Supply Chain in Retail Industry - Literature review Example

________________________ Number. ___________________________________ Module Assignment – Lean Thinking. Module BSP 546 Submission date. 10.00am Friday 20th June 2014 The Essay Title. Lean or Agile? Word Count: 2740 Lecturer. Owen James. Lean or Agile? Introduction Retailing businesses are facing significant challenges of the 21st century as a result of shorter life cycles, seasonal preferences and changing buying behavior of consumers, technological innovations, and tough competition with the outsourced products. In order to stay competitive on the market the companies should improve their supply chain systems (Harwell 2006). Supply chain is the term used to “describe the flow of goods from the very first process encountered in the production of a product right through the final sale to the end consumer” (Bruce, Daly & Towers 2004, 151). Supply chain in business plays a crucial role and is argued to be the major focus in today’s markets competition (Bruce, Daly & Towers 2004). Retailers from different spheres apply lean strategies to their supply chains striving to maximize the operating efficiency of their businesses. Lean supply management is defined as the “elimination of all waste, including time, to enable a level schedule to be established (Bruce, Daly & Towers 2004, 152). While historically lean management was first applied in the manufacturing sector by the Toyota, today this approach can be applied practically in every business activity. The fundamental approach here is called Kaizen, which implies a systematic analysis of the business processes aimed at identification and elimination of waste (Emiliani 2000). The objective of this paper is to identify what lean and agile strategies and what are the applicable lean and agile business strategies in retail sector, and how these strategies should and could be adopted in supply chain to take best advantage of them. Supply Chain in Retail Industry Retail industry varies broadly by the categories of products or goods the company sells. Respectively, this variety is directly transferred to the demand of the products. While some categories of goods tend to have predictable demand, demand for other goods interrelated with seasonality is often difficult to predict (Evan and Harrigan, 2005). In addition to demand volatility, time of delivery is also a very important factor in retail industry, as timely delivery allows retailers to respond to final fluctuations of consumer’s demand avoiding holding of the costly inventories. Evan and Harrigan (2005) state that lean strategies in retail business should be focused on the “market access” motive, whereas demand for timely delivery and distance are closely interacting factors. For minimizing lead times of providing service to the consumer in order to meet the volatile consumer demand, Hiebelar et al (1998, cited by Bruce, Daly & Towers 2004) have designed the agile operation. The agile supply chain enables the companies to be market sensitive and therefore be able to respond to actual changes in consumer demand in real time (Bruce, Daly & Towers 2004). More detailed overview of lean and agile retailing management is provided below. Lean management Lean management is based on a clear understanding of the value gained by the end-use consumer (Emiliani 2000). Therefore, while adopting lean or agile strategies, firstly, management should understand the expectations and needs of the people with whom the company interacts (specify the value). Secondly, management should understand what people do and why do they do it (identify the value stream). Thirdly, management should set up the processes that will minimize or eliminate stoppages or delays in the work performed by others (flow). Fourthly, management should recognize different mental models under which people operate and then to adjust communication approach accordingly (pull). Fifthly, management should identify systematically and eliminate the behavioral waste (perfection) (Emiliani 2000). Thus, the lean behavior strategy will look in the following way: 1. Specify the value 2. Identify the value stream 3. Flow4.Pull5.Perfection Based on this initial number of steps management can decide what lean or agile strategy is more appropriate in their organization. Lean management in retail industry The concept of lean retailing has many different variations in the literature, even though the first attempts of appliance of this concept date back from 1990s (Lukic 2012). Lean retail implies the application of the techniques that directly contribute to improvement of the overall performance of the retail business. While initially lean approach was not focused on retail, with time more and more retail stores of different formats (grocery stores, entertainment, apparel, specialty, and quick service restaurants) began to adopt lean techniques (Lukic 2012). The range of these techniques varies from simplifying of organization of work and removing of bottlenecks in the supply chain to eliminating of wasted materials, wasted time, wasted effort and motion (Lukic 2012). Cost-effective relationships with suppliers and minimization of labor costs on the retailing and distribution costs are the three major factors that contribute to successful lean retailing (Christopherson 2007; Chuang, Donegan, & Ganon 2011). However, in addition to these two factors, the company’s agility in using the strategic resources at its disposal (public capital, skilled labor) is also an important aspect (Christopherson 2007). In order to ensure rapid replenishment of products, on-time and tough timelines of delivery and shipment, accuracy and completeness of the orders, retailers should focus on the key lean aspects of the supply chain such as: bar coding system, shipment marking, and Electronic Data Interchange (Bruce, Daly & Towers 2004; Evan and Harrigan, 2005). Bar coding system enables retailers to keep daily track of every item sold and, therefore to ensure availability of particular products in stock. Electronic data interchange (EDI) enables the retailers to communicate with its suppliers in cheap but quick manner (Evan and Harrigan, 2005). The experts say that EDI and Quick Response allow reduction of retail prices by 10% (Lukic 2012). Lean retailing is similar to lean production as it relates not only to internal activity of the business but also to the external one and broadly covers the nature and content of relationships among manufacturers, suppliers, retailers and distributors (Christopherson 2007). Therefore, the businesses tend to compete more fiercely nowadays for its suppliers than for the end consumers, as effective collaboration and well-established relationships between the buyer and supplier is the keystone of their success. For this purpose, researchers introduce the Supplier-Oriented Purchasing Behavior (SOPB) which is referred to the purchasing practice or strategy designed “establish a position as an attractive or preferred customer relative to targeted suppliers” (Meier, Humphreys and Williams 1998, 41). This strategy is built on the win-win approach, whereas the success is achieved through the development of mutually beneficial relationships between the buyer and the seller (Meier, Humphreys and Williams 1998). These relationships can be achieved: when the buyer acquires and uses technical knowledge to benefit the supplier; when partners are involved in strategic planning; when partners establish collaborative communication; when they buy across a broader range of services and goods (Meier, Humphreys and Williams 1998). Based on these efforts, on the quality and type of governing firm’s networks business is competing in lean retailing. One of the most prominent examples is American-based retail giant Wal-Mart, whose strategy was built on establishing strong relationships with suppliers (Christopherson 2007). In addition to the above listed and briefly described requirements to lean retailing, Evan and Harrigan (2005, 293) add the list the necessity of having modern distribution centers that rapidly channel goods from suppliers to sales locations. Distribution centers or logistic platforms for distribution networks enable the retailer to shorten delivery time up to 24-48 hours, to achieve transportation economies of scale, to ensure the availability of a wide range of products, and to meet the dynamic demand needs through effective stock filling (Jaca et al 2012). Lean versus Agile approach As it has been already highlighted, the rapidly changing business environment, technology, and consumer demands require businesses to develop and implement agile competitive strategies. Meier, Humphreys and Williams (1998, 38) listed four dimensions of agile strategies that the companies ought to implement in order to be capable to develop their processes, information, management, and people into dynamic systems. These four dimensions require the company to: be a solution producer; have collaborative production systems; be knowledge-driven; and maintain an adaptive organization (Meier, Humphreys and Williams 1998). While both lean and agile strategies are aimed at improvement of the operational efficiency of the business, these approaches have some differences. Sometimes, sole application of lean approach does not allow for “efficient management of internal process or external relations” (Lukic 2012, 96). Agile approach is more applicable in conditions of low volume, unpredictable customer’s demand, high sensitivity of supply chain, or when it is difficult to control suppliers’ capacity and innovation (Lukic 2012). If the primary purpose of the Lean approach is to supply efficiently predictable demand at lower cost, the primary purpose of Agile approach is to respond quickly to unpredictable demand and thus to minimize stock-outs, obsolete inventory and forced mark-downs (Fernie and Sparks n.d.). Lean manufacturing is focused on maintenance of high average utilization rate, while agile manufacturing is focused on deploying of excess buffer capacity (Fernie and Sparks n.d.). Lean inventory strategy is aimed at generating high turns and inventory minimization, while agile inventory strategy is aimed at deploying significant buffer stock of parts (Fernie and Sparks n.d.). Lead time focus in lean approach is on shortening lead time of the costs are not increased, while lead time focus in agile approach is on aggressive investment in reducing lead time (Fernie and Sparks n.d.). Approach to supplier selection is also different in lean and agile retailing approach: lean strategy implies supplier selection based on cost and quality criteria, and agile strategy – on speed, quality, and flexibility criteria (Fernie and Sparks n.d.). Management is making its choice either towards lean or agile approach based on the following characteristics: Lean approach to supply chain: functional products; predictable marketplace demand; low product variety; long product life cycle; cost as a customer’s drivers; low profit margin; domination of physical costs; long-term contractual stockout penalties; purchasing policy – buy materials; information enrichment is highly desirable; forecasting mechanism is algorithmic (Lukic 2012, 97). Agile approach to supply chain: innovative products; volatile marketplace demand; high product variety; short product life cycle; availability as a customer’s drivers; high profit margin; domination of marketability costs; immediate and volatile stockout penalties; purchasing policy – assign capacity; information enrichment is obligatory; forecasting mechanism is consultative (Lukic 2012, 97). Use of IT in Lean Retailing The application of information technology is widely used in all spheres of businesses. Especially it plays a crucial role in organizations that adopt and apply lean approach. Information and communication technologies (ICT) enable retailers to optimize their supply chains through faster response of supply towards the actual sales (Lukic 2012). In addition to the above mentioned bar coding and EDI systems, there are IT systems that help retailers to respond to consumer’s needs more efficiently by learning the consumer’s behavior. Data collected via cash registers and scanners (information gathered from point of sale) provides purchasing information about the buyers (who, what, where, when they buy) (Lukic 2012; Finne and Sivonen, 2009). This information flow helps retailers to configure their supply chains to effectively adapt to customer’s demand (Lukic 2012). IT also enables buyers and suppliers to communicate more effectively and share data between each other in seconds (Bruce, Daly & Towers 2004). Moreover, IT allows setting of an effective information flow from the manufacturer to retailer, covering such issues as: quantity of available inventory, order information, pricing information, shipment date, due date, date of expiration, and payment information (Lukic 2012, 90). Thus, for example, in addition to bar coding, retailers widely use a special serial shipping container code (SSCC) which enables them to track individual shipping units throughout the whole supply chain process (Finne and Sivonen, 2009). Radio frequency identification (RFID) is another system that significantly helps retailers to transform to lean retailing as the system allows reading simultaneously a large number of items without manual processing; this system is more efficient than bar coding as devices are always ready to read the codes not requiring a visual line of sight (Finne and Sivonen, 2009). This system is especially helpful in stock management, where movement of the items is immediately automatically reflected in the system. Thus, improvements in the use of IT to obtain “real time” data implies that the retailers can rely less on the forecasts and are capable to respond to the changing customer’s needs more effectively (Fernie and Sparks n.d.). The barriers to the choosing a lean and/or agile strategy within the retail sector The barriers to the choosing a lean and or agile strategy within the retail sector are directly interrelated with the factors and criteria defined previously in the research. Mainly, these factors relates to the external environment, whereas competition, technology advancement, infrastructure development, regulatory framework all play an important role in the retail sector. Some other barriers may include internal factors, such as knowledge and expertise to adopt these strategies, as well as internal culture orientation and readiness towards lean operations. In addition to the barriers of choosing lean and agile strategies, some international companies have faced barriers to implementing their lean concept in foreign markets. Therefore, one of the barriers to choosing a lean strategy within the retail sector is referred to the companies that go internationally and should adjust their supply chain systems to the nuances of the foreign market. One of the greatest real-life examples would be Wal-Mart and its entrance to the Chinese market. Wal-Mart being one the largest retailers in the world was the company than has early recognized the necessity of adoption and application of “lean” management into its retail strategy. However, when the company went to China it faced a problem of localization necessity and therefore localization costs (Chuang, Donegan, & Ganon 2011). Wal-Mart has failed to apply its lean management strategy based on standardization of operations mainly because of several factors, including: the unique local business culture and its influence on supplier relationships; an immaturity of technology environment; under-developed infrastructure and its impact on logistics and distribution, etc. (Chuang, Donegan, & Ganon 2011). Conclusion Undoubtedly, retail business environment faces significant challenges of continuously changing buying behavior, tough competition, market volatility, etc. All these factors stimulate the retailers from different spheres to apply lean and/or agile strategies to their supply chains striving to maximize the operating efficiency of their businesses. While adopting lean or agile strategies, management should: understand the expectations and needs of the people with whom the company interacts, understand what people do and why do they do it, set up the processes that will minimize or eliminate stoppages or delays in the work performed by others, recognize different mental models under which people operate and then to adjust communication approach accordingly, and finally, identify systematically and eliminate the behavioral waste. While both lean and agile strategies are aimed at improvement of the operational efficiency of the business, these approaches have some differences. Based on this initial number of steps and set of criteria (market conditions) management can decide what lean or agile strategy is more appropriate in their organization. These criteria depend on: the product type (functional vs innovative), predictability of the marketplace demand; product variety; life cycle period; profit margin; purchasing policy; forecasting mechanism, etc. In order to implement lean and/or agile strategies, retail businesses use the Information and communication technologies (ICT) that enable retailers to respond to the changing customer’s needs more effectively and to optimize their supply chains through faster response of supply towards the actual sales. Some of the major IT utilities include: bar coding system, EDI, Data collection technologies (cash registers and scanners), special serial shipping container code (SSCC), Radio frequency identification (RFID) and others. However, while choosing a lean and/or agile strategy within the retail sector, management can face some barriers. Very often these barriers are related to the external business environment in which the company operates. Thus, for example, the retail companies going to international markets should be capable to adjust their lean strategies to the local supply chain and distribution systems and thus to incur additional localization costs. Also, the companies should consider such factors as potential barriers while choosing lean and/or agile strategy as technology environment, competition, internal culture and its readiness to changes, etc. Thus, it is possible to draw the following conclusion that appropriate choice and application of lean and/or agile strategy in retailing business helps the companies to manage the trade-off’s between costs, lead times and demand volatility, and with the help of advanced Information and communication systems combined with lean corporate culture and effective management the implemented changes can be sustained in the long-term perspective. References: Bruce, Daly and Towers. 2004, Lean or agile: A solution for supply chain management in the textiles and clothing industry? The Journal of Operations & Production Management. 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