Posted by on 07.05.16
What To Do Now
This three-part series explores a number of near-term and long-term moves retailers can make to eliminate or minimize holiday season fulfillment headaches and ensure their supply chain is up to the task.
In part one of the series, we identified the issues retailers faced during the holiday season of 2015. Specifically, retailers were unequipped to handle the surge in online sales and a prolonged holiday shopping season. In this second section of the series, we detail the specific actions retailers should take now to improve their operative efficiency and achieve success.
Retailers should start by analyzing the 2015 season’s volumes to understand where things broke down. Two dimensions, in particular, are important to explore:
Other important capacity levers to analyze include pick faces, throughput, parking, storage areas, staging, and sorters/conveyors. Ideally, this analysis should be done at the SKU level (or, at minimum, the product group level) so a retailer can fully understand the amount of space needed in the DC for each item’s slot. Such insights can indicate whether the projected product flow for the upcoming season will overwhelm the DC’s ability to store and fulfill product.
In some cases, spreadsheets will do the trick. But for a growing number of retailers whose network complexity has mushroomed, more robust packaged tools are likely required. Sophisticated modeling tools enable a retailer to simultaneously consider and optimize complex trade-offs among distribution, production, transportation, service levels and working capital. In doing so, the company can understand the economic benefits and costs of strategic scenarios relative to an agreed-upon baseline.
Such analyses also can help a retailer pinpoint bottlenecks in the network that erode performance. One of the most common is labor: The retailer may not have enough people working in the DC at the right times to keep up with the volume of orders during promotion- or volume-driven spikes. Another typical bottleneck is equipment: The DC’s materials handling equipment—sorters and conveyors—may simply be maxed out. Trucking could also be a problem: There’s insufficient trucking capacity on key lanes to get products from DC to DC or from a delivery agent to stores.
Eliminating the bottlenecks
There are several ways to eliminate or minimize these bottlenecks, depending on the nature and location of the problem. At a high level, retailers can either change the flow or change the capacity.
For instance, one simple step could be to alter the timing of the inbound flow: If a retailer finds that its products are creating a logjam at the receiving docks because they’re all arriving at once, it could smooth out inbound flow by pooling some product in an upstream facility, meter it in, and then release it to the DC in a just-in-time flow. This can help ensure that the products aren’t storming the gate at the same time and overwhelming the DC.
But more often, the answer is to add more capacity to the network to improve outbound flow. One obvious move is to increase the number of people on hand by adding more shifts or work days to boost labor capacity. Another move could involve rethinking how the retailer groups or waves orders for picking in the warehouse management system.
For instance, using a simulation tool, the company could find there are some logical groupings—say, picking all single-item orders that are going to a particular geography—that can make picking more efficient. Doing so can boost the existing labor pool’s productivity, which means an increase in units picked per hour without having to bring on more people. This is especially critical with the online, direct-to-consumer business, which tends to be a lot more dynamic and promotions driven during the holidays.
Such grouping decisions must be made in the context of the retailer’s broader service-level strategy (free shipping? one-day? two-day?) and cut-off times for parcel delivery providers.
Retailers also can employ the fairly standard practice of grouping all single-SKU orders for its online business in a processing wave—as lululemon athletica does. Through its warehouse management system, the yoga retailer separates single-line from multi-line orders, picking the former into a large tote that can hold as many as 35 orders and packing them using an autobagger. This eliminates manual packing from single-line orders and boosts efficiency.
For physical stores, a retailer can relieve some stress on the DC by pushing unallocated inventory to delivery agents, then flowing the inventory to the stores once demand becomes clear. In this way, the company can “read and react” more effectively to local markets or stores and more precisely place inventory at the store level. But there are technology implications: The business must have real-time visibility to the inventory at the delivery agent (typically a third party), which means the retailer’s and agent’s systems must be tightly linked.
In cases where it’s impossible to change the flow or squeeze any more capacity from the existing network, it could be time to go outside for help. Third-party logistics companies can provide supplemental capacity to relieve some of the pressure. But it’s important to lock up that help early; competition for such services becomes more fierce as the holidays get closer.
Collaborating via S&OP
A more ambitious action—one that could take longer than a few months to implement, but also is potentially much more impactful—is to adopt a “retail version” of sales and operations planning (S&OP). The goal is to get key merchants and supply chain decision makers together on a formal basis to collaboratively determine how best to meet the one- to two-month surge in demand. Using a simple model, such as the one below, the combined team can more effectively understand where they expect the peaks and valleys of demand and how the company will respond.
A simple model for a retail version of S&OP
Of course, S&OP’s not a crystal ball. Demand will lag for some items and exceed estimates for others. Promotions will be offered, generating spikes in demand. To help deal with this uncertainty, the team can look to the previous year as a guide. An analysis of past seasons could indicate that certain factors typically resulted in a specific promotion and accompanying spike in demand. This insight can help the supply chain team understand how the merchants are thinking about demand so they can ensure the supply chain can be responsive to those changes. For instance, the supply chain team might create new, temporary fulfillment nodes to flex capacity, increase speed, and reduce delivery costs.
In essence, S&OP helps the merchants and supply chain professionals create a basic “playbook” for the season. This playbook lays out a variety of demand scenarios and actions merchants could take, and the corresponding potential moves the supply chain would need to make to support those actions. Thus, during the season, when a merchant calls a specific “play”—e.g., a promotion on a slow-selling item or a chase order for more of a hot product—the supply chain isn’t caught off guard and forced to scramble to respond. It already knows what’s coming and what it, in turn, will do.
Importantly, with S&OP, communication goes both ways. True, the merchants must keep the supply chain informed of their thinking. But the supply chain team also must be upfront about what’s operationally possible and reasonable. They need to be able to say to a merchant, “We’ve deeply analyzed the situation, and if you take this action, we know what will happen from a supply chain perspective, and we’re going to have a bunch of angry customers.” From there, the merchants and supply chain team can jointly come up with the best solution.
Here’s how one company, a multi-billion dollar, global fashion retailer, used S&OP to its advantage. Several years ago, during an enterprise-wide systems upgrade, the company implemented tools to monitor and manage the flow of product through the distribution network. Beyond the tools, the company put in place a complete solution—encompassing people, process and technology—that became known as “Flow Planning.” Flow Planning became a critical, in-line planning function that optimized inventory flow through the network, subject to each store’s service requirements. Essentially, it dynamically solved the problem of “pushing the pig through the python”—managing the bubble of product flow in an efficient and effective way to ensure product availability. The S&OP dimension of this retailer’s solution is the ongoing dialogue between merchandise planning and allocation and the flow planning teams, which is backed up by fact-based analysis. This is especially critical in handling “fractional” or ”digital” demand—i.e., items that sell fewer than one unit per week, such as “fringe” sizes or items in uncommon combinations of style, size and color.
Part 3 of this series will detail the additional, and more substantial, steps needed to build stronger operational capabilities to improve holiday season performance in future years.
For nearly 60 years, Sedlak has helped retailers optimize their operations to meet peak season volumes and deliver on their promises to their customers. To learn more, fill out the Contact Us form below.