Retail Supply Chain Whitepaper - Part 2 - Physical Network Optimisation

PART TWO: Physical Network Optimisation

GRA Retail Supply Chain Series Whitepaper

Edition 2 of 4 – Physical Network Optimisation

Retail Supply Chain Serieswww.gra.net.au

A retailer’s operating costs (warehousing /logistics) typically can account for up to 10% of COGS and thereby planned deployment of assets and positioning of inventory can significantly improvement a company’s performance.

© GRA 2016

Deploying assets and positioning inventory well in asupply chain network is critical to delivering the rightservice at the right cost. Supply chains often evolveorganically and can become awkward collections ofsites, sources and inventory…

What we do know is customer expectations have increased over

the last decade, influenced primarily by what ecommerce has

delivered in greater information transparency, lower costs of

communication and rise in information processing capability – all for

the consumer!

For Australian retailers specifically, the supply chain challenges

in this changing environment are substantial. With lower population

densities, smaller markets and an expansive geographic distribution

of customers, the solutions overseas often aren’t as effective here.

So the typical Australian retailer needs to be able to do more with

less, in an setting that inherently has significant supply chain

complications.

We at GRA believe major structural change is upon

Australian retailers.

© GRA 2016 3

Executive Summary

Evidence of this change is printed everyday in

Australian newspapers. Board executives are all too

aware of the urgency in adaptive survival. Like

Australia’s manufacturing industry which faced a

fight or flight predicament, Australian retailers are

now fighting to remain relevant amongst new

international entrants such as Zara, ALDI, Costco,

H&M and Topshop. Responding to these threats,

major Australian Retailers such as Super Retail

Group, David Jones, Coles and Metcash have all

indicated to shareholders that their strategic plans

involve significant supply chain restructures. These

boards are prepared to invest in the short term to

realise long term sustainable growth.

Today, the Australian Retail sector is shadowed by an unprecedented amount of change and uncertainty.

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James Allt-Graham, Partner – GRA SydneyFor the last 20 years, James has helped organisations in Asia and Australia deliver rapid and sustainedperformance improvement through the practical application of leading processes, systems and a highperformance culture. James has worked with clients in the commercial and government sector and has afocus on engaging executives, agreeing a direction and driving transformation. Within professional servicesJames has held senior roles as Head of People for a 5,000 person organisation and as the Senior Partnerresponsible for the Risk Consulting practice consisting of over 700 professionals. He has served oninternational projects for clients, steering groups and has been responsible for running a regional business.

Luke Tomkin, Partner – GRA MelbourneLuke is a Partner with GRA and throughout his career has helped organisations in South East Asia andAustralasia deliver rapid and sustained inventory reductions, service level improvements and supply chaincost reductions through the practical application of leading supply chain processes, techniques and systems.Luke is responsible for the delivery of excellent service to clients in the context of their needs and working toproduce new solutions which create value to the client. He has worked with companies at both the strategicand operational levels to deliver results in the areas of supply chain network design, IT strategy and systems,demand and supply planning, inventory optimisation, customer service delivery, operational and tacticalplanning.

Shanaka Jayasinghe, Manager – GRA SydneyShanaka has proven experience in assisting clients design supply chain strategy as well as identify andpractically leverage service improvements and cost reductions in the supply chain. Shanaka has been deeplyinvolved in successful client engagements extending across the key strategic initiatives outlined in thispresentation – (1) physical network & flow optimisation, (2) Supply Chain & Merchandise Planning and (3)Enabling Integrated Frameworks (S&OP). Shanaka is passionate about presenting complex ideas to clientswith any level of technical background.

About the authors

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Physical Network

Optimisation

Overview:• Where is the demand? Where is the growth?• How many Distributions centres should we have and where should they be?• What is the profile of our inventory? Should we have less or more stocking locations?• How sensitive is demand to price, availability and responsiveness?• How should we best optimise inbound vs. outbound freight? • What should we consider doing upstream vs. downstream in the supply chain?• Do we have sufficient volumes to enable super warehouses?• Do we have sufficient volumes to fragment out inbound freight? Direct ship to WA and QLD?

What is our optimisation question?

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Cost Efficiency

Lead-time Responsiveness

High

Low

Short Long

Current Strategy

Prior to exploring network optimisation it is important to first understand the supply chain strategy and how this alignswith the business strategy. Business & supply chain strategies are the gravity for a physical network.

For example, the Australian fast-fashion retailer The Iconic has a customer value proposition of extreme responsivenesswith lead time to customer in some instances, less than 2 hours. Consider the supply chain network The Iconic musthave in place to deliver to such a promise; the number of stocking locations and, moreover, the proximity to customer ofthese locations.

Now this is certainly not to say we must all design a network to fulfil to such extreme lead-times, but it is to say thatsupply chain strategy has an pivotal influence on network design. Supply chain strategy & network design investmentsoften go hand-in-hand. The table below explains these concepts in greater detail.

Network Optimisation – Strategy Design

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Supply Chain Strategy

Distinguishing Attribution Lean Responsive Agile Service-Driven

Example Products Commodities Automotive Spare Parts Fashion Pharmaceuticals

Network Layout Centralised Regional Decentralised Hybrid

Market Demand Predictable Mixed (Predictable + Sporadic) Volatile Consistent

Product Variety Low Extremely High High High

Product Life Cycle Long Long Short Moderate

Customer Drivers Cost Timeliness Availability Availability

Profit Margin Low High High High

Dominant Cost Physical Costs Supply Chain Marketability Costs Inventory Carrying

Stock-out Penalties Sales - Long-term Contractual Sales - Short-term Contractual Sales - Immediate and Volatile Sales – Lowering Barriers to

Entry

Purchasing Policy Buy Goods Traditional Pull Assign Capacity Traditional Push

Forecasting Mechanism Algorithmic Algorithmic Algorithmic + Consultative Indent Algorithmic

© GRA 2016

Network Optimisation – Layout Design

To understand whether an opportunity exists in a network optimisation investment we must consider three key supply chainelements to determine the flexibility of the current physical footprint. Rationalisation & consolidation opportunities will typicallyalways exist from a cost perspective, however, it is critical to overlay the realities of business when making such decisions.

© GRA 2016 8

Where is demand? Where is the growth?Do we have sufficient

volumes to justify capital spend?

What are the customer’s

sensitivities to price, availability and responsiveness?

Where are my sourcing locations

and inbound receiving flows? Can

we fragment volumes?

Consolidation2015 2016

Network Optimisation – Facility Design

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Lean

Responsive

Service-driven

Agile

DC Operations

All

oca

tio

n High Fashion

La

teE

arl

y

Put-awayX-Dock (flow)

Ongoing Replenishment

Seasonal Lines

Volatile/Sporadic Demand

Event Stock

Big and Bulky

Stable Demand

High Margin

Another key consideration a company may face when optimising the supply chain network is answering:

“What is the appropriate mix of Cross-Dock vs. Put-away required in a facility and at what point shouldallocations to stores occur?”

To assist in answering components of this predicament, see table below from a product perspective.

Network Optimisation – Activity Design

VS

Supplier

Store

Supplier

Store

Flow-through

Model 1 – Cross-Dock Model 2 – Flow Through

Supplier

Store

DC

Model 3 – Put-away

VS

Cross Dock

© GRA 2016

Allocation occurs here

Lowest costLeast flexibility

Allocation occurs here

Replen. occurs here

Similarly, how flexible and agile should our supply chain be as we look to balance costs in both COGS and supply chain expense?

• Should we do more or less activities off-shore? How will this impact cost? How will this impact flexibility?

Consolidation PointConsolidation Point Consolidation Point

Added cost, increased flexibility

Added cost + inventory

Maximum flexibility

© GRA 2016

At GRA we understand the complex challenges retail organisations are facing

We can help you with not only designing an optimal retail supply chain, but also ensuring that your inventory is optimised to ensure that the highest possible service levels can be achieved at the lowest possible cost.

Contact usMelbourne (03) 9421 4611 Sydney (02) 9810 0229

www.gra.net.au

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