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.Dave Strachan, manager of distribution operations at Kimberly-Clark, similarly cited the need to not only integrate IT systems but also change the culture. “The process involves several teams that all have to work together. It begins with the folks that do the forecasting, but there are the customer-service folks, the distribution and transportation folks” and other department groups, “who all have to be in sync to optimize manufacturing and deliver the right amount of product to the right location.”

Arthur Smith, president and chief executive officer of ECCC Network Services, a subsidiary of Electronic Commerce Council of Canada, went even further in citing the need for cultural change in how people and companies work together.  In fact, he questioned the very idea of retail talking about “demand chain” optimization while the industry is still suffering from huge out-of-stocks and other problems.

“Look at how manufacturers have reacted to supply. In a lot of cases, you see a ring of excess inventory buildup around distribution centers so suppliers can react to retailers within 24 hours. So I challenge the whole idea of demand management. I mean, we have a lot of reactive systems in place all over. It is all reaction. There is very little pro-action in terms of trying to track actual customer demand at store level,” Smith said.

“The way we plan our assortments is ridiculous. We have to start right with the customer. And we do have a measure of backlog. It is called out-of-stocks, which are still upward of 10, 11, 13 percent on weekends. We also have accuracy issues regarding our ability to track at the stockkeeping unit level and build detailed information that is actionable. We have to overcome those problems,” throughout all of retail, he added.

Smith, along with the other executives, spoke at the Better Management Live conference in Las Vegas.

Ahold’s Schmitt added, “Too many people in the organization have different objectives and we’re still caught up in this. We have this continuous fight and conflicting objectives. Category managers are trying to beat last year’s sales goals or get the maximum number of end caps. They’re all clashing.”“We have a culture of buyers that really do make it on the buy,” Home Depot’s Healy stated.

Schmitt noted, “There’s no real incentive to be aligned. But I think where we’re headed merchants will begin to understand the essence of the business process. If we stop at the technological solution, it will just lead to another circle. I don’t have the magic potion, but I think we are going to begin to see a lot of companies fall off the face of the earth and I think the ultimate threat of doom will cause people to start straightening this out.”

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