Quick Response and ECR

1

Aims

• Quick conclusions from last week –positioning and market changes

Quick Response

• Definition and scope

• Drivers

• Enablers

• Examples – fashion and grocery sectors

• ECR introduction – model structure2

3

Product / Market Focus

Product range

Pricing services

Facilities

Location

Store design

Promotion

Customer-handling

Distribution

Product-handling

Services

Facilities

Buying quantitative

Range control

Cost Focus

Product / Market Focus

Sainsbury’s

Aldi, Lidl,

WaitroseCo-op

Asda

Change over time,

Companies such as Tesco attack

different segments via own label etc

Inefficiencies

IGD.com

IGD – Top Themes

• Product ranging and buying optimisation

• Progress towards recovery

• Shopper behaviour – price sensitivity

• Food price inflation

• Online retailing – continued growth

• Own label development

• Sustainability issues

• Company restructuring

• Different format opportunities

• Customer led innovations

7

Trends?1. Austerity: Government spending cuts will begin to impact

individuals

2. Confidence: Those who have so far escaped economic /

financial troubles may now be hit

3. Inflation: Rising global commodity prices / currency changes

will be manifest in-store

4. Credit: Shoppers will be unwilling / unable to fund

consumption through debt

5. Demand: Low confidence / rising prices / lack of credit will

mean weak volume demand

9

Why are Supermarkets Expanding

into Non-Food?

• Higher margins than food ranges

• Higher priced - assist total cash sales

• Customer interest - additional customers into the store

• Christmas trading opportunities

• Less mature - technical innovation and increased spending

• Overall growth in grocery markets - 3%, non food areas averaging 13%

• 32% of sales is non-food.

• Traditional categories such as health and beauty, household, petcare, news and magazines, and tobacco, have been sold in supermarkets for some time.

Which supermarkets are the main

players in Non-Food Retailing?Tesco’s

• Aims to be as big in non-food as it is in food

• Claims 6% share of UK Non-food market

• Non-food business amounts to £7 billion

• Includes clothing (4 brands:-Value,Tesco, Florence &Fred, Cherokee), electrical, home and leisure, toys

Asda

• Some superstores dedicate up to 40% of selling space to non-food

• Recently launched jewellery, homeware/furniture, wellbeing, and prescription eyewear.

• Launched first standalone “George” clothing store in 2003

Sainsbury

• Launched new-range of general merchandise in 2003 for all stores

Marks and Spencer

• Non-food range primarily of clothing

• “Home concept” in some stores including furniture, cookware, crockery, gift items, cosmetics and jewellers

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Retail Grocery Distribution

Evolution

Increasing

Automation &

Centralisation:

Centralised

Stock & MIS

systems:

Delivery direct

from supplier &

limited RDC

development:Development

of Systems &

loss of Store

Authority :

Key savings

Changes in

Retailer : Supplier

relationships:

13

Retail Grocery Distribution

Evolution

• Stage 1 : Store Control 1970’s - direct delivery,

inventory control at branch, weekly deliveries,

5 weeks stock at store.

• Stage 2 : Depot Control Early 1980’s - stock

control to Regional Distribution Centres

(RDC’s). Lead times. consolidation and

computerised replenishment systems; stock

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Retail Grocery Distribution

Evolution

• Stage 3 : Head Office (HO) - Late 1980’s - IT

systems, replenishment control - order

frequency, lead times, - 1 - 3 weeks stock in

stores. Ordering - EPOS.

• Stage 4: Just-in-Time (JIT) / quick response

1990’s, supplier links, further lead time

reductions. Small consignment orders,

restructuring.

• Integration companies - Efficient Consumer

Response (ECR) and CPFR.

What is Quick Response (QR)?

Fioritos (1998) defines quick response as follows:

• ‘Quick response (QR) is a vertical strategy where manufacturers provide retailers with goods or services in the exact quantity required, on a continuous basis within minimum lead times, resulting in minimum inventory levels throughout the pipeline.’

• (Source: Fioritos R, Retail Buyers’ Perceptions of Quick Response Systems, International Journal of Retail and Distribution Management, Vol 26, No 6)

• Extension of JIT – whole value added system – JIT more function specific

16

Key Characteristics

– A state of flexibility,

– Highly diverse range of products and services

– Exact quantity, variety and quality

– In response to real-time consumer demand

– Demand driven decisions at the last possible moment,

– Short lead times from design to final customer

– Highly competitive, volatile and dynamic markets

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The aims of QR are:

• To reduce the waiting time of inventory within the supply chain

• To prepare products in response to demand

• To eliminate unnecessary stock

• To reduce stockouts

• To eliminate bottlenecks from the supply chain

• To remove unnecessary tasks and automating where possible

Aims

• Finish QR concepts

• Grocery v industry examples

• ECR introduction and framework

• Category management introduction?

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To support these aims retailers need to improve efficiency in:

• Order management

• Inventory replenishment

• Physical handling and transportation

• The exchange of information.

• By working together, suppliers and retailers may harmonise their order management and inventory replenishment systems,

• By integrating their systems retailers can maximise their availability for sale at minimal cost.

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Review – Intro to Quick Response (QR)

• Time based competition becoming more

important

• Data captured at the retail end (product,

customers, demand) exploited at all levels and

used to manage finance & risk.

• Greater emphasis placed on integration

particularly in international marketplace.

• Technology fundamental to supply chain

efficiency requires investment at all levels.

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23

DEBATE: Changing Priorities? –

Accenture Reports 2010

BUT - This month ASDA ‘faster fresh’ at a glance

• Faster Fresh to get fresher,

higher quality products to

stores

• Eight chilled distribution

centres, 7,000 products and

407 suppliers

• Increased shelf life on 1572

products by an average of one

day

• Cut number of chilled loads to

stores by 3.7%, reduced road

miles

• Conclusion – wider potential

in assessing network structure 26

Cus tomer

Reques ted

Delivery

t 1

timeCus tomer

Order

t 0

Replenishment Lead T ime (3)

Cus tomer

Feasible

Delivery

t 3+y

Replenishment Order

P rocessing Time (y)

Customer service times are typically shorter than replenishment lead times.

A different approach to managing availability is required.

Cus tomer

Service Time

(1)Delay

Other Reading

• Fernie book – Chapters 5 & 6 (QR in

Fashion industry)

• Also relevant to future SCM lectures –

introduction to agility

27

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3 Stages to Development of QR

Stage 1. Introduction of basic technologies:

• SKU level scanning;

• Standard barcode;

• Use of standard EDI to transmit order and payment details

Stage 2. Internal process reengineering:

• Cross-docking

• Automatic replenishment systems

• Advances shipping notes (ASN)

Stage 3. Collaboration:

• Real time data sharing

• Integrated supply chains

• Product tracking

• Flatter company structures

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Retailer & Supplier Benefits

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Fashion Industry

• UK – most competitive market in Europe

• Multiples 70% total (M & S 12%)

• Competition from off-shore manufacturers

• Better choice, increased availability, lower prices

• Need for greater differentiation and efficiency

• UK – excess inventories, long lead times,

unwanted goods, markdowns or stockouts

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Fashion Market - Characteristics

• Fixed calendar of yarn and fabric exhibitions, fashion shows, and trade fairs

• Retailers’ time-table of selecting ranges and garments

• Yearly buying cycle, purchasing 6 month in advance of launch

• Two main seasons pa with smaller phases

• Historical sales basis for forecasts

• Difficulties with different styles and long planning horizon

• Goods manufactured in Far-East – problems with re-manufacture whilst in fashion

• Use of secondary local suppliers to back-up stocks at short notice despite increased cost

Fashion Market

• Short life cycles

• High volatility

• Low predictability

• High impulse purchase

Critical lead times:

• Time to market

• Time to serve

• Time to react

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Inventory Planning in Clothing Supply Chain

Zara – shorter, more frequent cycles, more responsive to actual sales,

avoid markdowns and obsolescence

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QR in Fashion Industry

• Share information on style, colour size

• Details on order schedule and deliveries

• Postpone design, style and colour decisions to reduce stock and wrong decisions

• Reduce risk of forecasting error (min lead time)

• Greater visibility of products to improve customer service

• Increased product information to reduce handling, shorted order cycles and improve accuracy

• Pass efficiency savings to consumer

Market Changes

• Primark – increasing market share ‘fashion at cheaper prices’

• Buy one year and replace with next design next year.

• Pressures to keep prices low

• International sourcing – China and India – issues regarding responsiveness

• Copying of latest designs – ‘some legal issues’

• Other – traditional grocers entering market – more standard goods, Asda overtaken M & S to become largest clothing retailer in UK (competitive advantage on cost rather than fashion)

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Decreasing Shelf Life

Decreasing Shelf Life – Several Categories

• Basic good – 25%

• Seasonal goods – replaced 2 or 3 times

pa – 45%

• Fashion goods - >4 changes p.a –

increasing share – greater variety and

more frequent changes

Examples

M & S

• Known for slow reaction to changes in

demand in 80’S / 90’s

• Strong investment in supporting technology

over recent years – visibility, RFID

Zara

• Textbook example

• Vertical integration

Primark

• Fashion v discount scenario – lean v agile? 37

Marks and Spencer: Stock Management

• “The biggest mistake was too much stock. We made the decision on winter stock levels in April and May. We increased buying by 10% for winter stock. The market wasn’t there. We have never seen the market turn down on us as fast as it did”.[]

• “We reduced forward orders. This damaged the balance of ranges, as popular goods sold out, we lacked the injection of fresh merchandise and had to clear unsold goods. Hence drearier shelves and higher costs of clearance. Further pressure came from the strength of sterling. This benefited our competitors, but disadvantaged us through our heavy reliance on the UK as a supply base”. [Peter Salsbury, Chief Executive, Marks & Spencer,].

• Overpricing and poor service behind falling sales, customers unhappy about drop in quality due to overseas sourcing.

How have M & S achieved QR by implementing new technology?

Zara – Typical model for QR in Fashion Industry

• Zara is widely used as a model for responsive supply chains within the fashion sector.

• Competitive advantage is achieved by the regular introduction of new lines.

• Frequent product changes and modern designs promote exclusivity.

• The model is based on a ‘make to order’ system which allows stock to be made available during the season which it is sold.

• The alignment of supply to demand enables markdowns to be reduced to approximately half the industry average

42

Zara

• Design led – new stock every 2 weeks

• Store space important issue

• Value for money clothing

• Own production facility

• Reacts to latest trends and demands

• Average UK fashion retailer: 60% buying budget 6 months before season, 90% at start, ie 10% during season

• Zara: 20% before, 50% at start, ie 50% during

• Success based on design and production flexibility

Production and sourcing

• Single global product range

• Cross-functional teams

• Responsive EPOS data from all stores

• Imported cloths – flatter demand patterns

(economies of scale) in-house (eg dyeing, cutting,

labelling)

• Others network of small contractors, dedicated

contracts, specialisms, Spain production –

automated factories,

• 3 weeks production cycle – industry norm months43

Zara: time-based competition in a fashion market

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DC

• 500k sq m!

• Electronic tagging

• Hand-held pcs

• RFID

• Automated routing

• Despatch – 8 hours from arrival

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Top Shop – Philip Green

• Retailers are locked in a battle to try to get key catwalk trends from the drawing board to the shelves as quickly as possible.

• Zara's fast fashion model had so revolutionised the industry

• "We certainly knew about Zara and were extremely impressed by them. They're very quick to get designer-influenced products into their stores, so when we heard they were coming to the UK we knew it would be a big challenge for us," says Top Shop's Shepherdson.

• Changing stock frequently means customers come back to check what's new and that means added sales. The Zara shopper drops in 17 times a year, the High Street average is just four.

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Fashion v Grocery

• Fashion – dynamic, high margins, short selling seasons

• Food – more stable, low margins, high inventory turns

• Food – most complex

• Fashion – longest

• QR – (reduce inventory, lead time, forecast error) ie Fashion industry

• Food – efficient replenishments, reduced order cycles, efficient product ranges, improved space allocation and efficient product introductions (ECR)

Conclusion• QR has revolutionised how retailing supply chain work

• Companies have achieved the conflicting objectives of reducing cost whilst improving service simultaneously

• Technology and wider partnerships across the supply chain are key enablers

• Greater visibility through systems such as RFID can keep stock moving and align stocks more closely to demand

• Quick response is not the universal solution for all clothing retailers; emphasis may be on lean cost saving methods where sales are more steady

• Profit benefits largely for retailer, with suppliers taking most of “cost burden”

• Shared information and shared benefits appear an unrealistic ideal.

• High level of distrust between supply chain members, denies one fundamental requirement of QR,

• Same lack of trust could explain why category management, has not yet been adopted.