Using Unified Retail Planning to Break Out of Functional Silos
Retail today isn’t for the faint-hearted. A recent quote from business magnate and investor Warren Buffet is quite telling, “I think retailing is just too tough for me, just generally.”
The sector is undergoing profound transformation and only time will tell who the winners will be. In any case, it is evident that retailers no longer can afford to sustain inefficient operations. The ability to keep operational costs in check is essential for profitability and even survival.
Three Types of Operational Costs
In retail, three kinds of costs dominate: space, staff and stock. The relative importance of each expense varies by retail segment and company. Proportionally, apparel retailers typically have the largest cost of space (real estate and leases), while grocery retailers have the largest staff costs (store personnel), and specialty retailers fall somewhere in between.
Improvements in each of these cost areas – space, staff and stock – can have a significant impact on the bottom line. Consequently, you can be sure that the merchandising, store operations, and supply chain departments at any given retailer are constantly honing their processes for improved efficiency.
Build a Unified Planning Process
Something that is routinely overlooked, however, are the strong links between retail’s core processes. A decision made by one department may substantially augment or lessen the efficiency of the others. Failing to take these inter-dependencies into account gives rise to sub-optimization, which has the potential to seriously hurt any retailer’s business.
The biggest opportunity for increased operational efficiency in retail lies in building a unified planning process spanning retail’s core functions: merchandising, supply chain and store operations. I’m not saying that the opportunities for improvement within each of the departments are exhausted, far from it. But by optimizing the processes in conjunction, the impact of improvements can be multiplied.
Here are a few ways retailers can build a unified planning process to reduce costs:
1. Decrease shelving costs by making changes in replenishment planning. Take grocery for instance. Fresh products require frequent deliveries between distribution center and stores. Despite the opportunity for next-day delivery across almost all categories, retailers should aim to concentrate their shipments of center-store products by aisle to specific days. That way, less frequent and much more consolidated deliveries of products displayed in the same aisle are planned, significantly increasing shelving efficiency. Because shelving is one of the most time-consuming tasks in supermarkets, the cost savings are huge and have the potential to be greater than the retailer’s total cost of transportation from distribution center to stores.
2. Lower store labor costs by using forecasts created by the supply chain. Traditionally, store workforce planning has been based on sales budgets or sales forecasts. However, this approach has proven to be inefficient. Instead, retailers should utilize forecasted customer footfall to estimate the workload at checkouts in combination with forecasted incoming deliveries per store and per day for estimating shelving workload. This means that the two most important workload drivers in retail are accounted for, making it possible to create rosters that meet the daily workload much more accurately. In addition to efficiency gains, more level workloads and better planned work schedules increase employee satisfaction.
3. Reduce out-of-stocks by optimizing planograms. Retailers should optimize shelf space based on each store’s local demand and replenishment cycles so that almost all incoming deliveries can be placed directly on the shelves. This minimizes the need for backroom storage and almost eliminates the risk of stock-outs caused by goods sitting in the backroom rather than made available to customers out on the shop floor. Naturally, the efficiency of shelf replenishment also increases as the number of trips between backroom and store floor are minimized.
Organizational Changes Are Key
Why then is sub-optimization so prevalent despite the obvious benefits of taking a more holistic view of planning? A major impediment has been the lack of systems support.
The second, and in my mind, more important challenge is organizational. Unified planning requires stepping out of the retail planning silos and replacing territorial fights for status and power with a shared understanding of strategic goals and the most important means of getting there. Strong leadership, clear prioritization and analytical skills are needed to master the complexity of optimizing the whole rather than the parts.
Unifing retail planning is a hard and big change. Yet, I am convinced that it will happen. Competition is tough, market growth is limited, and operational excellence is required to make a profit. For many retailers, unified retail planning will simply be a requirement to stay in the game.
Mikko Kärkkäinen is Group CEO of Relex Solution, which provides an integrated retail and supply chain planning system. Through precise demand forecasting, automated replenishment, innovative space planning and assortment optimization, Relex helps businesses plan better, sell more and waste less however fast the market changes.