Create a responsive and demand-driven supply chain

By 2020, the leading retailers will have shifted focus away from ‘on-shelf availability’ to ‘on-demand availability’, aiming to provide 100% product availability to fulfil customer orders for delivery in various formats anytime and anywhere, using a low-cost approach for distribution. The key to creating a successful demand-driven supply chains (DDSC) for retailers is to ensure sufficient supply chain visibility and execution, says Peter Liddell, Partner, Asia-Pacific Head of Supply Chain, KPMG Australia.

As the focus shifts away from ‘on-shelf availability’ to ‘on-demand availability’, retailers are under immense pressure to deliver products according to their customers’ choice of place and time. The move towards demand-driven supply chains (DDSCs) will allow retailers to better predict the changing requirements of consumer, who, by 2020, will not only expect access to quality products, but also an outstanding level of service provided at the lowest possible cost.

Indeed, a recent KPMG report, Demand-Driven Supply Chains, found that companies with true DDSCs can grow sales by up to 4%, cut operating costs by up to 10%, and reduce inventory by up to 30%.

The key to creating a successful DDSC for retailers is to ensure sufficient supply chain visibility and execution. Recent KPMG global surveys found that aligning operations with realtime fluctuations in demand was the top supply chain challenge for companies. About half of the respondents stated that effective management of true (real-time) demand and supplier performance — in terms of risk, reliability and quality — were the most critical operational imperatives that they would face over the next decade.

However, the research also found that only one in four companies have established true DDSCs, where sourcing and replenishment decisions are driven by actual demand and consumption of supply.

To gain real-time visibility of the supply chain, retailers require real-time interactive networks, demand-driven business processes and end-toend supply chain planning capabilities — all of which must be underpinned by high-quality data analytics and business intelligence capabilities. Harnessing these tools will help retailers succeed by giving them a better understanding of customer requirements, which will enhance planning for their store operations and enable far better sourcing and replenishment activities.

We observed that some retailers use advanced data analytics to combine thousands of internal and external demand signals, and assess the correlation between these signals, ‘store signatures’ and store cluster profiles to better predict customer buying behaviour. This ensured that physical inventory holdings were held to a minimum, yet sufficient to align with customer requirements.

In fact, KPMG research shows that leading retailers have used big data to increase forecasting accuracy for new stores by up to 93% — an almost impossible task only 12 months ago. These retailers have improved customer segmentation and store clustering by analysing big data and using advanced clustering techniques.

This increase in forecast accuracy has supported other strategies, such as better optimisation of product mix, pricing, promotions, new product introduction, marketing spend and advertising planning, as well as the ability to efficiently manage inventory throughout the supply chain.

Furthermore, while retailers typically use data analytics to find out more about their customers, they can also benefit by extending the data mining and analysis into the supply chain to holistically optimise their supply chain network. In doing so, retailers can minimise the large logistical and inventory costs incurred through operating an inefficient distribution system.

It is our view that in 2020, the leading retail companies will have invested in acquiring and training chief data officers and special data scientists to analyse and interpret big data, and help optimise business operations and the supply chain network.

DDSCs supporting omni-channel strategies
While the traditional linear brick-and-mortar supply chains are far from complex, newer retail supply chains are becoming increasingly intricate due to the proliferation of online ordering through diverse channels. And with same-day and next-day deliveries becoming the standard in many markets, the biggest challenge now lies in the fulfilment of customer orders.

Although variety has its benefits, the proliferation of retailers’ products and channels is increasing operational complexity. As retailers continue to refine their omni-channel strategies, not as a differentiator but as “a ticket to play”, the impact their operational costs, working capital and customer service performance. This is where retailers have struggled to ‘get it right’.

By 2020, the leading retailers will have shifted focus away from ‘on-shelf availability’ to ‘on-demand availability’, aiming to provide 100% product availability to fulfil customer orders for delivery in various formats — in store, home delivery and alternative site collections, for example — anytime and anywhere, using a low-cost approach for distribution.

Leading retailers use technologies to advance the automation of their replenishment activities to ensure that exposure to stock-outs (lost sales) is minimised. The impact of losses arising from stock-outs can be significant; while the direct sale will never be recovered and a loss of potential customers affects future sales, the costs associated with accessing new customers (as replacements) is becoming a significant operational expense.

To mitigate stock-outs while limiting exposure to high inventory levels, leading retailers will secure their supply base and consistently source products to arrive into their supply chain just in time. Furthermore, retailers will use data sourced from within the extended value chain to analyse future events and scenarios to predict the likelihood of sourcing risks, and create alternative strategies to proactively mitigate supply disruption.

However, when most retailers take stock and properly analyse their supply chains, they find that almost all of their supply chain processes and policies are designed to compensate for information latency and demand uncertainty. Information latency and a lack of timely and accurate visibility to actual demand and available supply are cited as the top inhibitors in establishing a DDSC, and thus contribute to the greatest amount of redundant cost within the supply chain. Supply chain collaboration and the use of a shared supply chain platform is a vehicle to enable an effective network model in a DDSC.

However, today we predominately see retailers working within a more traditional supply chain model, which is reactive to demand changes and restricted by the linear planning and replenishment framework.

Effective DDSCs leverage network-based models that allow all participants to work as one virtual organisation. They are also effective collaborators as they share big data across the network and respond quickly to changing customer demand signals. Companies have demonstrated higher sales, lower supply chain operating expenses and working capital improvements by adopting this approach.