PART ONE: Perspective on Strategic Investments

GRA Retail Supply Chain Series Whitepaper

Part 1 of 4 – Perspective on Strategic Investments

© GRA 2015

Australian retail supply chains today must be capable of managing

increasing customer expectations (lead-times, pricing, options), channel

diversification (online, store, multi-channel, omni-channel) as well as

increasingly complex product sourcing strategies.

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James Allt-Graham, Partner – GRA SydneyFor the last 20 years, James has helped organisations in Asia and Australia deliver rapid and sustainedperformance improvement through the practical application of leading processes, systems and a highperformance culture. James has worked with clients in the commercial and government sector and has afocus on engaging executives, agreeing a direction and driving transformation. Within professional servicesJames has held senior roles as Head of People for a 5,000 person organisation and as the Senior Partnerresponsible for the Risk Consulting practice consisting of over 700 professionals. He has served oninternational projects for clients, steering groups and has been responsible for running a regional business.

Luke Tomkin, Partner – GRA MelbourneLuke is a Partner with GRA and throughout his career has helped organisations in South East Asia andAustralasia deliver rapid and sustained inventory reductions, service level improvements and supply chaincost reductions through the practical application of leading supply chain processes, techniques and systems.Luke is responsible for the delivery of excellent service to clients in the context of their needs and working toproduce new solutions which create value to the client. He has worked with companies at both the strategicand operational levels to deliver results in the areas of supply chain network design, IT strategy and systems,demand and supply planning, inventory optimisation, customer service delivery, operational and tacticalplanning.

Shanaka Jayasinghe, Senior Consultant – GRA SydneyShanaka has proven experience in assisting clients design supply chain strategy as well as identify andpractically leverage service improvements and cost reductions in the supply chain. Shanaka has been deeplyinvolved in successful client engagements extending across the key strategic initiatives outlined in thispresentation – (1) physical network & flow optimisation, (2) Supply Chain & Merchandise Planning and (3)Enabling Integrated Frameworks (S&OP). Shanaka is passionate about presenting complex ideas to clientswith any level of technical background.

About the authors

What we do know is customer expectations have increased

over the last decade, influenced primarily by what ecommerce

has delivered in greater information transparency, lower costs of

communication and an rise in information processing capability –

all for the consumer!

For Australian retailers specifically, the supply chain

challenges in this changing environment are substantial… With

lower population densities, smaller markets and an expansive

geographic distribution of customers, the solutions overseas

often aren’t as effective here…

So the typical Australian retailer needs to be able to do more with

less, in an setting that inherently has significant supply chain

complications. We at GRA believe major structural change

is upon Australian retailers.

© GRA 2015 4

Executive Summary

Evidence of this change is printed everyday in

Australian newspapers. Board executives are all

too aware of the urgency in adaptive survival.

Like Australia’s manufacturing industry which

faced a fight or flight predicament, Australian

retailers are now fighting to remain relevant

amongst new international entrants such as Zara,

ALDI, Costco, H&M and Topshop. Responding to

these threats, major Australian Retailers such as

Super Retail Group, David Jones, Coles and

Metcash have all indicated to shareholders that

their strategic plans involve significant supply

chain restructures. These boards have are

prepared to invest in the short term to realise

long term sustainable growth.

Today, the Australian Retail sector is shadowed by an unprecedented amount change and uncertainty.

Such investments however come with large capital

investment exposure as well as in some instances medium

to long payback periods - these investment decisions

thereby can become turning points in a company’s life.

Get it right and you’re set.

The purpose of this series is to advise Australian retailers on

how to analysis and decide upon the right course of action;

what steps need to be taken to ensure the right investment

is made to protect the business and build a foundation for

ongoing growth without risking the farm?

© GRA 2015 5

The four edition series includes;

(1) Perspective on strategic investments

(2) Physical network & flow optimisation

(3) Supply Chain & Merchandise Planning

(4) Enabling Integrated Frameworks (S&OP)

Executive Summary

kThere are few decisions in an executive’s career which can define one’s

stewardship as a success. In today’s economic climate, where company boards are

more cost conscious, increasingly such opportunities are emerging from significant

supply chain investments with complex and sensitive payback timetables stretching

over several years.

The Retail Supply Chain

- Perspective

© GRA 2015 8

To assist executives’ preparation for such high-stakes decisions, this

presentation outlines three topical supply chain investments which if

implemented effectively can substantially transform an organisation's supply

chain into a competitive advantage.

© GRA 2015 9

Strategic Investment

Physical Network &

Flow Optimisation

Supply Chain & Merchandise

Planning

Enabling Integrated Frameworks (S&OP)

Investment Type

DescriptionImprovement

TargetPayback Timetable

Physical Network & Flow

Optimisation

Model and optimise the physical network responsible for warehousing and logistics execution as well as flow design.

Identifies opportunities to lower operating costs whilst delivering to the customer value proposition effective. This typically involves analysing freight, and fixed and variable storage cost benefits.

Warehousing and Logistics Operating Costs

Asset Utilisation

Customer (service driver)

Immediate benefits often include freight costs and service level improvement

2-3 year payback for labour efficiency savings/assetutilisation

Supply Chain & Merchandise

Planning

Merchandising and Supply Planning in retail is critical for supply chain effectiveness, and a key driver of operating costs.

Business processes and planning software need to be fit for purpose. A clear development road map should be in place.

Effective implementation is often the most significant challenge with this form of investment.

Sales

Working Capital

Gross Margin

Operating costs

Immediate payback in increased service levels and working capital efficiency

Enabler greater supply chain visibility and enhanced decision-making (e.g. strategic procurement decisions)

Enabling Integrated

Frameworks (S&OP)

End to end visibility across functional alignment are essential for retailers, particularly when making portfolio, merchandise or supply chain decisions.

S&OP (or M&OP) provides the structure to coordinate the various functions in an organisation work together through structured and regular meetings. More sophisticated S&OP processes instil a culture of accountability and prompt forward thinking in decision-making.

End-to-End Value Chain

Agile & Informed Decision-making

Cross-functional alignment

Medium to Long-term payback designed to enable sustained competitive advantage in an organisation

Enables agility to changes in operating environment.

Perspective – Strategic investments

Shareholder Value

Revenue Growth

Fixed Capital

Efficiency

Operating Cost

Reduction

Working Capital

Efficiency

© GRA 2015 10

Revenue Growth: A retailer’s supply chain activity does not only generatecost, it also generates revenue through the provision of service andavailability.

An investment in network design for instance can increase responsiveness,shortening lead-times and ultimately attract more customers and drivemarket share.

Similarly, an investment in merchandise and supply planning can improveavailability of the right product in the right place at the right time –thereby driving sales revenue. There have been several studies such asthe “which product should you stock” (2012 – Harvard Business Review)that have shown strong positive causality exists.

Fixed Capital Efficiency: The supply chain by nature is fixed assetintensive. A supply chain includes warehousing, trucks, materials handlingequipment, IT infrastructure and automation - all considerable investments.

A key driver for the rise of third party logistics providers has been thedesire of management to reduce fixed asset investment and associatedoverhead on the balance sheet – however it is all balance. Such strategiesshould recognise the opportunity costs of outsourcing; oftenoverlooked is the loss of capability to drive ongoing efficiency gains in thesupply chain in a 3PL environment.

An evident trend GRA is seeing today is company’s wanting to find the rightbalance when rationalisation distribution networks and production facilitiesto optimise operating costs - particularly freight when servicing Australia’sfar-reaching customer base.

What to consider when investing in the supply chain

Perspective – Strategic objective

Strategic Objective

Shareholder Value

Revenue Growth

Fixed Capital

Efficiency

Operating Cost

Reduction

Working Capital

Efficiency

© GRA 2015 11

Operating Cost Reduction: A significant portion of a business’s operatingcosts can be attributed to the supply chain. Thereby supply chain operatingcost reduction has great potential to improve overall business performance.

The physical network (distribution centre) operating costs can be generalgrouped under freight, fixed (leases, outgoings) and variable (salaries,wages) costs. Each dollar saved goes directly to profit.

Additionally, if we can improve inbound or landing costs by restructuringactivities such as allocations or labelling in upstream logistics – we caneffectively improve gross margin.

Working Capital Efficiency: Typically for retailers, inventory accounts for~50% of assets on the balance sheet. Thereby, any improvement ininventory efficacy through better planning and execution results in ahealthier working capital ratio and balance sheet. Moreover, this hasflow-on benefits as the reduction in obsolescence and risk can additionallyimprove gross margin.

Today, inventory management could not be more crucial to a retailer’ssuccess. As customer expectations increase, channels diversify and productsourcing strategies become more complex the traditional merchandise &demand planning and replenishment methodologies place businesses at riskof becoming too ‘fat’ or missing vital sales.

What to consider when investing in the supply chain

Perspective – Strategic objective

Strategic Objective

© GRA 2015 12

Strategic Objective Strategic Investment

Physical Network

Optimisation

IT – Demand & Replenishment

Planning

Aligning the investment with the return objective…

Shareholder Value

Revenue Growth

Fixed Capital

Efficiency

Operating Cost

Reduction

Working Capital

Efficiency

Perspective – Return on investment

Strategic Investment

© GRA 2015 13

Sales & Operations Planning (S&OP)

Supply chain decisions have impacts across the entire business and theoutcomes have immediate and direct influence on service levels, cash flowand profitability.

Leading organisations recognise this and are better integrating their supply chains withthe strategic goals of their business. Sales & Operations Planning (S&OP), orIntegrated Business Planning (IBP), is a proven methodology organisations turn to, orin many cases reinvigorating, to enable this. S&OP, through enhancing responsivenessas well as forward visibility is able to establish sustainable competitive advantage.

S&OP is a framework which enables value to be derived from the ‘planningcapability’ of an organisation. Consider the ‘planning capability’ to be anorganisation’s people, process, systems and data. At an organisational level, S&OPaligns this ‘planning capability’ with the business and supply chain strategy. And at afunctional level, S&OP leverages the ‘organisational structure’ encouraging teammembers to collaborate and work towards the achievement of organisational goals.

Effective S&OP enhances the decision-making quality in a business by providingvisibility and agility in portfolio, demand, supply and logistics management. It is a well-established, proven framework; however, many large organisations have difficulty ineffectively leveraging its benefits – primarily due to poor execution of S&OP meetingsand poor inputs into those meetings from the fundamental planning processes.

Executive Engagement

and Ownership

Business & Supply Chain

Strategy

Policy, KPI's & Incentives

Framework to pull it all together…Perspective

© GRA 2015 14

Service level

Supply chain

efficiency

(inventory,

warehousing

and transport)

Inventory

Cash to cash

cycle

Availability &

responsiveness

Physical

footprint &

utilisation

Sales revenue

Cost

Cash

Accounts

receivable/

payable

Inventory

Fixed assets

Capital

employed

Profit

Return on

investment

Strategic Objective Strategic Investment

Physical Network

Optimisation

IT – Demand & Replenishment

Planning

Sales & Operations Planning (S&OP)

Generate shareholder value through increasing return on investment

Perspective

© GRA 2015

At GRA we understand the complex challenges retail organisations are facing

We can help you with not only designing an optimal retail supply chain, but also

ensuring that your inventory is optimised to ensure that the highest possible service

levels can be achieved at the lowest possible cost.

Contact usMelbourne (03) 9421 4611

Sydney (02) 9810 0229

www.gra.net.au

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