Logistics is the total process of planning, implementing, and coordinating the physical movement of merchandise from manufacturer (wholesaler) to retailer to customer in the most timely, effective, and cost-efficient manner possible. Logistics regards order processing and fulfillment, transportation, warehousing, customer service, and inventory management as interdependent functions in the value delivery chain. If a logistics system works well, firms reduce stockouts, hold down inventories, and improve customer service—all at the same time. See Figure 15-9.
Logistics can also be quite challenging. Consider the case of Supervalu, the largest public grocery wholesaler in the U. S. as well as a retailer that owns the Cub Foods, Farm Fresh, Save-A-Lot, Fresh Market, and other chains. Supervalu is the primary grocery supplier to more than 2,000 single-store and independent grocers and the military. Its network of 18 distribution centers and more than 11 million square feet of facilities is part of a multitiered logistics system that provides order accuracy and strong service while meeting tight delivery schedules. The distribution centers offer support for grocery products across a range of categories, including meat, deli, bakery, grocery, frozen foods, and dairy, as well as home-and-beauty-care items, general merchandise, and pharmacy items. Customer service professionals work around the clock to support distribution customers. The center in Denver handles more than 100,000 customer contacts monthly.13
In this section, we discuss these logistics concepts: performance goals, the supply chain, order processing and fulfillment, transportation and warehousing, and customer transactions and customer service. Inventory management is covered in the final section of this chapter.
1. Performance Goals
- Match the costs incurred to specific logistics activities, thereby fulfilling all activities as performance. economically as possible, given the firms’ other performance objectives.
- Place and receive orders as easily, accurately, and satisfactorily as possible.
- Minimize the time between ordering and receiving merchandise.
- Coordinate shipments from various suppliers.
- Have enough merchandise on hand to satisfy customer demand, without having so much inventory that heavy markdowns will be necessary.
- Place merchandise on the sales floor efficiently.
- Process customer orders efficiently and in a manner satisfactory to customers.
- Work collaboratively and communicate regularly with other supply chain members.
- Handle returns effectively and minimize damaged products.
- Monitor logistics performance.
- Have backup plans in case of breakdowns in the system.
Innovel Solutions, formerly called Sears Logistics Services (SLS), is the sole point of contact for virtually all logistical activity at Sears and Kmart. It transports apparel and other products from manufacturers’ facilities to store shelves and manages other transportation and warehousing services. The nationwide home-delivery business for appliances, electronics, furniture, and home improvement goods from 106 delivery hubs in the Sears network is a profit center for the retailer. Its 1,100-truck delivery service provides the same service for some rivals, such as Costco.14
2. Supply Chain Management
The supply chain is the logistics aspect of a value delivery chain. It comprises all the parties that participate in the retail logistics process: manufacturers, wholesalers, third-party specialists (shippers, order-fulfillment houses, and so forth), and the retailer. For posts related to supply chain management, visit our blog site (www.bermanevansretail.com).
Many retailers and suppliers are seeking closer logistical relationships. One technique for larger retailers is collaborative planning, forecasting, and replenishment (CPFR)—a holistic approach to supply-chain management among a network of trading partners. According to the Voluntary Interindustry Commerce Standards Association, hundreds of leading manufacturers, service providers, and retailers (including Best Buy, Kohl’s, Macy’s, J. C. Penney, QVC, Staples, Target, Walgreens, and Walmart) have participated in CPFR programs.
Yet, retailers implementing CPFR must take into account the challenges associated with total implementation costs and determine whether they are at a competitive disadvantage. Aligning business goals and making internal changes can be challenging. Collaborative relationships mean that practices benefiting one party must be discontinued or modified if they are not rewarding to a partner. Examples include “channel stuffing” or “trade loading,” wherein a retailer is persuaded to periodically absorb larger-than-needed replenishment orders to help a supplier. Trust is a major hurdle in implementing CPFR, as many retailers and suppliers may be unwilling to share information that reduces their ability to negotiate.15
Omnichannel retailers often rely on third-party logistics (3PL), sometimes called outsourcing. Third-party logistics companies work closely with retail businesses of all sizes to provide such supply chain processes as warehouse management, transportation of goods, reporting and forecasting, and managing return logistics without long-term or inflexible capital costs, leases, or staffing. For example, many retailers (including online firms) with cyclical or uneven sales, rapid sales growth, or a weak logistics infrastructure rely on UPS Supply Chain Solutions, a division of United Parcel Service, as their logistics specialist. This allows the retailers to focus on their retail strategy, stay competitive, and be able to maintain profit margins. Logistics specialists can optimize distribution and transportation networks, and streamline global supply chains.16
The Web is a growing force in supplier-retailer communications. A number of manufacturers and retailers have set up dedicated sites exclusively to interact with their channel partners. For confidential data exchanges, passwords, and secure encryption technology are utilized. Target Corporation has a very advanced Web site called Partners Online, which took several years to develop and test. At the Web site, vendors can access sales data and inventory reports, accounts payable figures, invoices, and report cards on their performance. There are also manuals and newsletters.
3. Order Processing and Fulfillment
To optimize order processing and fulfillment, many firms now engage in quick response (QR) inventory planning, by which a retailer reduces the amount of inventory it holds by ordering more frequently and in lower quantity. A QR system requires a retailer to have good relationships with suppliers, coordinate shipments, monitor inventory levels closely to avoid stockouts, and regularly communicate with suppliers by electronic data interchange (via the Web or direct PC connections) and other means.
For the retailer, a QR system reduces inventory costs, minimizes the space required for storage, and lets the firm better match orders with market conditions—by replenishing stock more quickly. For the manufacturer, a QR system can also improve inventory turnover and better match supply and demand by giving the vendor the data to track actual sales. These data were less available in the past. In addition, an effective quick response system makes it more unlikely that a retailer would switch suppliers. The most active users of QR are department stores, fullline discount stores, apparel stores, home centers, supermarkets, and drugstores. Among the firms using QR are Dillard’s, Giant Food, Home Depot, Limited Brands, Macy’s, J. C. Penney, Sears, Target Corporation, and Walmart.
A QR system works best in conjunction with floor-ready merchandise, lower minimum order sizes, properly formatted store fixtures, and electronic data interchange (EDI). Floor-ready merchandise refers to items received at the store that are pre-tagged, with a UPC ticket marked with necessary information specified by the retailer such as style, size, type, color, and price (retailer price or suggested retail price or both) and placed on hangers so the items can be put directly on display without any preparation by retail workers. For example, Nordstrom requires that all merchandise displayed on hangers on the selling floor be shipped on floor-ready hangers, packed to prevent wrinkling. Nordstrom’s requirements for floor-ready merchandise differ for its full-line stores versus Nordstrom Rack stores. Suppliers must also be able to receive or transmit an EDI purchase order. Nordstrom charges an expense offset fee for merchandise not in compliance, so merchandise can be moved to the selling floor quickly with minimal handling.17
Quick response also means suppliers need to rethink the minimum order sizes they will accept. Although a minimum order size of 12 for a given size or color was once required by sheet and towel makers, minimum order size is now as low as 2 units. Also, minimum orders for men’s shirts have been reduced from six to as few as two units. The lower order sizes have led some retailers to refixture in-store departments. Previously, fixtures were often set up on the basis of a retailer’s stocking full inventories. Today, the retailer must make a visual impact with smaller inventories.
Electronic data interchange (described in Chapter 8), allows retailers to do QR inventory planning efficiently—via a paperless, computer-to-computer relationship between retailers and vendors. Research suggests that retail prices could be reduced by an average of 10 percent with the industrywide usage of QR and EDI. Lean supply chain management uses Web-based tools to implement collaborative, real-time synchronization of product transfers; exchange vital marketplace information; utilize logistics delivery capabilities for faster responses to consumer demand; and increase profitability for supply chain partners. Rigorously identifying and eliminating waste (all non-necessary activities that do not add value) to continuously improve processes is a vital function in lean supply-chain management. Major retailers such as Costco and Walmart—as well as their suppliers—use lean supply-chain management to drive down costs and pass savings to customers.18
Many firms in the food sector of retailing are using efficient consumer response (ECR) planning, which permits supermarkets to incorporate aspects of quick response inventory planning, electronic data interchange, and logistics planning. Efficient customer response focuses on developing a responsive, consumer-driven system in which manufacturers, brokers, and distributors work together to maximize consumer value and minimize supply chain costs by better transferring data, automating administration processes, and unifying replenishment cycles. Although ECR has enabled supermarkets to cut tens of billions of dollars in distribution costs, applying it has not been easy. Many supermarkets are unwilling to trade their ability to negotiate short-term purchase terms with vendors in return for routine order fulfillment without special deals.19
Retailers are also addressing two other aspects of order processing and fulfillment. (1) With advanced ship notices, retailers that utilize QR and EDI receive an alert when bills of lading are sent electronically as soon as a shipment leaves the vendor. This gives the retailers more time to efficiently receive and allocate merchandise. (2) Because more retailers are buying from multiple suppliers, from multilocation sources, and from overseas, they must better coordinate order placement and fulfillment. Home Depot, among others, has added an import logistics group to coordinate overseas forecasting, ordering, sourcing, and logistics; and Supervalu is addressing the complexity of buying products from so many different countries around the globe.
4. Transportation and Warehousing
Several transportation decisions are necessary:
- How often will merchandise be shipped to the retailer?
- How will small order quantities be handled?
- What shipper will be used (the manufacturer, the retailer, or a third-party specialist)?
- What transportation form will be used? Are multiple forms required (such as manufacturer trucks to retailer warehouses and retailer trucks to individual stores)? See Figure 15-10.
- What are the special considerations for perishables and expensive merchandise?
- How often will special shipping arrangements be necessary (such as rush orders)?
- How are shipping terms negotiated with suppliers?
- What delivery options will be available for the retailer’s customers? This is a critical decision for nonstore retailers, especially those selling through the Web.
Transportation effectiveness is influenced by the caliber of the logistics infrastructure (including access to refrigerated trucks, airports, waterway docking, and superhighways), traffic congestion, parking, and other factors. Retailers operating outside the United States must come to grips with the logistical problems in many foreign countries, where the transportation network and the existence of modern technology may be severely lacking.
Some retailers focus on warehouses as central or regional distribution centers. Products are sent from suppliers to these warehouses, and then allotted and shipped to individual stores. Claire’s Stores has its central buying and store operations offices, as well as its North American distribution center, in Hoffman Estates, Illinois. The distribution facility has over 370,000 square feet of space. Toys “R” Us has separate regional distribution centers for the U.S. stores and its international stores. Most centers are owned; some are leased.
Other retailers, including many supermarket chains, do not rely as much on central or regional warehouses. Instead, they have at least some goods shipped right from suppliers to individual stores through direct store delivery (DSD). This approach works best with retailers that also utilize electronic data interchange. It is a way to move high turnover, high bulk, perishable products from the manufacturer directly to the store. The items most apt to involve DSD (such as beverages, bread, and snack foods) typically have shelf lives of 60 days or less, whereas warehoused items have an average shelf life of one year or more. More than one-quarter of the typical supermarket’s sales are from items with DSD. Manufacturers or suppliers assume costs and responsibility for demand-driven delivery, inventory management, and merchandising; DSD trucks are “mobile warehouses” that reduce retailers’ operating costs.20
The advantages of central warehousing are the efficiency in transportation and storage, mechanized processing of goods, improved security, efficient merchandise marking, ease of returns, and coordinated merchandise flow. Key disadvantages are the excessive centralized control, extra handling of perishables, high costs for small retailers, and potential ordering delays. Centralized warehousing may also reduce the capability of QR systems by adding another step.
Direct store delivery offers retailers the opportunity to grow, increase stock turnover, improve cash flow, and drive higher volumes and margins. Suppliers provide value-added services in the form of in-store forecasting, shelf-sensing, demand-driven replenishment, trade promotions, and co-op funds. A direct-to-store model can help mitigate risks for high-value goods such as jewelry that are challenged with security issues and product theft. However, DSD delivery trucks cannot be used for products that require pallet display execution or for delivery to small-format convenience stores. Tight control of delivery times and customer service to ensure there are no stock-outs require a lot of scheduling precision, which means that all DSD channel members must have realtime access to all relevant interactions, information, and applications— from product availability, to scheduling, to sales data, to demand-generating activities. Determining the optimal routes for deliveries to multiple retail outlets can be complicated. There are many variables to consider, such as traffic patterns, speed limits, distance, and time calculations.21
5. Customer Transactions and Customer Service
Retailers must plan for outbound logistics (as well as inbound logistics): completing transactions by turning over merchandise to customers. This can be as simple as having a shopper take an item from a display area to the checkout counter or driving his or her car to a loading area. It can also be as complex as concluding a Web transaction that entails shipments from multiple vendors to the customer. A shopper’s purchase of a computer, a tablet, and a refrigerator from Rakuten.com may result in three separate shipments. That is why UPS, Federal Express, and others are doing more home deliveries of packages. They can readily handle the diversity of shipping requests that retailers often cannot.
Even basic deliveries can have a breakdown. Think of the local pharmacy whose high school delivery person fails to come to work one day—or the pizzeria that gets no customer orders between 2:00 P.M. and 5:00 P.M. and 25 delivery orders between 5:00 P.M. and 7:00 P.M.
There are considerable differences between store-based and nonstore retailers. Most retail stores know that the customer wants to take the purchase or pick it up when it is ready (such as a new car). All direct marketers, including Web retailers, are responsible for ensuring that products are delivered to the shopper’s door or another convenient nearby location.
Customer service expectations are affected by logistical effectiveness. That is why Amazon .com emphasizes excellent logistics and fulfills orders at different levels of service to its direct customers (Prime versus regular) to meet its goal of delighting every customer. In the United States, its Fulfillment by Amazon service provides storage, packing, and shipping for independent merchants selling products on Amazon’s Web site. In 2015, Amazon opened up four university brick-and-mortar bookstores and started operating 43 urban U.S. distribution facilities (Prime Now hubs and Fresh Delivery stations) to enable click-to-door delivery in 60 minutes or less. International fulfillment is outsourced or cosourced through delivery networks of third-party logistics firms and digital delivery. Amazon even owns French package delivery service Colis Prive to serve European customers. Its proposed Global Supply Chain initiative will set up a global delivery network controlling the flow of goods from factories in China and India to customer doorsteps in the United States and Europe.22
Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.