CHAPTER 10 INFORMATION SYSTEMS AND SUPPLY CHAIN MANAGEMENT ANNOTATED OUTLINE INSTRUCTOR NOTES I. Creating Strategic Advantage Through Supply Chain Management and Information Systems • It is the retailer’s responsibility to gauge customers’ wants and needs and work with the other members of the supply chain – distributors, vendors and transportation companies – to make sure the merchandise that customers want is available when they want it. • In a simplified supply chain, manufacturers ship merchandise either to a distribution center operated by a retailer or they ship directly to stores. • Supply chain management refers to a set of approaches and techniques firms employ to efficiently and effectively integrate their suppliers, manufacturers, warehouses, stores, and transportation intermediaries. • Retailers have increasingly taken a leadership position in their respective supply chains. As a result of their position in the supply chain, retailers are in the unique position to collect customer purchase information by individual customer and transaction. This information can be shared with suppliers to plan production, promotions, deliveries, assortments, and inventory levels. PPT 10-3 for supply chain definition. PPT 10-4 illustrates the components of a typical supply chain. PPT 10-5 illustrates why efficient supply chain management is important to retailers. A. Strategic Advantage • Not all retailers can develop a competitive advantage from their information and supply chain systems. Achieving this advantage requires a substantial financial investment as well as the coordinated effort of employees Zara’s strategic supply chain advantage is discussed in PPT 10-7. and functional areas throughout the company. • When retailers do develop a competitive advantage from these systems, as Wal-Mart has, the advantage is sustainable – it is very difficult for competitors to duplicate. Wal-Mart’s sustainable advantage through supply chain management is summarized in PPT 10-8. B. Improved Product Availability • An efficient supply chain has two benefits for customers: (1) fewer stockouts and (2) tailored assortments. These benefits translate into greater sales, higher inventory turnover, and lower markdowns for retailers. See PPT 10-9 for summaries of the benefits of supply chain management. Ask students to consider how their feelings towards a retailer change when the product they want is not available in the store? Do they continue to shop at that retailer? Do they lose trust in that retailer? 1. Reduced Stockouts • A stockout occurs when an SKU that a customer wants is not available. • In general, stockouts have short-term and long-term effects on sales and profits. 2. Tailored Assortments • Another benefit provided by information systems that support supply chains is making sure the right merchandise is available at the right store. • Retailers use sophisticated statistical methods to analyze sales transaction data and adjust store assortments on a wide range of merchandise on the basis of customer demand characteristic’s of the store’s local market. C. Higher Return on Assets • One measure of retailing performance is the ability to generate a target return on investment (ROI). • Net profit margin is improved by increasing the gross margin and lowering expenses. • An information system coordinating the buying staffs and vendors could allow the retailer to take advantage of special buying opportunities and obtain items at a lower cost, thus improving the gross margin. • Retailers can lower operating expenses by coordinating deliveries, thus cutting transportation expenses. • With more efficient distribution centers, merchandise can be received, prepared for sale, and shipped to stores with minimum handling, further reducing expenses. • Sophisticated inventory management systems can allow the retailer to carry relatively little backup inventory to stay in stock. • With a lower inventory investment, total assets are also lower, so the asset and inventory turnovers are both higher. See PPT 10-10 II. Information Flows • The flow of information is complex in a retail environment. • As the transaction takes place, the merchandise Universal Product Code (UPC) is scanned and a sales receipt is generated for the customer. Purchase information is recorded in the POS terminal and sent to the buyer/planner. The planner uses this information to plan additional purchases and make markdown decisions. See PPT 10-11 for an overview of Information and Merchandise Flows. See PPT 10-12. Walk through the diagram step by step. See PPT 10-13, 10-14, and 10-15 for detailed information on the Information Flow process. • The sales transaction data are also sent to the distribution center. When the store inventory drops to a specified level, more merchandise is shipped to the store and the shipment information is sent to the retailer’s computer system so the planner knows the inventory level left in the distribution center. • When the inventory drops to a specified level, the planner communicates with the vendor regarding the purchase order for the merchandise. At this point they often negotiate shipping dates and terms of purchase. • The planner communicates with the distribution center to coordinate deliveries from the vendor and to the stores, check inventory status, and so on. • When the manufacturer ships the product to the distribution center, it sends an advanced shipping notice (ASN) to the distribution center. An ASN is a document that tells the distribution center what specifically is being shipped and when it will be delivered. • When the shipment is received at the distribution center, the planner is notified and then authorizes payment to the vendor. A. Data Warehousing • Purchase data collected at the point of sale goes into a huge database known as a data warehouse. The information stored in the data warehouse is accessible on various dimensions and levels. • Analysts from various levels of the retail operation extract information from the data warehouse for making marketing decisions about development See PPT 10-17 Ask students what would they like to know about their customers? How would they use that information? Ask students why one major drug store retailer decided to put beer next to diapers. Because a market-basket analysis showed and replenishing merchandise assortments. • Data warehouses also contain information about customers, which is used to target promotions and group products together in stores. that guys were “sent” to the store at night to buy diapers and ended up buying beer. B. Electronic Data Interchange • Electronic Data Interchange (EDI) is the computer-to-computer exchange of business documents in a structured format , which means that the data transmissions used s standard format to communicate the data. See PPT 10-19 Ask students if they were buyers at the retail store, what information would they like to have from the vendor. 1. Standards • Two data transmission standards are used in the retail industry. The Uniform Communication Standard (UCS) which was used initially in the grocery sector (though now it has been adopted in several other supply chains) and the Voluntary Interindustry Commerce Standard (VCIS) used in the general merchandise retailing sector. • Using these standards, retailers and vendors can exchange many points of necessary data. • EDI relies on the development and use of transmission standards because they enable all retailers to use the same format when transmitting data to their vendors. 2. Transmission Systems • In larger retail firms, communications among employees within a company are done through an intranet. • Intranets are local area networks (LANs) that employ Internet technology in an organization to facilitate communication and access to information internally. Consider a large retail chain with over 500 stores spread in 10 countries. Discuss how intranets could provide better coordination of activities across the entire organization. • EDI transmissions between retailers and vendors occur over the Internet through extranets. • An extranet is a collaborative network that uses Internet technology to link businesses with their suppliers, customers, or other businesses. Extranets are typically private and secure in that they can be accessed only by certain parties. • An extranet is generally an extension of a company's intranet, modified to allow access by specified external users. 3. Security • Because the Internet is a publicly accessible network, its use to communicate internally and externally with vendors and customers raises security issues. • Some of the potential implications of security failures are the loss of business data essential to conducting business; disputes with partners, suppliers, distributors, customers; loss of public confidence; and bad publicity. • Internet security can be expensive but is necessary for even the smallest retailer or service provider. • Security has become a bigger challenge in recent years as a result of EDI using extranets and the operation of Internet retail channels. Now vendors and customers all need some form of access to the retailer’s information system. • To help control the changing information environment, retailers need to develop a corporate security policy. A security policy is a set of rules that apply to activities involving the computer and communications resources that belong to an organization. See PPT 10-20 Ask students what rules they would include if they were in charge of setting up the security policy. • The security policy should meet the following objectives: 1. Authentication. The system should be able to assure or verify that the person or computer at the other end of the session really is who/what it claims to be. 2. Authorization. The system should be able to assure that the person or computer at the other end of the session has permission to carry out the request. 3. Integrity. The system should be able to assure that the arriving information is the same as that sent. This means that the data are protected from unauthorized changes or tampering (data integrity). 4. Benefits of EDI • The use of EDI provides three main benefits to retailers and their vendors: • First, EDI reduces cycle time (the time between the decision to place an order and the receipt of the merchandise). • Second, EDI improves the overall quality of communications through better record-keeping and fewer human errors. • Third, the data transmitted by EDI are in a computer readable format that can be easily analyzed and used for a variety of tasks. • Due to these benefits, many retailers are asking their vendors to interface with them using EDI. However, small- to medium-sized vendors and retailers face significant barriers, specifically cost and lack of information technology (IT) expertise to become EDI enabled. III. The Physical Flow of Merchandise -- Logistics • Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements. • Merchandise flows from: 1. Vendor to distribution center 2. Distribution center to stores 3. Alternatively, from vendor directly to stores. • Sometimes merchandise is temporarily stored at the distribution center; other times it is immediately prepared to be shipped to individual stores. This preparation may include breaking shipping cartons into smaller quantities that can be more readily utilized by the individual stores (breaking bulk), as well as tagging merchandise with price tags or stickers, UPC codes, and the store's label. See PPT 10-21. Also see a diagram of Merchandise Flow in PPT 10-22. A. Distribution Centers versus Direct Store Delivery • Retailers can use a distribution center or direct store delivery, depending on merchandise characteristics and the nature of demand. • To determine which distribution system – distribution centers or direct store delivery - is better, the retailer must consider the total cost associated with each alternative versus the customer service criterion of having the right merchandise at the store when the customer wants to buy it. • Advantages of using a distribution center are: (1) more accurate sales forecasts, (2) the retailer’s ability to carry less merchandise in the individual stores, which results in less inventory The advantages of using a Distribution Center are summarized in PPT 10-24 Ask students if they have ever bought a refrigerator from a big retailer like Sears. Remind them that they were asked if they wanted a left or right handed refrigerator, and that the refrigerator was delivered from investment system-wide, (3) easier to avoid running out of stock or having too much stock, and (4) since distribution centers are better equipped to prepare merchandise for sale, it is more cost-effective to store merchandise and get it ready for sale than in individual stores. • Distribution centers are not viable for all retailers. If a retailer has only a few outlets, then the expense of a distribution center is probably unwarranted. Also, if many outlets are concentrated in metropolitan areas, then the merchandise can be consolidated and delivered by the vendor to all the stores in one area. In some cases, it is quicker to get merchandise to stores by avoiding the extra step of using a distribution center. This is particularly important for perishable goods (meat and produce), high-fashion items, or fads since shelf life is limited. • What type of retailer should use a distribution center? Retailers with wildly fluctuating demand at a store level, stores that require frequent replenishment, stores that carry a relatively large number of items or order in less than full-case quantities, and retailers with a large number of outlets that are not geographically concentrated within a metropolitan area would all benefit from using a distribution center. a distribution center. Why? The retailer was practicing the "Principle of Postponement". That is, the retailer did not put the handle on the refrigerator until it was about to be delivered. Also, all inventories were stored in a central location. In this way, the total amount of inventory could be reduced because the retailer does not have to stock both left and right handed refrigerators, and there need not be any inventory stored at individual stores. Ask students to name types of retailers that should use distribution centers and those who should not. IV. The Distribution Center • The distribution center performs several functions, which might include: A. Activities Managed by Distribution Centers See PPT 10-23 for the activities performed by a distribution center. 1. Management of Inbound Transportation • Buyers and their staffs get more involved in coordinating the physical flow of merchandise to the stores. • The dispatcher is the person who coordinates deliveries to the distribution center. 2. Receiving and Checking • Receiving refers to the process of recording the receipt of merchandise as it arrives at a distribution center. • Checking is the process of going through the goods upon receipt to make sure they arrived undamaged and that the merchandise ordered was the actual merchandise received. • Many distribution systems using electronic data interchange are designed to minimize, if not eliminate labor-intensive and time-consuming processes. 3. Storing and Crossdocking • After the merchandise is received and checked, it is either stored or crossdocked. • Merchandise cartons that are crossdocked are prepackaged by the vendor for a specific store. Because the merchandise is ready for sale, it is placed on a conveyor system that routes it from the unloading dock at which it was received to the loading dock for the truck going to the specific store – thus, the name crossdocked. • Crossdocked merchandise is only in the distribution center for a few hours before it is shipped to the stores. • Merchandise size and the sales rate typically determine whether cartons are crossdocked or stored. Ask students what they think an ideal cross- docking distribution center would look like. Draw it on the board. Draw a long skinny rectangle with bays on both sides, one for incoming freight, the other for outgoing freight, and no storage space in between. 4. Getting Merchandise Floor Ready • Floor-ready merchandise is merchandise that's ready to be placed on the selling floor. Getting merchandise floor ready entails ticketing, marking, and, in the case of apparel, placing garments on hangers. • Ticketing and marking refers to affixing price and identification labels on the merchandise. • It is more efficient for a retailer to perform these activities at a DC than in the stores. • An even better approach from the retailer's perspective is to get vendors to ship the merchandise floor-ready, thus totally eliminating this expensive, time-consuming process. Having floor- ready merchandise benefits the retailer because the cost of making the merchandise floor-ready is passed on to vendors. Ask students if they think retailers are asking too much of their vendors in making them provide floor-ready merchandise. Consider the challenges for manufacturers of having to adhere to multiple retailers’ floor-ready requirements. Ask students if they have ever been in a store that was cluttered with merchandise being ticketed while all the salespeople were too busy to wait on customers because they were busy checking in and marking merchandise. Point out inefficiencies of such a system. 5. Preparing to Ship Merchandise to a Store • After receiving the store order, the computer at a distribution center creates a pick ticket, a document that tells the order filler how much of each item to get from the storage area. • The pick ticket is printed in warehouse location sequence so the order fillers don’t waste time crisscrossing the distribution center looking for merchandise. The computer knows which items are out of stock so it doesn’t even print them on the pick ticket. • Order fillers take the merchandise to a staging area where an electronic sorter routes the merchandise to the bay with the truck going to the store. 6. Management of Outbound Transportation • The management of outbound transportation from distribution center to stores has become increasingly complex as chain stores expand. Centers may use a sophisticated routing and scheduling computer system. This system considers the rate of sales in the store, road conditions, and transportation operating constraints to develop the most efficient routes possible. As a result, stores are provided with an accurate estimated time of arrival and vehicle utilization is maximized. B. Outsourcing Logistics * To streamline their operations and make more productive use of their assets and personnel, retailers are constantly looking to outsource logistical functions if those functions can be performed better or less expensively by third-party logistics companies. * Third party logistics companies are firms that facilitate the movement of merchandise from manufacturer to retailer, but are independently owned. * Specifically, they provide transportation, warehousing, consolidation of orders, and documentation. See PPT 10-25 Ask students to weigh the pros and cons of outsourcing logistics. 1. Transportation * Retailers must choose their shippers carefully and demand reliable, customized services. A retailer’s lead time and the variation in lead time are determined by the chosen transportation company. * Also, many retailers are finding that the added cost of airfreight is worth the benefit of getting merchandise into stores more quickly. * Some retailers mix modes of transportation in order to reduce overall cost and time delays. 2. Warehousing * To meet increasingly stringent demands retailers are placing on their vendors to meet specific delivery times for floor- ready merchandise, many vendors must store merchandise closer to their retail customers. * Rather than owning these warehouses themselves, the vendors typically use public warehouses that are owned and operated by a third party. 3. Freight Forwarder * Freight forwarders are companies that purchase transport services. They then consolidate small shipments from a number of shippers into large shipments that move at a lower freight rate. 4. Integrated Third-Party Logistics Services * Traditional definitions distinguishing between transportation, warehousing, and freight forwarding, have become blurred in recent years. * Some of the best transportation firms, for example, now provide public warehousing and freight forwarding. The same diversification strategy is being used by the other types of third- party logistics providers. C. Pull and Push Supply Chains • In a pull supply chain, orders for merchandise are generated at the store level on the basis of sales data captured See PPT 10-26 for a summary of characteristics of push and pull supply chains. by POS terminals. The demand for an item pulls it through the supply chain. • In a pull supply chain, there is less likelihood of being overstocked or out of stock because the store orders merchandise as needed on the basis of consumer demand. • This approach increases inventory turnover and is more responsive to changes in customer demand. • In a push supply chain, merchandise is allocated to the store on the basis of forecast demand. A forecast is developed and specific quantities of merchandise are shipped to distribution centers and stores at predetermined time intervals. • Although generally more desirable, a pull approach is not the most effective in all situations. It requires a more costly and sophisticated information system to support it, some merchandise does not allow retailers flexibility to adjust inventory levels on the basis of demand, and push supply chains are more efficient for merchandise that has steady, predictable demand, Ask students: “All other things held equal, which retailer is more sophisticated, one using a pull or a push logistics system?” D. Reverse Logistics • Reverse logistics is the flow back of merchandise through the channel, from the customer to the store, distribution center, and vendor, for customer returns. • Reverse logistics can be challenging. Items may be damaged, and without the original shipping carton, thus causing special handling needs. Transportation costs can be high because items are shipped back in small quantities. Ask students what percentage of merchandise they return to either catalog or Internet retailers. Have them discuss both excellent and poor return experiences. PPT 10-28 illustrates the Reverse Logistics process. C. Supply Chain for Fulfilling Catalog and Internet Orders See PPT 10-29 • Fulfilling Internet orders from customers is very different than distributing merchandise to stores. • Internet retailers have outbound shipments with 1 or 2 items per order that are shipped to addresses all over the world. • Some retailers have a fully integrated information system, whereby distribution to stores and to customers ordering through a Web site or catalog are handled by the same information system. Yet they use different DCs to service store and Internet and catalog customers. • Other retailers use one distribution center for catalog, stores, and Internet orders. Catalog and web orders are treated identically but separated from the store-based distribution system. Ask students, “If you were a bricks and mortar retailer going into the Internet space, would you integrate your logistics system, or create a separate system for the Internet?” V. Collaboration Between Retailers and Vendors in Supply Chain Management • Retailers’ and vendors’ objectives for supply chain management are to make sure that merchandise is available in the stores when customers want it and to accomplish this task with the minimum investment in inventory and costs. • Supply chain efficiency dramatically improves when vendors and retailers share information and work together. • By collaborating, vendors can plan their purchases of raw materials and production process to match the retailer’s merchandise needs. • Excess inventory buildup, referred to as the bullwhip effect, often takes place in uncoordinated channels. This effect is caused by: (1) delays in transmitting orders and receiving merchandise, (2) overreacting to shortages, and (3) ordering in batches. Ask students to discuss the risks associated with the bullwhip effect. Who is harmed most by its occurrence? The retailer? The vendor? The consumer? PPT 10-31 illustrates the Bullwhip Effect. • Four approaches for coordinating supply chain activities are: (1) using EDI, (2) exchanging information, (3) using vendor-managed inventory and (4) employing collaborative planning. A. Using EDI • The use of EDI to transmit purchase order information reduces the time it takes for retailers to place orders and for vendors to acknowledge the receipt of orders and communicate delivery information about those orders. • EDI additionally facilitates the implementation of the other collaborative approaches discussed below. For an overview of the development of retailer and vendor relationships, see PPT 10-33. B. Sharing Information • Sharing sales data with vendors is an important first step in improving supply chain efficiency. • Better information sharing will allow vendors to respond more precisely to sales increases and decreases. C. Vendor-Managed Inventory • Vendor-managed inventory (VMI) is an approach to improving supply chain efficiency in which the vendor is responsible for maintaining inventory levels at the retailer’s individual stores and/or distribution centers. • In a VMI system, the vendor replenishes inventories in quantities that meet the retailer’s immediate demand, reducing stockouts with minimal inventory. • VMI can reduce both vendor’s and retailer’s costs. • VMI is not a new approach. Snack foods and beverage vendors have For an overview of VMI, see PPT 10-34 managed the stocks of their products on supermarket shelves for a long time. However, technological advances have increased the sophistication of VMI. • For instance, the sharing of POS data allows vendors to sell merchandise on consignment; the vendor owns the merchandise until it is sold by the retailer, at which time, the retailer pays for it. Consignment selling provides incentive for the vendor to pick SKUs and inventory levels that will minimize inventory and generate sales. • Although a more advanced level of collaboration than simply using EDI and sharing information, VMI has limitations, such as limited awareness of actions the retailer may be taking to increase sales of specific products or categories. D. Collaborative Planning, Forecasting and Replenishment • Collaborative planning, forecasting and replenishment (CPFR) is a more advanced form of retailer-vendor collaboration that involves sharing proprietary information such as business strategies, promotion plans, new product developments and introductions, production schedules and lead time information. • The software used to exchange CPFR information is Internet based and thus more easily and inexpensively available to all parties. See PPT 10-35, 10-36 VI. Radio Frequency Identification (RFID) • Radio frequency identification (RFID) is a technology that allows an object or person to be identified at a distance using radio waves. • The RFID technology has advantages over traditional bar codes, including the See PPT 10-37, 10-38 ability to hold more data and update data stored on the device. • RFID enables accurate, real-time tracking of every product item from manufacturer to retail check-out. A. Benefits of RFID • RFID has several demonstrated benefits including: (1) reduced labor costs for warehouse and distribution, (2) reduced labor costs at point-of-sale, (3) inventory savings, (4) reduced theft, and (5) reduced out-of-stock conditions. Discuss the advantages of RFID. Ask students if they foresee any disadvantages. What are the risks or downsides of these systems? B. Impediments to the Adoption of RFID • High costs are the major obstacle to the adoption of RFID systems. • In addition, RFID generates more information than can be efficiently processed, making it even more difficult to justify its costs. VII. Summary • Supply chain management and information systems have become important tools for achieving sustainable competitive advantage. Developing more efficient methods of distributing merchandise creates an opportunity to reduce expenses and improve customer service levels. • The systems used to control the flow of information to buyers and then on to vendors have become quite sophisticated. Through the use of technology, retailers and vendors are collaborating to improve supply chain efficiency ANSWERS TO “GET OUT AND DO ITS” 2. INTERNET EXERCISE Go to Barcoding Incorporated’s Web page at http://www.barcoding.com and search on retail, warehouse management and RFID. How is this company using technology to support retailers with information systems and supply chain management? Some of the information students will find on this homepage… “If inefficiencies throughout the system could be eliminated, from the stockroom to the shelf to the point of sale, it eases the pressures faced at the register, and unlocks even greater profit potential. Mobile computing and data capture solutions, such as bar code and RFID (radio frequency identification), provide retail companies with greater visibility and control over inventory and stock levels, more productive employees, and a better customer experience. Barcoding Inc. can deliver bottom line benefits to retail companies of all shapes and sizes with our tailored solutions. By leveraging technologies like mobile checkout, and RFID and wireless networks to maximize employees' time on the floor and improve the shopping experience through more face time with customers, Barcoding can deliver key benefits like higher same store sales, decreased inventory stock outs, and increased inventory turnover while delivering long-term efficiencies that help season after season.” 3. INTERNET EXERCISE Go to the homepage for RFID Journal at www.rfidjournal.com/ and search for supply chain in the current issue. Summarize one of the recent articles, and explain how the key concept(s) described could make the shopping experience better for consumers and improve efficiency in the supply chain. Students’ answers will vary depending on the article they search. The website has an entire section devoted to RFID and retail. Students can see how RFID chips improves efficiencies in B2B relationships for everyone from fish mongers to luxury retailers. 4. INTERNET EXERCISE Go to the homepage for Vendor Managed Inventory at http://www.vendormanagedinventory.com/index.php and answer the following questions: What is vendor managed inventory? What are the benefits and limitations of a vendor managed inventory approach? Definition of Vendor Managed Inventory – “A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels. The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders.” The Benefits and Pitfalls. (Lists from the web site) DUAL BENEFITS: - Data entry errors are reduced due to computer to computer communications. Speed of the processing is also improved. - Both parties are interested in giving better service to the end customer. Having the correct item in stock when the end customer needs it, benefits all parties involved. - A true partnership is formed between the Manufacturer and the Distributor. They work closer together and strengthen their ties. - Stabilize the timing of Purchase Orders - PO's are now generated on a predefined basis. DISTRIBUTOR BENEFITS: - The goal is to have an improvement in Fill Rates from the manufacturer and to the end customer. Also, a decrease in stock-outs and a decrease in inventory levels. - Planning and ordering cost will decrease due to the responsibility being shifted to the Manufacturer. - The overall service level is improved by having the right product at the right time. - The manufacturer is more focused than ever on providing great service. MANUFACTURERS BENEFITS: - Visibility of the Distributor’s Point of Sale data makes forecasting easier. - Promotions can be more easily incorporated into the inventory plan. - A reduction in Distributor ordering errors (which in the past would probably lead to a return) - Visibility of Stock Levels helps to identify priorities (replenishing for stock or a stock-out?). Before VMI, a manufacturer has no visibility of the quantity and the products that are ordered. With VMI, the manufacturer can see the potential need for an item before the item is ordered. POTENTIAL PITFALLS - VENDOR MANAGED INVENTORY EDI problems: Extensive EDI testing should be done to validate the data being sent. Is the distributor sending all the data that should be sent? Is each field populated with the correct data? Acceptance: Make sure that all employees involved in the process fully understand and accept this new way of doing business. It's not enough to just sell the concept to senior management, all employees who are involved must be willing participants. Promotions/Events: Anything that adds or takes away from the normal ordering pattern must be properly communicated to the manufacturer. Customer Base: Any large customers, either gained or lost, must be communicated to the manufacturer. The distributor must guide the manufacturer on how this will affect sales. Over/Obsolete Stock: An agreement must exist between the manufacturer and the distributor on what to do if an overstock does occur (or in the case of an ordering error). Also, both parties must agree on how to handle obsolete stock. Time: Both parties involved must understand that this is a learning process. Errors will occur. You will probably not have a perfect process in place day 1. ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS 1. Retail system acronyms include DSD, VMI, EDI, CPFR and RFID. How are these terms related to one another? Each of these terms describes a system designed to enhance the efficiency of supply chain management. DSD, direct store delivery, bypasses the retailer’s distribution center and delivers merchandise directly to the retailer’s stores. When DSD happens, retailers receive additional services such as assessing the store’s stock levels and backroom inventory. DSD and VMI are often partnered together. When a vendor engages in VMI, the vendor likely will offer the retailer the option of DSD. VMI, vendor-managed inventory, seeks to improve supply chain efficiency by assigning the vendor to maintain inventory levels in the retailer’s stores. These systems are typically based on electronic data interchange (EDI). An EDI is an exchange of data between two or more computers. In most cases, the vendor’s and retailer’s computers “talk to each other” and exchange data on ordering, inventory levels, delivery dates, and sales. CPFR (collaborative planning, forecast and replenishment) is a system of integrated information sharing between retailers and their vendors including such information as forecasts, strategies and promotion plans. Collaborative supply chain management relationships are designed to reduce the lead-time for receiving merchandise, thereby lowering inventory investment, improving customer service levels and reducing distribution expenses. RFID stands for Radio Frequency Identification, the next generation of inventory tracking and identification. 2. Explain how an efficient supply chain management system can increase a retailer's level of product availability and decrease its inventory investment. By eliminating the need for paper transactions, an efficient supply chain management system reduces lead-time. Shorter lead-time reduces the need for safety stock because the shorter the lead-time, the easier it is to forecast demand, and therefore, less inventory is needed to hold as safety stock. In short, since the retailer can make purchase commitments closer to the time of sale, inventory investment is reduced. Finally, an efficient supply chain management system also can reduce distribution expenses by allowing the retailer to negotiate a direct store delivery system in which the vendors deliver to each store rather than the distribution center, and also prepare the merchandise for sale with services such as price labeling. 3. This chapter presents some trends in logistics and information systems that benefit retailers. How do vendors benefit from these trends? Vendors benefit from collaboration in supply chain management just as retailers do. As vendors share the retailer’s goals of providing merchandise to customers where and when they want it, with minimum cost, collaborations to improve the flow of information and merchandise benefit both of these supply chain members. When working collaboratively with a retailer, the vendor can better plan their purchases of raw materials and production process to provide the optimal merchandise flow, eliminating potential for a bullwhip effect of excess inventory buildup to take place. Additionally, vendors also benefit from enhanced information flows in collaborative relationships allowing them to respond to retailers’ needs more precisely and rapidly. 4. What type of merchandise is most likely to be crossdocked at retailers’ distribution centers? Why is this the case? Merchandise prepackaged by vendors for specific stores is crossdocked because it is ready for sale. No further processing and no storage at the distribution center are required. This merchandise is routed on a conveyor system through the warehouse from the unloading dock to the loading dock for the truck going to the store for which it is designated. Floor-ready merchandise, is likely to be cross-docked, as is large or bulky merchandise that would be more cumbersome to store. Also, merchandise that can be relied on to sell quickly likely moves through the crossdock system in a matter of hours to make its way to the designated retail store. 5. Why haven't more fashion retailers adopted an integrated supply chain system similar to Zara's? Zara's integrated supply chain management system depends on two major factors for its success. The first is the technological connections between the sales floor and the design center in Spain. Such technology requires higher capital investments and employee training. The second is the fact that Zara's is vertically-integrated- it controls the entire design, production and sales process. Zara's integrated supply chain management system is particularly beneficial to Zara’s, since it sells high fashion products. For retailers selling conventional products or products that stay in fashion for a longer time, such coordination between sales and design may not be needed. Also, most retailers are not as vertically-integrated as Zara's. For a conventional retailer, the added cost of collecting consumer information on design issues and transferring it to vendors may not be worth the effort – most retailers would rather let vendors/manufacturers take care of consumer demands/trends through their own marketing research systems. Moreover, the production processes for most products may gain little from the added margins obtained in small lot production as in fashion clothing. On the contrary, most manufacturers may seek economies of scale and therefore make design changes to products and retooling changes to production processes only infrequently. Such design and manufacturing changes are done easily for clothing manufacturers, as in the case of Zara's, since the design and production processes here are based on a work-station flow model (rather than assembly line) and are quite labor intensive. 6. Explain the differences between pull and push supply chains. A pull distribution strategy is when orders for merchandise are generated at the store level on the basis of demand data captured by point of sale (POS) terminals. A push distribution strategy is when merchandise is allocated to the stores based on historical demand, and the inventory position at the distribution center, as well as the needs of the stores. The pull strategy decreases the likelihood of being overstocked or out-of-stock, and the stores may order merchandise based on the needs of their customers. Although it is effective, retailers with less sophisticated forecasting and information systems usually cannot use pull distribution. A push strategy also benefits retailers that have less desirable merchandise that still must be sold. 7. Consumers have five key reactions to stockouts: buy the item at another store, substitute a different brand, substitute the same brand, delay purchase, or do not purchase the item. Consider your own purchasing behavior and describe how various categories of merchandise would result in different reactions to a stockout. A stockout occurs when an SKU a consumer wants is not available. Student’s answers will vary widely here. This question allows for discussion of factors such as brand loyalty, and shopping behavior in gauging response to stockout situations. Consider the different impacts of convenience shopping, comparison and specialty shopping to determine likely responses. For instance, explore the consumer’s reaction to a 7-Eleven being out of milk on a quick stop versus Best Buy being out of a popular DVD-R model, available at several other consumer electronics retailers and on-line, on a planned shopping trip. 8. Abandoned purchases as a result of stockouts can mean millions of dollars a year in lost sales. How are retailers and manufacturers using technology to reduce stockouts and improve sales? Retailers are turning to investments in information technology and supply chain management systems to help reduce stockouts. Some retailers are turning to CPFR systems to share high levels of information with vendors to anticipate changes in product offerings, promotions and business strategies aimed at better managing and maintaining product availability. 9. What is a Universal Product (UPC) code? How does this code enable manufacturers, distributors and retailers to track merchandise throughout the supply chain? “Universal Product Codes (also known as GTIN-12) appear as lines (bars) of varying widths representing the series of numbers commonly shown below the bars. Barcode scanners, as you will know them from your favorite retailers, read the bars and convert them back to the 12-digit UPC number that they represent. This number is then looked up within the retailer's inventory system to find the corresponding product name and price that you provided them with when you signed your agreement for them to carry your product. In short, the UPC is a 12-digit unique code for your product represented by scannable bars.” http://www.upccode.net/faq.html#q1 10. For what types of products is item-level RFID most beneficial for retailers? RFID is especially beneficial to retailers in certain product categories. First, RFID is important for items that are exclusive or in high demand, like video games or fashion items. RFID allows retailer to keep better track of inventory counts. If a retailer promotes itself as the exclusive distributor of a product or as a fashion leader, it is important to have the inventory to support that claim. Second, RFID is helpful on high theft items. RFID can track items through stores, warehouses, and distribution centers. High theft items include razor blades, diapers, formula, as well as jewelry and electronics. Solution Manual for Retailing Management Michael Levy, Barton A. Weitz, Dhruv Grewal 9780078028991
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