Chapter 10
Information Systems and
Supply Chain Management
McGraw-Hill/Irwin
Retailing Management, 7/e
© 2008 by The McGraw-Hill Companies, All rights reserved.
Retailing Strategy
Retail Market and
Financial Strategy
Chapter 5, 6
Retail and
Site Locations
Chapter 7, 8
Information
Systems &
Supply
Management
Chapter 10
Organizational
Structure and
Human Resource
Management
Chapter 9
Customer
Relationship
Management
Chapter 11
10-2
Questions
■ How does merchandise and information flow
from the vendor to the retailer to consumers?
■ What information technology (IT) developments
are facilitating vendor-retailer communications?
■ How do retailers and vendors collaborate to
make sure the right merchandise is available
when customers are ready to buy it?
■ What are the benefits to vendors and retailers of
collaboration on supply chain management?
■ What is RFID, and how will it affect retailing?
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Creating Strategic Advantage Through Supply
Chain Management and Information Systems
Supply chain management …..
A set of approaches and techniques firms employ to efficiently
and effectively integrate their suppliers, manufacturers,
warehouses, stores, and transportation intermediaries into
a seamless value chain. This chain incorporates which
merchandise is produced and distributed in the right
quantities; to the right locations; and at the right time; as
well as to minimize system wide costs, while satisfying the
service levels their customers require.
Ryan McVay/Getty Images
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Illustration of Supply Chain
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Why is Efficient Supply Chain
Management so Important to Retailers?
■ Improved product
availability
■ Higher return on
investment
■ Strategic advantage
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Improved Product Availability
Benefits of Efficient Supply Chain
Management to Customers:
■ Reduced stockouts –
merchandise will be available
when the customer wants them
■ Tailoring assortments – the right
merchandise is available at the
right store
Ryan McVay/Getty Images
These benefits translate into greater sales, lower costs,
higher inventory turnover, and lower markdowns for retailers
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Strategic Importance of
Supply Chain Management
■ Opportunity to Increase Sales by Making the Right
Merchandise is in the Right Place at the Right Time


Fewer Stock-outs
Greater Assortment with Less Inventory
■ Opportunity to Reduce Costs


Transportation Costs
Inventory Holding Costs
■ Improved ROI
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Fast Fashion Enabled by Efficient and
Effective Supply Chain Management
Fast Fashion:
a retail business strategy that uses a supply
chain management process to rapidly introduce
fashionable merchandise and quickly respond to
customer demand for the merchandise
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ZARA




Timely information from store
mangers with handheld devices to
the corporate office
Shorter cycle time from design to
production to delivery to stores
Shorter lead time – own
production, small quantity
production in close proximity,
efficient logistics, premium
transportation, frequent delivery
No discounts necessary
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H&M
• Improve channel performance by owning key components of SC
• Private label - designed by design teams, manufactured by subcontractors
• More efficient SC, shorter lead time ( 3 weeks to 60 days)
Zara : 7-30 days, however, own production plant
Typical clothing retailer : 40-50 weeks
Minimize reaction time to market trend & customer feedback
cost advantage – production time & inventory are reduced
Effect
reduce the fashion risk, avoiding overstocks and markdown
product characterized by high exclusivity ‘climate of scarcity’
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Strategic Advantage : Wal-Mart
■ Wal-Mart’s success is from its information and
supply chain management systems
■ Why are competitor’s lagging behind?



Made a substantial investment in developing its
systems and has the scale economies
Through experience and learning, changes are
always made to improve the system
Coordinated effort of employees and functional
areas throughout the company
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Why are coordinated efforts important?
Example: A task of keeping stores in stock
Stock stores with
adequate shelf space
Stock stores with
appropriate frequency
Buyers place
accurate,
timely orders
with vendors
and distribution
centers
Forecast accurately
Distribution Centers
need to send right
quantities when the
stores need it
Buyers and marketing
managers coordinate
merchandise delivery
with special sales and
promotions
Managers need to provide
enough lead time for deliveries
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Higher Return on Investment
Return on assets = Net profit margin x Asset turnover
Net profit =
Total assets
Net profit x Net sales
Net sales
Total assets
Efficient Supply Chain Management leads to 
■ Increased Sales from more attractive assortments in stock
■ Improved Net Profit Margins from increased gross margin and
lowered expenses
■ Lowered inventory from less backup inventory in stock and higher
asset (inventory) turnover
Same Sales Using Less Inventory
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Information and Merchandise Flow
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Information Flow
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Information Flow
When a customer makes a
purchase (the toaster oven), sales
associate scans UPC code on
merchandise and customer credit
card/loyalty card (1)
Steve Cole/Getty Images
PhotoLink/Getty Images
Information about purchase is transmitted
from POS terminal to the buyer/planner.
The planner uses this information to
monitor and analyze sales and decide to
reorder more toaster ovens or reduce its
prices if sales are below expectations (2)
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Information Flow
Sales transaction data are also sent to the distribution center (6)
When the store inventory drops to a specified level,
more toaster ovens are shipped to the store, and the shipment
information sent to the corporate computer system (5) so that the
planner knows the inventory level, which remains in the
distribution center.
Information about purchases are aggregated
by buyer/planner and sent to distribution
center and vendor to ship merchandise
(3)
StockTrek/Getty Images
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Information Flow
When inventory drops to a specified level
in the distribution center,
buyer/planner communicates with vendor,
and then places a purchase order to re-supply
stores (4)
Buyer/planner notifies distribution
center about incoming orders and
how they are to be distributed to stores (5)
PhotoLink/Getty Images
Store managers inform
distribution center about
receipt of merchandise and
coordinate deliveries (6)
David Buffington/Getty Images
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Information Flow
When the manufacturer ships the toaster
ovens to the distribution center, it sends
an advanced shipping notice to the distribution (7)
Advanced shipping notice (ASN) is a document that tells the distribution
center what specifically is being shipped and when it will be delivered.
The distribution center then makes appointments for trucks to make
the delivery at a specific time, date, and loading dock.
Store managers inform
distribution center about
receipt of merchandise and
coordinate deliveries (6)
David Buffington/Getty Images
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Data Warehousing
Data warehousing is the coordinated and periodic
copying of data from various sources, both inside
and outside the enterprise, into an environment
ready for analytical and informational processing
Wal-Mart makes good use of its data warehouse.
Experts estimate that it is second in size only to
that of the U.S. government
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Data Warehousing
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Electronic Data Interchange
■ EDI is the computer-to-computer exchange of business
documents between retailers and vendors
• Merchandise sales, Inventory On Hand, Orders
• Advanced shipping notices,
• Receipt of merchandise, Invoices for payment


Standards:
• UCS (Uniform Communication Standard)
• VICS (Voluntary Interindustry Commerce Solutions)
Transmission system:
• Intranet: local area network (LAN) that employs Internet
technology
• Extranet: collaborative network that uses Internet technology
to link businesses with suppliers, customers, etc.
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Royalty-Free/CORBIS
EDI Security
There are implications of security failures (loss of data, loss of public
confidence), but retailers have security policy objectives:
Authentication – system assures person on
other end of session is who it claims to be
Authorization - that person has permission to
carry out request
Integrity – info arriving is the same that was
sent
Ryan McVay/Getty Images
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Benefits of EDI
■ Reduces cycle time – inventory turnover is higher
■ Improves overall quality of communications
through better record-keeping
■ Information can be easily analyzed
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Stockbyte/Punchstock Images
Pull and Push Supply Chain
Push Supply Chain
Merchandise is allocated
to stores
on the basis of
forecasted demand
Pull Supply Chain
Orders for merchandise are
generated at the store level
on the basis of
POS sales data
Less likely to be overstocked or out of sock
Increases inventory turnover
Responsive to changes in customer demand
Efficient when demand is uncertain, and
hard to forecast
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Requirements for a Pull Approach to Work
■ Requires a more costly and sophisticated
information to support it
■ Should have the flexibility to adjust inventory
levels on the basis of demand
■ Push supply chains are efficient for merchandise
that has steady, predictable demand
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The Physical Flow of Merchandise Logistics
■ Logistics:

The aspect of supply chain that refers to the planning,
implementation, and control of the efficient flow and
storage of goods, services, and related information
from the point of origin to the point of consumption to
meet customers’ requirements
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Merchandise Flow
10-29
Advantages of Using a Distribution Center
■ More accurate sales forecasts are
possible when retailers combine
forecasts for many stores serviced
by one distributor
■ Enables retailers to carry less
merchandise in the store
■ Easier to avoid running out of
stock
■ Retail store space is more
expensive than space at the
distribution center
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Advantages of Direct Store Delivery
■ Gets merchandise faster, and is thus used for
perishable goods (meat and produce)
■ Helps the retailer’s image of being the first to sell
the latest product (video games) or fads
■ Some vendors provide direct store delivery for
retailers to ensure that their products are on the
store’s shelves, properly displayed, and fresh
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Who Can Use DC’s?
■ Retailers selling non-perishable
merchandise
■ Retailers offering merchandise that
has highly uncertain demand like
apparel
■ Retailers selling merchandise that
needs to be replenished frequently
■ Retailers that carry a large number of
items shipped in broken case
quantities like drug stores
■ Retailers with many outlets
Ryan McVay/Getty Images
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Activities Performed by Distribution Center
■ Managing inbound transportation
■ Receiving and checking
merchandise
■ Storing or cross docking
merchandise
■ Getting merchandise floor ready


Ticketing and marking
Putting on hangers
■ Preparing to ship merchandise to a
store
■ Managing outbound
transportation
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Reverse Logistics
■ The process of moving returned goods from their customer
destination for the purpose of capturing value or proper
disposal
■ Retailers recover loss through on-line auctions
© image100 Ltd
Customer
The McGraw-Hill Companies,
Inc./Andrew Resek, photographer
Store
Steve Cole/Getty Images
Distribution Center
Royalty-Free/CORBIS
Vendor
10-34
Logistics for Fulfilling Catalog and Internet
orders
■ When fulfilling orders from individual consumers,
retailers ship small packages with one or two
items to a large number of different places

Distribution centers for picking and packing orders for
consumers
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Outsourcing Logistics
■ Retailers consider outsourcing logistical
functions if those functions can be performed
better or less expensively by third-party logistics
companies
■ Transportation
■ Warehousing
■ Freight Forwarders
■ Integrated Third-Party Logistics Services
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Bull-Whip Effect
The built up inventory in an uncoordinated
channel where retailers and vendors do not
coordinate their supply chain activities
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What Causes a Bull-Whip Effect?
■ Delays in transmitting orders and receiving
merchandise
■ Over-reacting to shortages
■ Ordering in batches rather than generating a
number of small orders
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Retailers and Vendors Work Together
Four approaches for coordinating
supply chain activities to reduce the
level of inventory in the chain and
reduce the number of stock-outs
(in order of the level of collaboration)
PhotoDisc/Getty Images
■ Use EDI
■ Exchange information to reduce need for backup
inventory, improve sales forecasts and production
efficiency
■ Vendor manage inventory (VMI)
■ Collaborative planning, forecasting and replacement
(CPFR)
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Initial Efforts at Coordinating
Vendor and Retailer Supply Chain
■ Efficient Consumer Response
(ECR) – Food Retailing
■ Trade Promotions => Forward
Buying => Extremely Uneven
Production
■ Motivation for Packaged Goods
Mfrg

Stop Price Promotion,
Forward Buying

Level Out Demand
■ Motivation for Supermarkets

Rise of Warehouse
Clubs/Discount Store
• Use of EDLP Pricing

Need to Become More
Efficient

Excessive Inventory - $30
Billion
■ Quick Response (QR) Apparel
■ Inherently Unpredictable
Demand
■ Old Solution - Over Buying and
Markdown
■ Quick Response (modeled
after JIT)

Provide Initial Assortment

Forecast Sales for
Intermediate Form

Monitor Early Sales

Make Final Assortment
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Vendor Managed Inventory (VMI)
■ Manufacturer access to POS information
■ Replenishment automatically triggered
■ Enables demand-based view of replenishment
& production planning – reduce bull whip effect
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Vendor Managed Inventory (VMI)
The vendor is responsible for maintaining the retailer’s inventory levels in
each of its stores
10-42
VMI Logistics
POS
Make
Decide
Pack
Buy
Buyer
Store
Order
Pick
Receive
Pack
Sell
Ship
Store
Ship
Factory
Warehouse
10-43
Why VMI Works
Supplier
Distribution
Manufacturer
Store
Consumer
b
Order
Time
Demand
Order
Order
Time
Time
Reduce Bullwhip Effect
Time
React to real demand
can reduce inventory
& out of stock
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VMI Limitation
■ The vendor does not know what other actions
(e.g., promotion) the retailer is taking that might
affect the sales of its products in the future
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VMI—What it Lacked
■ Focused on replenishment activity only
■ Static-model based (assumed fixed reorder
points to trigger replenishment)
■ Often only moved inventory ownership rather
than removing it
■ Incomplete information for decision making
■ Vendor and retailers use different systems and
data bases
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CPFR (Collaborative Planning,
Forecasting, and Replenishiment)
■ Developed by VICS and adopted by ECR Europe
■ The sharing of forecast and related business information
and collaborative planning between retailers and
vendors to improve supply chain efficiency and product
replenishment
■ The most advanced form of retailer-vendor collaboration
that involves sharing proprietary information, such as
business strategies, promotion plans, new product
developments and introductions, production schedules,
and lead time information.
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CPFR
■
■
■
■
■
Common goals
A single demand forecast developed collaboratively
Collaborative Promotional planning & execution
A single, shared data source
Improved inventory management across entire Supply
Chain
■ Optimized replenishment strategies with joint ownership
■ Process simplicity creates optimal framework for
success
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Radio Frequency Identification (RFID)
Radio Frequency Identification (RFID)
allows an object or a person to be
identified at a distance using radio waves.
■ Reduces warehouse and distribution labor
costs
■ Reduces point of sale labor costs
■ Inventory savings by reducing inventory
errors
■ Reduces theft – products can be tracked
■ Reduces out of stock conditions
10-49
Why the Hesitation with RFID?
■ RFID is expensive – the return
on investment is low
■ It still only makes sense to put
tags on pallets, cartons,
expensive merchandise or
high theft items
■ RFID generates more data
than what can be currently
processed
■ Consumers worry about
privacy invasion
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