Summary 1CM40 Retail Operations
Week 1 – Retail strategy
Lecture slides
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 their suppliers to understand the processes in retail and their impact on the supply
chain.
• Problems faced by retails (data availability, dealing with increased variety, etc.) are shared
by many other firms in any other industry.
What is retailing?
• Retailing: a set of business activities that adds value to the products and services sold to the
consumers for their personal or family use.
• A retailer is a business that sells products and/or services to consumers for personal or
family use.
How retailers add value (examples)
• Breaking bulk: buy it in quantities customers want (products are made in large quantities,
but the customers want small quantities).
• Holding inventory: buy it at a convenient place when you want it.
• Providing assortment: buy other products at the same time (variety of different brands and
flavours).
• Offering services: see it before you buy, get credit (buy now and pay later), layaway.
Historical development of retail
• Small local independent stores (year 1900 ~ 100 items) versus large global retail chains (year
2000 ~ 100000 items).
Multichannel retailing
• Retailers may use multiple channels, including non-store retail formats like:
- Electronic retailing
- Catalogue and direct mail
- Direct selling (trying to sell products through phone calls)
- Television home shopping
- Vending machines (drinks or snacks)
The retail supply chain
• Manufacturing → wholesaler (distribution centres) → retailer (stores) → consumer.
Retail strategy
• Retailers use different retail mixes:
- Merchandise: variety (breadth = how many different product categories) / assortment
(depth = how many different products in a category).
- Service (lower service = lower price).
- Store design, visual merchandising.
- Location (city centre vs cheaper location).
- Pricing.
- Communication mix (how does the retailer reach out to the customer).
• Survival of the fittest: some combinations of retail mixes satisfy the needs of significant
segments and persist over time.
Decision variables for retailers
• Six dimensions of retail strategy:
,Let’s compare two global retailers: Walmart and Zara
• Walmart: department store; Zara: fashion retailer.
• What are the key differences in retail strategy between these chains?
• What is similar?
• What are the unique assets?
• How does their retail strategy have an impact on their operations management?
The Walmart case
• Number 1 retailer worldwide with $514 billion in global revenue in the fiscal year 2019.
- 2nd Amazon, 3rd Costco, 4th Schwarz Group (Lidl), .. 8th Aldi, 9th Carrefour, 10 JD.com
(China).
• Active on 27 markets outside the US (South America, Europe, Asia, etc.).
• 2.2 million associates worldwide, 11,300 stores.
The Zara case
• Zara is part of Inditex (Spain).
• The world’s largest fashion retailer (2nd is H&M (Sweden).
• Active in 202 countries worldwide, More than 7,337 stores.
• €19,6 billion in global revenue in the fiscal year 2019.
• More than 176,000 associates worldwide, many females.
Supply: mix from local and global
• The Inditex supply chain in 2020 was made up of 1,985 suppliers. To ensure the proximity of
suppliers, 54% of production has its origins in suppliers located near Inditex’s headquarters
in Spain. Supply: 50% Spain/Portugal, 25% Morocco/Turkey; 25% Asia.
Walmart’s retail mix
• Location: free-standing stores (not in the city centres; large stores
with a lot of parking places).
• Merchandise assortment: large number of categories, few items
in each category.
• Pricing: low, EDLP.
• Communication mix: tv and newspaper ads which attract people
to come to the store.
• Store design and display: basic (not fancy), special displays for products.
• Customer service: limited (not a lot of employees so limited service).
Zara’s retail mix
• Location: in fancy buildings in city centres.
• Merchandise assortment: few categories, within each category also small number of
products.
• Pricing: affordable prices for exclusive products.
• Communication mix: mouth to mouth advertisement.
, • Store design and display: very important, stores look appealing.
• Customer service: limited, fill rate is also low (this makes the customer buy the product
quickly to avoid out of stock later).
Alternative classification for retailer strategies
• First mile (concept to design, source, forecast, order & make).
• Middle mile (DC to store).
• Last mile (ex-factory to DC/store to consumer).
• Magic mile (it is magic because it is required to sustain a margin
model in decline).
Implications retail strategy for tactical and operation decision
• Example Zara case: ‘quick to adapt to new trends’ and
‘affordable exclusivity’ pricing strategy imply a moderate-cost-fast-supply-chain →
- One DC, regional production near DC and frequent parcel distribution to avoid long lead
times → high responsiveness and less markdowns.
- Only stores in high-end high-traffic shopping areas (to limit markdowns).
Demand and supply chain operations planning framework
Thorbeck 2017 Retail Strategy
• Amazon has determined that the ‘last mile’ wins the customer.
• Middle mile: Walmart began to build its distribution network through small market hubs,
enabling an unequalled DC-to-store delivery advantage.
• First mile: first mile is a significant source of value, exceeding profit potential in last and
middle mile strategies. Efficiency is doing more with less cost, productivity is doing more
with same cost, but Zara actually produces superior returns with higher costs.
• Magic mile: it is magic because it is required to sustain a margin model in decline, or, worse,
relies on hope that the fashion cycle will return to something near normal.
, Van Donselaar et al 2005 Improvement in Retail Operations
Introduction
• This chapter focuses on inventory replenishment strategies and capacity utilisation in the
retail sector.
• The automation of the store ordering is generally done at one central point within the
company, and the resulting ordering rules can be used in all stores.
• In general, the logistic decisions taken by the retailer can be improved by increasing:
- The level of differentiation when controlling the operations.
- The level of sophistication in the decision support systems.
- The level of integration of multiple decisions (made by the retailer company and/or its
supply chain partners).
The level of differentiation when controlling the operations
• ABC-classification: items with low turnover (A-items) need to be treated differently
compared to items with low turnover (C-items).
• Five main product categories:
- Phasing-in/out items (including items with a short product life cycle)
- Promotion items
- Purchasing driven items
- Capacity driven items
- Regular items
• Improvement opportunities for phasing-in/out items reported in literature are:
- Using similarity in forecasts made by different individual people as an indicator of
forecast accuracy when no sales data are available yet.
