Jun 01, 2003 9:30 PM  By

RETAIL SUPPLY CHAIN EFFICIENCY has increased dramatically since the late 1990s — and this, as with most other changes in retailing, is a result of the phenomenon known as Wal-Mart. The retail behemoth’s influence is so vast that it shapes the entire U.S. economy. According to a study by the consulting firm McKinsey & Co., a large part of U.S. productivity growth between 1995 and 1999 “can be explained in just two syllables: Wal-Mart.”

The operational innovations that Wal-Mart pioneered have raised the bar for all retailers, who have either followed the leader by improving supply chain efficiency or have faltered and gone the way of Ames, Bradlees, and Kmart. Trailblazers such as Wal-Mart and Target Corp. have installed productivity-enhancing technologies and established supplier management practices that have virtually removed significant costs from the supply chain. These improvements are creating ripple effects throughout the global supply chain for all industries.

RECEIVING BULK INVENTORY As retailers grow in size and sophistication, they often receive inventory in bulk at their distribution centers. That inventory is broken down into smaller quantities and shipped to stores to replenish sold merchandise. This “store-specific” distribution is labor-intensive (and therefore costly), because bulk cases received from suppliers must be split open and picked and packed in small quantities. But the alternative — receiving inventory in bulk at each store — would result in much higher freight, shipping, labor, and real estate costs. By automating their facilities, retailers have lowered the costs of store-specific distribution. Although Wal-Mart and its trend-setting peers (such as Kohl’s, Target, Lowe’s, and Walgreen’s) pioneered DC automation, many medium-sized retailers (including Gymboree, Urban Outfitters, DOTS, and The Men’s Wearhouse) have implemented systems that enable their DCs to distribute efficiently on a store-specific basis.

DEMANDS ON SUPPLIERS Even as retailers were successfully automating their distribution centers in the 1990s, most suppliers of merchandise to retailers continued to fulfill bulk orders manually. Now, however, retailers have begun to trim additional costs from the supply chain by focusing on suppliers. Merchants often impose requirements on suppliers that reduce the amount of time required in the retailer’s DCs and stores. Most retailers levy penalties on their suppliers (“chargebacks”) for errors in distribution. Chargebacks have become standard in the industry and can be exorbitantly expensive, decimating margins for suppliers.

Another common mandate is that suppliers distribute goods ready to be displayed on store shelves (“store-ready”), reducing labor at the retailers’ end. For example, merchandise may have price tags, bar codes, security devices, and special packaging already affixed or included. Retailers may also require that a supplier distribute merchandise in bunches (“pre-packs”), such as four blue shirts and three red shirts. Pre-packs enable retailers to increase DC productivity rates because each pick of a pre-pack is like picking several units of merchandise. In addition, when pre-pack quantities equal what stores need for replenishment, fewer cases need to be split open. Instead, cartons can be cross-docked, lowering the costs of labor, real estate, and inventory.

The most stringent demand that retailers make, however, is that suppliers pick, pack, and ship orders on a store-specific basis, shipping the items either directly to stores (bypassing the retailer’s DC altogether) or to distribution centers where the goods are cross-docked and then sent to stores. Merchandise distributed from suppliers to stores requires much less handling by retailers, making for a more efficient supply chain.

Although all four mandates impose burdens on vendors, none requires as great a degree of change as store-specific distribution does. This strategy provides retailers with tremendous savings, but it also forces suppliers to adopt different and complex business practices. How they adapt to the new requirements will largely determine which suppliers thrive, and which falter, in today’s highly demanding retail supply chain.

MANUAL LABOR Many suppliers today fulfill orders as most retailers did 20 years ago, and are not equipped with appropriate technology or business practices for store-specific distribution. Manually splitting cases using paper-based systems is labor-intensive, error-prone, often cannot turn orders quickly enough — and the high error rates inevitably subject suppliers to significant chargebacks and labor costs. For example, a supplier of men’s accessories manually picks, packs, and ships neckties to major retailers on a store-specific basis and is struggling with accuracy and delivery time. Because of the costs of overtime labor, low accuracy, and low account satisfaction, store-specific distribution is a major, margin-lowering problem for this supplier.

Similarly, a supplier of manicure products to major retailers manually picks, packs, and ships store-specific orders. This supplier has been able to ship on time and accurately by using large teams of people and working overtime. Although account satisfaction and error rates are sufficient, the dramatically high costs of handling and audit labor have reduced profit margins for this vendor.

Other suppliers have followed the leads of retailers in implementing automation to fulfill store-specific orders. SaraMax, an apparel supplier, uses the same technologies as major retailers to quickly, efficiently, and productively carry out store-specific distribution to DCs. Able to fulfill orders on time, with minimum labor, and accurately (with almost zero chargebacks), SaraMax maintains profit margins, increases market share, and views the store-specific distribution trend as an opportunity rather than a threat. Another resourceful vendor, Electronic Arts, uses automated systems to supply video games to major retailers’ stores. With low labor costs and highly accurate shipments, EA satisfies its customers, retains profit margins, and keeps distribution costs low even as sales volume increases.

Because the practices and technologies of store-specific picking, packing, and shipping have been proven for more than a decade, suppliers experience little adoption risk and find that automated systems can often be paid for out of labor cost savings. Store-specific distribution, however, is a double-edged sword for suppliers. Those who do it well benefit greatly, increasing their market share and profit margins. Those who do it poorly have seen margins tumble and are losing market share. Like retailers, suppliers who do not adopt innovative practices will go the way of the Kmarts and Bradlees, whereas those who embrace new technology and processes will become the Wal-Marts of supply chain efficiency.

Paul Lightfoot is CEO of AL Systems, which provides solutions that improve the flow of merchandise through distribution facilities. Reach him at (973) 586-8500, plightfoot@alsysinc.com. or info@alsysinc.com.