March 03, 2017 Industry news
Knowing where supply chain expenditure is building is key to boosting profits for online apparel retailers who are seeing omnichannel sales grow as margins shrink.
LCP Consulting’s Laura Morroll – co-author of our white paper ‘Where did your profitability go?’ with Richard Wilding of Cranfield School of Management and GS1 UK’s Jacky Broomhead – recalls how research revealed this is an area of which many retailers are ignorant.
“When we asked retailers for a breakdown of their unit costs, they couldn’t pinpoint them,“ says Laura. “The granularity of data just wasn’t there at an item level from the product design stage through the purchase order management process, inbound, warehousing, outbound or returns.”
Cost mix by different retail types
But while many individual businesses surveyed said they found it tough to breakdown how costs build up at all functional links in the supply chain, the white paper research shed important light on key cost areas. It’s encapsulated in the report’s ’ready reckoner’ that identifies retailers’ biggest cost exposure.
When it comes to where the costs are building for retailers, it really depends on what type of business they’re operating. Lower volume retailers with fewer stores won’t be spending as much on inventory management. But, one of the biggest factors on the cost-to-serve is the proportion of online sales – which adds significant cost in fulfilment. Consistently though, it’s downstream costs that account for the majority of operational costs.
Launch panellist Simon Ratcliffe, Sourcing and Supply Chain Director at fashion retailer Fat Face, added that while he and his company had an accurate picture of their downstream costs, it was the upstream supply side that was more difficult to quantify.
“I’d be interested to know how much cost-per-unit fulfilment by channel awareness there is,” said Simon. “Because I don’t think the upstream data and planning is as good as it could be.”
Getting it right – from the top
It’s vital for apparel retailers to have the right information at the right time to get hold of their upstream costs. Our research found some key contributors to upstream costs that can significantly impact costs further downstream.
For example, range is a significant factor, amplifying costs in an apparel sector where an average of two collections per year has now risen to 18. While this can be a source of competitive advantage, the added cost of design, development and sourcing activity to deliver it can be significant. What’s more, a large number of styles may never make it through to being finished product – also adding to cost pressures.
“Managing many suppliers are another challenging feature of the upstream landscape,” adds GS1 UK’s Market Development Manager for Apparel Jacky Broomhead, “with a lack of integration making more manual and labour intensive forms of communication necessary. In turn, a lack of connectivity at key product handover points can then impact downstream planning accuracy.”
How retailers manage stock along the whole supply chain plays a key factor in managing operational costs. Upstream, the challenge of managing a more varied supply base complicates and drives up the cost of point of origin consolidation prior to shipment. Whereas downstream, retailers need to balance the location of stock relative to their customers with the number of distribution centres to manage the cost of fulfilment. And, critically, any errors in master data entry will delay the process of moving product from one point to the next adding unnecessary costs and affecting downstream processes such as warehouse inbound and online information.
With extended range upstream supplier communication, data issues and new channels all playing a role in an average apparel returns rate of 38% – their costs exacerbated by the promise of free returns – it’s no surprise the cost to UK industry is as high as £690 million per year. And it’s a returns headache that’s hard for apparel retailers to avoid in a market where 55% of customers say they won’t buy unless returns are free.
Get things right upstream through accurate, timely information at appropriate levels of granularity means downstream processes and service not only become easier to manage, but more cost-effective too.
Find out more about cost-to-serve pressure points
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