View Slideshow

The supply chains of mass retailers are rightly famous. They are colossal procurement engines, fitted with automated processes that produce, track and shuttle $3 trillion worth of goods around the globe a year. Wal-Mart Stores Inc., owner of what is considered the best and most-studied supply chain, relies on 20,000 suppliers and a data satellite system rivaled in size only by the Pentagon’s.

Another large retailer replenishes 20-million-item location combinations — which represent an item’s stockkeeping units and where it is placed in the store — on a daily basis, and 105 million combinations on a weekly basis, according to Pratik Pal, worldwide practice head for Tata Consultancy Services, which works with Target, among others.

“The mass merchants of the world are driving a level of sophistication into every level of supply chain, moving across everything they touch,” emphasized Steven Skinner, a retail partner with Accenture.

Supply chains perform a certain art — not only meeting consumers’ needs on a moment-to-moment basis, but also anticipating their wants months in advance.

But for all the art, analysts say supply chain management could still use more science.

Between $180 billion and $300 billion annually — or roughly another fiscal Wal-Mart — is lost because of poor visibility in a chain, according to recent data from Carnegie Mellon, Stanford University and AMR Research. Communication gaps, miscalculation of demand, lost or sidetracked shipments and shrinkage mean that an estimated 6 percent of sku’s are out-of-stock in big-box stores at any given moment, according to industry estimates. With the economy on the mend, experts are predicting supply chain spending will shift away from the relentless cost-cutting of recent years and into more experimental and forward-looking programs, such as radio frequency identification, or RFID. The latter is the much-hyped wireless tracking technology many consider to be the successor to the bar code.

“We are seeing a marked increase in people looking for innovation again,” said Andrew White, supply chain management research director with Gartner Inc. The Stamford, Conn.-based research firm tracks IT trends across a variety of industries. “Instead of simply a focus on cost-cutting, we’re seeing buyers looking for projects that are more strategic, that will make them more competitive or bring them more market share.”

This story first appeared in the January 9, 2004 issue of WWD. Subscribe Today.

As retailers demand more insight into suppliers’ operations, collaborative planning, forecasting and replenishment initiatives are coming to the fore. CPFR relies on data-sharing and a retailer’s ability to peer far back into manufacturing processes, which is why experts say retailers are demanding their suppliers hook up their databases.

Retailers “want visibility back into the chain, even to where they aren’t technically responsible,” noted AMR Research retail director Paula Rosenblum. “And suppliers are pushing it further back on their contractors. Companies want visibility into the mills’ systems, to know more than three days out if the fabric isn’t going to be on time, so they can start asking for air shipping or making alternative plans.”

Going forward, “The question is: Can you integrate transportation, planning and forecasting systems, yes or no?” emphasized Don Gilbert, senior technology consultant with the International Mass Retail Association. “If the answer is no, it won’t matter how neat your product or attractive the price point, you won’t be able to do business.”

He said a leading mass player has laid down the law on integration. “And it wasn’t Wal-Mart,” he added.

Although Gilbert declined to specify the retailer, other industry players pointed to Target, noting the Minneapolis-based retailer has placed a major emphasis on better operations integration with vendors and can be just as demanding as Wal-Mart.

Among other things, integrated databases mean retailers can keep closer tabs on the efficiency of the partnership. Many big vendors sign service contracts with retailers specifying exact supply and replenishment terms.

“Retailers want to be more fact-based with how they interact with suppliers,” Accenture’s Skinner noted. “Particularly as they are issuing penalties to suppliers when they weren’t supplied on time, or were left hanging at a certain number of stores.” It all comes down to greater visibility into what can be a convoluted and confusing decision-making process. Insiders shudder about the “bullwhip effect,” where a change at store level is misinterpreted, causing reverberations through the chain and problematic fluctuations at the factory level with too much or too little suddenly produced.

“Visibility is a hot item,” noted Rosenblum. “Twenty percent of retailers’ applications budgets are spent on supply chain management — and the lion’s share of that goes to visibility and other analytic applications.” Coupled with a push for more visibility, retailers are tackling data synchronization and master data management — the need for a common language across the supply chain.

In a research note, AMR retail and consumer packaged goods vice president John Fontanella described the current global supply chain as “a polyglot of systems, standards and applications… Trading communities will have to turn an asynchronous and nonlinear supply chain process into one that is synchronized and governed by a common workflow.”

While the leading mass retailers like Wal-Mart, Target and Costco have evolved different strengths based on their business models, they are all keeping their eye on a few major initiatives for next year. Among them:


Without question, RFID will be a front-runner this year in terms of devouring IT attention and budgets.

The buzz is at a fever pitch, thanks to mandates from Wal-Mart and the U.S. Department of Defense that key suppliers adopt RFID tags.

In November, Wal-Mart officially threw its weight behind the technology, gathering its top 100 suppliers to its headquarters for a briefing on its requirements that all pallets and cases destined for three Dallas-area distribution centers be RFID tagged.

The Dallas pilot includes Wal-Mart Stores general merchandise and food distribution centers, as well as a Sam’s Club DC, according to sources familiar with the meeting.

In a statement, a Wal-Mart spokeswoman noted that an additional 26 suppliers voluntarily joined the November meeting and the program. The group will reconvene in February when suppliers will present their implementation plans and discuss any potential barriers, she said.

“This is a team effort,” she wrote, adding, “Wal-Mart has assigned an [internal] executive sponsor and a program sponsor to each of these 126 suppliers to ensure we are all working together in good faith to make this happen.”

Collaboration with suppliers is “critical to the success of the rollout of RFID,” she continued. “We are being extremely mindful that this initiative should deliver value not just to Wal-Mart but our suppliers, too. This is the only way we will achieve mass adoption and thus drive real benefit back to our customer.”

Christopher Boone, senior analyst for Framingham, Mass.-based IDC, an IT research firm, predicted that most of the suppliers will not meet the 2005 compliance deadline, but that in five to six years nearly 100 percent of goods entering distribution centers will be tagged.

Although Wal-Mart has become the public face of retail RFID, Target and Costco are also pursuing the technology.

“The best assumption is that all the big players are working on it, but they are being quiet,” noted Boone. “They share the same suppliers and they might as well take advantage of the work Wal-Mart is forcing them to do.”

Costco chief financial officer Richard Galanti said the warehouse club currently uses a proprietary smart-tagging system in its distribution centers to cross dock pallets. Replacing the proprietary system with RFID will shave off certain labor costs, he speculated, but he believes Costco will get its biggest payoff when the tags can be deployed on products in the stores.

Since Costco uses larger, and more expensive pack sizes of consumer goods — and also sells a range of high-margin items like fine jewelry, leather outerwear and electronics —the retailer doesn’t have to wait for tags to drop to mere pennies per unit to be cost-effective on individual products. “While we may not get as much of a boost on the back end, we think we may end up being further along on the front end [of deployment] than others,” he said.


Retailers are also in hot pursuit of better CPFR (collaborative planning, forecasting and replenishment) practices. CPFR is a process by which retailer and vendor share a variety of data (everything from POS data to customer psychographics) and together, make decisions about what to produce, how much and when to replenish. In reality, Gartner’s Andrew White says CPFR is “the standardization of what Procter & Gamble and Wal-Mart have been doing for years.” And while that’s relatively easy if you’ve had years of practice, a steady-demand product like Tide laundry detergent and a proprietary sales monitoring program like Wal-Mart’s Retail Link, for most retailers and suppliers, CPFR remains an elusive goal.

One of CPFR’s potential benefits is to allow a retailer to “visualize exactly what’s coming into the DC and when,” said Jeff Roster, global retail analyst with Gartner and a colleague of White’s.

The end goal, common to nearly every supply chain initiative, is to reduce risk, whittle down safety inventory and free up working capital.

“Collaboration between the retailer and supplier needs to evolve further because right now supply is not demand,” noted IMRA’s Gilbert. “We need forward-looking merchandise development based on specific demographic information.” Target is “absolutely pursuing collaborative relationships with suppliers,” he added.

While Target is not thought to have a proprietary sales-tracking system like Retail Link, Gartner’s White said the retailer has experimented with CPFR using private e-marketplaces hosted by the Worldwide Retail Exchange. “I think they got an early grounding on what was good and bad with CPFR,” he said. “I would imagine they are not too far behind Wal-Mart.”

Tata Consultancy’s Pal said: “Every retailer that we are working with has or is developing a B2B strategy with its suppliers and plans to invest in a big way to integrate its systems with suppliers’ systems for faster replenishment.”

While those interviewed didn’t have specific information about CPFR with apparel vendors, most mass retail apparel departments appear to be prime candidates for better collaborative planning. Too often, retailers’ private label, exclusive and national brands will overlap, for example offering nearly identical takes on a zip hoodie. With few pricing, fabric or color differences among the brand options, it can lead to a floor that appears cluttered and redundant. Galanti said Costco is at the beginning stages of using auto-replenishment. “We are starting to do more with it,” he said. “We’ve put together some basic algorithms, based on previous sales.” Although he couldn’t specify particular categories, he said steady-demand items like toilet paper, cereal and basic men’s blue jeans might be good candidates.

Master Data Management and Item Synchronization

Ask why data synchronization is such a big deal and most industry consultants will tell the tale of the mislabeled pallet.

When a worker scans a pallet that has arrived at a distribution center and the product code doesn’t match the purchase order listing, the pallet is usually set aside for troubleshooting at the end of the day.

“And then they find out it was the right thing and that it was a fast-moving product that was out of stock somewhere,” White observed. “You’ve got a whole range of consequences, from lost revenues to customer service issues.”

Yet the demand for a universal product directory — to avoid such language and labeling gaps — has been a “tough nut to crack,” White said, because it calls for changes in culture and protocol across organizations.

According to White, here again Wal-Mart is wielding its big stick to keep global retail on a forward march. The company mandated that its top 100 suppliers connect to UCC Net, which maintains a database of standardized product codes, by the beginning of this year, although White said many suppliers are late on the deadline.

Guest Relationship Management

For years, retailers’ attempts to make something out of copious POS data has been like trying to knit a baby sweater with fireplace pokers.

“Every retailer, right up to our friends in Bentonville, would say they are not getting all the value they can out of this data,” observed Roster. “It is so rich in possibility.”

Now, mass retailers are hiring companies to dissect the reams of data, looking beyond demographic basics for specific categories of reaction to product, prices and promotions.

“We’re seeing more retailers throwing the data over the transom and saying ‘Here, what do you make of this?’” said Accenture’s Skinner.

In an analysis Accenture did for a department store, for example, they were able to identify specific purchasing profiles, including a customer who only responded to sales offers of at least 33 percent off. “If you’re trying to clear merchandise, for example, don’t waste your mailers sending out an offer for 20 percent off to that customer. They’ll toss it,” he said. “And don’t ruin your credibility with the customer who only responds to newness.”

According to IDC’s Boone, the trend has been “a boon to Ph.D. mathematics, who are running pretty robust algorithms against these mountains of data,” said Boone. “Knowing what consumer 163 bought doesn’t help anyone, but seeing unexpected correlations between certain categories is what is important.”

Target, for one, has been vocal about the benefits reaped from such analysis. In its third-quarter conference call, Target vice chairman Gerald Storch said data gleaned from POS data analysis “led to our intensified focus on trip frequency, mom-and-baby guests, recent movers and zoomers — the affluent, aging Baby Boomers.”

That in turn caused the Minneapolis-based retailer to design a new prototype store, with a floor remerchandised to create “worlds” of related goods catering to these specific consumer profiles. During the third-quarter conference call, Storch said this prototype would bow in March.