No half measures!
How can we manage to control two value chains perfectly while meeting customer expectations?
Why are many companies unable to adequately differentiate their value chains?
Actually, it goes without saying that retailers should be able to differentiate their planning arrangements, product development, procurement and merchandise management.
Surely the obvious thing to do is to purchase low-risk goods that are more oriented towards the basics early on and at low cost, while deciding on more fashionable articles at a later date and including them closer to or during the actual season.
But a glance at the real situation clearly shows that most value chains are, in the final analysis, neither long nor short but somewhere in between, and that the potential benefits (gross margin, turnover, efficiency) fall by the wayside. Most people look for the reasons for this in malfunctioning processes. It’s certainly the case that some of the answers are to be found here, but the real causes should be looked for much further upstream – specifically in the underlying conditions, which are often inadequately clarified.
The matter always starts with the basic questions that need to be answered over again every season:
- How many and which articles do we want to decide on at quite an early stage? What risks do we face if the current season/month is nowhere near to being on target and we don’t know anything about the season’s final inventory? What arrangements should we make for the planning process and the OTB on a cross-seasonal basis?
- For what categories of merchandise does it really make sense to develop, procure and integrate relatively large quantities in the short term? Should they be genuinely new fashion trends? Or reorders of best-selling articles? Won’t we be too boring if we stock the same goods for longer periods just because the numbers are positive?
- Are we adequately able to recognize good and reliable new trends for ourselves, and do the higher costs really result in better turnover and lower write-downs? Are the shortened selling periods sufficient for us?
- How do we concentrate quantities and determine basic materials? Are we confident in making capacity promises and reserving input materials? Are we attractive to suppliers or do we pay too much for our relatively stringent requirements?
And, with all this inadequately settled, the outcome is often a compromise. As this has the best prospects of succeeding in terms of processes and because everyone can somehow agree on it, there is now an “average speed”. But this path is neither cheap nor flexible – and not very convincing to the customer.
How can we create the right underlying conditions?
Four keys to success
1. A clear-cut strategic superstructure
“Clear-cut strategic superstructure” is something that doesn’t really sound new at the moment and is actually always present – or so one would think. Our experience, however, shows that a “well-documented strategy” often doesn’t provide enough focus on action when it is broken down into the various functions and processes. The process of discussion and argument that takes place is inadequate. Consequently, you should conduct a critical examination:
- Are the vision and strategy truly kept firmly in mind? By everyone?
- Have systematic conclusions been drawn from them with regard to operational requirements?
- Are these logical and consistent with one another?
- What conflicting goals exist and how are they dealt with?
2. Customer expectations should be systematically linked with assortment and POS strategies
The customer has a clear-cut motivation for making purchases. Each one of these
“purchasing mindsets” has to be optimally addressed and poses specific requirements to be met by the value chain.
Convenience: meet the customer’s needs swiftly, simply and without complications
Even quite fashion-oriented customer target groups make purposeful needs-related purchases in which emotional states of mind play a minor role. The customer
looks for an easy-to-understand offering, from which he or she makes a rapid selection.
Availability is more important than variety. It is not without reason that many retailers actually call this their “bread and butter” assortment. The eCom channel is
predestined for this – Amazon sets the pace when it comes to “convenience”. Competitive differentiation is not easy.
Expertise: raise sales expectations through higher standards of excellence
It’s all about core competencies and strengths in the assortment, which must be realised with a high standard of excellence. The customer has to be able to perceive these things immediately: strong messages about the assortment and trends, product benefits, presentation of goods, breadth and depth of the product offering. The claim regarding expertise is usually taken for granted when it comes to relatively high-end categories, but expertise is just as necessary and achievable lower down the scale. Ernsting’s family, for instance, is certainly a business model with a high degree of expertise in the children’s clothing field. Online distributors establish expertise via the breadth of their product offerings (as they do not have limited floor space).
Add-ons: surprise the customer with intelligent additional items
Many customers are open to spontaneous purchases and look for small inspirations and surprises. Retailers who are good at displaying “easy-to-shop” product assortments on the sales floor and can combine these with convenience create additional sales and often even higher purchase frequencies. IKEA, Lidl and even Tchibo provide examples of good add-on management. The online distributors do the same with “Customers have also bought ...” and systematic “Deals of the day, week, month ...”
Seduction: cultivate the supreme discipline of retail
The idea here is to give customers a real surprise within a well staged setting (“Wow, I never thought they could pull that off ...”) and put them into an “I want that!” buying mood. Here, a new and courageous approach is to be tested – whether we are talking about assortment content, price categories, add-on benefits, or the presentation of goods. In this field, genuine differentiation factors are created – ones that are not only available to the fast-movers like Zara.
The long-term value of the strategy soon becomes apparent after these four sources of purchase motivation are applied to assortments and services. One result is usually an unprecedented level of transparency – often coupled with a need for action. It suddenly comes to light that potential convenience product groups are far too broad, yet have gaps in availability, or that product groups requiring expertise cannot be developed at all on the sales floor. Or the controlling department “kills” seduction initiatives instantly by establishing the same KPI requirements everywhere.
And even more important: it is precisely this examination of customers’ purchasing mindsets that reveals the demands to be made on the focus of the various value chains in the business model. The greater the significance of convenience, the more long-term supply chains have to safeguard prices and availability. In terms of expertise, and in particular “seduction”, considerably faster product development and procurement processes are a must. The goal is maximum possible clarity regarding the demands indicated by customer needs, with the goal of clearly differentiating and systematically aligning the various value chains.
3. Giving the season calendars the right focus
When the strategy is established, in harmony with assortment, floor space and marketing plans, the next step is to bring time schedules and calendars into alignment.
A simple comparison of the various calendars is enough to show the weak points. The time schedules are subject to different interests, responsibilities, and deadlines. That means: too little synchronization is carried out or it is carried out at such a time that all that remains is “to make the best of it”.
Consequently: an overriding calendar has to be established as a point of departure for setting the other milestones. We find the term “season-floor space roadmap” suitable. It should provide answers to the following questions:
- What do I wish to be in the eyes of the customer at all times?
- With which merchandise themes can we best achieve this?
- What pace does this result in?
- How can marketing and POS management support this?
- What does this now mean when it comes to incoming goods and the retroactively-calculated logistics flow line?
- How do we take into account different operating times with regard to incoming goods / markdown planning?
4. Supply chain synchronization
Only now, after the cornerstones have been defined according to the customer and the timelines for development and operational steps, can we draw reliable conclusions regarding the consequences and requirements for sourcing, procurement, QM and logistics to efficiently implement the two value chains:
Completely optimized long-term procurement
Not only do absolute initial price levels and articles with a high degree of comparability
require a stable development and supply-chain process very early on (as a general rule, 1 year in advance), but an approach that pulls out all the possible stops: Access to cheap
production capacities in low-wage countries and a range of suppliers that have to be given additional security and volumes in order to obtain the most favourable prices – e.g. in the form of
- Low-season placement.
- Uniform utilization of entire conveyor belts or production facilities.
- Support in the financing and procurement of raw materials by reserving materials.
- Reduced complexity, e.g. via a reduction in the numbers of different materials and types of equipment.
- Support and heightened awareness for CSR and quality management.
Flexible short-term procurement
If, on the other hand, you put your faith completely in prompt decision-making and intra-seasonal procurement (< 6 weeks), you need different exceptional process capacities:
- A high degree of in-house expertise for the purpose of very rapidly and creatively developing the right products, also in technical respects.
- Highly effective sampling procedures, usually dispensing with physical samples.
- A close partnership with a limited number of suppliers who are prepared to reserve production capacities for last-minute orders.
- Reduced complexity, as a rule based on the use of closely defined basic materials.
- Similarly, reserving materials so that style and colour only need to be determined at this stage.
- OTB management and appropriate instruments for reducing and disposing of stock to avoid derailing if the season goes off track.
- Fast-track logistics chains and branch processes to avoid losing valuable time again in handling processes.
A “no half measures” policy means being resolute. Starting with the customer, and systematically defining and perfecting the strategy and business model. Applying concepts within horizontal hierarchies and simple processes to facilitate rapid decision-making. The ability to communicate all this consistently and to implement it in the various functions and product categories. Every employee must be able and willing to support the process, and be certain -+of receiving management support, even in difficult phases.
Is a partner and corporate development expert in Team Retail Excellence. He is a process and purchasing expert for retailers and brands. In his view, the linkup of customer requirements with the supply chain offers great potential for companies.