Chapter 16 Buying and supply management in retail

Program Definitions Role and importance of purchasing in trading and retail business. Structure and organization of the purchasing process Developments in trading and retail companies Trends in sourcing and supply chain strategies

Definitions Trade and retail companies:  Characterized by the absence of a production process  Value added is low compared to manufacturing companies  Existence is primarily based on the exchange of values  Time between the purchase and sale is very short Category management: because of a short time between purchase and sale, buying and selling are sometimes integrated into one function.

Inbound logistics Outbound logistics Merchandising/ commodity management Facilities buying Human resources management Technology Infrastructure The value chain in trade companies (Adapted from Porter, 1985) Definitions

Trade companies can be divided into two levels:  Wholesale level (B2B)  Retail level (B2C) Companies that operate on wholesale level deliver their products to other companies.  Customers are retail, industrial and service companies.  Wholesale companies devote less effort to promotion, shop layout and selection of location.  Further wholesalers make large transactions with a limited number of companies.

Manufacturer Consumer Wholesaler Retailer Wholesale and trade in the business chain Definitions

Trade companies fulfill the intermediary between producer and end user. Their added value lies in the following activities: Sales and promotion Buying and building up a product assortment Bulk breaking Storage Transportation Carrying the risk Market information Management and marketing services Purchasing in trade and retail companies

Regarding the retail trade, various types of stores can be distinguished in the area of consumer products: Specialty store Department store Supermarket Convenience store Combination store, superstore and hypermarket Service business Purchasing in trade and retail companies

Organization of the purchasing process Stages in the buying-selling cycle:  Estimating demand  Determining product assortment and distribution strategy  Selection of most suitable supplier  Contractual agreements  Ordering  Automatic replenishment  Expediting and evaluation Retail buyers pay more attention to marketing and sales aspects than industrial buyers. The function of retail buyer evolves from straight buying to commodity or category management.

Cross-functional structure  Teams are responsible for all aspects of a category in order to generate a maximum return for the retail company  Buying, styling, visual merchandising and distribution functions operate in one organizational entity. (‘category management’) Functional purchasing structure  Purchasing is important and reports directly to top management  Ordering and purchasing often separate activities.  Purchasing and Category Management are conducted central and ordering is carried out decentral as much as possible.  Planning is more and more delegated to the suppliers (i.e. VMI) Organization of the purchasing process

Developments in trade and retail companies Changing consumer behavior in European countries:  Ageing population, ongoing individualism, more men shopping  Increasing income gap between population groups  Growing number of earning couples  Increased exposure to other cultures and integration of ethnic minorities  Increased concern for the environment  Increased attention to healthier living This means that the commodity manager/ retail-buyer must constantly tailor his product assortment to more specific and often smaller groups. This means that the commodity manager/ retail-buyer must constantly tailor his product assortment to more specific and often smaller groups.

Other developments…. Concentration: Globalization of competition and concentration through mergers and acquisitions. International co-operation: Due to the concentration of power on the suppliers’ side, trade companies are searching for internationalization as an option to counterbalance this development. Private labels: Private labels support retailer identity and image. Finding suitable suppliers for private label products will become increasingly difficult. Developments in trade and retail companies

More developments… Space management: based on detailed cost information retailers decide on the most profitable display lay out. ‘Green’ issues: ecological considerations are growing in importance (e.g. natural ingredients, biodegradable packaging) Information: Some developments in information technology have an immediate impact on consumers. Others are less visible to the consumer. For example:  Electronic banking  Bar coding  Tele shopping Developments in trade and retail companies

Supply chain strategy trends Modern supply chain management retail is based on the following concepts:  Vendor Managed Inventory (VMI)  Efficient Consumer Response (ECR)  Collaborative Planning, Forecasting and Replenishment (CPFR)  Electronic marketplaces  Radio frequency Identification Detection (RFID)

Vendor Managed Inventory (VMI) VMI is a continuous replenishment program in which the retailer provides the supplier with detailed information to allow the supplier to manage and replenish product at the store or warehouse level  Typically the activities of forecasting, scheduling, requisitioning and ordering are performed by the supplier.  Electronic Data Interchange (EDI)s an integral part of the VMI process  Benefits of VMI Solidified customer-vendor relationships Reduced shipping costs and lead time Fewer human errors Improved service levels

Efficient Consumer Response (ECR) ECR is a grocery industry supply chain management strategy aimed at eliminating inefficiencies, and non-value-added costs, thus delivering better value to the end customers It is designed to re-engineer the grocery supply chain from a “push” system into a “pull” system by using e-commerce information technology ECR attempts to eliminate inefficiencies by introducing strategic initiatives in four areas:  Efficient store assortment  Efficient product information  Efficient promotion  Efficient product replenishment

Efficient Consumer Response (ECR) Programs that companies need to have in place are:  Category management (i.e. managing a group of products as strategic business units within each store)  Continuous replenishment program (CRP) Further support is needed of the following technologies:  Barcodes / Scanners  Electronic Data Interchange (EDI)  Computer aided ordering (CAO)  Cross docking / direct store delivery  Activity based costing The main obstacle is not technical but managerial, with managers reluctant to transform their adversarial trading relationships into open partnerships The main obstacle is not technical but managerial, with managers reluctant to transform their adversarial trading relationships into open partnerships

Efficient Consumer Response (ECR) Kurnia et al, (2002)

Collaborative Planning, Forecasting and Replenishment (CPFR) CPFR allows cooperation across the supply chain, using a set of processes and technology models. Providing dynamic information sharing and integrating both demand and supply side processes, for effectively planning, forecasting and replenishing customer needs through the total supply chain. Advantages of CPFR:  Increased responsiveness  Product availability assurance  Optimized inventory and associated costs  Increased revenues and earnings  Improved relationships with trading partners

Electronic marketplaces A distinction can be made between Open exchanges (accessible for everyone) and Private exchanges (only for members) An e-marketplace can provide a platform for:  Core commerce transactions which can automate and streamline the entire requisition-to-payment online  A collaborative network for production design, supply chain planning, optimization and fulfillment process  Industry wide product information that is aggregated into a common classification and catalogue structure  An environment in which sourcing, negotiations and auctions can take place in real-time  An online community for publishing and exchanging industry news, information and events

Radio frequency Identification Detection RFID is a term for technologies that use radio waves to automatically identify. Auto-ID Center is developing an open global network (a layer on top of internet) that can identify anything, anywhere, automatically. This network will give companies near perfect supply chain visibility Also, if widely adopted the network could:  eliminate human error from data collection  reduce inventories  keep product in stock  reduce loss and waste  free up staff to perform more value added functions  improve safety and security

Supply chain strategy trends The four major developments show how the landscape of the traditional retail buyer has changed Advanced systems will allow them to optimize their supply chain operations Future competition in retail will no longer be between individual companies, rather it will be among clusters of companies As research shows the development towards this kind of collaboration can be troublesome Trust between the partners, a long term commitment and a balanced sharing of risks and rewards is required to be successful

Conclusions The buying function plays a very important role in trade companies. In retail companies buying policy is much more integrated with sales and marketing policy, Company policy is primarily focused on improving turnover and margin whilst reducing working capital. Retail today is a truly international business. Advanced information systems allow the application of new logistics concepts such as VMI, ECR, CPFR and electronic marketplaces.