Where does the money go?
In the fast moving and highly competitive fashion market, it is the omni-channel retailers who understand true supply chain complexity and cost drivers that are set to achieve sustainable, profitable growth. Key for them is knowing where and how profit is made, and how it can be improved. This requires a new approach - one that gives a shared understanding of revenue, cost and profitability across the business - the Cost-to Serve®.
A more complex and costly landscape
Online is the fastest growing retail market in the UK and Europe with apparel accounting for 20% of total online sales. Customers shopping across channels see only one brand and expect a seamless experience. The retailers who achieve ‘one brand seamlessness’ across customer touchpoints come out on top on sales…but what is the omni-channel proposition doing to their bottom line?
The mix of online within overall sales growth is leading to lower margins as apparel retailers grapple with the added costs of serving the omni-channel shopper, the capital investments needed, and the overall operating model changes required to deliver ‘seamlessness’.
And the forecast online growth shows no let up. Looking forward, the majority of apparel retail growth will continue to come from the online channel. Forecasts from Mintel suggest online will grow at an average of 13% year on year until 2021, outpacing the total market average of 4%. With this backdrop, retailers lacking an understanding of their Cost-to-Serve® face challenging times.
The challenges in understanding and managing the Cost-to Serve®
When buyers and merchandisers build their assortments they meticulously plan intake and sales margins and ASPs to reconcile to the top down business plans. However, the supply chain has a disproportionate influence on product profitability, since sourcing options, handling characteristics and customer behaviours all build to erode gross margin, yielding a far lower net margin than expected.
Often, the real drivers of cost in the supply chain are not fully visible, and true costs are not and cannot be considered within commercial pricing decisions.
The majority of retailers face significant challenges in understanding their end-to-end Cost-to-Serve®. This is partly as a result of physical supply chain configuration and partly as a result of legacy systems, data and information availability. Instead of re-structuring to enable true omni-channel back end operations, most retailers ‘bolt-on’ capability to enable online fulfilment. This results in sub-optimal processes and product flows and can add significantly to cost.
Over and above physical infrastructure and systems, internal organisational structures and functional silos, together with the increasing reliance on third parties in the supply chain, mean that effective communication and collaborative ways of working are critical to understanding and subsequently, managing costs. Where ‘what gets measured gets managed’, alignment of KPIs within organisations and cost transparency with external parties are key to building a view of Cost-to-Serve® that can support business wide informed decision making and trade-offs.
Key cost drivers – where does the money go?
Upstream: From primary sourcing to production, upstream cost can accrue from poor supplier integration, unstructured product development, low sourcing hit rates, and inaccurate production planning. It is key that retailers get their planning and sourcing right.
Downstream: Post-production costs build up through poor management of peak promotions, returns processing, and data integrity. Although downstream costs often take up the bulk of operational expenditure it doesn’t mean they should be analysed in isolation – quite the opposite in fact. It is essential that retailers look at total cost build up along the entire end-to-end supply chain.
The most successful retailers recognise this and ensure upstream production processes are efficient while downstream, they remain agile and customer focused. Not only do they have right market information but they also have the tools and skills to respond quickly to market changes.
So what can they do to overcome this?
Identifying the supply chain areas where costs build up is important. But understanding the levers to control that build-up can be the difference between making profit or not. Levers can be grouped into 2 categories: 1) Efficiency levers, and 2) Strategic choice levers
Efficiency levers: Improve the flow of information leading to accurate planning, efficient use of resources and minimising non-value added tasks, for example:
- Supplier relationship management and collaboration
- Inventory management and centralisation
- Data integrity management
- System integration – from planning to execution to post mortem
- Internal organisational alignment
Strategic choice levers: Relate to a retailer’s proposition strategy and how they choose to compete or differentiate themselves in the market e.g.
- Service promise and customer proposition management
- Product range by channel
- Peak and promotions management
It’s only by understanding the Cost-to-Serve® that the impact of these levers can be understood and businesses can drive cost efficiency where appropriate and make informed strategic choices and trade-offs.
Laura Morroll is an MBA graduate with a passion for retail. Laura began her career in retail operations with Decathlon and Nike, then into Buying and Merchandising with Nike, The Works and Claire’s accessories. In consulting Laura has led a number of end-to-end sourcing, speed to market, buying and merchandising process optimisation, DC, and network projects.
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