The Importance of an efficient Supply Chain

Erika Pacini
AACS Research January 2012

An efficient supply chain is not only an asset to any business, but critical in today’s very competitive retail environment. Growth can be achieved through effective supply chain practices. These practices can improve business performance, increase product innovation, increase revenue and potentially profitability. In addition there are sustainability benefits associated with a streamlined supply chain for businesses.

Below are five ways to maximise growth potential and help to create an efficient supply chain for 2012.

1. Reduced Risk:During 2011 numerous industries were affected by devastating events. The first step in reducing risk is to identify those materials, products, or services that are critical to supporting business continuity. Uncover and understand the supply chain that supports these areas and implement mitigating actions to increase supply certainty. Potential options include secondary sources of supply, supplier-managed inventories, and alternative means and routes of delivery. The floods in Queensland is an example of how natural disasters can affect a businesses access to goods and services.

2. Reduced Cost:Convenience stores do have an expensive price perception in a number of areas and reengineering their supply chain may drive costs down allowing prices to be sharper whilst maintaining acceptable margins. Improved value will also translate into increased sales volumes. Examine new ways such as cross dock, VMI and greater consolidation of deliveries for greater efficiency and elimination of costs.

3. Increased Innovation:Where would companies like Samsung, Apple, and Google be if not for the innovation of their supply base? The technology being introduced for smart phones may have been the work of the parent company, but these ideas are only brought to life through the innovative ideas and solutions of their suppliers. Initiate ideas that could improve the value to customers, or that could set products, services and your brand / store apart from the competition. Reach out to key suppliers with thoughts and ideas to take your products to the next level. Collaboration with key partners is essential but is an area not well understood or acted upon.

4. Enhanced competitive advantage:Building competitive advantage requires setting products or services apart from the competition. Some of the most effective means of doing so are to rapidly introduce new ideas and concepts, deliver them to the market faster than the competition, and maintain the necessary levels of inventory required to support new customer demand. Leverage these activities through your supply base utilizing supplier knowledge, strategic inventory placement, and favourable payment terms. Supply chain effectiveness can be a major lever to ensuring competitive advantage through ensuring consistency of offer, freshness and speed to market for new products.

5. Improved customer service: Customer service is about perception and response. Having the ability to rapidly fulfil obligations requires the consistent and prompt support of suppliers, contractors and service providers. Restaurants such as McDonalds have built their reputation based on efficient order replenishment, all supported by strategically positioned suppliers with the capability of rapidly fulfilling and shipping orders, minimizing the on-hand inventory for McDonalds whilst meeting or exceeding customer requirements. Consider a means to improve customer service and determine how to best align suppliers to support the initiative.

The impact of supply chain dimensions on customer satisfaction

Recent research released in January 2012 analysed the effect of the supply chain on customer satisfaction. According to the hypotheses, supplier relationship management is divided to 6 dimensions; communication, cooperation, conformity, commitment, dependence and trust. These all have a direct relationship with customer satisfaction.

Communication and dependence were shown to have the highest and lowest effect respectively on customer satisfaction.Results showed that there is a significant relationship between these supply chain dimensions and customer satisfaction. It was found that customer satisfaction increased when the supplier relationship increased. To achieve the effective management of supply chain relationships, suppliers and stores have to work together in a coordinated, integrated way with the observation of partnership principles, a high level of communication, information and dialogue. Goals should also be aligned.

A closer look at the convenience industry & the supply chain

Cutting supply chain costs remains a challenge for convenience store chains large and small. Dealing with primary wholesalers, multiple vendors and local foodservice providers are some ways convenience store chains are learning to grow more efficient without sacrificing goods and services. Some of the ways they are doing this include improved reporting systems, maximizing product turns, reducing out-of-stocks and eliminating slow-moving SKUs to make room for potentially better sellers.

“I think it gets back to the fact that you really have to analyse assortment in a very detailed way,” said Kit Dietz, president of Dietz Consulting in Huron, Ohio. “Embracing category management is important.” There are, some big in-store opportunities available in candy and snacks, one of the highest margin and true profitability categories in store. “It’s very impulse driven. Most candy purchases are unplanned, so the candy aisle should be located in the highest-traffic area in the store.”

Operators also need to make sure they have the best-selling SKUs. The top 50 SKUs, which only represent about six-tenths of 1% of all of the SKUs in the convenience channel, drive 32% of the business. “So make sure you have the proper focus on core assortments,” Dietz said.

What Dietz has found in his extensive industry experience is that many retailers want a particular brand and end up carrying product duplications, which builds cost into the system. “Sometimes one SKU is enough for a whole category,” he said. “They should focus on best-selling brands so they can satisfy consumers and understand what the impact can be on the total supply chain.”

Not Just Price

Many retailers also tend to concentrate on price rather than the total cost of acquisition, noted Steven Montgomery, president of b2b Solutions in Lake Forest, Illinois, USA. “Price is what they see on an invoice. Total cost includes all the elements of cost that go into a purchase. This could include cost elements such as terms, return policies, order quantities, delivery and a host of support services.”

Focusing solely on price is a mistake, experts claim. “The most deadly sin is being focused on the lowest cost of goods rather than on how to sell more to the consumer,” Dietz said. “You can’t save your way to prosperity.”

One of the best ways to remove cost from the supply chain is to control the number of vendors making deliveries to stores. This is an area 7-Eleven has been heavily studying of late. The results of a pilot program the chain is running in California could have a significant impact on how goods are delivered to convenience stores across the United States, “We have worked with retailers who have vendors with overlapping items,” Montgomery said. “One of our recommendations is to consolidate vendors whenever possible.”

Benefits of Self-Distribution

With 400-plus-stores Kwik Trip in La Crosse, Wis. USA, operates its own distribution system. “Unlike a lot of other convenience store chains out there, one of our corner stones is controlling our own supply chain,” said Steve Wrobel, the company’s head of corporate communications and leadership development.

Kwik Trip has the right size, volume and geographic locations to be successful with self-distribution. All of Kwik Trip’s stores are located in a three-state region—Wisconsin, Minnesota and Iowa—which allows the chain to distribute from its central warehouse in LaCrosse. While size matters, execution is just as important. Executives at Kwik Trip, according to Wrobel, are constantly working to introduce efficiencies to the system and thus cut costs. “Obviously we also watch our inventory turns carefully,” he said. “Our category management team reviews on a regular basis the movement of individual products.”

Family Express in Valparaiso, Indiana, USA operates 52 stores, yet owns and operates a new central distribution centre that controls and prepares fresh food items, baked goods and its growing line of private label products.

Buy Direct

Like Family Express, Wesco Inc. in Muskegon, Michigan, USA, is a smaller chain producing big-time savings with its own distribution centre. “The most effective way we’ve cut costs is through buying direct,” said Russ Bolitho, distribution director for the 51-store marketer. “We lowered operating costs to less than what the distributors offered. We make sure that our delivery costs are in line, that we have our inventory turns in line and that we keep the cost of goods down for our stores based on buying direct.”

Self-distribution also increases the opportunity to get a piece of additional marketing dollars. “There is a lot of promotional and discount money that is kept by the distributors,” Bolitho said. “By going direct we are able to get a piece of that action, and it’s become a pretty good revenue source.”

Category Management Help

Whilst the convenience industry has matured well beyond where it was just 10 years ago, all retailers can use some help evaluating their category management practices. “Category management is absolutely critical. We have a limited amount of space in the convenience store, we have consumers who are primarily focused on instant consumption and there are products being ignored that can perform extremely well,” Dietz said.

There are “significant gaps” in the best-selling SKUs in the marketplace, Dietz added. “That’s not to say that only independents are missing it; some of the big chains miss it as well. When it comes to the biggest opportunity to improve profitability, that comes from finding a distributor that is able to deliver high-quality planograms that are developed not only by looking at national data, but regional data, and from looking at individual retailers’ movement in the store.”

“It all comes down to having the right item for the consumer in the store and merchandising it the right way,” Dietz said.

References

Casemore S, 2011, Five Ways To Revitalise Your Supply Chain, CFO.com, http://www.cfo.com/article/2011/12/procurement_supply-chain-growth-casemore-2012?currpage=1

Gilaninia S et al, 2012, Impact of Supply Chain Dimensions on Customer Satisfaction, Kuwait Chapter of Arabian Journal of Business and Management Review Vol. 1, No.5, http://www.arabianjbmr.com/pdfs/KD_VOL_1_5/11.pdf

Rigik, E & Lofstock , J, 2011, Effectively Managing the Supply Chain, Convenience Store Decisions, http://www.csdecisions.com/2011/02/23/effectively-managing-the-supply-chain/