In the Classroom
Bringing "Rocket Science" to Supply Chains

Marshall FisherWall Street investment was once primarily an art, until the introduction of advanced information technology and high-grade analytics launched its "rocket science" age. Supply chains are now seeing similar benefits from the use of technology and models. Wharton Professor Marshall Fisher, academic co-director of the Managing Global Supply Chains: Products and Services program, has applied new tools and frameworks to retail and other industries to bring "rocket science" to supply chain management.

"In retail, better analytics can easily double a retailer's profit," Fisher says. "Data and analytic tools can lead to better in-stock performance and fewer markdowns. This can result in a profit increase of  5 to 10 percent of revenue."

Opportunities for Improvement

Fisher notes that there are a variety of strategies companies can use to improve their supply chains, including:

  • Making more accurate forecasts:  In apparel, forecasting errors of 50 to 100 percent for a season are not uncommon. These errors lead to markdowns if there is too much of a certain product. On the other hand, if the store runs out of the product, this can result in lost sales or lost customers.

  • Creating nimble chains that shorten lead time: Lead times can be up to 11 months for apparel sourced from Asia, although some companies such as Zara have shortened lead times to just two weeks.

  • Eliminating execution errors: Sweating the details of supply chains at the store level can lead to better assortments and help to spot problems that undermine the effectiveness of the chain.

Better Forecasts and Shorter Lead Times

While retailers have often relied upon buyers and other experts for forecasts, they can use early sales to improve the accuracy of their forecasts. A fashion cataloguer, for example, found that the forecasts by a committee of four merchandisers had an error rate of 55 percent. But a forecast based on extrapolating from the first two weeks of orders had an error rate of just 8 percent. "Early sales were highly predictive," Fisher says.

Simple extrapolation of early sales was not very accurate, however, because of the impact of pricing markdowns and stockouts. They developed a more sophisticated model, taking into account pricing and supply, which led to the more accurate forecasts. Better forecasts result in higher margins. For example, for just one style and color of garment, the original forecast would have produced a gross margin of about $385,000 but the "read and react" forecast based on early sales resulted in a gross margin of $562,000.

Fisher recalls that the leader of a major shoe retailer once observed, "If you line up ten shoe buyers and ask for the hot product of the next season, you will receive ten different answers." Product assortments in retail stores are often chosen by fairly junior executives. The process can be improved by mining all sales from the past year to find guidance for future orders and also tailor the assortment to specific stores.  "Retailers need to manage at the level of SKUs in stores, but they can't do this without analytic tools," Fisher says. "There is too much data for a manual approach."

For example, a study of sales of tires for a major automobile parts retailer found that changing the assortment of SKUs could lead to a leap in sales of 60 percent. "The customer was saying that price matters, so an assortment with more private-label tires would sell more," Fisher says.

Execution: Shooting the Holes

The best designed supply chain can fall victim to poor execution. One major retailer conducted a study to "shoot the holes" in its stores, physically looking for out-of-stock items on the shelves at the end of the day to compare with information in its computer system. The retailer found that 30 percent of items listed as having positive inventory were actually out of stock on the shelves.

Why? It turned out that one of the biggest problems was from irregularly shaped items such as surge protectors that hung on pegs at the end of the aisle. When the pegs were filled, employees put the remaining products in a box in the back room — and forgot about them. The computer showed that the store had inventory, so the product was not reordered. But the store employees thought the product was out of stock and so the pegs sat empty. Customers were not buying the item because it was not there to buy. Once the problem was recognized, the system could be improved by using a just-in-time system so the store didn't order more inventory than could fit on the floor.

Increasing the Science

Wharton's Managing Global Supply Chains program is one of the first executive programs to take an integrated view of supply chains — exploring both supply chain management and business process outsourcing (BPO). The program brings together insights from experts on supply chain management such as Fisher and authorities on business processing outsourcing BPO such as Professor Ravi Aron, who is academic co-director. They present strategies for both supply chains that produce products and demand chains that handle information and services.

Such broad perspectives, as well as the application of better analytics and models, can improve the performance of both supply chains and demand chains for services. There are a lot of good "rocket science" tools that can now be brought to supply chain challenges, creating opportunities for better performance.

While supply chain management in retail and other industries will always be a mix of science and art, there are opportunities to increase the science. "The challenge is how to inject science in a way that will not interfere with the art," Fisher says. "Wall Street is now more science than art. That might happen in retailing."

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