The Collapsing Supply Chain

By building their supply chains to be driven by consumer demand, leading retailers are driving new speed and efficiency through their chains. By using forecasting tools that focus on customer behaviors, retailers are balancing demand and production resources with automation of their replenishment cycles. The goals of a demand-driven chain are to reduce inventory, improve control and ultimately, add to the bottom line.

Diverse retailers are succeeding in this area. Some of the results include streamlined shipping, minimized stock-outs and optimized shelf space. New efficiencies allow store managers to see more shipments arriving exactly when they need them, getting products on the shelf more quickly than before.

Re-Supply Strategies

Party Concepts, a national retail party supply outlet chain with more than 170 stores across 35 states, faces many common supply chain demands. As with any other chain, replenishment can become a serious issue — shelves must be stocked with products customers want to buy. As a chain, Party Concepts sells a lot of small items at a very low price and ships these items to stores in high case packs. One supply model they have used involved providing stores with much more product than they currently needed.

"You're looking at a lot of small product that is very low price," says Ron Mathis, Party Concepts' chief information officer. "It's almost cheaper to send more than the stores need than to use fancy inventory management systems."

The cumulative effect of over shipping, however, can be significant. In such a seasonal business, shelf space is always in flux. The beginning of summer, for example, means graduation party materials dominate shelf space and Fourth of July barbeques are just around the corner. Stores ended up carrying much more stock than needed, and shelf space became clogged. Mathis eventually decided to auto-mate his shipping cycle and teamed with retail management software provider Island Pacific (IP) to come up with a new supply chain plan for his stores.

Party Concepts and IP focused on stock forecasting, modeling, actionable analytical reporting and automatic purchase-order genera-tion. Now Party Concepts is able to calculate sales profiles by evaluating average weekly sales, seasonal variances and other trends. The Trends component of IP's enterprise resource planner uses these profiles to forecast replenishment demand and identifies merchandise needs with accuracy. As a result, Party Concepts was able to minimize lost sales, increase stock turns and achieve sales goals.

"What we needed was a replenishment system that would forecast sales using last year's history and current trend information," says Mathis. In other words, Party Concepts decided to implement a consumer demand driven supply chain model.

Next-Gen Supply Chain

Ace Hardware operates 5,100 stores throughout 62 countries. It uses an ERP from JDA Software Group to build up a demand history within its stores and ship according to forecasts in order to minimize costs. In the past, Ace took costs out of the supply chain by purchasing in quantity and raising reorder minimums, but unexpected events can often cause replenishment problems.

Shortly after 9/11, director of homeland security Tom Ridge gave a speech in which he detailed some of the things people could do to help protect themselves from the effects of terrorism. One thing he mentioned was taping plastic to windows with duct tape to block any potentially hazardous chemicals from entering homes. Although this was joked about at the time, Ace started noticing duct tape shortages in its stores almost immediately.

To combat unforeseen shortages, Ace now works with manufacturers to bring forecasts into production planning. Nonetheless, training issues have brought out resistance. Many suppliers simply don't know or don't have the capabilities to do this yet, but the competitive advantages it would lead to are important. Items low on stock are immediately identified, and new shipments arrive at stores just in time. This process will be extended to apply to order forecasts. Eventually, manufacturers dealing with Ace will be able to dial into the company network and view forecasting reports.

Growing Pains

Growth is a problem every retailer wishes it had, but it can create difficulties such as increased demands on existing systems. But implementing growth plans provides a perfect opportunity for retailers to upgrade systems, facilities and practices. It also allows them to redesign their supply chain more effciently, leading to happier customers and even more growth.

"It's not always easy to install ERPs," says Mark Lacey, director of distribution for Schurman Fine Papers, "but it's almost always worth it." Lacey learned this the hard way when his company installed a Red Prairie ERP.

Schurman Fine Papers owns and operates more than 150 Papyrus upscale paper stores. It decided to install an ERP in June 2003 — switching over from a completely paper-driven shipping system to Red Prairie software. In addition to corporate growth, the complete change in process brought growth pains. Despite this, within just nine months the retailer started to see return on investment, and today couldn't do the volume of business it does without the new system.

Efficiency Transformation

But Schurman had to endure a learning curve and some initial mistakes. The company chose to train management rather than the people actually using the software, and it took nearly a whole additional month getting everyone who would actually use the system up to speed. This was a critical mistake since Schurman brought the systems up around the Christmas shipping season where they typically experience their highest volume. As a result, their distribution center was completely down the first week of the installation.

"It was a shock to the majority of our workforce," Lacey says. But installing the software eventually led to greater integrity of their inventory. Fill rates that were between 60 percent to 70 percent when the system was first installed are close to 99 percent now, and throughput has doubled. "We had to learn the sophistication within the system," says Lacey.

Eventually, they did. They now know what they have and where it is. Being better able to forecast and fulfill customer needs has helped Schurman increase profits and minimize costs. The 140,000-square-foot distribution center in Nashville, Tennessee, will soon be expanded by an additional 75,000 square feet. Current plans see it doubling within three years. According to Lacey, Schurman "couldn't do the volumes we do now," without the new system.

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