SUPPLY CHAIN STANDARD NOVEMBER 2008
www.supplychainstandard.com
alternate sources of supply for key components.
In our view, it is time for European organisations
to adopt a similar proactive approach to supply
chain risk. This is particularly important as the
Europeans in our survey were a third more likely
than North American firms to be increasing
sourcing from low cost regions and nearly three
times more likely to be increasing manufacturing
there, with associated increases in supply chain
length and complexity.
Despite citing complexity as a primary challenge,
the European firms in our survey also seem to be
less active than Americans in dealing with the issue.
North American respondents were three times more
likely than European ones to say they were working
to increase their ability to offer differentiated
products for different regions or markets.
It seems that European supply chain leaders’
relentless focus on efficiency and cost reduction has
made them reluctant to take the steps to build the
robust segmented supply chains needed to supply
highly differentiated offerings to diverse customer
groups. This attitude will have to change. In a
separate, but related piece of work, we recently
conducted an in-depth review of supply chain
practice and performance at more than 60
companies across a wide range of industries. This
analysis shows that, where segmentation is
supported by effective planning processes, a welldesigned
supply chain network and disciplined
execution, it can be achieved without incurring a
significant cost penalty.
DEEPAK MISHRA IS A PARTNER IN THE LONDON
OFFICE OF MCKINSEY & COMPANY. DENISE
PAULONIS IS AN ASSOCIATE PRINCIPAL IN THE
reflect and put into effect the plan for the business.
● People tend to elaborate rather than simplify their
work. So resources cluster on tasks that have only a
slight impact on profitability.
● Any activity managed on technical criteria will
makealoss.
● The optional extras that people demand can
double the cost and timescale for any development.
Our recent booklet, “Managing Costs”, shows the
strategic nature of costs and their impact on profit.
It draws on the experience gained from our work in
large businesses over the last 35 years. It sets out
frameworks for tackling different types of costs, and
deals with techniques such as value analysis,
activity-based costing, and zero-based budgeting.
And it shows how to put the plans into action.
Will companies be able to cut the costs that they
need to without damaging the capabilities in the
supply chain that they have taken such pains to
build up in the last ten years? And will they retain
the right structures to meet the challenges once the
economic cycle comes round to growth again?
CALLUM MOY WORKS IN SUPPLY CHAIN STRATEGY
FIRM’S CHICAGO OFFICE.
AND OPERATIONS AT COLLINSON GRANT.
THE REAL ONLINE COST
With online retailing, apparently, maintaining growth and
sales rather better than the high street, managing home
deliveries efficiently and cost-effectively has to be a priority
for every retailer.
PENELOPE ODY
The hyperbole at times is a little OTT: did, for
example, the IMRG/CapGemini e-Retail Sales Index
really mean to imply that online had reached 23
per cent of total UK retail business in July when it
estimated internet sales for the month at £4.8
billion? Or was it just a case of someone not
applying a reality check to the extrapolations?
Such estimates excluded, most analysts currently
put online retail sales somewhere around 4.5–5
per cent of total UK retail. It’s a similar figure in the
US, with both countries reporting growth rates in
e-retail of up to 11 per cent or so depending on
product category.
With high street sales at best stagnant, such
growth rates provide a bright spot in an otherwise
bleak landscape: for many multi-channel retailers,
web site sales are now ranked among their best
performing branches and cannibalisation of high
street business is becoming a very real problem.
So, too, is understanding the real costs involved in
fulfilling all those online orders.
Most retailers began their online operations
with a separate fulfilment centre for online sales –
often simply a cordoned off area at the warehouse
or RDC to break bulk and pick individual items.
Some, like Tesco, began by simply taking stock
from the retail shelves and only when this began
to impact store operations did it set up dedicated
online fulfilment operations (basically a physical
store with just pickers roaming the aisles rather
than real customers).
Dedicated online fulfilment centres bring their
own merchandise management headaches too:
they need to be allocated stock just like a real
world branch with all the inevitable under- and
over-stocks that result as the season’s sales
develop. Retailers also have to cope with ever
more demanding customers who expect to be
able to wander unimpeded across the channels as
they shop: finding information online, ordering by
phone, collecting at a store or whatever. Keeping
up with these meanderings can be a nightmare
for any retailer which has yet to fully integrate all
its channel operations.
It can also prove rather expensive: in a recent
study consultancy business, CVL, argues that
running a separate fulfilment centre can cost
twice as much per order as fulfilling from an
integrated distribution centre and erode up to six
per cent of margin. “Online sales can be less
predictable than real world business in terms of
demand patterns,” says CVL consultant Ray
Fowler. “Costs can also go up with collect in-store
models – especially if the item has to be shipped
to the store specially for a customer.”
SCS:VIEWPOINT 07
Based on analyses from its clients, CVL
suggests that processing a typical online order –
from receipt of product to final dispatch, but
excluding the actual cost of the home delivery –
costs £2.07 from a separate fulfilment centre but
just £1.04 if an integrated DC managing both
store and home deliveries is used. Comparable
figures for shipping an individual item to a store
for collection it estimates as, respectively, £2.81
and £1.08.
Few retailers – with of course the exception of
Argos and its “catalogue showroom” model – have
sufficiently sophisticated real-time stock control
to handle reservation and fulfilment from store
stocks. Yet, reserve online and collect in-store is
becoming a popular option for customers with
goods generally available at the store within 24 -
48 hours. It is usually a free service but, according
to the CVL data, could be costing almost £3 per
order to fulfil.
Retailers also have to cope
with ever more demanding
customers who expect to be
able to wander unimpeded
across the channels.
Picking both bulk and individual items from a
single pick face is not difficult, argues Ray Fowler,
citing one fashion retailer which does just this,
sending the broken packs to selected branches
which can make the necessary goods inwards
stock adjustments.
When online sales were few and far between,
spending an additional £1.73 or so on handling
each order was probably not something that
concerned too many retailers. It was rather like
the early days of online grocery shopping where
the £5 delivery charge was accepted as coming
nowhere near the £13-£22 (depending on which
retailer you spoke to) that it actually cost to pick
and deliver the goods. As online sales grew the
supermarkets had to improve efficiency and cut
costs: it is now just the same with non-food online
shopping – a time to measure and control.
With discretionary spending continuing to fall
and with discounting increasing, giving away
margin unnecessarily by duplicating fulfilment
operations is surely something that very few
retailers can afford to do for very much longer.
PENELOPE ODY IS A REGULAR COLUMNIST FOR SCS
AND IS A RETAIL MARKET SPECIALIST.
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