Modern Retail
Industry Overview
Organized Retail offers the value proposition of a wider basket of products for customer selection under one roof, with a premium in shopping experience, confidence of end-to-end service quality and aligned with all legal mandates of the land. Organized retail industry boasts of a chain of stores as an asset, increasing its buying power which creates a cost advantage for the retail industry. In some cases this cost advantage converts in price competitiveness as a value proposition for the customer.
The retail industry works on the mantra to provide the right product at the right place at the right time. The dual objective of high availability with lean inventory is desired. The pursued management paradigms, on the contrary, are rather building high inventory which is compromising profitability. Most retail companies have significant challenges of excess inventory coupled with lost sales of the fast-moving products.
Industry Challenges
The Modern Retail industry is besieged by different challenges and obstacles. Most businesses are either not profitable or manage low profitability and low return on investment. The primary path of expansion pursued is to establish more retail outlets – a high investment option. Alternately stores expand their product categories and range – hoping to add to a little more to their sales from non-core segments. Neither of these have led to leapfrogging success for modern retail in the last ten years
Inventory management is an extremely challenging endeavour for modern trade. With a wide array of products each store will have excess of what it does not want, and will be stock-out of its runner models. The warehouse is usually overflowing with inventory, usually slow-moving or non-moving inventory. This stuck investment forces liquidation activities through capturing display space, offering discounts & promotions and overall consuming the bandwidth of management. The negative ramifications of the above actions are
- Discounts compromise throughput;
- Displaying the slow-movers deprives the fast runners from more display, thus impacting sales;
- Excess inventory and cash available for new purchases compromises on buying of fast-runners, creating a vicious cycle of dealing in slow-runners.
- Cash flow is also affected due to discounts and low sales.
- Schemes & Promotions creates expectations of discount-buying phenomena;
- Brand perception gets associated with discounts and old products;
On one hand modern retail has to manage with inventory overflow, and on the other there is constant stock-outs leading to lost sales opportunities. The runner models are often not available. This happens when the actual consumption is higher than the forecast provided. The negative impact on sales and profitability are apparent. Despite high levels of automation and technology lost sales is not measured in this industry. The generic belief is that the impact of lost sales to the top line is about 3%-5%, whereas in reality it is close to 20% of sales. The impact on bottom-line is even more significant, at times close to 100% of the bottom-line. Lost throughput is directly equivalent to lost profit.
Surplus and stock-outs are two different aspects of the phenomenon of forecasting. While modern trade consistently endeavours to improve the forecasting model by adding complexity, there has been no apparent breakthrough, and the same inventory challenges continue to overwhelm the industry. Forecasting tools have failed to provide the crystal ball which can be used to plan inventory placement at retail outlets.
Despite this knowledge forecasts are used for procurement planning and inventory management, as it is the only known option. Forecast accuracy, whenever measured, is no better than 60%. Forecast accuracy is inversely proportional to product width, as is the case in modern retail. Thus, modern retail is inherently destined for high lost-sales and high misaligned inventory. Is there an alternative available for modern retail?
Theory of Constraints Intervention
Theory of Constraints proposes to move away from forecasts for inventory management – instead use buffer management and replenishment system as the tools to manage inventory. This is a paradigm shift with a proven potential to improve inventory health – reduce stock-outs as well as excess inventory, thus resulting in significantly improved financial health.
Theory of Constraints establishes a single priority system across the supply chain, triggered by an actual customer sale at any store. The chain of events are put in motion, resulting in a pull-based replenishment from all intermediate warehouses, and finally a pull from the vendor, completing the replenishment across the system. The vendor partner has to supply frequently and in small batches, aligned with the rate of customer sales.
This simple mechanism improves the system substantially, by significantly improving availability coupled with minimizing surplus inventory. This process aligns the inventory held to consumption and in the process utilizes the cash & space most effectively. Theory of Constraints actually enables operating with lean inventory, leading to significantly improved return on investment.
TOC promotes changes in policies and procedures to establish a single priority system which is also simple to implement. With aligned measures across the supply chain, from the vendor partner to retail outlet, TOC establishes a win-win system.
The final output of the TOC way is to have the right inventory at the right place at the right time – nothing less than a crystal ball!
Avenir Expertise
Avenir, with its team of TOC Experts deliver significant growth for their clients. Our engagement model is based on closely working with the client in strategy development and implementation of the TOC Solution. We have deployed TOC Solutions across various industry segments in India and abroad – a national player in the white-goods industry, the market leader in locking solutions, a dominant player in a niche apparel market with international presence, a new entrant into the beverages market in India are some of our successes.