Three Key Foundational Elements For Demand-Driven Retail Success: Gartner

Defining the role of supply chain, span of control and metrics maturity are the key enablers to demand-driven retail success, according to a recent survey by Gartner, Inc. The 2012 demand-driven survey was conducted from September through November 2012 across six retail segments in North America, Western Europe and Asia/Pacific.

Gartner defines demand-driven retailing as “a system of technologies and processes that captures consumer behaviour at each point of interaction. It merges the business domains of demand, supply and product to fulfill customer expectations, improve operational performance and facilitates a timely, profitable response across a network of suppliers, employees and sales channels.”

“Demand-driven retailers balance operations and innovation excellence, while delivering an exceptional and profitable customer experience,” said Mike Griswold, research vice president at Gartner. “Retailers progressing along this journey realise a need for three key foundational elements that provide the platform for other demand-driven initiatives.”

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Griswold explained the importance of these three key enablers.

Enabler 1: The role of the supply chain

This is a clear definition and alignment around the role of the supply chain to foster alignment with business strategy. Organisations typically find their supply chain fills one of three roles:

• Cost of doing business — Least popular role of the supply chain with only one in five respondents indicating this as their supply chain role.

• One of several sources of competitive differentiation — While globally 45 percent of respondents identified this as the role of their supply chain, North American retailers appear more mature, with 58 percent respondents citing this as their supply chain role.

• Primary source of competitive differentiation — Respondents segmented as leaders and citing this as their supply chain role are 64 percent more likely to deliver return on assets (ROA) of greater than 16 percent.

The role of a supply chain will vary by retailer, potentially evolving over time. Organisations that see the supply chain as a source of differentiation tend to view their supply chain as more mature and playing a more strategic role within the company.

Enabler 2: Supply chain span of control

Although the role of the supply chain may differ by retailer, leaders share one common trait — they define their supply chains more inclusively than their peers. Many retailers use a narrow span of control (such as distribution centre [DC] operations, transportation and procurement) to define their supply chains. More-mature retail supply chains broaden the span of control to include forecasting, replenishment, new product launch and sourcing responsibilities. Ultimately, it is the inclusion of store-level supply chain activities (such as inventory management, determining minimum shelf presentation guidelines and replenishment frequency) into the span of control of the supply chain that identifies leaders.

Enabler 3: Establishing a robust set of end-to-end supply chain metrics

Many retailers today measure aspects of their supply chains, but see a need for a more-comprehensive measurement program. Supply chain leaders understand successful performance measurement takes two things: determining the right set of metrics and understanding how to use those metrics to optimise performance across the value network. The key is to focus on the few critical metrics that really matter.

Once the foundations have been established, the survey found that promotional and new item forecasting is the primary challenge for demand-driven retailers. Increasing and changing shopper requirements puts incredible pressure on demand planning capabilities. The typical retail supply chain responds fairly well to predictable demand patterns. With a stable set of data that includes seasonality and trending, base demand levels can be predicted fairly accurately, and replenishment transactions can occur in a predictable and cost-effective manner.

“However, with shopper tastes and preferences constantly in flux, many organisations turn to more complex promotional strategies and launching new items as a way to meet these changing preferences,” said Griswold. “With promotional activity and complexity increasing, the demand signal for many retailers is anything but stable.”

According to the survey, at least two-thirds of respondents identified base, promotional and new item forecasting as “extremely important” to their organisations. Yet, despite the growth in e-commerce, only 59 percent of respondents cited multichannel forecasting as “extremely important.” This highlights a continuing disconnect that must be addressed for retailers to deliver improved order fill rates and inventory productivity.

With a new item failure rate at around 50 percent, and promotional strategies expected to expand and become more complex, retailers must quickly address this gap and determine ownership of the forecasting process (ideally the supply chain) before making technology decisions. In this way they will be able to create a technology road map that provides the organisation with a unified forecasting platform responsible for creating the demand signal across all sales channels.