Logistics in Retail - Dissertation Example

Logistics in Retail Name Institution Date Table of Contents Table of Contents 2 2.0 Supply Chain and Order Practices 3 2.1 Centralized Warehousing 3 2.2 Cross-docking 3 2.3 Just-in-Time Inventory 4 2.4 Barcodes for inventory management 4 3.0 How to Lower Prices without compromising quality 4 4.0 Supply Chain Service Outcomes 4 4.1 Spatial convenience 4 4.2 Lot size 5 4.3 Waiting time 5 4.4 Product variety 5 5.0 Logistics Challenge 5 5.1 Holding excess stock 5 5.2 Low inventory turnover 6 5.3 Inefficient inventory tracking 6 5.4 Poor basis for Economics of scale 6 6.0 Recommendations for Food Town 6 6.1 Improvement of Store Planning 6 6.2 Adopting Just-in-time inventory for some products 6 6.3 Adopting Barcode inventory management System 6 6.4 Strategic Direction for Food Town 7 7.0 Conclusion 7 8.0 References 8 1.0 Introduction Food Town is a small independent retailer operating in an inner suburb of Melbourne. The retailer has operated profitably for the last 20 years despite questionable supply chain practices. For decades, Food Town main competitor has been a large retailer located 10 minutes away. High margins mask the costly, inefficient and ineffective supply chain practices used by Food Town. Food Town uses a manual inventory management system where the owner/manager has to physically inspect the inventory to make new orders. The store also sets aside some safety stock to guard against stock outages. However, these practices mean that inventory occupies significant space in the store and there is limited shopping space in the establishment. In effect, the store is only able to offer one product per category, and has limited product offerings. The level of supply chain customer services delivered by Food Town is also very low compared to other retailers. However, Food Town has never had to worry about customer service levels or inventory inefficiencies as it was able to sell its products at high prices and cover for the inefficiencies. Food Town also shows little concern to customer service as it is the only retailer in the immediate neighborhood. Unfortunately, a new retailer is set to open several blocks from Food Town, and thus pressure to become more competitive has increased. The new retailer will be using inventory and purchasing order principles that ensure minimization of inventory management costs, and better performance in supply chain service outputs. Some of the practices that will be used by the new supplier include Just-in-time inventory, centralized warehousing with cross-docking facilities and barcodes for inventory management. The aim of this report is to provide the manager/owner of Food town with supply chain knowledge that can assist him enhance the competitiveness of Food Town against the new competitor. The report starts by defining and explaining the supply and order principles used by the new retailer. Secondly, it suggests the best method for Food Town to lower its prices without compromising product quality. Finally, the report provides recommendations on the practices that Food Town can adopt to become a more competitive retailer. 2.0 Supply Chain and Order Practices 2.1 Centralized Warehousing A centralized warehouse is where several retail points or stores use the same distribution point. The centralized warehouse enables the whole supply chain to minimize cost of distributing supplies to the different stores that make-up the supply system (McCubbrey 2009). Centralized warehouses can be used by small independent stores like Food Town in partnership with other smaller retailers. 2.2 Cross-docking Cross-docking is a logistics practice used in warehouse that involves unloading materials on to outgoing cars, rail cars, trucks and trailers directly from incoming railroad cars or trailers (Haniefuddin, Shamshuddin and Baba 2013). In many cases, cross-docking avoids the cost of storing products before delivery to the store. The purpose of cross-docking is to sort materials according to destination, combine materials to be transported by a single outbound vehicle, and change the type of transport. Cross-docking is a common logistics strategy used by Walmart. Walmart is able to deliver stock to its stores rapidly while minimizing storage costs. According to to Bloomberg, LeMay and Hanna (2002), the goods of retailers that use cross-docking spend less than 12 hours in the warehouse. Cross-docking thus allows for the reduction of lead times and inventory costs. 2.3 Just-in-Time Inventory Just-in-Time (JIT) is an inventory management approach where new materials are acquired according to demand. The aim of JIT is to ensure that the business does not hold excess inventory and thus pay for the burden of managing the excess inventory (Haniefuddin, Shamshuddin and Baba 2013). Retailers engaged in JIT only acquire materials when customers demand them. JIT is the opposite of Food Town’s practice of keeping safety stock and enables the retailer to save on storage space and costs. According Fernie and Sparks (2009), the use of Just-in-time inventory has several advantages for retailers that use this strategy. JIT eliminates the cost of storage, stock movement and organization. In addition, retailers that use JIT are less likely to be faced by the problem of expired or wasted products. However, JIT is a practice that leaves the retailer exposed to glitches in the supply system. A glitch could see the retailer experience a shortage of stock. For example, transport problems or erratic weather could prevent shipments from reaching the store’s shelves. 2.4 Barcodes for inventory management Barcodes for inventory management enable the automated tracking of inventory levels. Every item in the inventory is assigned a bar code and item scanned from the point of sale are automatically deducted from inventory (McCubbrey 2009). With barcodes, the retail chain can gain a real time view of inventory levels. Barcode inventory management systems also enable for the automatic re-ordering of stock that is running low. 3.0 How to Lower Prices without compromising quality The best approach to use to lower the prices of products without compromising services levels is to lower the cost of inventory management. In this case study, Food Town’s cost of inventory management is much higher than that of the competing retailer (Haniefuddin, Shamshuddin and Baba 2013). Food Town can adopt some of the practices like Just-in-Time inventory to reduce the amount of space and the cost of managing its safety stock. 4.0 Supply Chain Service Outcomes 4.1 Spatial convenience Spatial convenience is a supply chain service outcome that is concerned with the time and effort needed to satisfy a customer’s consumption needs. Spatial convenience is best described by the level of centralization or decentralization of shopping activities (McCubbrey 2009). Customers prefer to shop within one location for all their shopping needs. A retailer provides spatial convenience is able to cater for all the needs of the customer in one location. The new retailer which is 7 times larger than Food Town will obviously provide more spatial convenience to its customers. It is obvious that the new store will have an array of product thus reducing the time and effort needed to shop for different products. 4.2 Lot size Lot size is another important output of the supply chain service that affects the prices of products provided to customers. Lot size is concerned with the number of products that can be provided at the same cost (Haniefuddin, Shamshuddin and Baba 2013). In this case, Food Town is able to provide more products within the same lot size. Food Town holds inventory longer and thus can have more products supplied at the same supply line than the larger retailer. 4.3 Waiting time Waiting time is another important supply chain service output that is important to customers. Waiting time is concerned with the amount of time it takes for a product to be delivered to the customer after an order is made (McCubbrey 2009). Retailers that offer lower lead times are considered to have better supply chain service. The new retailer is likely to have lower waiting time as automatic stock replenishment is in place using the barcode inventory management system. In contrast, Food Town relies on a manual stock replenishment system which is error-prone and slow. Some products are likely to run out as manual inventory management is challenging. 4.4 Product variety Product variety is also an important supply chain service output. Product variety is concerned with the number of product variants that are available in a single marketplace (Haniefuddin, Shamshuddin and Baba 2013). Contemporary consumers prefer to shop in stores where they can get more product choices and lines. The new retailer will offer a wide range of products as seen by the variety of products per Stock keeping unit. In contrast, Food Town only has one product variety per stock keeping unit. Thus, Food Town performs poorly in terms of product variety when compared to the new retailer. 5.0 Logistics Challenge 5.1 Holding excess stock One of the biggest logistics problems facing Food Town is the holding of excess stock in inventory. Food Town holds safety stock for all its stock keeping units (McCubbrey 2009). The excess stock occupies a lot of space in the small warehouse used by the retailer. The new retailer is able to use the same warehouse space as Food Town but offer more product variety than Food Town. The cost of storage of the excess stock accounts for most of the inventory costs of Food Town’s operations. Food Town is also confronted with the problem of wastage as some stock exceeds it best by date while still in inventory. 5.2 Low inventory turnover The inventory at Food Town moves very slow. Unfortunately, holding inventory for long means the cost of storage also increases with increase in storage time. 5.3 Inefficient inventory tracking Food Town uses a manual inventory tracking system which is extremely inefficient. In many cases, the management may not be even aware when some items are running out of stock. According to Bloomberg, LeMay and Hanna (2002), David uses manual inspection to find out the items that need to be restocked at the store. 5.4 Poor basis for Economics of scale Food Town cannot be able to take advantage of economies of scale that come with ordering products in bulk. Food Town only order stock at the minimum quantities possible. This practice of ordering stock in small quantities mean that Food Town cannot take advantage of economies of scale even in situation where the company order some item in bulk 6.0 Recommendations for Food Town 6.1 Improvement of Store Planning Food Town should increase the amount of space available for shoppers at the stores. Store planning will open the way for enhancement of spatial convenience, and product variety service outputs (McCubbrey 2009). Currently, the store is equally divided into a storage area and shopping area. Consequently, the amount of shopping space is severely constricted forcing Food Town to offer only one product variant per product category. The product variety at Food Town is also very small placing the retailer at a disadvantage when competing with large retailers like the store that set to open soon in the neighborhood. Food Town should increase the amount of shopping space at the expense of storage space to enhance the spatial convenience and product variety outcomes. 6.2 Adopting Just-in-time inventory for some products Just-in-time inventory will help Food Town overcome some of the logistics challenges that increase the stores overheads. However, Food Town should adopt Just-in-time inventory for the products that are most suited for the supply chain practice. For example, perishable products like fruits, confectionaries, and meat should be acquired using the Just-in-time inventory system. 6.3 Adopting Barcode inventory management System Food Town can benefit from using a barcode based inventory management system that will help to automate inventory management in the organization. With the barcode inventory management, the retailer will scan each item that enters the warehouse and subtract it from inventory once the product passes through the point of sale. A barcode based inventory management system will avail the retailer with a real time view of the inventory and enable for automatic reordering of items that are below reorder levels. 6.4 Strategic Direction for Food Town Food Town needs to enter into supermarket chain as a Franchisee in order to be able to apply some of the supply chain practices explored in the report (McCubbrey 2009). Food Town can become a Franchisee of supermarket chains such as Park n Shop in order to be able to make use of purchasing economies of scale and reduce costs through strategies such as centralized warehousing. 7.0 Conclusion Food town needs to urgently change its order purchasing and inventory management practices. When the new retailer starts operating in the neighborhood, Food Town will have no choice but to become more competitive. The retailer will no longer benefit from high margins as it will not be able to offer products at the usual high prices. Food Town needs to adopt order purchasing and inventory practices that are efficient and minimize the cost of getting its products into the market. The changes need to be undertaken urgently before the new competitor enters the market. 8.0 References Bloomberg, D.J., LeMay, S., and Hanna, J.B., 2002.“Logistics”. Prentice-Hall, Upper Saddle River, New Jersey. Fernie, J. and Sparks, L., 2009. Logistics and retail management: emerging issues and new challenges in the retail supply chain. Kogan Page Publishers. Haniefuddin, S, Shamshuddin, S and Baba, S.K. 2013. Essentials of Logistics and Supply Chain Management. LPH international McCubbrey, D 2009. Business Fundamentals. Equity LLC Read More