Context

Retailers operating in today’s highly competitive, complex market face unprecedented supply chain management challenges. Resulting inventory issues are expensive and erode retailers' already thin margins, making supply chain optimization a key success factor. Stockouts alone cost retailers an estimated trillion dollars per year in missed revenue. Although the most acute phase of the COVID supply crisis is behind us, that massive disruption continues to impact retail supply chains through shortages, logistics and transportation constraints, and significant human resource issues.

At the same time, consumers demand greater personalization and product variety than ever before, driving SKU proliferation and supply chain complexity. The pace of new product launches in grocer’s alone is twice what it was two decades ago. Adding more difficulty, consumers also expect speed and convenience in the form of a frictionless omnichannel experience. Further, increasingly ambitious objectives in the area of environmental preservation complicate supply chain management, especially since the bulk of retail’s environmental impact is linked to their supply chains. In most cases, retailers are facing these unprecedented supply chain management challenges with the same siloed organizational processes and technical ecosystem that they have had in place for twenty years.

Stockouts, excess inventory, and cost overruns are the obvious margin-deteriorating symptoms of suboptimal supply chain management. However, the true cost to retailers of supply chain management failures is much higher and more complex. Cart abandonment, damage to brand reputation, loss of market share, delayed cash flows, loss of productivity, and increased operational costs are all consequences of inflexible supply chain management.

Even those retailers who have made substantial investments in business transformation and APS software continue to fall short of achieving the agility and intelligence they need to shore up a competitive advantage in today’s market.

Consultants can help retailers chip away at these considerable challenges thanks to their expertise in inventory and supply chain management. To catalyze their impact and differentiate themselves from competitors, consultants need to embrace innovative solutions that provide actionable insights and empower their retailers to dynamically and automatically optimize their supply chains. Supply Chain Genius technology allows consulting firms to add more value than ever before, both for operational engagements and to support true business transformation.

Paradigm Shift: Towards Dynamic, Agile, and Autonomous

To understand how Supply Chain Genius enables a true paradigm shift, consider how typical retailers currently operate: Their teams define target service level order brackets or backup stock policies once a year by distribution center, supplier, or item category. Incoterms are defined during negotiations and then established as static policy that remains in place regardless of how business conditions evolve. This practice is easy to understand: For most retailers, defining rules and policies is a time-consuming process that usually revolves around spreadsheets. It is therefore typically done at a low frequency and at a high level.

That stale, inflexible approach almost certainly leads to suboptimal results. Even though low-frequency, high-level management is the most common approach for practical reasons, retailers should be managing rules and policies frequently and at a granular level because the market and supply environments continuously change. A one-size-fits all target service level might look right for the entire company when budget and objectives are defined in November or December. By February, however, the target service level most likely warrants revision in light of the new usual black swan, the real demand for new items in the assortment, or an unexpected supplier constraint. Additionally, the target service level may have to be adjusted at an SKU level. For a company objective of 97%, the optimum service level for some items may have to be 95% to avoid too much inventory, and it could be 98% for other items with more stable demand and more reliable suppliers.

The value creation potential of dynamic, granular management of buy rules and policies is clearly enormous when the target service level example is extrapolated to all the other rules and policies retailers have to manage, including those related to backup stock, product flow (cross-dock vs. stored vs. inbound grouping, etc.), orderable unit and multiple, order frequency, order bracket, incoterms, change of supply approach to support a demand change or promotion, buy opportunities, investment buy opportunities, etc.

Supply Chain Genius works differently than an APS. It can be used as an APS substitute for replenishment planning. And it is complementary to APS solutions because it goes beyond APS output to calculate multiple distribution and procurement scenarios in relation to business metrics and identifies the best policies to meet current company targets.

Requirements for Dynamic Supply Chain Management

There are three critical pillars of agile management of supply chains and buy rules:

I. Clearly Defined Targets and Trade Offs: For example, if reducing the days of supply is required to meet a retailers’ monthly inventory target, they will need to select levers to act upon. Options include changing the target service level, orderable unit, order frequency, bracket, backup stock, or managing in cross stock instead of on stock. For each lever, decision-makers need to understand the impact on the target, timing of impact, and the trade-offs with other KPIS like cost to serve, service level, and capacity.

II. Automated Scenario Modeling: To achieve dynamic supply chain management, retailers must be able to launch automated scenario planning at scale. Granular what-if simulations must be automated so that retailers can evaluate the huge volume of combinations while maintaining the velocity required by the consumers.

III. Continuous Monitoring and Evaluation of Rule and Policy Changes: Visibility into the business impact of adjusting rules and policies is critical to choosing the right approach and enabling continuous improvement.To achieve this, an organization must have sufficient business analytics capabilities to understand the state of the business across the supply network. It must also have adequate decision intelligence to understand the decisions made, how recommendations can be improved, and which decisions can be automated. For example, a retailer seeking to dynamically manage its target service level must ensure that its inventory is reduced but its target service level is still achieved.