Thought Leaders
Is Your Supply Chain Missing a Link?

Marshall L. Fisher, UPS Transportation Professor for the Private Sector, Professor of Operations and Management

Sweating the small stuff can make a big difference to a retailer's bottom line, according to Professor Marshall Fisher, academic director of Supply Chain Management: Creating Competitive Advantage. Simple errors, such as misrecording an exchanged item as a returned item, or counting misplaced items under the wrong SKU, create incorrect data. "These sound like minor issues, but they add up to a lot of problems," Fisher said. "The accuracy of retailers' data and the quality of their execution is 90 percent of the battle in getting a product from supplier to distribution centers to the store."

In his research with several nationwide and smaller local retailers, Fisher found that on average if a store reports a ten percent stock-out rate, nine percent of that is due to data inaccuracy and only one percent to difficulty in prediction.

What's Your Problem?

Accurate data is essential to having your supply chain run smoothly, yet many companies overlook such seemingly inconsequential errors. On the whole, retailers who develop their own in-house systems for auditing data accuracy have more effective supply chains, Fisher said. And applying concepts of total quality management or Six Sigma programs to enhancing data quality has helped many of the companies with which Fisher has consulted with to improve their store-level revenues. While these types of quality assurance programs were originally developed in assembly-line environments to help reduce product defects, "they work equally well in a store that has hundreds of thousands of items in stock. Doing quality control and supply chain processes well starts with figuring out you have some problems to begin with," he said.

One retailer discovered an alarming "phantom stock-out" (the item is listed as being in the store but cannot be located) rate of 17 percent throughout its stores by conducting a Six Sigma program that involved tedious product audits. As a result of this finding, it is developing methods to reduce that rate. These include, first of all, making all employees aware of the problem and then holding ‘quality circles' where everyone is encouraged to offer input on reducing such problems. They also have begun periodic spot checks of sections of the store. (Results of these spot-check surveys are part of the store managers' evaluations.)

IT is No Substitute for Strategy

Information technology is a crucial tool in supply chain design and management because of the complexity of tasks such as tracking hundreds of thousands of items, tracking an avalanche of customer data, and merging sales forecasts from manufacturers, distributors, and retailers. But Fisher warns that managers sometimes fall into the trap of thinking of an off-the-shelf software package as a substitute for a carefully developed supply chain strategy. "Just buying a software package and thinking that is all you need to do for your supply chain tends to insulate you too much from thinking about how things work at your company." In a survey of 32 retailers, Fisher found those with their own "homegrown" IT systems had much more efficient supply chains. "These systems were much more effective because the retailers took the time to really understand their processes."

A disturbing trend Fisher sees is retailers using IT programs and other analytic tools to calculate better markdown percentages. That's "fixing the problem on the back end rather than the front end," Fisher said. "You need to get rid of excess inventory — that's the point of using such sophisticated systems in the first place."

While a software or IT solution can make huge improvements, the real work is in coordinating all the data and forecasts, he said. In the food industry, a process called Coordinated Planning Forecast and Replenishment (CPFR) is under development.

This process attempts to connect suppliers and retailers during their individual (and very complicated) planning processes. For instance, if a cosmetics company has a certain forecast for how much it expects to sell at one national retailer but that retailer has another forecast, under CPFR, these companies would share data so they can create a mutual forecast.

"I am working on a consulting basis with a major retailer of home fabrics and one of their largest suppliers to both improve their individual processes for forecasting demand and setting inventories and the coordination between these processes," Fisher said.

If the Shoe Fits...

"I've worked with a high-end shoe designer, which has its own shops and sells to other retailers as well. If one of their shoe styles is selling well in a certain department store, for example, does that necessarily mean that store will order more or will they start phasing it out? Neither the designer/manufacturer nor the department store really knows. There are two independent parties involved in making buying decisions. Each party wants to preserve its independence but they are very dependent on each other: If the retailer doesn't sell more, the manufacturer won't make more. There's a great value in the two of them coordinating their decisions," Fisher said.

Recommended Reading:
Marshall L. Fisher, Fisher and Kumar Rajaram, "Accurate Testing of Retail Fashion Merchandise: Methodology and Application," Marketing Science No. 3, Summer 2000

Marshall L. Fisher, Ananth Raman, and Anna Sheen McClelland, "Rocket Science Retailing Is Almost Here — Are You Ready?" Harvard Business Review July-August 2000 (Reprint R00404)

Marshall L. Fisher, "What Is the Right Supply Chain for Your Products?" Harvard Business Review March-April 1997 (Reprint 97205)

   

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