Advantage: Bar Codes (for now)

Supply Chain Digest’s series on Supply Chain by the Numbers for Week of Jan. 13, 2011 cites a Kroger pilot with read rates exceeding 98.5%. The pilot is built around reducing the manual imagetouches during the check-out process. As the products move through the tunnel, their bar-codes are read and accounted for, an OCR (optical character recognition) system supports the bar-code reader by identifying products where the bar-codes may be unreadable. Any items that could not be “read” using the bar-code reader or the OCR device are handled manually at the end of the tunnel to finish the check-out. This was showcased in the recently concluded NRF 2011.

The system can potentially reduce billions of manual touches during the check-our process as well as provide substantial improvements in loss-prevention and inventory accuracy processes. All of which should provide Kroger with definite cost-savings and a much improved replenishment capability in its stores.

Another possible inference? SC Digest says that, “the development of the system is obviously a bet that item-level RFID tags capable of being read en-masse or at high speeds are not coming to the grocery industry any time soon – else Kroger or any retailer would not have made the investment in this UPC-based technology”. This view is corroborated by Kroger’s CEO as well.

Where does that leave RFID at least for now? Well, RFID is in a great revival as well – with a host of retailers adopting RFID technology to manage their store replenishments from their back-rooms as well as to manage their receiving and shipping operations in the warehouses by adopting RFID tags at case, pallet, and/or LPN levels, in addition to renewed efforts to kick-start the item-level tagging.

American Apparel reports 99+% inventory accuracy in their store pilots, Wal-Mart re-launched its RFID efforts at item-level with apparel. J.C. Penney has been another big retailer actively toying with the RFID tags to better manage its supply chain as well as stores. Once the technology matures and item-level tagging becomes mainstream, the POS & check-out processes should also be able to leverage RFID tags!


© Vivek Sehgal, 2011, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my books on Supply Chain Management at Amazon.


Cost of Sales and Supply Chain Competence

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Supply chain competence affects your bottom-line in more direct ways than you might realize. In an earlier article, I covered the role of inventory and how the ability to define and control inventory in the supply chain affects your financials. In this article, let us review the role of controlling cost of sales through supply chain competencies and its effect on the corporate financial statements. 

The cost of sales appears on the income statement right below the revenues. The difference between the revenues and the cost of sales is the gross profit. Therefore, the cost of sales directly determines the gross profit of a firm and that is directly responsible for the firm’s bottom-line. It has several aliases: it may be called cost of goods sold, cost of products, cost of products sold or something else similar in connotation. That is not important. What is important is what constitutes the cost of sales. Typically, for manufacturers and retailers, it is also the second biggest number on the income statement after the revenues. In fact, for the financial year 2009, the COGS was 50% of 2009 revenues for P&G, 76% of the total revenues for Wal-Mart, and 70% of sales at Target for FY2009. Therefore, if one had to start looking at reducing costs, COGS fits the bill nicely. This is the largest pie of expense in an organization and even a small reduction in this will naturally generate a large impact on the firm’s bottom-line.

What does cost of sales consist of?

Cost of sales generally includes all direct expenses related to the products or services that a firm sells. For manufacturers, this typically includes the cost of raw materials and purchased sub-assemblies, cost of conversion to the finished goods like the direct labor used to run a plant, depreciation of the plant and machinery, or things like the coolant oil needed to cut metal on the turning centers, cost of freight to transport raw-materials to its factories, warehousing costs to maintain the finished-goods stocks and shipping costs to ship them to their customers. In a retail scenario, the cost of sales will include the cost of merchandise and the cost of freight from its suppliers to its warehouses, and the cost of distribution from its warehouses to its stores. In summary – include all direct expenses related to the value-adding activities of the firm in the cost of sales.

So how can supply chain competency affect the cost of sales?

Almost all expenses related to the value-adding activities are controlled through the supply chain processes and the efficacy of these processes determines the cost basis of the activity. Take the warehousing costs, for example, automating the warehouse planning and execution activities through a warehouse management & execution system can increase the number of cases handled on inbound and outbound shipments for every labor-hour employed. The freight costs can be reduced by employing a better process for planning shipments – that can reduce the miles driven, enhance the equipment utilization rates, or consolidate shipments to reduce freight. Any way you look at it, developing supply chain process competencies affects the process efficiencies that in turn, affect the cost of sales and hence your profitability.

Following are some of most common expenses included in the COGS and the supply chain process that can potentially optimize it.

Cost Component of COGS

Supply Chain Process Managing the Cost Component

Financial Metrics Affected

Direct Materials and Supplies, Cost of Raw Materials and Inputs (for manufacturers), or Merchandise (for retailers), etc.

Forecasting, Replenishment, Inventory Management (raw materials), Sourcing, Purchasing

Gross Margin, EBITDA, Inventory, Inventory Turnover, Current Assets, Working Capital, Return on Assets.

Direct Labor, Cost of Transformation (production, manufacturing, processing, etc.), Depreciation, Direct Manufacturing Overheads, etc.

Production Planning, Factory Planning, Resource Planning, Inventory (work-in-progress) Management

Gross Margin, EBITDA, Working Capital, Return on Capital Employed.

Cost of Freight (all inbound, outbound, and intra-facility transfers of material)

Transportation Management

Gross Margin, EBITDA, Working Capital.

Cost of Warehousing, Inventory Shrink, Obsolescence, Mark-downs, Handling, Inventory Carrying

Warehouse Management, Labor Management, Inventory Management (finished goods or merchandise)

Gross Margin, EBITDA, Working Capital.

As the Table 1 shows, the major components that constitute the cost of sales are the cost of merchandise or raw materials, cost of distribution, cost of manufacturing, and the cost of labor. The supply chain capabilities that can help reduce these costs are as follows.

  • The cost of materials, whether raw materials or merchandise, can be reduced through strategic sourcing, bid optimization, and supplier contracts-based optimization. Good demand and supply management practices also help in reducing the cost of materials by reducing obsolescence. Obsolete inventory typically results in merchandise clearance and write-offs both of which increase the total costs of materials.
  • Distribution costs primarily consist of warehousing and transportation. Supply chain processes that can help reduce these costs are network planning, warehouse management, and transportation management. The warehousing management capabilities reduce the warehousing costs through better use of space, better inventory management in the warehouse, automation, and optimized labor scheduling. Network planning can reduce the cost of distribution through optimal positioning of the distribution centers with respect to the suppliers and stores. Transportation management capabilities help reduce the distribution costs by optimizing shipments that reduce the total miles driven and enhance the container and trailer volume utilization. Better fleet management capabilities can increase the efficiency of the fleet and freight invoice automation can reduce the expenses related to validating and paying for freight.
  • Manufacturing costs can be reduced through better scheduling and factory planning processes. Supply chain optimization solutions that allow modeling of the demand, available inventory, available resources, operations, and sequencing constraints are typically used to produce feasible manufacturing schedules that can optimize the usage of assets and resources to produce manufacturing schedules that drive most profitable product-mix for the given demand or maximize the demand fulfillment for given orders. Increasing the asset utilization reduces need for investing in capital assets thus reducing long-term debt used to finance capital investments. In turn, it positively impacts return on capital employed by reducing the total current liabilities.
  • Major labor costs for the retailers occur in the warehouses and the stores, and for manufacturers, they are in the factories. Warehouse management processes can help directly reduce the labor costs in the warehouses, by better labor planning, scheduling, and task tracking. Better demand forecasting in the stores helps in streamlining the labor plans in the stores. Manufacturing labor costs are minimized through better scheduling and factory planning capabilities that can model the material and asset constraints to produce feasible labor plans.

Any reduction in the cost of sales directly translates into increased margins assuming the other factors remain constant.


© Vivek Sehgal, 2010, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.


Who Needs a Hundred Varieties of Toothpaste?

In a story about the retailers’ efforts to optimize assortments, NRF reports that several retailers are reducing the number of SKUs they carry. This is expected to help trim the assortments and enhance the overall efficiency of operations including the shelf-space usage in the stores. The article mentions Wal-mart, CVS, Supervalu, and Kroger among retailers that are possibly starting a rationalization process for their assortments.

I believe this is long overdue. Think of all the products in categories like detergent, dish-washing, personal hygiene, cleaning supplies, breakfast cereal, bottled water and many more that are similar as in “utilitarian” products – there is so little  differentiation among the competitive products that a little less variety is almost certain not to affect the retailer’s sales in any significant way. While brand-loyalty has historically contributed substantially to sales, it is losing its edge in the utilitarian segments. I believe this will continue because the underlying reason for the phenomenon is the overall quality improvements through standardized manufacturing practices and standardized inputs. Such standardization has been facilitated through mass-production and globalization of businesses that are becoming truly global in all respects: global customer base, global manufacturing facilities, global manufacturing standards, and stringent quality control processes that are very similar across most larger companies. The result is product homogenization: while the product positioning, packaging, advertising, and marketing practices are still developed for local audience, the products themselves are getting more and more homogeneous and un-differentiated. 

Irrespective of the place or the manufacturer, the ingredients and the manufacturing processes for most of the world’s utilitarian products are consistent. It is not lost on the consumers that a lot of products sold under different brand names are actually manufactured in the same factory, on the same equipment, using the same ingredients, and so on. As consumer awareness grows, the branding will become less of a factor in making the buying decisions, except for few specific items that individual consumers may continue to prize due to personal preferences for flavors, fragrances, and other similar traits.

The growing popularity of the store brands in the last few years is the proof of the larger trend described above.

Brands, however, will not disappear. Stronger brands will survive and thrive, but the world may just not have the space for the “also-rans” any more.

Commerce Retail Sales Advance Report: YOY Jumps 5.9%

Yesterday, I promised to post the report from Commerce for the advance retail sales numbers. You can access it here. Here is the summary:

  • Change from Previous Month (November 2009 to December 2009): Decrease of 0.2%
  • Change from Previous Year (December 2008 versus December 2009): Increase of 5.9%


However, the big disappointment was that for the 12 months total sales for 2009 were down 6.2 percent (±0.2%) from 2008. That is a huge change from last year, probably reflecting the continued softness in the overall economy. Hopefully 2010 rings better.


Well, the NRF was Not Right After All

On November 13, I wrote: If NRF is Right, Not Much Holiday Cheer. In the article, I disagreed with NRF’s projections of lower holiday sales, since all other indicators just did not point to a weak holiday season. Well, the NRF was not right after all!

Most numbers now show that the sales for the holiday season for 2009 did rise.

Data from MasterCard Advisors’ SpendingPulse showed that the increase was as much as 3.6% – see the news article from Bloomberg here.

ShopperTrak now reports that retail sales increased 1.7 Percent for 2009 holiday season even as the foot-traffic declined. Could the decline in foot traffic be a result of increased online retail?

Retail Indicators Branch of the Census Bureau will release their advance retail trade numbers for December 2009 tomorrow. Most likely those numbers will reinforce what we have been hearing so far. So don’t hold your breath, but do come back to check the release tomorrow. 


Commerce says Retail Sales up by 1.2% Without Autos

Well, that is really good news. On Nov. 13, I wrote that there is a very good likelihood that retail holiday sales this year will be better this year than last. This is a view not shared by NRF, though I would stick to it. That has been the trend so far and I think it is going to continue through the rest of the season. When compared to November, 2008, this month’s numbers are up by 1.9%! Click here for the news release from the bureau.

The best part is that while the total retail sales rose by 1.3%, most of the rise happens to be the real retail, as in without the autos. Autos did not contribute heavily to this number so that the retail without autos rose 1.2%. However, autos sales rose as well by 2.0% (6.7% over November 2008 numbers).

All in all, a definite up-trend.


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Clicks Win Over Bricks

Here are the final tallies for the holiday retail sales so far:

Black Friday Weekend Sales Rise 1.6 Percent as Compared to 2008 (links back to the ShopperTrak’s news article).

  • Black Friday weekend retail sales increased a marginal 1.6 percent to a total of $20.5B.
  • Black Friday began the season with a large spend as retail sales totaled $10.66 billion, equaling just a 0.5 percent increase over Black Friday 2008 but representing the largest dollar amount ever spent on the day.
  • Black Saturday posted a slight 0.9 percent rise over last year with $6.107 billion spent.
  • Sunday retail sales increased a seemingly impressive 5.2 percent at $3.73 billion.

Online Cyber Monday sales up 5 pct and number of Web shoppers up 6 percent (links back to the Reuters story).

  • Online shoppers spent 5 percent more this Cyber Monday than they did last year.
  • More consumers flocked to the Web for holiday shopping though they spent slightly less per person.
  • Monday, Nov. 30 was the strongest Cyber Monday in terms of sales since the term was coined five years ago.

Now, some more data from the US Census Bureau: when you compare the rates of decline and rise for total retail and online retail, the online retail help up much better that the total retail. The chart below shows the quarterly change year-over-year for the two time-series. Focus specifically on the data from Q3-2008, the declines in the online retail have been smaller and the improvements in online retail stronger. Few points of note:

  • Online retail seems to have started growing again at growth rates stronger than the total retail. This is not surprising since that has been the trend all along with few exceptions during the recent recession.
  • Notice the trend of the green-line in the second chart – it shows the E-commerce as percent of total retail has a positive trend. The trend has held even during the last two years.  



Lessons for retailers:

  • Build your online stores if you have not yet!
  • When you do, pay attention to the bold new world of multi-channel retailing that you can leverage as a conventional retailer!


© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.