By  on January 12, 2005

Store optimization efforts are making headlines and providing some quick in-store paybacks for retailers. The supply chain side of the equation, though, is quite another matter.

The roadmap for the supply chain of the future — or demand chain, as many now refer to it — calls for integrating replenishment systems with other retail departments, such as merchandising, financial, marketing and advertising, that could be used to accurately predict product supply and consumer demand.

The goal is to create a “demand chain” driven in real or near-real time by consumer sales, and in the process eliminate out-of-stocks, excess inventory, markdowns and chargebacks and maximize assortment, sales and profits. For apparel retailers, moving to a replenishment model that reduces markdown would be a huge change and, in theory at least, result in much higher margins and net profits.      

The Home Depot is one company in the process of revamping its supply chain operations. Company executives have “defined [the demand chain] as forecasting the entire supply chain and customer demand,” said Mark Healy, the retailer’s senior director of merchandising operations. Turning the supply chain into a demand chain driven by accurate forecasting of customer sales requires “a ton of statistical analysis, [uncovering] the customer trends — and a tremendous amount of luck,” he said.

Healy emphasized “change management is probably the toughest thing to go through. We grew up as an entrepreneurial company and still have that sprit alive. But we need to rely much more on data. The ‘facts’ we used to operate on were our emotions. Well, we can’t defend our emotions as well as data. Usually when you are talking with someone who is arguing emotion vs. data, data wins,” he said, referring to changes in Home Depot’s demand chain decision-making processes and operations.

Thomas Schmitt, director of global chain analysis at food retailer Ahold Global Services, said systems integration and workforce issues are core stepping stones — and challenges — to creating a true demand-chain, customer-driven operation.

“We need an integrated supply chain — and then we can talk about different options. Our problem today is we do a great job talking about these things but we don’t forecast accurately enough. And we are a little stingy about [sharing] store-specific demand. There are still a lot of trust issues between retailers and suppliers. We don’t get the lead time we need. There is a tremendous amount of opportunity for savings. But I think the issue is not so much technical as it is [cultural],” Schmitt said.

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