How to Optimize SCM in Retail for Better Inventory Control and Cost Efficiency

What does it mean to ‘optimise’? Why read this blog?

Not much behind in the past, sending space missions to the International Space Station used to take several days. Today, it has been reduced to a matter of hours after launch. In other words, it could also be said that space missions to the ISS have become more optimised. To optimise is to make something more efficient and effective for better results or performance. This concept has significant relevance for individuals as well as organisations. One such commercial area where optimisation is highly sought after is supply chain management. Focusing on the retail industry, this blog highlights six focus areas for supply chain optimisation for retail with an eye on achieving better inventory management and cost-efficient supply chain management.

Focus Areas for Supply Chain Optimisation

Demand Forecasting and Planning

Accuracy in demand forecasting has several implications in striving to achieve supply chain optimisation. To begin with, the volume of inventory is rationalised to the required levels instead of having to handle anything over the board. With optimised inventory levels, the holding costs come down which reduces the overall costs of managing supply chains. Accuracy in demand forecasting also indicates reduced investment in inventory. With greater certainty of inventory requirements, businesses can procure with higher emphasis on the factor of timeliness.

In improving demand forecasting, the use of cutting-edge technologies like AI and ML are gaining increasing prominence. While conventional demand forecasting solutions rely on historical data and basic statistical tools, AI and ML bring home an advanced approach where vast volumes of data are analysed, diverse patterns are established, and complex insights are generated. The most important part is that AI-based solutions can learn and improve to deliver better results for decision-making and planning. While AI and ML capabilities are superior, they still need accurate and relevant data. This is where the need arises to ensure data collection from multiple sources like POS, website traffic, social media, and search engine analysis. Another important strategy is to secure collaborative working relationships with supply chain associates for better information sharing and lending flexibility to supply chains.

Inventory Management

Inventory is a vital constituent of supply chains. Although we discussed demand forecasting in the previous point, it is only a part of inventory management. In this point, we will cover the other facets of inventory management for achieving supply chain optimisation. The first in the list of retail inventory control strategies is inventory classification. Inventory classification affects the quality and quantum of efforts management has to invest in managing inventory. For example, when the emphasis is higher on high-value items, the chances of deviations in supply chain operations concerning such items are also reduced. Secondly, the implementation of inventory optimisation standards like EOQ and JIT helps bring down purchase, holding and carrying costs contributing to the smooth commercial performance of inventory functions of companies. The third facet is securing strong supply chain visibility and transparency into the inventory lines. To keep supply chains running smoothly, it is important to not just keep the flow of inventory up and running but also make it more agile and responsive. Investing in technologies like RFID and blockchain assumes significance. Real-time visibility into inventory lines is critical to make adjustments. This is also important to show order status information to customers which has now become a standard in eCommerce and omnichannel.

Supply Chain Network Optimisation

A supply chain network is the web or route of entities, processes, and capabilities going through which a product or service is transferred from its origin to its destination. During this journey, products and services may undergo several value additions to arrive at their final form for sale and/or consumption. To optimise supply chains, optimising these networks emerges as a prerogative. A supply chain network that is haphazard and not well-contemplated is prone to encounter numerous challenges.

For supply chain network optimisation, a critical requirement is to evaluate and reshape the existing network design. One objective for doing so is to shrink and simplify the network for improved productivity. This may involve reassessing the roles of entities. Process remapping and the establishment of new operational standards are almost always on the cards. Any change in the supply chain network also necessitates appropriate changes in logistics management. Even without changes in the supply chain network, there are many aspects of logistics management that can be re-assessed like route planning which can lead to reduced transportation costs and lead times. In the efforts to achieve supply chain network optimisation, collaboration with and participation of supply chain associates also plays a pivotal role. Their support and cooperation is essential to achieve the desired outcomes.

Technology Upliftment

As new technological developments are making a foray into the world of retail and supply chain management, it is important for organisations to keep an eye on how these new advancements can improve their operations. Since supply chains are heavily dependent on technologies, technological developments carry significant potential to improve supply chain management. The first requirement in the list is to keep the existing IT infrastructure updated including retail SCM software, hardware assets, and industrial equipment concerning supply chain and management operations used in offices, warehouses, logistical assets, distribution centres, and retail outlets. Upgrading technology may also result in the automation of many processes or parts thereof. The next level of effort lies in the consideration of making technological leaps. Many new technological uprisings like IoT and AI are enabling superior management capabilities like remote and real-time monitoring of inventory movement, altering storing conditions, automation of decision-making, automated alert and reporting, self-learning analytical tools, etc.

Lean Principles

The essence of lean principles is to eliminate waste and strive for continuous improvement. Supply chains are long journeys that pass through an extensive network of entities, places, and processes. This gives rise to high chances of having wastage and redundancies in supply chains. The scope of the application of lean principles for supply chain optimisation is wide. Avoiding overproduction is one of them. By improved accuracy in demand forecasting and regulation over purchase and production, it is possible to cut down on unwanted inventory entering supply chains. This brings down both costs and efforts in managing inventory. Avoiding delays is another similar application. Waiting for inventory for processing at any stage in a supply chain costs time which in turn costs financial resources.

The other aspect of lean principles is continuous improvement. There could be numerous approaches to reach continuous improvement but a time-tested approach is kaizen. The essence of Kaizen is making incremental changes over time. An important requirement for implementing Kaizen is a well-defined system. Without standardisation, it can be extremely difficult to keep track of performance and identify scopes of improvement. For better implementation of Kaizen, root-cause analysis is also used. The presence of Standard Operating Procedures (SOPs) provides a strong advantage in following Kaizen.

Risk Management

Supply chains are exposed to numerous risks from all quarters. Since supply chains tend to be long and extensive with the involvement of multiple entities, places, and processes subject to different environmental conditions, it significantly increases the risk exposure of supply chains. When we say environment, it can be natural, economic, business, technology, geopolitics, and so on. In such a situation, it becomes imperative for organisations to have proper risk management frameworks in place. The foremost requirement is to be aware of the potential risks. After identification, risks must also be classified for prioritisation. Different risks may demand different levels of preparation. For example, geopolitical events are rarely within the control of organisations. Two effective solutions to this are building strong collaborations with supply chain partners for better insights and risk sharing. Since these events are out of control, the second solution is to be ready with draft contingency plans. Risk management may also have implications for hiring. Internal expertise is important to be able to foresee problems and devise solutions, the burden of which often lies on the shoulders of senior leadership positions. Other measures include maintaining safety stock, avoiding wastages, strategic positioning of inventory, multiplicity of supply sources and logistical mediums, etc.   

Quick Wrap

Supply chain optimisation has an extensive scope in terms of what could be done to achieve it. Different organisations adopt different approaches and solutions to increase the efficiency and effectiveness of their supply chains. Organising these approaches and solutions lead to the emergence of a few important focus areas which are highlighted in this blog.

Demand forecasting and planning have several implications in striving to achieve supply chain optimisation. With optimised inventory levels, the holding costs come down which reduces the overall costs of managing supply chains. In improving demand forecasting, the use of cutting-edge technologies like AI and ML are gaining increasing prominence.

Inventory management is a vital constituent of supply chains. Inventory classification, implementation of inventory optimisation standards, securing strong visibility and transparency into the inventory lines, and the use of technology are some vital considerations here. Since supply chains are heavily dependent on technologies, technological developments carry significant potential to optimise supply chain management including achieving retail and supply chain integration.

To optimise supply chains, optimising the supply chain networks is another important focus area. A supply chain network that is not well-planned is prone to encounter numerous risks and challenges.

Supply chains are long journeys that pass through an extensive network of entities, places, and processes. This gives rise to high chances of having wastage and redundancies in supply chains. Implementation of supply chain SOPs provides a strong advantage in applying lean principles like Kaizen.

Since supply chains are exposed to numerous risks from all quarters, it becomes imperative for retail brands and businesses to have proper risk management frameworks in place for enhanced supply chain resilience in retail. Strong collaborations with supply chain partners, risk sharing, internal expertise, contingency plans, safety stock, and a multiplicity of supply sources and logistical mediums are some highly recommended standards and practices for supply chain risk management.

About Your Retail Coach:

YRC is a retail and eCommerce consulting house with expertise in startups, management, transformation, and scale. With a scaling global presence and over ten years of proven experience, YRC has worked with more than 500 clients in 25+ sectors with a success rate of over 94%.

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