Retail Elasticity

Retail Elasticity

Supply chains as a cost centre

For many years, the retail sector has benefited from standardised and slowly evolving demand profiles. Peaks associated with seasons, festive events or sales were predicted with relatively high accuracy. This allowed for medium to long-term resource and capacity planning, with operations designed to maximise efficiency and minimise cost. Nevertheless, this focus on efficiency came at the expense of flexibility and agility when responding to unforeseen events or changing trends, which proved critical in reacting to the recent upheaval in consumption patterns.

Prior to the pandemic disruption, retailers were already beginning to feel pressure in their operations to keep up with the growing consumer demand. Big retailers like Amazon or Walmart have put everyone else to the test with their fast service models with delivery times of only a few hours (and sometimes via drones).

In response to these new challenges, organisational leaders have changed their supply chain paradigm. If previously it was seen as a cost centre with the objective was to minimise the cost of each transaction, the supply chain is now perceived as a strategic capacity outlet that can become a competitive advantage if the focus is placed on flexibility, speed and service level. This paradigm shift is a reaction to the shock that abrupt changes in demand brought to retailers who had very productive, yet inflexible operations.

The competitive advantage of elastic operations

In 2020 we see a strong change in the profiles and mix of demand, both for products and services. The shift to online retail was evident, but that was by no means the only change. The number of orders per week, the average number of items and the average value per order also changed, along with adjustments in consumer routines. This morphological change in orders has a direct impact on the way they are processed in the logistics centres, thus significantly altering the capacity needed to meet demand.

The theme of "resilient supply chains" has been present in many discussions and emerges as the solution to cushion the impact of unforeseen disruptions in supply chains. This theme is usually associated with the relationship with suppliers and the ability to create redundancies or approximate resources in order to eliminate risk.

However, for a supply chain truly prepared for disruption, it is also essential to focus on the core of the organisation: its internal operations. A supply chain that is not able to readily adjust its capacity according to actual customer demand cannot call itself "resilient". In fact, the issue of capacity adjustment is a challenge for 69% of organisations who say they do not have the agility to increase or reduce their capacity in the short term.

Traditionally, retailers associate flexibility with automation and resource redundancy. They believe that capacity can only be reduced or increased quickly by having the operation staffed by equipment rather than people. Additionally, they fear that the possibility of increased capacity will lead to redundant resources, which may be underused most of the time. However, and fortunately for business, flexibility does not depend only on automation or resource redundancy, but such an approach would only contribute to increased costs unless scenario planning and team polyvalence is ensured. Supply chain leaders need reliable and timely data, fast decision-making, standardised operations, agile teams and collaboration with suppliers.

Flexibility vs. standardisation

Flexibility and standardisation usually appear at opposite poles, but in this case, they are side by side. To react quickly to disruption in demand, volume and mix, retailers must:

  • Plan and standardise to meet different scenarios. Retailers should design the operating model for the different demand scenarios. Each scenario is optimised through different operating models, be it the layout, the picking method, order aggregation or even team organisation. Once operations have been standardised for the different demand scenarios, it is essential to train teams effectively in the different models and tasks. So, each week or even day, the teams and spaces mould themselves to the existing demand.
  • Plan short-term capacity with actual customer data. By having the flexibility for the different scenarios, it is possible to plan for the short term. Short-term planning benefits from the incorporation of real demand data that improves the quality of forecasts and enriches the algorithms. The use of reliable data also allows leaders to accelerate decision-making by making it more fact-based.
  • Leverage the polyvalence of the teams for the reallocation of resources. Only by ensuring the versatility of the teams between areas will it be possible to transform organisations according to the real needs of the business. This is possible through effective, practical training programmes sustained by optimised operations.
  • Cooperate with suppliers. Collaboration is key to flexibility. Sharing information with suppliers will make it easier to adjust delivery plans, levelling stocks and, at the same time, maintaining the level of service. Sharing information with suppliers will make it easier to adjust delivery plans, levelling stocks while maintaining the service level.

The demand pattern we find at the moment is not the new normal. The new normal is disruption and the rapid evolution of trends, driven by technological acceleration and consumers' access to a globalised market. Elastic operations are not only a competitive advantage to overcome disruption, but a key to leading in a market that is constantly changing.

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