December 19, 2017 Guest opinion piece
A view from Stuart Higgins, Retail Partner at LCP Consulting
Following the launch of GS1 UK’s new whitepaper on apparel cost-to-serve, research partner LCP Consulting address the difficulty of maintaining margins while managing more channels.
In order to achieve sustainable growth while making a profit, omnichannel apparel retailers need to understand the real cost drivers within their supply chain. The starting point to this is getting a clearer picture of the varying degrees of profitability by channel, and incorporating this into their broader business strategy. For many, this means adopting a new approach – one that gives a shared understanding of revenue, cost and profitability across the business – the cost-to-serve.
The value and cost of the omnichannel customer
The digital era means that more and more customers are now shopping in an omnichannel way – if not for the physical purchase then definitely along the customer journey on their path to purchase. This means the relative economics of serving that omnichannel customer are, to a certain extent, secondary – if we don’t set ourselves up to service their needs, then they will simply go elsewhere.
The right question to be asking then, is not what the overall economics of omnichannel is, but how can it be broken down through cost-to-serve to provide visibility of the root causes of cost, to identify how it can be reduced.
The challenges in understanding and managing the cost-to-serve
Most retailers face significant challenges in understanding their true cost-to-serve, partly due to the complexity of the physical supply chain operations and partly due to a lack of data and information availability.
Most of them still operate legacy physical supply chains that are optimised for store replenishment, and instead of restructuring in order to enable true omnichannel back-end operations, they ‘bolt-on’ their capabilities to enable online fulfilment. This results in sub-optimal processes and product flows, and can add significantly to cost.
It’s often the case that these legacy issues extend to IT systems, data architecture and outmoded approaches to measuring and managing business performance.
The result is that very few retailers have true visibility of their channel economics so they can’t measure profitability by channel. This is a huge concern given the trend in sales towards omnichannel which brings with it an inevitable margin erosion.
What is driving costs?
It’s rare for supply chains to be optimised for true end-to-end performance and, to borrow and adapt from Dave Brailsford – ‘the aggregation of marginal inefficiencies adds significant cost’:
- New seasonal trading patterns lead to expensive peaks of demand – a typical supply chain operation will operate at full capacity for only a few days a year
- Over-replenishing stores creates challenges and inefficiencies in managing shelf replenishment effectively
- Over-inflated and poorly targeted initial allocations lead to imbalances in inventory and availability over the course of a season. This typically results in the conflicting situation of poor stock availability in faster selling stores and overstocks in slower selling stores, requiring deep markdown to clear
- Few retailers have genuinely realised that increases in online volumes inevitably lead to increases in return volumes. Typically returns processing is not optimised for cost, or for speed. This can also lead to further risk of markdown if goods are not returned to free stock in a timely fashion
Value added vs non-value added costs – taming the monster
It is a truism that the retail industry has created a rod for its own back as far as deliveries are concerned. By blindly following Amazon down the ‘faster’ and ‘freer’ delivery route, retailers have simply educated customers into believing that delivery is free, even when it’s next day. Now this is clearly not the case and retailers typically have to absorb delivery costs of around £3-£5 for one man parcel delivery and around £12-£15 for a grocery home delivery. However, we frequently see free delivery used as a marketing tool to attract footfall without understanding the true cost impact of that decision.
Part of the problem is that internal functions often make decisions in isolation from the rest of the business and retailers simply don’t understand their cost base fully – nor do they understand the cost impacts of managing volume peaks on that cost base.
Retailers need to ensure they are fully informed before taking strategic proposition-related decisions, particularly regarding marketing initiatives around free delivery and sales promotions. That typically means fully understanding:
- Your cost-to-serve across different channels
- The incremental impact of the proposed activity
- What your customer truly wants – don’t just base decisions on what your competitors are doing and try to follow suit
Once you’ve done this, you can then assess the consequences and make an informed decision whether to proceed.
Ensuring the sustainability of the omnichannel value proposition
It’s clear that the retail landscape will continue to change at a pace that will only intensify.
There are significant opportunities for those who continue to pursue the omnichannel model to not only improve their bottom-line, but also to improve operations and service performance.
In summary, for retailers looking to succeed in today’s omnichannel world;
- Start by understanding your channel and product economics - know your cost-to-serve
- Embrace customer centricity. It is important to know your customer and respond to their needs, not just their specific requirements. However, the balance can be tricky – you need to make sure you are not over-servicing those needs
- Align your decision making process across your end-to-end supply chain
- Critically challenge your existing ways of working and embrace change – if you always do what you’ve always done, you will always get what you’ve always had!
Alongside the Cranfield School of Management, LCP Consulting was one of the research partners on GS1 UK’s cost-to-serve project. Click the link below to download the full report and learn how your business can influence its apparel cost-to-serve.