• Choose a category
• All
• Classic-Fiction

By Root 2900 0

clear that the resulting strategy must be the one that is stated in this step. It is important to note that there is a limit to how many times a customer will keep coming back to the same shop the more they are disappointed. The NAs in Step 2.1 (in each VV S&T tree) lead us to understand how the particular type of company addressed can achieve a DCE. The word “knowing” in the strategy is important here. It is not enough for the availability to be high; customers must be aware of the remarkable level of availability. The best kind of “advertising” in retail is word of mouth. The last part of the strategy means that parameters such as price, quality, and product selection (to name a few) must not change from their current levels. Their current levels were sufficient to be competitive until now. Therefore, not changing them, while remarkably improving availability, will result in a DCE.

TABLE 34-2 Step 2.1 of the Retailer VV S&T tree (© E. M. Goldratt used by permission, all rights reserved. Source: E. M. Goldratt, 2008).

Now that we agree on the strategy, the question is how to achieve it. The tactic tells us how. Next, we validate whether the PAs are currently facts of life for the particular retailer. The second PA needs to be explained more. The replenishment time includes the order lead time (the time between when the first unit of an SKU is sold after an order of that SKU is received and an order for that SKU is placed again) and the supply (production and transportation) lead times. The retailer places orders with their suppliers based on the forecasted level of demand of the SKUs. Chaos theory tells us that it is theoretically impossible to forecast accurately on the SKU level at each retail shop. We need to find a way to ensure that we do not have shortages and surpluses. The answer is quick reaction to what is selling, which is measured by inventory turns. Let’s consider an example to understand the meaning and impact of inventory turns. If a retail shop currently has four inventory turns per year, then they are in essence selling what they hold on the shelves and the back storeroom in entirety four times a year. Since there are 12 months in a year, they must be holding, on average, three months worth of inventory. If we can manage the supply chain effectively to react to changes in demand, we can reduce both shortages and surpluses and significantly improve the inventory turns.

The third PA should be explained as well. The NP to sales ratio in retail ranges from 2 to 3 percent for grocery retailers to as high as 5 percent for fashion goods. The average markup on retail products from the purchase price is 100 percent. The markup is much higher for jewelry and much lower for furniture and some other types of products, such as commodities. Based on these numbers and the typical shortage statistics, we can determine how much of an impact significantly reducing the shortages would have. If shortages are 10 percent, the markup is 50 percent, and the NP to sales ratio is 2 percent, what will the NP to sales ratio become if shortages are reduced to zero? Let us assume for the moment that the costs are not affected. If sales are 100, then the TVC is 50 and T is 50. If NP is 2, then OE must be 48. If sales increase by 10 percent, then 5 more will be added to NP (half was TVC, while OE did not increase). Thus, the NP to sales ratio increases from 2 percent to over 6 percent. However, since the shortages are of high runners, it is likely that the sales will be much higher when shortages are reduced because we cannot really know how much sales of high runners are lost when shortages occur. We will only know how much sales increase once the shortages are reduced. Even if OE does increase some, the impact on NP is still significant.

Reducing surpluses has a significant impact on investment. If up to 30 percent of the SKUs have shortages, then it is likely that more than 50 percent of the SKUs have surpluses. It is not uncommon for a retailer to have four inventory turns a year. This means that the shop is holding, on average,