This article originally appeared on the BeyeNETWORK
Entertainment retailers are in a challenging position in the supply chain. They must please an audience that demands the hottest releases immediately at low prices, while negotiating for supply and favorable cost with those who produce and distribute the music, movies and other entertainment.
In an environment of low customer loyalty and increasing financial pressure, these retailers must deliver goods to the consumer while delivering profit to shareholders. Much like retailers in other industries, entertainment retailers are now turning to business intelligence. They are doing this to optimize spend management and improve the terms and conditions they get from vendors.
Having products on store shelves when the customer is there and wants to buy them is crucial. If the CD or DVD isn’t in stock, the customer will probably buy it elsewhere. This means lost revenue for the retailer today, as well as a greater chance that the same disappointed customer might not return in the future. This problem can result in significant lost revenue if the out-of-stock CD or DVD is a new and very popular release. On the other hand, having too much of a particular product means money tied up in inventory. Eventually, high inventory results in either deep discounts to sell the product or additional costs to return it to vendors.
Our client and example for this article is an entertainment retailer with a nationwide presence. This retailer sells an extensive selection of music CDs and movie DVDs, along with books and magazines, clothing, accessories and other products. Their large stores contain an average of over 250,000 SKUs in each location, with the entire chain ringing up about 7 million transactions a year. With a large catalog of entertainment titles, the chain carries over 400,000 unique active SKUs.
The Challenges of Vendor Management
Without being able to analyze sales patterns, inventories levels, receipts and return-to-vendor (RTV) experience at the product level, this retailer was at the mercy of its vendors. Management knew that having the right information would give them a better position when negotiating for delivery of quantities of popular products to satisfy expected demand, getting that product on time and getting the best price possible. Management also felt that improving supply chain relationships offered an opportunity to free up cash from inventory and improve overall gross margins.
Our retailer’s supply chain is large and sometimes complex. A vendor can be a record label or movie studio (who produces as well as distributes the entertainment product), or can be merely a distributor (the “middle man” between the producer and the retailer). Our client deals with several thousand distinct vendors across their broad product range.
This retailer also has two or three sources for the same product most of the time. About 78 percent of SKUs are available from two or three vendors (one primary and one or two alternates) with which the retailer already has a relationship. This fact reveals a potential opportunity to exert leverage. Using the power of information to track and compare vendor performance, the retailer could switch vendors if needed to get better pricing, terms and accuracy of delivery. This leverage was not yet tapped.
Improving Delivery Performance and Profitability
Vendor performance analysis and scorecarding is a major planned phase in the retailer’s data warehouse and business intelligence implementation. Earlier phases dealt with the fundamental areas of shopper traffic and point-of-sales (POS) performance, with the data warehouse designed to deliver near real-time information. Such information included sales volumes and margins by SKU, shopper conversion rates and inventory levels. To help improve vendor performance, a few key performance indicators (KPIs) are being implemented to measure product delivery and product profitability by vendor. In general, the scope of vendor analysis involves two main aspects: accuracy of delivery and product profitability.
Product delivery deals with the timeliness and completeness of shipments to the retailer. One key performance indicator in this area is the actual delivery date compared to the retailer’s expected delivery date (as requested on the purchase order). The other mainKPI is the order fill rate, which is the percentage of the total order received (on the first actual delivery date) compared to the quantity ordered.
A problem with product delivery, however, can damage the retailer’s profitability. There is cost associated with managing multiple receipts, managing purchase orders and shipping back unsold products. For example, if a particular order for one SKU arrives piecemeal (half on one day, a quarter the next day and a quarter the day after that), the retailer must unpack the orders and stock the shelves. This takes a great deal of extra effort for the retailer. If product arrives after the expected delivery date specified in the purchase order, that product will be less likely to be in stock when customers are looking for it. Such a delay results in lost revenue. If the popularity of the product declines quickly, or if a promotion ends before the shelves are restocked, late receipts could translate into high and slower moving inventory. As a result, the retailer is faced with selling that product at a discount or returning it to the vendor. Returns (RTVs) involve a restocking fee, as well as the cost of repacking and shipping.
Product profitability is the other focus. Here, the key performance indicator is the product gross margin. While the retailer’s gross margin can be affected by both “price events” and “cost events,” the “cost events” are usually within the vendor’s control. Product cost can be impacted by vendor incentives on certain products, large quantity purchases, or purchases in combination with certain other products. By comparing the “regular price” (the regular sales price, not reflecting any “price events,” such as promotions or discounts to the customer) with the vendor’s price to the retailer, the retailer has a gauge of product gross margin by vendor.
One significant challenge was that the retailer’s purchase order (PO) system keeps only the current state of each PO. When an item is received or a line item is cancelled, that line is automatically deleted from the system. Similarly, when an entire PO is fully received or cancelled, it is completely deleted with no historical footprint at all. Consequently, the details of each PO and action, including SKUs and quantities ordered, SKUs and quantities received, costs, requested and actual receipt dates, etc. must be captured and stored in the data warehouse before they are overwritten or deleted in the PO system. These details are not only critical for vendor performance analysis, but also for buyer performance analysis, which is becoming a priority.
With the vendor performance analysis just now going live for the holiday sales season, a tangible impact on the business should be seen in early 2006. This retailer will be able to back up vendor negotiations with hard data, and it won’t need to blindly trust the vendors to ship the right product in the right quantities. Being able to track daily receipts at the line item level and analyze performance over time, this retailer will be able to clearly demonstrate issues to its vendors and possibly achieve better pricing in compensation. Furthermore, this retailer should attain greater leverage when negotiating for allocations of new and heavily-promoted releases. This will result in greater high-margin sales