Retail today isn’t for the faint-hearted. A recent quote from business magnate and investor Warren Buffett is quite telling, “I think retailing is just too tough for me, just generally.”

The sector is undergoing profound transformation and only time will tell who the winners will be. In any case, it is evident that retailers no longer can afford to sustain inefficient operations. The ability to keep operational costs in check is essential for profitability and even survival.

Retail’s Three Operational Costs

In retail, three kinds of costs dominate: 1) space, 2) staff, and 3) stock. The relative importance of each cost area varies by retail segment and company. Proportionally, apparel retailers typically have the largest cost of space (real estate and leases), while grocery retailers have the largest staff costs (store personnel), and specialty retailers fall somewhere in between.

Improvements in each of these cost areas – space, staff and stock – can have a significant impact on the bottom line. Consequently, you can be sure that the merchandising, store operations, and supply chain departments at any given retailer are constantly honing their processes for improved efficiency.

Building a Unified Planning Process

Something that is routinely overlooked, however, are the strong links between retail’s core processes. A decision made by one department may substantially augment or lessen the efficiency of the others. Failing to take these inter-dependencies into account gives rise to sub-optimization, which has the potential to seriously hurt any retailer’s business.

My own background is in supply chain, from which I have encountered countless examples of superb optimization of the wrong things. A classic example is highly efficient order picking in distribution centers resulting in roll cages and pallets containing a random mix of products to be displayed in totally different parts of the stores. In this case, efficient warehouse operations are attained at the expense of significantly increased shelving costs in hundreds or thousands of stores, leading to higher overall costs.

As I see it, the biggest opportunity for increased operational efficiency in retail lies in building a unified planning process spanning retail’s core functions: merchandising, supply chain, and store operations. Don’t get me wrong, I’m not saying that the opportunities for improvement within each of the departments are exhausted, far from it. My point is that by optimizing the processes in conjunction, the impact of improvements can be multiplied.

Here are some examples from our customers:

  • In-store shelving costs reduced by 20 % through changes in replenishment planning. As fresh products require frequent deliveries, this grocery retailer’s trucks go from the distribution center to most of its stores on a daily basis. Despite the opportunity for next-day delivery in almost all product categories, the retailer’s replenishment planning aims to concentrate shipments of center-store products, by aisle, to specific days. This results in less frequent and much more consolidated deliveries of products displayed in the same aisle, significantly increasing 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 retailer’s total cost of transportation from distribution center to stores.
  • Optimized planograms enabling an 80 % reduction in out-of-stocks. A drug store retailer has found that optimizing shelf space based on each store’s local demand and replenishment cycles makes it possible for almost all incoming deliveries to be placed directly on the shelves. This minimizes the need for backroom storage and nearly eliminates the risk of stock-outs caused by goods sitting in the backroom rather than made available to customers out on the shop floor. Naturally, the efficiency of shelf replenishment also increases as the number of trips between backroom and store floor are minimized.
  • Store labor costs reduced by 12 % by taking advantage of forecasts created by the supply chain department. Traditionally, store workforce planning has been based on sales budgets or sales forecasts. A large retailer of fast moving consumer goods has found this approach insufficient. Instead, it utilizes forecasted customer footfall to estimate the workload at the checkouts in combination with forecasted incoming deliveries per store and per day for estimating shelving workload. This means that the two most important workload drivers in retail are accounted for, making it possible to create rosters that meet the daily workload much more accurately. In addition to efficiency gains, more level workloads and better planned work schedules increase employee satisfaction.

Systems Support and Organizational Changes are Key

Why then is sub-optimization so prevalent despite the obvious benefits of taking a more holistic view of planning?

A major impediment has been the lack of systems support. This obstacle is, however, quickly becoming overcome through the introduction of flexible planning solutions that can draw on a variety of planning information to form a coherent picture of the future. This, in combination with unprecedented computational power, makes it possible to gain an extremely detailed view of the impact of plans from many different perspectives, enabling cross-functional optimization.

The second, and in my mind, more important challenge is organizational. Unified planning requires stepping out of the retail planning silos and replacing territorial fights for status and power with a shared understanding of strategic goals and the most important means of getting there. Strong leadership, clear prioritization, and analytical skills are needed to master the complexity of optimizing the whole rather than the parts.

It is a hard and big change. Yet, I am convinced that it will happen. Competition is tough, market growth is limited, and operational excellence is required to make a profit. For many retailers, it will simply be a requirement to stay in the game.

Mikko Kärkkäinen

Mikko Kärkkäinen

Group CEO, D.Sc. (Tech.)

Phone+44 7802 658 237

Mikko Kärkkäinen is the Group CEO at RELEX and the author of more than thirty papers on logistics and supply chain issues delivered at conferences or published in leading magazines.

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