Week 1: Introduction and Retail Strategy
Introduction to Retail
Why study retail operations?
- Retail is very dynamic and innovative sector.
- Retailers play a dominant role in many supply chains (not only important
for retailers, but also for suppliers to understand processes in retail and
their impact on supply chain).
- Problems faced by retailers (data availability, dealing with increased
variety, etc.) are shared by many other firms in any other industry.
Retailing is a set of business activities that adds value to the products and
services sold to consumers for their personal or family use.
Adds value can be done by:
o Breaking bulk: buy it in quantities customers want
o Holding inventory: buy it at a convenient place when you want it
o Providing assortment: buy other products at the same time
o Offering services: see it before you buy, get credit, layaway
A retailer is a business that sells products and/or services to consumers for
personal or family use.
There is a use change in retail, historical development:
Year 1900 ~100 items Year 2000 ~10.000 items.
Multichannel retailing: retailers may use multiple channels, including non-
store retail formats like electronic retailing, catalog and direct mail, television
home shopping, vending machines.
Retail supply chain
When we redesing processes at retailer of
manufacturer, be aware of potential
consequences for other companies in
retail supply chain.
Retail Strategy
Retailers use different retail mixes. There are an infinite amount of variations.
1. Merchandise
o Variety: indicates the number of different product categories
(breadth)
o Assortment: indicates how many different products are offered
within one product category (depth)
2. Services (e.g. high service can mean higher price, and low service means
lower price)
3. Store design, visual merchandising (e.g. basic store, lower costs, and
also lower price for consumers)
4. Location (e.g. city center means higher price)
5. Pricing (price consumers need to pay for the products)
6. Communication mix (how does the retailer reach out to its customers,
e.g. TV, mouth-to-mouth)
,Survival of the Fittest – some combination of retail mixes satisfy the
needs of significant segments and persist over time.
Decision variables for retailers:
Example: compare two retailers Walmart and Zara.
Walmart Zara
Number 1 retailer worldwide World’s largest fashion retailer
Active in 27 markets outside the US Part of Inditex (Spain) – suppliers
(South America, Europe, Asia, etc. close to headquarters in Spain
Active in 202 countries worldwide,
2.2 million associates worldwide, More than 176.000 associates
11300 stores worldwide, many female, more than
7337 stores
Keep prices as low as possible Key behind success: urgency – some
(suppliers to Asia: pressure on price items are in store for one month,
and on costs) exciting for shoppers
Can set standards for the nation as a Incredibly fast: capable of spotting
whole; most power new trends very quickly, and
translating into products
High volume, big variety of products, Products look rather exclusively, but
pool system with retailers deciding are offered at affordable price
what is being sold and tell
manufacturers what to produce and
when based on what is actually being
sold
When you become beating people, Word to mouth advertisements
you start creating enemies (Amazon is
doing this), so many people fall in love
with Walmart, like Google
collaboration
Retail mix of Walmart
1. Merchandise: large number of categories, few items in each category
(space limitations)
2. Services: limited customer service
3. Store design, visual merchandising: basic, special displays for
products
4. Location: free-standing stores, outside of city center; store can be large,
huge parking
5. Pricing: low, Every Day Low Pricing (EDLP)
6. Communication mix: tv and newspaper, insert ads
Retail mix of Zara:
1. Merchandise: a few categories, not huge amount of different products
within category
2. Services: limited service in helping and inventory replenishment
3. Store design, visual merchandising: appealing, modern and very
trendy (expensive)
4. Location: high street locations in city center, fancy buildings, expensive;
people walking by
, 5. Pricing: affordable prices relative to exclusive products
6. Communication mix: not on tv, rather mouth-to-mouth advertisements
Alternative classification for retailer strategies
- First mile: processes starting from designing product, sourcing it,
forecasting it, ordering and making the product (e.g.
Zara; spot trends and quickly react)
- Middle mile: processes in distribution center, bringing
from DC to store (e.g. Walmart; getting massive
volumes)
- Last mile: processes from ex-factory to DC/store to
consumer (e.g. Amazon; huge variety of products, only
possible by online concept)
- Magic mile: magic, because it is required to sustain a
margin model in decline (e.g. use celebrities to promote
product)
Quick to adapt to new trends and affordable exclusivity pricing strategy imply a
moderate-cost-fast-supply-chain, e.g. Zara. – high responsiveness, less
markdowns.
Demand and supply chain
operations planning framework
Week 2: Inventory
Control
Inventory Control in Retail
Classification: different items need different inventory control concepts [Van
Donselaar (2005)].
Classification in:
o Items with short life cycle
o Promotion items
o Purchasing driven items
o Regular items
Non-perishables
Perishables
Inventory control for items with short life cycle
- For items with short lifecycle: balancing availability and obsolescence risk
- Three stages:
1. Initial store-fill
, 2. Inventory replenishment
3. Phasing-out at end of life cycle (e.g. a season)
- Two potential policies for stages 1 and 2:
o The stores order when needed
o The alpha-policy
- In stage 3, a policy is needed which optimizes the markdown level
Stage 2: How to replenish stores from the DC?
- Alpha-policy: directly ship α% of DC-inventory to the stores and when
the first stores reach their minimum inventory norm, allocate the rest
based on actual inventories and sales at each of the stores
o How large should α be?
Optimal value for α ~70%-80%.
o Advantages high value α: in first allocation round high service in the
stores.
o Disadvantages high value α:
Inventory may be allocated to wrong store (where demand
disappointed)
Potentially lower service in second allocation round
- Reordering by stores
Advantages alpha-policy Advantages reordering by stores
Central decision making (HQ deciding Local knowledge
how much to send), so avoids gaming
Due to only 2 waves, it increases Local responsibility
availability at store (esp. applicable if life
cycle quite short)
Possibly multiple orders per store
(if medium life cycle)
You would like to have as few allocations as possible, to put all service closer to
the customers in the customer stores, for that reason only 2 waves for alpha
policy (with 2 waves: better informed, than 1).
Exercise for final (= 2nd) allocation in alpha policy:
- Design two allocation rules, discuss their merits and give expressions for
the number of CU’s from SKU i allocated to store j.
- Given:
o The sales for SKU i in store j in the first 9 weeks of the life cycle
have been Sij,
o current inventory levels in the stores are INVij,
o the minimum inventory level (for a 93% fill rate based on previous 3
weeks) in store j is MINij
o the inventory in the DC for SKU i is IDCi.
Two allocation rules:
1. Equal run-out times
a. Determine order up to level OULij:
o Consider how much inventory is available in the total system (both
DC and stores)
Introduction to Retail
Why study retail operations?
- Retail is very dynamic and innovative sector.
- Retailers play a dominant role in many supply chains (not only important
for retailers, but also for suppliers to understand processes in retail and
their impact on supply chain).
- Problems faced by retailers (data availability, dealing with increased
variety, etc.) are shared by many other firms in any other industry.
Retailing is a set of business activities that adds value to the products and
services sold to consumers for their personal or family use.
Adds value can be done by:
o Breaking bulk: buy it in quantities customers want
o Holding inventory: buy it at a convenient place when you want it
o Providing assortment: buy other products at the same time
o Offering services: see it before you buy, get credit, layaway
A retailer is a business that sells products and/or services to consumers for
personal or family use.
There is a use change in retail, historical development:
Year 1900 ~100 items Year 2000 ~10.000 items.
Multichannel retailing: retailers may use multiple channels, including non-
store retail formats like electronic retailing, catalog and direct mail, television
home shopping, vending machines.
Retail supply chain
When we redesing processes at retailer of
manufacturer, be aware of potential
consequences for other companies in
retail supply chain.
Retail Strategy
Retailers use different retail mixes. There are an infinite amount of variations.
1. Merchandise
o Variety: indicates the number of different product categories
(breadth)
o Assortment: indicates how many different products are offered
within one product category (depth)
2. Services (e.g. high service can mean higher price, and low service means
lower price)
3. Store design, visual merchandising (e.g. basic store, lower costs, and
also lower price for consumers)
4. Location (e.g. city center means higher price)
5. Pricing (price consumers need to pay for the products)
6. Communication mix (how does the retailer reach out to its customers,
e.g. TV, mouth-to-mouth)
,Survival of the Fittest – some combination of retail mixes satisfy the
needs of significant segments and persist over time.
Decision variables for retailers:
Example: compare two retailers Walmart and Zara.
Walmart Zara
Number 1 retailer worldwide World’s largest fashion retailer
Active in 27 markets outside the US Part of Inditex (Spain) – suppliers
(South America, Europe, Asia, etc. close to headquarters in Spain
Active in 202 countries worldwide,
2.2 million associates worldwide, More than 176.000 associates
11300 stores worldwide, many female, more than
7337 stores
Keep prices as low as possible Key behind success: urgency – some
(suppliers to Asia: pressure on price items are in store for one month,
and on costs) exciting for shoppers
Can set standards for the nation as a Incredibly fast: capable of spotting
whole; most power new trends very quickly, and
translating into products
High volume, big variety of products, Products look rather exclusively, but
pool system with retailers deciding are offered at affordable price
what is being sold and tell
manufacturers what to produce and
when based on what is actually being
sold
When you become beating people, Word to mouth advertisements
you start creating enemies (Amazon is
doing this), so many people fall in love
with Walmart, like Google
collaboration
Retail mix of Walmart
1. Merchandise: large number of categories, few items in each category
(space limitations)
2. Services: limited customer service
3. Store design, visual merchandising: basic, special displays for
products
4. Location: free-standing stores, outside of city center; store can be large,
huge parking
5. Pricing: low, Every Day Low Pricing (EDLP)
6. Communication mix: tv and newspaper, insert ads
Retail mix of Zara:
1. Merchandise: a few categories, not huge amount of different products
within category
2. Services: limited service in helping and inventory replenishment
3. Store design, visual merchandising: appealing, modern and very
trendy (expensive)
4. Location: high street locations in city center, fancy buildings, expensive;
people walking by
, 5. Pricing: affordable prices relative to exclusive products
6. Communication mix: not on tv, rather mouth-to-mouth advertisements
Alternative classification for retailer strategies
- First mile: processes starting from designing product, sourcing it,
forecasting it, ordering and making the product (e.g.
Zara; spot trends and quickly react)
- Middle mile: processes in distribution center, bringing
from DC to store (e.g. Walmart; getting massive
volumes)
- Last mile: processes from ex-factory to DC/store to
consumer (e.g. Amazon; huge variety of products, only
possible by online concept)
- Magic mile: magic, because it is required to sustain a
margin model in decline (e.g. use celebrities to promote
product)
Quick to adapt to new trends and affordable exclusivity pricing strategy imply a
moderate-cost-fast-supply-chain, e.g. Zara. – high responsiveness, less
markdowns.
Demand and supply chain
operations planning framework
Week 2: Inventory
Control
Inventory Control in Retail
Classification: different items need different inventory control concepts [Van
Donselaar (2005)].
Classification in:
o Items with short life cycle
o Promotion items
o Purchasing driven items
o Regular items
Non-perishables
Perishables
Inventory control for items with short life cycle
- For items with short lifecycle: balancing availability and obsolescence risk
- Three stages:
1. Initial store-fill
, 2. Inventory replenishment
3. Phasing-out at end of life cycle (e.g. a season)
- Two potential policies for stages 1 and 2:
o The stores order when needed
o The alpha-policy
- In stage 3, a policy is needed which optimizes the markdown level
Stage 2: How to replenish stores from the DC?
- Alpha-policy: directly ship α% of DC-inventory to the stores and when
the first stores reach their minimum inventory norm, allocate the rest
based on actual inventories and sales at each of the stores
o How large should α be?
Optimal value for α ~70%-80%.
o Advantages high value α: in first allocation round high service in the
stores.
o Disadvantages high value α:
Inventory may be allocated to wrong store (where demand
disappointed)
Potentially lower service in second allocation round
- Reordering by stores
Advantages alpha-policy Advantages reordering by stores
Central decision making (HQ deciding Local knowledge
how much to send), so avoids gaming
Due to only 2 waves, it increases Local responsibility
availability at store (esp. applicable if life
cycle quite short)
Possibly multiple orders per store
(if medium life cycle)
You would like to have as few allocations as possible, to put all service closer to
the customers in the customer stores, for that reason only 2 waves for alpha
policy (with 2 waves: better informed, than 1).
Exercise for final (= 2nd) allocation in alpha policy:
- Design two allocation rules, discuss their merits and give expressions for
the number of CU’s from SKU i allocated to store j.
- Given:
o The sales for SKU i in store j in the first 9 weeks of the life cycle
have been Sij,
o current inventory levels in the stores are INVij,
o the minimum inventory level (for a 93% fill rate based on previous 3
weeks) in store j is MINij
o the inventory in the DC for SKU i is IDCi.
Two allocation rules:
1. Equal run-out times
a. Determine order up to level OULij:
o Consider how much inventory is available in the total system (both
DC and stores)
