Supply Chain Management in Retail

Supply Chain Management in Retail

Supply Chain Management (SCM) is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. Previously, individual activities of the SCM process were warehousing, distribution, transportation etc. done separately. Later, the process moved on to logistics where every activity was carried out in a logical sequence following a specific timetable. Now, an information backbone supporting the SCM process has helped retailers in greatly reducing cycle times and attaining efficiency.


There are three levels of decisions-strategic, tactical and operational. The strategic level decisions are long-term decisions about location, production, inventory and transportation. Location decisions include size, number geographic location of supply chain entities. Production decisions determine what to produce, where to produce, which suppliers to use etc. Inventory decisions decide the way of managing inventories throughout. Transport decisions decide the mode of transport. Tactical level decisions are medium term decisions such as weekly demand forecasts, distribution planning production planning, material procurement planning. The operational level decisions are of short-term decisions concerned with day to day operations

Efficient Inventory Planning: Efficient inventory planning enables the retail organization to achieve its strategies and benchmarked standards of customer deliveries and thereby reducing supply chain expenses. Forward planning is done by forecasting sales and Beginning of Month (BOM) and End of Month (EOM) inventories for specific periods, and preparing the OTB (Open to Buy) plans. Efficient inventory planning optimizes purchasing controls through OTB so that the planned stock turns are achieved for the store with just-in-time inventories for freshness and achieving customer satisfaction through the seven ‘rights’ of merchandising –right product, right place, right quantity, right quality, right price, right mix and right time.

Pre-Purchase Order (PPO) and Purchase Order (PO): The PPO is an instrument through which the tentative plan of order placement to the vendor is done for the whole season as soon as the inventory planning is completed. The Purchase Order is the confirmed order for supply.


The end-to-end integration of all supply chain elements and functions are achieved by applying interlinked packages. The integrated supply chain starts from the design stage at the vendor level to the time when there is consumer response at the retail stage. The benefits of having an integrated supply chain are best delivery performance, reduced inventory, faster cycle time, accurate forecasts, lower supply chain costs, improvement in overall productivity, improvement in capacity utilization, and so on.

Vendor Management: Efficient vendor management involves selecting the right vendors capable of giving the right quality of merchandise and to deliver the right quantities to get the right ‘hit ratio’. The right hit ratio measures the gap between delivery and purchase orders and helps eliminate backlog in deliveries. In a chain store scenario, vendors’ direct delivery to stores is an important element in attaining good supply chain efficiency.

The vendors directly manage inventories in a few retail organizations. Vendor Managed Inventory (VMI) is ideal for retail organizations as it totally eliminates inventory-carrying costs. The vendors manage the inventory at every store, monitoring the flow of information and ensuring just-in-time deliveries. The vendors are able to take back slow-selling and non-moving merchandise, thus reducing the scope for mark-down losses for the store.

Electronic Data Interchange (EDI) helps in establishing an efficient information flow on stock movement, and the vendors can know sales and inventories instantaneously. Reorder supplies are immediately planned and executed by the vendors. The time taken to exchange documents for placing orders is eliminated thus achieving just-in-time inventory management. EDI is done with the help of the organization’s ERP package that interacts with the vendors’ systems.

Warehouse Management The retail warehouse or the distribution centre receives the ordered stocks; checks for the right quality, quantity and price; stores and tags the merchandise with both the MRP and security tags; prepares the merchandise; transports the merchandise; receives goods returned from retail stores, if any; and sends returned merchandise ‘to vendors back as returns.

A Goods Received Note (GRN) is prepared when the merchandise received at the warehouse from suppliers is checked and matched with the relevant purchase order after certifying all the elements of quality, quantity, etc. The GRN is then automatically recognized by the system after authorization for payment to the vendor by the accounts department. The merchandise is then docked and tagged with bar codes and price tags if applicable.

Inter-Transfer Note (ITN) When the prepared and readied merchandise is supplied to the retail stores ITN is prepared. The reverse ITN (ITN out) is prepared when goods are sent back to the warehouse by the retail store. Goods that are returned to the warehouse are then sent back to the suppliers and vendors. The system recognizes the same and raises a debit note to the vendors.

Transportation is done according to timely delivery schedules so that replenishments are delivered as per the plan. Cost efficiency and reduction in delivery time are critical success factors in transportation.

Efficient docking with a plan ensures the best utilization of space. Docking ensures that the First in First out (FIFO) delivery plan is followed so that ageing of merchandise in the warehouse is kept to the minimum.

Material Handling Equipment in the warehouse should be tailored for specific varieties of merchandise. At a micro level of handling, most of the time garments are delivered by hangers and sometimes by the browser itself in a ready-to-sell state. Value Chain The entire SCM process is a value chain where bottlenecks, value-adding factors and liability factors are identified and addressed, thus enabling the retail organization to have an efficient supply chain. The entire process needs to be audited to meet timelines, and may be reengineered to achieve cost efficiencies and reduce cycle times.

Efficient Consumer Response (ECR) This is a replenishment system designed to link all parties in the logistics channel to create a massive flow-through distribution network. Replenishment depends upon consumer demand and point of sale information. In a retail organization, an integrated supply chain — with the right application of packages enabling the free flow of information and consequently merchandise and services elicits the greatest response from consumers since it addresses their needs appropriately.


While oversized inventories are a costly inventory management strategy; low fill rates are also costly. Therefore the company’s interest to balance inventories holding cost and the cost of imperfect satisfaction. The main pitfalls in inventory management are:

•Inappropriate information system
•Incorrect delivery dates
•Organizational barrier
•Incomplete supply chain
•Failure to account uncertainties


The challenges that a retail organization include huge stock-keeping units (SKUs), seasonal variations of product lines necessitating the introduction of new SKUs, complex tax structures, the sheer geographic spread of the country, changing consumer demands, etc. A retail organization has to plan perfectly to satisfy the needs of every customer. Automation through the implementation of ERP systems has helped many organizations improve their efficiency and helped them grow.