The Devil’s in the Details

The department store model in Asia is almost always stores within stores.  The department store owners are in effect landlords who provide the space, electricity, POS etc.  The suppliers provide and own the stock and usually the fixtures and they always provide the staff.

To a lesser degree we see shops within shops in Australia.

One of the reasons that suppliers go down this path (and the retailers concede this) is because the suppliers can do a better job of retailing their goods compared to the retailer – a terrible indictment on retailers.

And one of the reasons that suppliers do it better, is because they can handle the detail and that is where the Devil is in retail.   Retail is detail.

If you take the number of products (or SKU’s) held in a store and multiply that number by the number of stores in a typical chain, you get a handle on what needs managing.  Take Walmart as an example.  They need to manage one and a half billion products let alone SKU’s !!!

Of course computerisation has helped enormously with tasks of this magnitude but it is how that computerisation is used that counts.  Even with the help of technology, large retailers simply don’t have the bandwidth to deal with the amount of data that they have at their disposal.  Hence the onus is placed on the suppliers which is a kind of halfway house to the consignment option mentioned above.  The suppliers manage the inventory within given parameters and based on a high degree of trust.  Abuse the trust and you will find yourself skating on thin ice.  Use the trust and the supplier will become a category champion.

There is nothing new about vendor managed inventory.  It has been around for several years.  Ironically the suppliers who are not interested in VMI raise suspicion.  Why would a vendor not want to manage their inventory?  One reason is that they want to pump as much stock into the retailer as possible whether they can digest it or not.  This is a short term gain for the supplier and invariably it comes back to bite them.

A real true example of a vendor not wishing to manage inventory goes like this.  A cosmetic supplier whose sales folk were on high commissions would ruthlessly force stock onto retailers.  They used their muscle citing the “contract” which stated that the retailer had to take new ranges – usually colour which changes seasonally.  Last season’s colours remained on the shelves and after a few seasons the retailer was suffering from severe indigestion.   Head office was not at all happy with the stockturn in the 2’s which should have been much higher given that cosmetics is a consumable.  The solution was simple and this was long before VMI appeared.  Call in the supplier, ask them what a reasonable stockturn would be for their products, and offer to hand over the management of the stock to them.  All they would be required to do was to deliver the stockturn.

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Needless to say the supplier declined the offer.

One lesson to be learnt by retailers is to trust suppliers, provide guidelines and manage the relationship with KPI’s and exception reports.

One lesson to be learnt by the supplier is to maximise performance and respect the trust that the retailer has granted.

This can only lead to a win win.