Getting the retail value chain right


August 31, 2009

Times of Oman

Monday, August 31, 2009

THE global retail industry today is struggling to get out of the recessionary clutches and finding ways to curtail operating expenses and maintain profit margins.

The consumer driven industry is feeling a dire need to streamline processes and optimise operational efficiencies. Industry experts are of the view that to fight back in this challenging environment, retail value chain can prove a handy tool for retailers to understand and identify performance improvements within the network while at the same time improving the customer experience in every store.

Management guru, Michael Porter theorises in the concept of retail value chain: "The term ‘margin’ implies that an organisation’s capability to realise a profit margin depends on their ability to manage the linkages between all activities in the value chain."

Chhavi Sharma, brand manager (Parfums), Christian Dior, Capital Store, avers: "A retailer’s ability to gain a competitive edge in these times will depend on its ability to gain that margin by focusing on the links of operations, technology and customer relationship management (CRM)."

"Value chain describes the activities within and around an organisation, and relates them to an analysis of the competitive strength of the organisation. Therefore, it evaluates what value each particular activity adds to the organisations products or services."

The concept of retail value chain (RVC) differs from the standard value chain definition. Industry experts say RVC must start and end with the customer – what the customer desires and whether the retailer exceeded those expectations.

A.T. Kearney, one of the world’s foremost management consulting firms, defines RVC through its proven store operations excellence framework, which starts with understanding the voice of the customer and ends with the key interactions and final impression in the core store operations.

Two theories that have evolved in the retail value chain are quick response (QR) and efficient consumer response (ECR). The QR theory was introduced in the context of speciality retailing while ECR was developed in the FMCG segment.

"The focus of QR is to rely on information systems to renew processes. The main thrust is to improve forecasting and follow up orders, to reduce product stock outs and obsolescence costs," says Sharma. Inventory management is a nightmare for any business but more so for a retailer. The focus lies in carrying the right inventory at the right time. Recently, the world’s largest retailer Wal-Mart Stores posted a second-quarter profit fuelled by tight inventory controls beating the Street estimates.

"Wal-Mart has drawn more affluent shoppers away from rivals with its new focus on better brands, better service and cleaner stores. This fiscal year, the chain is remodelling 600 of its 3,600 US stores at a cost of $1.6 billion to $1.7 billion and sprucing up its merchandise even more in the hope of retaining its new customers after the economy recovers," according to an Associated Press report.

Case study

The retail giant’s business model on how it captured and dominated the US retail industry is a classic case study for business schools around the world.

One of the case study reveals that "Wal-Mart made strategic attempts in its formulation to dominate the retail market where it has its presence, growth by expansion in the US and internationally, create widespread name recognition and customer satisfaction in relation to brand name Wal-Mart and branching into new sectors of retailing."

For retailers it is important to understand which activities can be eliminated or simplified, resulting in reduced costs. Recently "Gap posted a slightly stronger than expected quarterly profit as more full-priced sales, inventory controls and cost cuts helped offset declining revenue at all its chains.

Gap has boosted margins by streamlining its organisation, reducing inefficiencies in its supply chain and cutting costs," says a Reuters report.

Cost reduction initiatives are achieved across the retail network through real estate portfolio management or efficiencies gained through technology.
"Within the stores, the store productivity cycle provides an ongoing analysis of primary value chain activities to eliminate, transfer, or simplify retail processes," says Robert A. Ziegler, partner-vice president, A.T. Kearney (Middle East).

Recently, for a global big-box retailer, A.T. Kearney conducted a store operations excellence project to transform the core of the retail value chain at the store operations level. Benefits resulted in increased efficiencies, decreased costs, better category management, and most importantly improved customer experience.

"Retailers must go back to basics at the core of the value chain – store operations – to ensure that every customer interaction provides a positive experience, while at the same time managing costs throughout," says Ziegler.

Industry experts say companies like Zara, The Limited, Gap, H&M, Li & Fung are good examples of buying organisations that effectively manages the logistic chain.

A case study on Zara, the flagship brand of the Spanish retail group Inditex, reveals the fact that the brand focuses on the actual need of the consumers. "It just quickly produces the least amount possible of what is hot with consumers and moves to the next hot style fast. Garment styling for Zara actually starts from the email or phone call received from the stores.

Thus from the beginning Zara is responding to an actual need, rather than forecasting for a distant future," says Devangshu Dutta in his case study on Zara. Dutta is CEO, Third Eyesight, a consulting firm focussed on the retail and consumer products sector.