OCTOBER 2016

By Dan Gilmore, Editor, Supply Chain Digest.

Last month, I wrote a column saying that we may be at an important inflection point in the history of the retail supply chain.

The retail sector has been willing to accept a level of supply chain variability simply unheard of in the manufacturing sector, variability relative to lead times, fill rates and vendor shipment details (labeling, ASN accuracy, etc.).

But the times may be changing, Some say it is inevitable that variability will be high given the thousands of vendors a retailer may have, from huge to mom & pops. Others note that soft goods, with all the variables (style, color, size), present special challenges, and they are correct to an extent. And no question, retailers have caused much of their own supplier variability by “Bullwhip type” order patterns. Finally, over the years, there has been some tightening in the fill rate and on-time requirements.

However, I think it is very fair to say there simply has not been a “reduce supply variability” mindset on the part of the majority of retailers. It has been the way it’s been for a long time. Most retailers have consoled

themselves with the “chargeback” to vendors - fines for missing fill rates or late deliveries or bad ASNs - as a substitute for reducing variability. The reality is few retailers actually measure variability, even if they do give vendors a grade on things like on-time.

But is the status quo changing? A major regional grocery chain has about finished rolling out a highly integrated store-level planning system - among the most comprehensive that has been deployed by any retailer to date. Now that it has leaned out its store-level inventory and replenishment planning approach, where is the inventory risk? “Vendor failure,” it says. Now when a vendor shipment is late or the fill rate is less than 100%, the chance of an out-of-stock rises versus the previous approach, which had more buffers - and the grocer is deploying a vendor compliance program not common in the grocery sector to reduce that potential vendor variability.

That’s a good start. Consequentially, Walmart and Target, two of the heaviest retail hitters, now seem focused on reducing supply chain variability. - continued pg. 2 -

Creating visibility into supply chain activities is critical for breaking the cycle of poor vendor performance, which in turn impacts supply chain performance and success at the store or on-line. Clarity into the supply chain offers the potential for improving buyer planning, and merchandising execution. It can also provide the basis for:

• Identifying vendor failures and recovering the associated costs• Reducing labor costs by minimizing problem shipments and

streamlining inbound auditing• Reducing the amount of required safety stock• Improving customer satisfaction and sales It should be every retailer’s ambition to adopt a Vendor Compliance Program (VCP), since they’re proven to provide a comprehensive view into all supply chain activities. A VCP lays the groundwork for improving supply chain performance and positively contributing to a retailer’s profit target goals and meeting shareholder expectations.

Effective supply chain execution via a VCP enables a retailer to gain control of their supply chain by establishing accountability for

- continued pg. 2 -

SCDigest is pleased to announce an upcoming new Videocast on successful vendor compliance featuring Norman Katz, author of the new book Successful Supply Chain Vendor Compliance.

We reviewed Katz’s excellent book on the pages of the Retail Vendor Performance Management Bulletin earlier this year, but in this broadcast we will get into more detail, as Katz and SCDigest editor Dan Gilmore discuss key issues around compliance program success. In this outstanding Videocast, Katz will summarize key elements of his book. Highlights of the broadcast will include:

• Why it’s time for this book right now• Compliance program guiding principles• What is permissible under the law relative to vendor chargebacks?• Common mistakes companies make in rolling out and maintaining

vendor compliance programs• Why retailers are often their own worst vendor compliance enemies• The many “E’s” of successful vendor compliance, from “Envision”

to “Ethics”

- continued pg. 3 -

An Inflection Point in the Retail Supply Chain? Part 2

Compliance Networks Corner: Industry News Round UpUpcoming Videocast: Successful Supply Chain Vendor Compliance for Retailers & Beyond

www.compliancenetworks.com Your First Stop for Supply Chain Informationwww.scdigest.com

Understanding Vendor Compliance Optimization

Your First Stop for Supply Chain Information

An Inflection Point in the Retail Supply Chain? Part 2 (continued)The Wall Street Journal recently reported that “Target is taking aim at “stock-outs,” those dreaded moments when a toy, clothing or electronics that a customer wants isn’t on the shelf, by tightening its inbound distribution schedule. Reducing “variability” in its distribution centers, especially when scheduling deliveries, is a key step toward reducing stock-outs, company executives recently told Wall Street analysts.”

Target COO John Mulligan recently said “an unacceptable number of vendor shipments were received by our DCs either too early or too late,”, adding “We have been collaborating with our vendors to increase the percent of shipments that arrive on the correct date and have already seen meaningful progress.”

Mulligan added that that the percent of shipments arriving on time has more than doubled and Target expects to see additional improvement as it rolls out new processes to additional vendors over time.

By the way, on-time improvement has enabled Target to reduce out of stocks in its ecommerce business by more than 50% in the past six months or so.

Meanwhile, in a recent blog post for vendors, Walmart said it was reducing the window for which a shipment is considered on time from the current four days to just two, starting in February 2017. In addition, the fill rate requirement is being raised from 90% to 95%, measured at the case fill level.

So, the times really may be changing. Obviously, there are major vendor compliance issues. But equally, there are also issues retailers must address in terms of visibility and order patterns. We’ll discuss that in the last part of this column series next month.

- pg. 2 - Learn More & Subscribe Today at www.scdigest.com/retail_vendor_performance.php

Compliance Networks Corner: Understanding Vendor Compliance Optimization (con’t.)

vendors and other key stakeholders alike. A VCP brings clarity to all internal and external supply chain activities while yielding insights that lead to predictability into future performance.

A VCP automates processes, formalizes workflows, encourages collaboration and places the organization on a continuous improvement track. It also provides key stakeholders with a 360-degree view of all aspects of their supply chain activities so that they are equipped to make data-driven decisions.

The Elements of Vendor Compliance Optimization A meaningful Vendor Compliance Optimization effort is comprised of four supply chain elements that directly support the retailer’s overall objectives:

• Application: The technology (software, hardware, and database) infrastructure that supports all compliance assessment activities.

• Workflow: The integration of human activities with the application to automate the optimization program.

• Collaboration: The communication, planning, and cooperative activities between all stakeholders which facilitates optimal execution of the merchandising plan.

• Continuous Improvement: The performance data (PD) generated by vendor compliance activities that enables stakeholders to focus on continuous improvement. PD identifies execution successes and failures and facilitates adjustments to the merchandising plan and supply chain activities.

Vendor Compliance Adoption ModelPrior to taking any actions or making any decisions, it’s important to evaluate where your organization is on the Vendor Compliance Adoption Model, as shown in the graphic nearby. That graphic illustrates the three levels of vendor compliance sophistication and value: visibility, variability, and velocity.

Each level provides different degrees of visibility, variability, and velocity benefits, however, it is important to note that as retailers improve the design and execution of their vendor compliance programs they can expect to move into outcome levels that are best described by their focus on visibility, variability, or velocity.

Next month, we will discuss each of these levels and the opportunity to advance to higher levels of maturity.

Not to be missed for those interested in starting or improving vendor compliance programs.

Compliance Networks CEO Greg Holder will join the end of the broadcast to share his experience for building successful compliance programs.

For details and on-line registration for this complimentary broadcast go to: www. sctvchannel.com/Videocast_Successful_Vendor_Compliance.php

Macy’s Doubles Down on RFID CommitmentAt a recent industry conference, Bill Connell, Macy’s senior VP of logistics and operations, revealed that his company plans to have 100% of all items in every store tagged by the end of 2017. To achieve this goal, the retailer is asking all product vendors to supply merchandise already fitted with passive ultrahigh-frequency (UHF) RFID tags based on the EPC Gen 2 standard.

“We still have a lot of work to do with our suppliers to get joint commitment to apply tags at source,” Connell said. “But we are fully prepped and continue to expand [our use of RFID]. We are now moving into additional use cases that are enabled because of RFID and, equally important - because of the availability of accurate information - on a very quick basis.”

In 2015, Macy’s announced it was expanding its RFID-tagging deployment to all lines of businesses at its stores, except for jewelry and cosmetics. These two categories were not a focus since there were challenges finding tags that worked effectively and would not negatively impact the items’ presentation. “We are now working with GS1 and others to find solutions [for these categories],” Connell said, “both in the technology and the presentation techniques to bring those categories of business into the fold as well.” However, he noted, there is a chance that Macy’s will not be able to resolve those issues in time to meet the end-of-2017 goal.

By the end of 2016 or the start of 2017, Connell told attendees, more than 60% of goods at most Macy’s stores will be RFID-tagged and cycle-counted monthly via handheld RFID readers. Macy’s had published the tagging requirement in its vendor standards manual, he said. Now, the retailer is working with suppliers to get them to tag merchandise at its source.

There is a “much greater acceptance and understanding of the benefits” among suppliers, Connell explained. “There is a momentum that suggests to us that we are pretty much at that tipping point.”

According to Connell, Macy’s has been expanding steadily into categories beyond apparel, and has found that the technology delivers value throughout its stores. “We’re finding that in home [products], it has a great deal of applicability,” he said. “In areas where there are samples, like tabletop, those are further expansions.”

Replenishing more effectively was what got Macy’s involved in RFID, Connell told the audience, but the company also found additional benefits, as many experts had suggested. “You find this natural ability to expand and do additional things that have a big impact on sales and profitability,” he said. “And I assure you, we track, through control testing and so forth, our performance in these categories quite consistently. We have been quite pleased with the results, both operationally and from a financial perspective.”

Of course, vendor source tagging with RFID creates a whole new set of requirements relative to tag quality, proper encoding, and more, all of which must be monitored for compliance. RFID tagging may also allow much easier confirmation of ASN accuracy in mixed-SKU cartons.

Amazon’s Total Share of ecommerce May be Larger than EstimatedThe share of US ecommerce business that may be flowing through Amazon could be as high as 30% and growing, according to new estimates from the investment analysts at Piper Jaffray. That would be almost double the 15% share most analysts have calculated, based on Amazon’s reported sales numbers and Dept. of Commerce data on on-line sales.

But those Amazon sales numbers do not include the retail sales value of items moving through Amazon’s marketplace services, in which consumers buy products on Amazon’s site from third-party retailers, for which Amazon makes a small commission, generally about 10%. So the total value of merchandise purchased on Amazon’s site in the US could be as much as $125 billion already.

An article in the USA Today newspaper says some 49% of total sales through Amazon.com come from such third-party marketplace vendors.

Industry News Round Up (continued)

- pg. 3 -Your First Stop for Supply Chain Information

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