Retail today isn’t for the faint of heart. Even Warren Buffet, a business magnate and investor renown the world over, once admitted “I think retailing is just too tough for me, just generally.”
Even before COVID-19, the retail sector was already undergoing a rapid transformation that has only accelerated over the course of the last year. In that time, one thing has become abundantly clear as retailers struggled to meet changing consumer demands: they can no longer afford to sustain inefficient operations.
Going forward, retailers’ ability to keep operational costs in check is absolutely essential for profitability and survival.
Retail’s Three Operational Costs
Three types of cost—space, staff, and stock— dominate retail, though they vary in relative importance depending on retail segment and company. For example, apparel retailers typically have the largest space costs (real estate and leases), while grocers have the largest staff costs (store personnel) and specialty retailers fall somewhere in between.
Improvements to each of these cost areas has a significant bottom line impact. At any given retailer, teams devoted to merchandising, store operations, and supply chain planning continuously hone their processes to improve efficiency and outcomes.
Building a Unified Planning Process
Despite this work, retailers routinely overlook the strong links between these core processes in retail planning. After all, a decision made on one team has the potential to substantially enhance or lessen the other teams’ efficiency. A retailer who ignores these interdependencies is settling for sub-optimization, which holds the potential to seriously damage any retailer’s business.
My own background is in supply chain, where I’ve seen countless examples of superb optimization—of the wrong things. A classic example is when highly efficient order picking in distribution centers leads to roll cages and pallets containing a random mix of products to be shelved in completely different parts of the store. They’ve attained efficient warehouse operations, but at significant expense: increased shelving costs in hundreds or thousands of stores, ultimately leading to higher overall costs at the end of the day.
As I see it, the biggest opportunity to increase operational efficiency lies in unifying the planning process that span retail’s core functions: merchandising, supply chain, and store operations. Don’t get me wrong—I’m not saying that retailers have exhausted the opportunities for improvement within each department. Far from it! My point is that by optimizing these processes together, we effectively multiply the impact of each improvement we make.
So what does unified retail planning actually look like in practice? This short video presents a great demonstration. We’ve seen this type of unified retail planning deliver some incredibly successful outcomes for our customers:
20% reduction in in-store shelving costs through changes in replenishment planning. Because fresh products require frequent deliveries, one of our grocery customers’ trucks travel daily from the DC to most of its stores. While they are capable of next-day delivery in almost all product categories, the retailer’s replenishment planning instead draws on store-level space data to concentrate ambient product deliveries by aisle on specific days. This results in less frequent, more consolidated deliveries for products displayed in the same aisle, significantly increasing their shelving efficiency. As shelving is one of the most time-consuming tasks in supermarkets, the cost savings are huge—in this case, larger than the total transportation cost from the retailer’s distribution center to their stores.
80% reduction in stock-outs through planogram optimization. A drugstore retail customer found that by optimizing shelf space based on each store’s local demand and replenishment cycles, they were able to place almost all incoming deliveries directly onto their shelves. This kind of “one-touch replenishment” minimizes the need for backroom storage and nearly eliminates the risk of stock-outs that can occur when goods sit in a backroom while customers find empty shelves on the sales floor. Naturally, the efficiency of shelf replenishment also increases as the number of trips between backroom and store floor are minimized.
6–10% reduction in store labor costs by taking advantage of forecasts created by the supply chain department. Traditional store workforce planning is often based on sales budgets or forecasts, but our customer, a large retailer of fast-moving consumer goods, found this approach insufficient. They now use customer footfall forecasts to estimate workload at their cash registers, then combine that with shelving workload estimates that are based on incoming delivery forecasts by store and day. By accounting for checkout and shelving—the two most important workload drivers in retail stores—they are able to create shift schedules that meet more accurately match the overall daily workload at each store. Beyond the obvious efficiency gains, these level workloads and well-planned work schedules have also increased employee satisfaction.
Systems Support and Organizational Changes Are Key
The benefits of a holistic approach to retail planning seem obvious so far—so why is sub-optimization so prevalent?
A lack of system support remains a major impediment to unified planning success, even for the largest, most sophisticated of retailers. However, today’s retailers have access to a new generation of flexible planning solutions that can help them quickly overcome this obstacle.
Modern solutions make use of unprecedented computational power, drawing from a comprehensive range of planning information to form a coherent, holistic picture of the future. By bringing data and plans from different departments into a single, centralized solution, retailers can generate a detailed view of how a plan developed in one department will impact other plans throughout their business, enabling cross-functional optimization that serves the whole company’s best interests.
A second—and in my mind, more important— impediment is organizational in nature. Unified planning requires people to step out of their retail planning silos. It requires teams to replace territorial fights for status and influence with a shared understanding of strategic goals and the means of getting there. To master the complexity of optimizing the whole business rather than its component parts, you need decisive leadership, clear prioritization, and strong analytical skills.
It’s a big, difficult change—but I’m convinced that unified optimization is the future of retail. Competition is tough, market growth is limited, and operational excellence is absolutely necessary for profitability. For many retailers, unified planning will prove to be a requirement just to stay in the game.