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Chapter 16Buying and supply management in retail
Program Definitions Role and importance of purchasing in trading and
retail business. Structure and organization of the purchasing process Developments in trading and retail companies Trends in sourcing and supply chain strategies
Definitions
Trade and retail companies: Characterized by the absence of a production process Value added is low compared to manufacturing companies Existence is primarily based on the exchange of values Time between the purchase and sale is very short
Category management: because of a short time between purchase and sale, buying and selling are sometimes integrated into one function.
Category management: because of a short time between purchase and sale, buying and selling are sometimes integrated into one function.
Inboundlogistics
Outboundlogistics
Merchandising/ commodity management
Facilities buying
Human resources management
Technology
Infrastructure
The value chain in trade companies (Adapted from Porter, 1985)
Definitions
Definitions
Trade companies can be divided into two levels: Wholesale level (B2B) Retail level (B2C)
Companies that operate on wholesale level deliver their products to other companies. Customers are retail, industrial and service companies. Wholesale companies devote less effort to promotion, shop layout and
selection of location. Further wholesalers make large transactions with a limited number of
companies.
Manufacturer
Consumer
Wholesaler
Retailer
Wholesale and trade in the business chain
Definitions
Trade companies fulfill the intermediary betweenproducer and end user. Their added value lies inthe following activities:
Sales and promotion Buying and building up a product assortment Bulk breaking Storage Transportation Carrying the risk Market information Management and marketing services
Purchasing in trade and retail companies
Regarding the retail trade, various types of stores can bedistinguished in the area of consumer products:
Specialty store Department store Supermarket Convenience store Combination store, superstore and hypermarket Service business
Purchasing in trade and retail companies
Organization of the purchasing process
Stages in the buying-selling cycle: Estimating demand Determining product assortment and distribution strategy Selection of most suitable supplier Contractual agreements Ordering Automatic replenishment Expediting and evaluation
Retail buyers pay more attention to marketing and sales aspects than industrial buyers. The function of retail buyer evolves from straight buying to commodity or category management.
Cross-functional structure Teams are responsible for all aspects of a category in order to
generate a maximum return for the retail company Buying, styling, visual merchandising and distribution functions
operate in one organizational entity. (‘category management’)
Functional purchasing structure Purchasing is important and reports directly to top management Ordering and purchasing often separate activities. Purchasing and Category Management are conducted central and
ordering is carried out decentral as much as possible. Planning is more and more delegated to the suppliers (i.e. VMI)
Organization of the purchasing process
Developments in trade and retail companies
Changing consumer behavior in European countries: Ageing population, ongoing individualism, more men shopping Increasing income gap between population groups Growing number of earning couples Increased exposure to other cultures and integration of ethnic
minorities Increased concern for the environment Increased attention to healthier living
This means that the commodity manager/ retail-buyer must constantly tailor his product assortment to more specific
and often smaller groups.
This means that the commodity manager/ retail-buyer must constantly tailor his product assortment to more specific
and often smaller groups.
Other developments…. Concentration: Globalization of competition and concentration
through mergers and acquisitions. International co-operation: Due to the concentration of power
on the suppliers’ side, trade companies are searching for internationalization as an option to counterbalance this development.
Private labels: Private labels support retailer identity and image. Finding suitable suppliers for private label products will become increasingly difficult.
Developments in trade and retail companies
More developments… Space management: based on detailed cost information retailers
decide on the most profitable display lay out. ‘Green’ issues: ecological considerations are growing in
importance (e.g. natural ingredients, biodegradable packaging) Information: Some developments in information technology have
an immediate impact on consumers. Others are less visible to the consumer. For example:
Electronic banking Bar coding Tele shopping
Developments in trade and retail companies
Supply chain strategy trends
Modern supply chain management retail is based on the following concepts: Vendor Managed Inventory (VMI) Efficient Consumer Response (ECR) Collaborative Planning, Forecasting and Replenishment (CPFR) Electronic marketplaces Radio frequency Identification Detection (RFID)
Vendor Managed Inventory (VMI)
VMI is a continuous replenishment program in which the retailer provides the supplier with detailed information to allow the supplier to manage and replenish product at the store or warehouse level Typically the activities of forecasting, scheduling, requisitioning and
ordering are performed by the supplier. Electronic Data Interchange (EDI)s an integral part of the VMI process
Benefits of VMI Solidified customer-vendor relationships Reduced shipping costs and lead time Fewer human errors Improved service levels
Efficient Consumer Response (ECR)
ECR is a grocery industry supply chain management strategy aimed at eliminating inefficiencies, and non-value-added costs, thus delivering better value to the end customers
It is designed to re-engineer the grocery supply chain from a “push” system into a “pull” system by using e-commerce information technology
ECR attempts to eliminate inefficiencies by introducing strategic initiatives in four areas: Efficient store assortment Efficient product information Efficient promotion Efficient product replenishment
Efficient Consumer Response (ECR)
Programs that companies need to have in place are: Category management (i.e. managing a group of products as strategic
business units within each store) Continuous replenishment program (CRP)
Further support is needed of the following technologies: Barcodes / Scanners Electronic Data Interchange (EDI) Computer aided ordering (CAO) Cross docking / direct store delivery Activity based costing
The main obstacle is not technical but managerial, with managers reluctant to transform their adversarial trading relationships into open partnerships
The main obstacle is not technical but managerial, with managers reluctant to transform their adversarial trading relationships into open partnerships
Efficient Consumer Response (ECR)
Kurnia et al, (2002)
Collaborative Planning, Forecasting and Replenishment (CPFR)
CPFR allows cooperation across the supply chain, using a set of processes and technology models.
Providing dynamic information sharing and integrating both demand and supply side processes, for effectively planning, forecasting and replenishing customer needs through the total supply chain.
Advantages of CPFR: Increased responsiveness Product availability assurance Optimized inventory and associated costs Increased revenues and earnings Improved relationships with trading partners
Electronic marketplaces
A distinction can be made between Open exchanges (accessible for everyone) and Private exchanges (only for members)
An e-marketplace can provide a platform for: Core commerce transactions which can automate and streamline the
entire requisition-to-payment online A collaborative network for production design, supply chain planning,
optimization and fulfillment process Industry wide product information that is aggregated into a common
classification and catalogue structure An environment in which sourcing, negotiations and auctions can take
place in real-time An online community for publishing and exchanging industry news,
information and events
Radio frequency Identification Detection
RFID is a term for technologies that use radio waves to automatically identify.
Auto-ID Center is developing an open global network (a layer on top of internet) that can identify anything, anywhere, automatically.
This network will give companies near perfect supply chain visibility Also, if widely adopted the network could:
eliminate human error from data collection reduce inventories keep product in stock reduce loss and waste free up staff to perform more value added functions improve safety and security
Supply chain strategy trends
The four major developments show how the landscape of the traditional retail buyer has changed
Advanced systems will allow them to optimize their supply chain operations
Future competition in retail will no longer be between individual companies, rather it will be among clusters of companies
As research shows the development towards this kind of collaboration can be troublesome
Trust between the partners, a long term commitment and a balanced sharing of risks and rewards is required to be successful
Conclusions
The buying function plays a very important role in trade companies.
In retail companies buying policy is much more integrated with sales and marketing policy,
Company policy is primarily focused on improving turnover and margin whilst reducing working capital.
Retail today is a truly international business. Advanced information systems allow the application of
new logistics concepts such as VMI, ECR, CPFR and electronic marketplaces.