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Thursday, September 15, 2011

Important Cost Drivers in the Retail Supply Chain

Success in retail is primarily determined by how the retail companies identify the cost drivers to effectively utilize available resources in order to reduce the costs and coordinate and integrate the various supply chain driver components in the value chain.
There are mainly four important cost drivers which are common in all Retail formats.




1. Inventory Costs
Inventory is a very large and costly investment which every stage of the supply chain needs to incur. It is very important to have a clearly defined inventory policy that provides optimal product availability balancing demand and supply, achieving economies of scale and act as buffer for protection from uncertainty in the order cycles.
Important metrics to measure inventory performance are Inventory turnover, GMROI (Grossmargin return on inventory investment), Stock to sales ratio, and sell through percentage.

2. Space
Space planning allows optimal capital investment on fixtures, increases space productivity and helps store execution to be aligned with corporate strategy. Better integration of Floorplan and Planograms helps reduce fixture costs and capture lost sales due to replenishment. It also helps reduce inventory carrying costs by integrating Space planning with Store replenishment by identifying Min/Max amount of SKU required for presentation quantities allowed.
It is important for the retailers to understand the relationship between Retail Space, Sales turnover and profitability. Big players also need to assess the contribution of IT to space allocation process by understanding the principles of a space allocation system. Some of the big IT players like JDA, Oracle and SAP have developed efficient retail softwares which optimizes the space planning process and improves space productivity.
Important metrics that help measure retail space performance are Sales per Square feet, GMROF (Grossmargin return on total floor space and average sales/ transaction.

3. Labor
Store Labor efficiency and capacity utilization of core departments like Stores and Warehouse functions play an important role in optimizing profits for the retail organization. Application of lean management principles helps retailers improve cycle time, throughput time and effective equipment utilization in store checkouts, warehouse picking, putaway, consolidation and shipping functions. Retailers also need to invest on training store staff to increase customer satisfaction and competence in closing sales. Human resource planning must include a program for job analysis, recruitment selection, training, motivation and rewarding valuable employees.
Important metrics that can measure Labor efficiency would be cycle time, throughput time, sales per employee and GMROL (Grossmargin return on labor).

4. Marketing
Retailers should explore the relationship between product management and retailer to to consumer communications through an integrated retail communication plan, focusing on the use of promotional communication to draw shopper's attention to maximize sales opportunities and increase category profits. Allocation of communication budgets to various marketing vehicles like Advertising, Sales promotions, Contests, Coupons, In-Store events and promotions should aim at informing the target customers about the various offerings and persuade the shopper to visit the store and convert prospects into loyal customers and clients who can spread the word of mouth.





Cheers,
Arroon

Spacedpractice.com

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