How to create a Goldilocks supply chain

Predicting demand and matching supply is fraught with difficulties, but technology may be able to help


Creat the perfect supply chain

In retail, having a balanced supply chain is as important as hiring the right people and stocking products customers like. But meeting demand with supply precisely is probably the trickiest task of the three.

A supply chain, unlike the physical chain upon which the metaphor is based, is not a consistent set of bonds linked together. It is fluid and volatile, more like a wormhole than a chain in practical terms. Supply chains flex on demand from capricious end-consumers.

In broad terms this has always been the case, but two things have made a big difference in recent years. One is customer expectations, which have been stoked by higher-quality, cheaper products that can be ordered one hour and be in their hands the next.

The other is the technology itself, which affords businesses the opportunity to shift stock in ever-shorter periods of time. A bonus third reason is social media as Twitter storms can stoke demand for items overnight where there was none before.

Projecting the future ebb and flow of demand is, therefore, a more vital ingredient of organisational success than ever, yet it is also getting harder to achieve with the old finger-in-the-air projections.

“Demand planning for retailers has become significantly more complicated as the number of influencing factors increases,” says Gavin Masters, head of e-commerce consulting at Maginus, providers of Fortnum & Mason’s e-commerce and back-office systems.

“Very few businesses have an accurate enough frame of reference from which to predict upcoming demand. All it takes is a small online retailer to undercut your product and suddenly demand drops significantly,” he says.

“Alternatively, panic on social networks about the availability of a product can send demand through the roof, leading to an unexpected rush and stock shortages.”

Factors ranging from celebrity endorsements to the weather can drive sales up or down, while seasonal peaks in retail shopping are based on shifting sands blown about by economic winds.

Panic on social networks about the availability of a product can send demand through the roof

Lucy Larkin, managing director at Accenture’s UK retail practice, says judging seasonal peaks accurately is tricky. “We saw this a few months ago when a couple of high street clothing chains cut their profit forecasts due to warmer-than-expected weather,” she says.

“Shopping peaks may also occur out of seasonal cycles. For instance, Accenture research shows that in 2014 57 per cent of UK consumers had already started or planned to start their Christmas shopping by mid-September.”

Making the right bets is an unseen ingredient in a company’s success. It’s not just about good brands and enticing products; meeting demand with supply is vital as well. Run out of stock, and lose trade and customer loyalty; order too much and forsake profit margin in the sales.

According to Ms Larkin, successful shops prioritise products that their customers love the most, but also understand that educated guesswork about the future cannot be 100 per cent accurate, so setting up mechanisms to react quickly when the market changes is important too.

FIRING SILVER BULLETS

One silver bullet, if such a thing exists in this area, is technology. Cook, a chain of shops selling high-quality meals with a home-cooked vibe, is growing quickly and, more than most businesses, must predict increased demand based on new interest as well as all the other factors.

Jeff Turner, head of IT and finance at Cook, says: “One of the most difficult things for Cook in this area is that we have to make what we sell, all from fresh ingredients. So we want to make sure that we’re making the correct amounts to cater for demand.

“We launched a new online click-and-collect service in the summer, which changed the way our customers can shop with us. The retail world is definitely becoming more multichannel which poses a different challenge to all retailers.

“Making sure there is enough stock in the right place at the right time becomes even more critical, which meant that we had to have complete visibility of what was going on during our busy Christmas period.”

One silver bullet, if such a thing exists in this area, is technology

The business uses stock tracking software called QlikView, which is one of a number of software applications offering real-time stock information. Mr Turner says technology has played a major part in helping the business move quickly and it experienced a 10 per cent uplift in sales over Christmas compared with 2013.

Another business utilising technology to make clearer decisions is ethical cosmetics brand Lush. Scott Silverthorn, head of reporting and data services, says freshness is an important aspect of the product line, so getting orders wrong could mean money down the drain.

“Our business is based on the freshness of our products and we deliberately don’t package them due to environmental reasons. As this means there is the potential for a lot of waste, we need to keep as tight a rein as possible on our physical stock,” he says.

“So we try our best to order the right quantities of materials that we need to make the right amount of stock for the levels being sold in stores, while ensuring that no products go out of date.”

Using data in a smart way and knowing your customer’s likes and dislikes are the two stand-out ways of creating a “Goldilocks supply chain”. Organisations that strike the balance will reap benefits in the form of efficient sales and profits unfettered by waste.

Such was the carnage caused by Black Friday that major retailers and pundits are asking whether it has a shelf life here in the UK. But consumer sentiment is a force no shop can resist, so retailers better roll up their sleeves for another day of carnage in 2015.

Case Study

BLACK FRIDAY: GOOD OR BAD?

Black Friday

Black Friday is a new thing for the UK, yet shoppers across the country have embraced the day of retail insanity in a way no one could have predicted. Scenes of grown-ups tussling over flat-screen TVs like hyenas over scraps of meat was shocking and perhaps a little depressing to watch.

Industry experts say it is great for consumers, who can now get their discounted items before the Christmas period, let alone the January sales, get into full swing. But they have been left scratching their heads over the value of Black Friday to retailers.

For a start, it drops a discount bomb right in the middle of the festive buying spree, when retailers are said to make their profits for the whole year. It therefore messes with a gentle equilibrium that has been nurtured by the industry for decades.

John Lewis managing director Andy Street expressed his reservation with the madness, which lumps enormous stress upon retailers’ back-end and delivery systems during an already busy period. Worse, it precedes related shopping days, such as Cyber Monday and Small Business Saturday, also designed to entice consumers to spend big in small chunks of time.

“We’ve got to ask if it’s right to concentrate trade so much in that one period. My personal hope is that this is the high water mark for Black Friday. I don’t think we can put the genie back in the bottle, but do we need to stoke that fire anymore? I personally hope not,” he says.

Jason Shorrock, retail strategy director at JDA, says Black Friday was a poisoned chalice for many retailers, particularly smaller ones that tried to bask in the glow of the occasion, but were burnt by insufficient back-room capabilities.

It messes with a gentle equilibrium that has been nurtured by the industry for decades

“To guarantee future success, retailers must execute home delivery and ‘collect in store’ operations faultlessly, in order to win customers’ Christmas budget during the holiday period. Failure to do so will put off customers who don’t want to risk their Christmas deliveries with a retailer that has already let them down,” he says.

The sheer volatility of Black Friday – there for everyone to see – has hit supply chains and sent those in charge of predicting demand into a tizzy. Tom Cropper, chief executive of Challenge Group, says these problems went right down the supply chain.

“Due to the high demand in December, retailers have a difficulty in providing reliable forecasts around the amount of stock required,” he says. “Understocking can have significant consequences on sales, forcing logistics firms to take on additional work under considerable time constraints.”