to satisfy consumer demand.

Alignment and success come from a collaborative environment where a partnership approach supplants the adversarial shipper versus buyer mentality. According to Dan Gilmore, editor-in-chief of Supply Chain Digest, supply chain collaboration (SCC) requires companies to go beyond simple transaction integration and cooperation to joint planning, process redesign across trading partner interactions, and the sharing of risks and rewards. Achieving Gilmore’s vision of SCC is not easy, but it is well worth the effort. A properly established initiative will reduce out-of-stocks by 4.4 percent and supply chain costs by 5.4 percent, according to a 2014 McKinsey & Company study.

Successful SCC is based upon three building blocks: cohesive goals, rich information, and reliable fulfillment. To understand these SCC building blocks, industry experts from the supplier, third-party logistics, and retailer communities shared their thoughts about how “supply chains (and SCC) make the store.”

Cohesive Goals
One of the primary challenges to supply chain success is a tradition of functional silos and internal focus that exists within most organizations. This leads to narrow goals and performance metrics that prioritize individual activities rather than collective outcomes.

For example, seeking to minimize delivery costs by using rail delivery will reduce cost per hundredweight, but may lead to higher inventory costs due to shipment size and greater shrink from slower transit time. Instead of sub-optimizing delivery costs, the collective goal of shippers and retailers should be to ensure on-shelf availability balanced with low shrinkage rates and total logistics cost control.

Getting to this level of goal cohesion is not simple and cannot be achieved with an “us versus them” mentality. It requires a willingness to help one another and invest time in building strong relationships according to Chuck Olsen, chief executive officer of the Chuck Olsen Company in Visalia, CA, and a 50-year produce industry veteran. “It’s up to us as a supplier to help our customers move more product, make more money, reduce shrink, and to teach them how to keep the cold chain going.”

Olsen acknowledges that buyers may find it faster to communicate via email and EDI [electronic data interchange], but notes the importance of human connections. Spending time on the phone and having face-to-face communication are very valuable for building relationships.

It is also necessary to move beyond a broad collaboration strategy and specify the focus of the SCC initiative. Time must be invested in developing a front-end agreement between parties. This helps to clarify roles, ensure fairness, and promote commitment. Likewise, the agreement will bolster confidence in SCC.

“Mutual respect and trust are needed for a truly effective relationship,” confirms Mike Graham, senior vice president of supply chain operations for Meijer, Inc., a 200-plus discount chain based in Grand Rapids, MI. “There should be an agreement on the goals and responsibilities of each party.”

Graham adds that the SCC relationship should always be centered on serving the consumer better. Through collaboration, the supplier and retailer can provide higher in-stock availability of fresh product which translates to greater customer value.

Rich Information
This past January’s Supply Chain Solutions column stressed the importance of information. To recap, accurate and timely data sharing between partners generates actionable information. This rich information can be used by trading partners to collaboratively plan, facilitate decision making, and coordinate these activities across the fresh produce supply chain.

MIT’s Beer Game: Experiential Learning and the Supply Chain

Sometimes a simple game can help people understand a concept better than a presentation or discussion. This is the premise behind the Massachusetts Institute of Technology’s four-part “Beer Game”—a role-playing simulation in which participants experience the challenges of managing a traditional supply chain—that is, one in which information sharing and collaboration do not exist and systemic thinking does not take place.

In the simulation, each participant represents an independent organization in a four-stage supply chain. The factory produces kegs of beer that move through distributors, wholesalers, and retailers for sale to final customers. Each participant’s goal is to purchase adequate inventory to ensure availability for downstream customers, while keeping internal inventory costs under control. Order and delivery lead times exist as in a normal supply chain. Sounds simple, right?

The game begins as a very stable supply chain with consistent demand patterns. Then a simple demand spike, combined with a lack of communication and poor downstream insight, sets off a chain reaction of ill-informed ordering. The bullwhip effect occurs as the participants typically overreact to perceived changes in demand rather than actual demand. The result is an unstable supply chain where inventory levels rise and stockouts occur simultaneously. Through the game, participants learn that insular, error-ridden decision making results from a lack of supply chain collaboration.

Rich and usable information results from tightly interwoven systems, smooth data transfers, and effective mining of the data. Online portals with detailed information about product availability, purchase order requests, and backorders are extremely helpful to retailers, according to a recent SCC research study by Kane Is Able, a Scranton, PA third-party logistics provider.

“The back-and-forth information sharing between retailers and suppliers is a key to success,” notes Alex Stark, Kane’s senior director of marketing. “If they can create visibility to each other’s operations, then there are opportunities for better flows. This leads to inventory reductions, chargeback reductions, and bottom line savings.”

The Kane study also highlighted room for information improvement. From the supplier perspective, retailers have an opportunity to improve the upstream flow of demand data and promotional plans. Also, the timeliness and accuracy of a retailer’s demand forecasts need to increase. For their part, retailers want better communication from trading partners. One only needs to play MIT’s “Beer Game” simulation to quickly recognize the importance of these expectations, as poor information sharing causes supply chain chaos.

Information problems may not be easily resolved; investment in connective systems may be required and trust must be built up before strategic information sharing will occur. Graham also notes that some information is considered strategic and may not be shared at all. Highly detailed consumer or store level information falls into this category.

“Consumer data is becoming very valuable and some companies are not willing to share all data—and rightfully so,” comments Graham. “The combined supplier-retailer supply chain can still be very effective with data that is rolled up to distribution points.”

Despite the challenges, the value of creating rich information is worth the effort. Supply chain collaboration combined with visibility of rich information creates measurable financial benefits. In the Kane study, one participant was able to take 10 days of inventory out of the network while another slashed retailer deductions by 75 percent.

Reliable Fulfillment
Consistent on-shelf availability of fresh produce is the key to customer satisfaction and retention.

Product availability—and the avoidance of customer defection—is the outcome of a concerted fulfillment effort among suppliers, logistics service providers, and retailers. All must collaborate to understand demand, establish consistent product flows, and maintain cold chain integrity.

Reliable fulfillment begins with accurate forecasts; growers and shippers must provide insights regarding weather, harvest timing, and other considerations that affect produce availability. Retailers need to share information on sales history, promotional plans, and related factors that will influence demand. As much as possible, the goal is to be demand driven—and this means adopting a customer focus.

“Understanding and forecasting consumer demand is the critical starting point,” explains Meijer’s Graham. “Start with the consumer and work upstream. Product should move in concert with demand from the consumer; some products have longer lead times that need to be accommodated.”

Coordination of logistics activities is also necessary. Adequate transportation capacity, accurate inventory rotation, and timely picking and dispatch of orders are all elements of success. Though this sounds straightforward, the reliance on lean inventory levels, just-in-time delivery, and part-time labor can complicate the situation. A slight spike in demand or a scheduling error can quickly disrupt the supply chain.

“The margin for error is so small,” ob-serves Stark, “you can’t miss appointments; you can’t have the product sitting in the yard. You need coordination across all parties and everyone working in concert to get the product to retailers.”

Maintaining cold chain integrity, of course, is a fulfillment priority throughout the fresh produce supply chain. Temperature fluctuations in a truck, on the receiving dock, or a store backroom can lead to shelf-life degradation. These problems can be avoided through precooling practices, selecting the right transportation providers, and minimizing inventory dwell time. Here, SCC also plays a key role when organizations are willing to share their expertise with trading partners.

“Our quality control people work with retailer distribution centers and store managers to help them understand the cold chain and how they can handle product to decelerate decay,” explains Olsen. “We also offer a service for our customers to pick up their orders from multiple suppliers, take it to one of our consolidation centers, and have it ready when their trucks arrive. When the consolidated orders arrive at the customer’s warehouse, the product is fresher and shrink is decreased.”

Graham succinctly summarizes the importance of reliable fulfillment, noting “strong planning processes and even stronger execution will lead to high rates of on-shelf availability.”

Summary
As a longtime supply chain professional and educator, it is my natural bias to believe the initial claim of this article—supply chains make the store.

After talking to the experts and doing some additional thinking, however, it’s clear this statement needs to be tweaked slightly for accuracy. It is fair to claim that supply chain collaboration makes the store. Consistent on-shelf availability of produce is best achieved through a coordinated effort among partners who are willing to share their expertise for the benefit of the overall supply chain.

Remember, stores cannot ensure product availability on their own. They depend on the effective coordination of internal and external supply chain resources to generate timely flows of fresh produce from the field to store shelves.

Success is promoted when and if organizations all along the supply chain adopt cohesive goals, share accurate information, and establish reliable fulfillment processes. This will require both commitment and trust, but the results will be well worth the collaborative efforts.

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