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SUPPLY CHAIN MANAGEMENT PRACTICES OF VARIOUS RETAIL
chain management (SCM) is the
management of a network of interconnected businesses involved in the ultimate
provision of product and service packages required by end customers.
Supply Chain Management spans all movement and storage of raw materials,
work-in-process inventory, and finished goods from point of origin to
point of consumption. It defines SCM as the "design, planning, execution,
control, and monitoring of supply chain activities with the objective
of creating net value, building a competitive infrastructure, leveraging
worldwide logistics, synchronizing supply with demand, and measuring performance
globally." A supply chain is a network of facilities and distribution
options that performs the functions of procurement of materials, transformation
of these materials into intermediate and finished products, and the distribution
of these finished products to customers. Supply chains exist in both service
and manufacturing organizations, although the complexity of the chain
may vary greatly from industry to industry and firm to firm.
Supply chain management is typically viewed to lie between fully vertically
integrated firms, where the entire material flow is owned by a single
firm, and those where each channel member operates independently. Therefore
coordination between the various players in the chain is key in its effective
management. Cooper and Ellram  compare supply chain management to
a well-balanced and well-practiced relay team. Such a team is more competitive
when each player knows how to be positioned for the hand-off. The relationships
are the strongest between players who directly pass the baton, but the
entire team needs to make a coordinated effort to win the race.
Supply chains encompass the companies and the business activities needed
to design, make, deliver, and use a product or service. Businesses depend
on their supply chains to provide them with what they need to survive
and thrive. Every business fits into one or more supply chains and has
a role to play in each of them. The pace of change and the uncertainty
about how markets will evolve has made it increasingly important for companies
to be aware of the supply chains they participate in and to understand
the roles that they play. Those companies that learn how to build and
participate in strong supply chains will have a substantial competitive
advantage in their markets.
Supply Chain Decisions: We classify the decisions for supply
chain management into two broad categories -- strategic and operational.
As the term implies, strategic decisions are made typically over a longer
time horizon. These are closely linked to the corporate strategy and guide
supply chain policies from a design perspective. On the other hand, operational
decisions are short term, and focus on activities over a day-to-day basis.
The effort in these type of decisions is to effectively and efficiently
manage the product flow in the "strategically" planned supply
There are four major decision areas in supply chain management:
7. Transportation or distribution
The strategic decisions include what products to produce, and which plants
to produce them in, allocation of suppliers to plants, plants to DC's,
and DC's to customer markets. As before, these decisions have a big impact
on the revenues, costs and customer service levels of the firm. These
decisions assume the existence of the facilities, but determine the exact
path(s) through which a product flows to and from these facilities. Another
critical issue is the capacity of the manufacturing facilities--and this
largely depends the degree of vertical integration within the firm. Operational
decisions focus on detailed production scheduling. These decisions include
the construction of the master production schedules, scheduling production
on machines, and equipment maintenance. Other considerations include workload
balancing, and quality control measures at a production facility
These refer to means by which inventories are managed. Inventories exist
at every stage of the supply chain as either raw material, semi-finished
or finished goods. Since holding of inventories can cost anywhere between
20 to 40 percent of their value, their efficient management is critical
in supply chain operations. It is strategic in the sense that top management
sets goals. However, most researchers have approached the management of
inventory from an operational perspective. These include deployment strategies
(push versus pull), control policies --- the determination of the optimal
levels of order quantities and reorder points, and setting safety stock
levels, at each stocking location. These levels are critical, since they
are primary determinants of customer service levels.
The geographic placement of production facilities, stocking points, and
sourcing points is the natural first step in creating a supply chain.
The location of facilities involves a commitment of resources to a long-term
plan. Once the size, number, and location of these are determined, so
are the possible paths by which the product flows through to the final
customer. These decisions are of great significance to a firm since they
represent the basic strategy for accessing customer markets, and will
have a considerable impact on revenue, cost, and level of service. These
decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. Although location decisions
are primarily strategic, they also have implications on an operational
The mode choice aspect of these decisions are the more strategic ones.
These are closely linked to the inventory decisions, since the best choice
of mode is often found by trading-off the cost of using the particular
mode of transport with the indirect cost of inventory associated with
that mode. While air shipments may be fast, reliable, and warrant lesser
safety stocks, they are expensive. Meanwhile shipping by sea or rail may
be much cheaper, but they necessitate holding relatively large amounts
of inventory to buffer against the inherent uncertainty associated with
them. Therefore customer service levels, and geographic location play
vital roles in such decisions. Since transportation is more than 30 percent
of the logistics costs, operating efficiently makes good economic sense.
Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing
and scheduling of equipment are key in effective management of the firm's
How much data should be collected and how much information should be
shared? Timely and accurate information holds the promise of better coordination
and better decision making. With good information, people can make effective
decisions about what to produce and how much, about where to locate inventory
and how best to transport it.
The sum of these decisions will define the capabilities and effectiveness
of a company’s supply chain. The things a company can do and the ways
that it can compete in its markets are all very much dependent on the
effectiveness of its supply chain. If a company’s strategy is to serve
a mass market and compete on the basis of price, it had better have a
supply chain that is optimized for low cost. If a company’s strategy is
to serve a market segment and compete on the basis of customer service
and convenience, it had better have a supply chain optimized for responsiveness.
Who a company is and what it can do is shaped by its supply chain and
by the markets it serves.
Importance of Supply Chain IN Retail sectors
One of the most important challenge in organized retail in India is faced
by poor supply chain and logistics management. The importance can be understood
by the fact that the logistics management cost component in India is as
high as 7% -10% against the global average of 4% - 5% of the total retail
price. Therefore, the margins in the retail sector can be improved by
3% - 5% by just improving the supply chain and logistics management.
In India, with demand for end-to-end logistics solutions far outstripping
supply, the logistics market for organised retail is pegged at $50 million
and is growing at 16%. It is expected to reach $120-$130 million by 2010.
Organised retail on the other hand is growing at 400% and is expected
to reach around $30 billion by 2010.Even supply chain and logistics firms
like Hong Kong based Heng Tai Consumables and ABS Procurement Co and ACM
China (the greenhouse specialist) is also eying the opportunity for managing
The supply chain management is logistics aspect of a value delivery chain.
It comprises all of the parties that participate in the retail logistics
process: Manufacturers, Wholesalers, Third Party Specialists like Shippers,
Order Fulfillment House etc. and the Retailer. Here, logistics is the
total process of planning, implementing and coordinating the physical
movement of merchandise from manufacturer to retailer to customer in the
most timely, effective and cost efficient manner possible. Logistics regards
order processing and fulfillment, transportation, warehousing, customer
service and inventory management as interdependent functions in the value
delivery chain. It oversees inventory management decisions as items travel
through a retail supply chain. If a logistics system works well, the retail
firm reduces stock outs, hold down inventories and improve customer service
– all at the same time.
Logistics and Supply Chain enables an organized retailer to move or store
products more effectively. Efficient logistics management not only prevents
needless movement of goods, vehicles transferring products back and forth;
but also frees up storage space for more productive use.
Retail analysts say on-time order replenishments will become even more
critical once the Wal-Mart/ Bharti combine begins operations - the American
retailer works almost entirely on cross-docking and is likely to demand
higher service levels, including potential levies for delays in shipment.
The efficiency and effectiveness of supply chain and logistics management
can also be understood by the fact that m odern retail stores maintain
lower inventories than traditional retail. In India, generally in the
traditional kirana stores, three weeks inventories are kept; while in
a modern retail store like Hyper city, it's nine days and it's under two
weeks for Food Bazaar. Now, it is beneficial for both the manufacturer
as well as the retailer. If we go through the following food supply chain
in India, we find that a lot can be improved by maintaining the supply
chain and logistics.
Participants in the Supply Chain
Producers or manufacturers are organizations that make a product.
This includes companies that are producers of raw materials and companies
that are producers of finished goods. For the customer, distributors fulfill
the “Time and Place” function—they deliver products when and where the
customer wants them.
Retailers stock inventory and sell in smaller quantities to the general
public. This organization also closely tracks the preferences and demands
of the customers that it sells to. It advertises to its customers and
often uses some combination of price, product selection, service, and
convenience as the primary draw to attract customers for the products
Customers or consumers are any organization that purchases and uses a
product. A customer organization may purchase a product in order to incorporate
it into another product that they in turn sell to other customers. Or
a customer may be the final end user of a product who buys the product
in order to consume it.
Introduction of Indian Retail Industries:
Retail is India’s largest industry, accounting for over 10 per cent of
the country’s GDP and around eight per cent of the employment. Retail
industry in India is at the crossroads. It has emerged as one of the most
dynamic and fast paced industries with several players entering the market.
But because of the heavy initial investments required, break even is difficult
to achieve and many of these players have not tasted success so far.
However, the future is promising; the market is growing, government policies
are becoming more favorable and emerging technologies are facilitating
operations. Retailing in India is gradually inching its way toward becoming
the next boom industry. The whole concept of shopping has altered in terms
of format and consumer buying behavior, ushering in a revolution in shopping
in India. Modern retail has entered India as seen in Sprawling shopping
centers, multi-storied malls and huge complexes offer shopping, entertainment
and food all under one roof. The Indian retailing sector is at an inflexion
point where the growth of organized retailing and growth in the consumption
by the Indian population is going to take a higher growth trajectory.
Retailing is more than selling goods:
Retailing consists of the sale of goods or merchandise, from a fixed location
such as a department store or kiosk, in small or individual lots for direct
consumption by the purchaser.
Retailing is a well recognized business function which compromises making
available desired product in the desired quantity at the desired time.
This creates a time, place and form utility for the consumer. The success
of retailing is highly dependent on an efficient supply chain management.
A well-developed supply chain reduces wastages and transaction cost thereby
reducing the cost of inventories to be maintained by the producers and
the traders. A reduction in the cost of inventory management leads to
a reduction in the final price to the consumer.
Retailing has been identified as a thrust area for promotion of textiles,
processed foods, agricultural and horticultural produce. Retail Sector
can be divided into organized and unorganized sectors:
Unorganized retailing is characterized by a distorted realestate market,
poor infrastructure and inefficient upstream processes, lack of modern
technology, inadequate funding and absence of skilled manpower. Therefore,
there is a need to promote organized retailing.
Many of the world’s largest supermarket chains, including Wal-Mart, Tesco
and M&S have been concentrating their collective efforts on improving
their supply chain. While much has been achieved the activities have tended
to be focused on specific aspects of the supply chain, such as packaging
waste. It is important to recognise that there is a need to look at what
else needs to be done and whether regulation is required in order to see
our shopkeepers go the extra mile?
Some of the most highly publicised supply chain issues have been focused
on the footwear and textile industries in relation to labour practices.
Given that many of the major supermarket brands also retail clothing items
it makes sense that they have begun to focus on issues of supply chain.
So too stakeholder concerns on the impact of large retail chains on the
high streets have extended to concerns over the treatment and location
of their suppliers.
Whilst each of the major chains may be at different stages of implementation
of corporate responsibility activities there are a couple of common themes
the programmes listed on their websites and in their corporate responsibility
reports seem to cover.
Waste minimisation: Prompted by participation in the voluntary Courtauld
Commitment with WRAP (Waste Resources Action Programme) many retailers
have been working with suppliers to reduce packaging waste associated
with the products sold. This has included an aim to maintain current waste
levels despite growth which has seen ASDA sell its animal by-waste to
soap and pet food manufacturers, Waitrose improve its recycling labelling
and M&S use lighter packaging for its ready meals and promote the
recycling of its clothes in partnership with Oxfam
Transport: Combined with local sourcing and clearer labelling of items
that have been flown in from abroad many supermarket chains have been
looking at their own transport usage. This has seen some, such as Sainsbury,
rethink the locations of warehouses to reduce the number of road miles
required. Others, including M&S, have changed their fleet vehicles
to more efficient vehicles and the use of lower emission fuels. Tesco
has switched some of its transportation activities from road to rail.
Retail footprint: This includes both the building of new stores as well
as items used in store across their vast property portfolios. Tesco, M&S
and Morrisons have all trialled new eco buildings at various locations
throughout the United Kingdom.
Sustainable produce: This typically includes third party certification
of fresh produce including Morrisons’ use of RSPCA certified salmon and
chicken, Waitrose’s array of over 1,500 organic products and Tesco’s code
of practice for animal welfare for its British growers.
Items such as reusable crates for use in transport and in displaying produce
as well as the use of lower emission and more efficient refrigerant systems
have also become commonplace.
Whilst there have been some shining examples of what can be achieved there
is generally a need for a more holistic approach as well as acceptance
that not all customers are naturally predisposed to making sustainable
By taking a holistic approach that follows more of a product lifecycle
philosophy, perverse subsidies and unintended consequences can be avoided.
For instance, the immense focus on packaging reduction can in fact lead
to more waste through increased food waste. Single serve packaging can
be more suitable for small households; packaged bananas ripen more slowly
again leading to reduced food waste which can have significant environmental
and social benefits.
In order to further improve their impacts supermarkets will need to continue
to provide incentives similar to those provided by Tesco through the use
of Club Card points in return for using their own bags.
These messages also need to take a holistic approach. To be taken seriously
by consumers, as with any communication campaign, the messages need to
be consistent and reinforcing. So too do the actions taken.2
The question remains as to how much of this will be undertaken without
regulation with some in the sector calling for it to encourage those who
are only paying such activities lip service. Either way there will be
a need to engage with customers to ensure that retail makes a return to
a focus on value rather than volume, the seeds of which the current economic
environment are beginning to sow
How the Supply Chain Works in Retail Sector?
Production refers to the capacity of a supply chain to make and store
products. The facilities of production are factories and warehouses. The
fundamental decision that managers face when making production decisions
is how to resolve the trade-off between responsiveness and efficiency.
If factories and warehouses are built with a lot of excess capacity, they
can be very flexible and respond quickly to wide swings in product demand.
Facilities where all or almost all capacity is being used are not capable
of responding easily to fluctuations in demand. On the other hand, capacity
costs money and excess capacity is idle capacity not in use and not generating
revenue. So the more excess capacity that exists, the less efficient the
operation becomes. Factories can be built to accommodate one of two approaches
1. Product focus—A factory that takes a product focus
performs the range of different operations required to make a given product
line from fabrication of different product parts to assembly of these
2. Functional focus—A functional approach concentrates
on performing just a few operations such as only making a select group
of parts or only
doing assembly. These functions can be applied to making many different
kinds of products. A product approach tends to result in developing expertise
about a given set of products at the expense of expertise about any particular
function. A functional approach results in expertise about particular
functions instead of expertise in a given product. Companies need to decide
which approach or what mix of these two approaches will give them the
capability and expertise they need to best respond to customer demands.
As with factories, warehouses too can be built to accommodate different
approaches. There are three main approaches to use in warehousing:
1. Stock keeping unit (SKU) storage—In this traditional
approach, all of a given type of product is stored together. This is an
efficient and easy to
understand way to store products.
2. Job lot storage—In this approach, all the different
products related to the needs of a certain type of customer or related
to the needs of a particular job are stored together. This allows for
an efficient picking and packing operation but usually requires more storage
space than the traditional SKU storage approach.
3. Cross docking—An approach that was pioneered by Wal-Mart
in its drive to increase efficiencies in its supply chain. In this approach,
is not actually warehoused in the facility. Instead the facility is used
to house a process where trucks from suppliers arrive and unload large
quantities of different products. These large lots are then broken down
into smaller lots. Smaller lots of different products are recombined according
to the needs of the day and quickly loaded onto outbound trucks that deliver
the products to their final destination.
Inventory is spread throughout the supply chain and includes everything
from raw material to work in process to finished goods that are held by
the manufacturers, distributors, and retailers in a supply chain. Again,
managers must decide where they want to position themselves in the trade-off
between responsiveness and efficiency.
Holding large amounts of inventory allows a company or an entire supply
chain to be very responsive to fluctuations in customer demand.
However, the creation and storage of inventory is a cost and to achieve
high levels of efficiency, the cost of inventory should be kept as low
possible. There are three basic decisions to make regarding the creation
and holding of inventory:
1. Cycle Inventory—This is the amount of inventory needed
to satisfy demand for the product in the period between purchases of the
Companies tend to produce and to purchase in large lots in order to gain
the advantages that economies of scale can bring. However, with large
lots also comes with increased carrying costs. Carrying costs come from
the cost to store, handle, and insure the inventory. Managers face the
trade-off between the reduced cost of ordering and better prices offered
by purchasing product in large lots and the increased carrying cost of
cycle inventory that comes with purchasing in large lots.
2. Safety Inventory—Inventory that is held as a buffer
against uncertainty. If demand forecasting could be done with perfect
accuracy, then the only inventory that would be needed would be cycle
But since every forecast has some degree of uncertainty in it, we cover
that uncertainty to a greater or lesser degree by holding additional inventory
in case demand is suddenly greater than anticipated. The tradeoff here
is to weigh the costs of carrying extra inventory against the costs of
losing sales due to insufficient inventory.
3. Seasonal Inventory—This is inventory that is built
up in anticipation of predictable increases in demand that occur at certain
times of the year.
For example, it is predictable that demand for anti-freeze will increase
in the winter. If a company that makes anti-freeze has a fixed production
rate that is expensive to change, then it will try to manufacture product
at a steady rate all year long and build up inventory during periods of
low demand to cover for periods of high demand that will exceed its production
rate. The alternative to building up seasonal inventory is to invest in
flexible manufacturing facilities that can quickly change their rate of
production of different products to respond to increases in demand. In
this case, the trade-off is between the cost of carrying seasonal inventory
and the cost of having more flexible production capabilities.
Location refers to the geographical setting of supply chain facilities.
It also includes the decisions related to which activities should be performed
in each facility. The responsiveness versus efficiency tradeoff here is
the decision whether to centralize activities in fewer locations to gain
economies of scale and efficiency, or to decentralize activities in many
locations close to customers and suppliers in order for operations to
be more responsive. When making location decisions, managers need to consider
a range of factors that relate to a given location including the cost
of facilities, the cost of labor, skills available in the workforce, infrastructure
conditions, taxes and tariffs, and proximity to suppliers and customers.
Location decisions tend to be very strategic decisions because they commit
large amounts of money to long-term plans. Location decisions have strong
impacts on the cost and performance characteristics of a supply chain.
Once the size, number, and location of facilities is determined, that
also defines the number of possible paths through which products can flow
on the way to the final customer. Location decisions reflect a company’s
basic strategy for building and delivering its products to market.
This refers to the movement of everything from raw material to finished
goods between different facilities in a supply chain. In transportation
the trade-off between responsiveness and efficiency is manifested in the
choice of transport mode. Fast modes of transport such as airplanes are
very responsive but also more costly. Slower modes such as ship and rail
are very cost efficient but not as responsive. Since transportation costs
can be as much as a third of the operating cost of a supply chain, decisions
made here are very important. There are six basic modes of transport that
a company can choose from:
1. Ship which is very cost efficient but also the slowest
mode of transport. It is limited to use between locations that are situated
next to navigable waterways and facilities such as harbors and canals.
2. Rail which is also very cost efficient but can be
slow. This mode is also restricted to use between locations that are served
by rail lines.
3. Trucks are a relatively quick and very flexible mode
of transport. Trucks can go almost anywhere. The cost of this mode is
fluctuations though, as the cost of fuel fluctuates and the condition
of roads varies.
Information is the basis upon which to make decisions regarding the other
four supply chain drivers. It is the connection between all of the activities
and operations in a supply chain. To the extent that this connection is
a strong one, (i.e., the data is accurate, timely, and complete), the
companies in a supply chain will each be able to make good decisions for
their own operations. This will also tend to maximize the profitability
of the supply chain as a whole. That is the way that stock markets or
other free markets work and supply chains have many of the same dynamics
1. Coordinating daily activities related to the functioning
of the other four supply chain drivers: production; inventory; location;
and transportation. The companies in a supply chain use available data
on product supply and demand to decide on weekly production schedules,
inventory levels, transportation routes, and stocking locations.
2. Forecasting and planning to anticipate and meet future
demands. Available information is used to make tactical forecasts to guide
the setting of monthly and quarterly production schedules and timetables.
Information is also used for strategic forecasts to guide decisions about
whether to build new facilities, enter a new market, or exit an existing
Within an individual company the trade-off between responsiveness and
efficiency involves weighing the benefits that good information can provide
against the cost of acquiring that information.
Abundant, accurate information can enable very efficient operating decisions
and better forecasts but the cost of building and installing systems to
deliver this information can be very high. Within the supply chain as
a whole, the responsiveness versus efficiency trade-off that companies
make is one of deciding how much information to share with the other companies
and how much information to keep private. The more information about product
supply, customer demand, market forecasts, and production schedules that
companies share with each other, the more responsive everyone can be.
Balancing this openness however, are the concerns that each company has
about revealing information that could be used against it by a competitor.
The potential costs associated with increased competition can hurt the
profitability of a company.
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