Chapter 16 Buying and supply management in retail Program

Chapter 16
Buying and supply
management in retail


Program
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Definitions
Role and importance of purchasing in trading and
retail business.
Structure and organization of the purchasing process
Developments in trading and retail companies
Trends in sourcing and supply chain strategies


Definitions
Trade and retail companies:
Characterized by the absence of a production process
 Value added is low compared to manufacturing companies
 Existence is primarily based on the exchange of values
 Time between the purchase and sale is very short


Category
Category management:

management: because
because of
of aa short
short time
time between
between purchase
purchase
and
and sale,
sale, buying
buying and
and selling
selling are
are sometimes
sometimes integrated
integrated into
into one
one function.
function.


Definitions
Inbound
logistics

Outbound
logistics

Merchandising/
commodity

management

Facilities buying
Human resources management
Technology
Infrastructure
The value chain in trade companies (Adapted from Porter, 1985)


Definitions
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Trade companies can be divided into two levels:
Wholesale level (B2B)
 Retail level (B2C)
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Companies that operate on wholesale level deliver their
products to other companies.
Customers are retail, industrial and service companies.
 Wholesale companies devote less effort to promotion, shop layout and
selection of location.
 Further wholesalers make large transactions with a limited number of
companies.



Definitions

Manufacturer

Wholesaler

Retailer

Consumer
Wholesale and trade in the business chain


Purchasing in trade and retail companies
Trade companies fulfill the intermediary between
producer and end user. Their added value lies in
the following activities:
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Sales and promotion
Buying and building up a product assortment
Bulk breaking
Storage
Transportation
Carrying the risk
Market information

Management and marketing services


Purchasing in trade and retail companies
Regarding the retail trade, various types of stores can be
distinguished in the area of consumer products:
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Specialty store
Department store
Supermarket
Convenience store
Combination store, superstore and hypermarket
Service business


Organization of the purchasing process
Stages in the buying-selling cycle:
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Estimating demand
Determining product assortment and distribution strategy
Selection of most suitable supplier
Contractual agreements
Ordering
Automatic replenishment
Expediting and evaluation

Retail buyers pay more attention to marketing and sales aspects than
industrial buyers. The function of retail buyer evolves from straight
buying to commodity or category management.


Organization of the purchasing process
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Cross-functional structure
Teams are responsible for all aspects of a category in order to
generate a maximum return for the retail company
 Buying, styling, visual merchandising and distribution functions
operate in one organizational entity. (‘category management’)
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Functional purchasing structure
Purchasing is important and reports directly to top management
 Ordering and purchasing often separate activities.
 Purchasing and Category Management are conducted central and

ordering is carried out decentral as much as possible.
 Planning is more and more delegated to the suppliers (i.e. VMI)



Developments in trade and retail companies
Changing consumer behavior in European countries:
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Ageing population, ongoing individualism, more men shopping
Increasing income gap between population groups
Growing number of earning couples
Increased exposure to other cultures and integration of ethnic
minorities
Increased concern for the environment
Increased attention to healthier living

This
This means
means that
that the
the commodity
commodity manager/
manager/ retail-buyer
retail-buyer must

must
constantly
constantly tailor
tailor his
his product
product assortment
assortment to
to more
more specific
specific
and
and often
often smaller
smaller groups.
groups.


Developments in trade and retail companies
Other developments….
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Concentration: Globalization of competition and concentration
through mergers and acquisitions.
International co-operation: Due to the concentration of power
on the suppliers’ side, trade companies are searching for
internationalization as an option to counterbalance this

development.
Private labels: Private labels support retailer identity and
image. Finding suitable suppliers for private label products will
become increasingly difficult.


Developments in trade and retail companies
More developments…
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Space management: based on detailed cost information retailers
decide on the most profitable display lay out.
‘Green’ issues: ecological considerations are growing in
importance (e.g. natural ingredients, biodegradable packaging)
Information: Some developments in information technology have
an immediate impact on consumers. Others are less visible to the
consumer. For example:
Electronic banking
Bar coding
Tele shopping


Supply chain strategy trends
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Modern supply chain management retail is based on the
following concepts:
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Vendor Managed Inventory (VMI)
Efficient Consumer Response (ECR)
Collaborative Planning, Forecasting and Replenishment (CPFR)
Electronic marketplaces
Radio frequency Identification Detection (RFID)


Vendor Managed Inventory (VMI)
VMI is a continuous replenishment program in which the
retailer provides the supplier with detailed information to
allow the supplier to manage and replenish product at the
store or warehouse level
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Typically the activities of forecasting, scheduling, requisitioning and ordering
are performed by the supplier.
Electronic Data Interchange (EDI)s an integral part of the VMI process

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Benefits of VMI

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Solidified customer-vendor relationships
Reduced shipping costs and lead time
Fewer human errors
Improved service levels


Efficient Consumer Response (ECR)
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ECR is a grocery industry supply chain management strategy aimed
at eliminating inefficiencies, and non-value-added costs, thus
delivering better value to the end customers

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It is designed to re-engineer the grocery supply chain from a “push”
system into a “pull” system by using e-commerce information
technology

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ECR attempts to eliminate inefficiencies by introducing strategic

initiatives in four areas:
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Efficient store assortment
Efficient product information
Efficient promotion
Efficient product replenishment


Efficient Consumer Response (ECR)
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Programs that companies need to have in place are:
Category management (i.e. managing a group of products as strategic
business units within each store)
 Continuous replenishment program (CRP)
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Further support is needed of the following technologies:
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Barcodes / Scanners
Electronic Data Interchange (EDI)
Computer aided ordering (CAO)
Cross docking / direct store delivery
Activity based costing
The main obstacle is not technical but managerial, with managers
reluctant to transform their adversarial trading relationships
into open partnerships


Efficient Consumer Response (ECR)

Kurnia et al, (2002) 


Collaborative Planning, Forecasting and
Replenishment (CPFR)
CPFR allows cooperation across the supply chain, using
a set of processes and technology models.
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Providing dynamic information sharing and integrating both demand and
supply side processes, for effectively planning, forecasting and replenishing
customer needs through the total supply chain.

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Advantages of CPFR:
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Increased responsiveness
Product availability assurance
Optimized inventory and associated costs
Increased revenues and earnings
Improved relationships with trading partners


Electronic marketplaces
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A distinction can be made between Open exchanges (accessible for everyone)
and Private exchanges (only for members)

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An e-marketplace can provide a platform for:
 Core commerce transactions which can automate and streamline the entire
requisition-to-payment online
 A collaborative network for production design, supply chain planning,
optimization and fulfillment process
 Industry wide product information that is aggregated into a common
classification and catalogue structure
 An environment in which sourcing, negotiations and auctions can take
place in real-time
 An online community for publishing and exchanging industry news,
information and events

Radio frequency Identification Detection
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RFID is a term for technologies that use radio waves to automatically
identify.
Auto-ID Center is developing an open global network (a layer on top
of internet) that can identify anything, anywhere, automatically.
This network will give companies near perfect supply chain visibility
Also, if widely adopted the network could:
 eliminate human error from data collection
 reduce inventories
 keep product in stock
 reduce loss and waste
 free up staff to perform more value added functions
 improve safety and security


Supply chain strategy trends
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The four major developments show how the landscape of the
traditional retail buyer has changed

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Advanced systems will allow them to optimize their supply chain
operations

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Future competition in retail will no longer be between individual
companies, rather it will be among clusters of companies

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As research shows the development towards this kind of
collaboration can be troublesome

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Trust between the partners, a long term commitment and a
balanced sharing of risks and rewards is required to be
successful


Conclusions
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The buying function plays a very important role in trade
companies.
In retail companies buying policy is much more integrated
with sales and marketing policy,
Company policy is primarily focused on improving turnover
and margin whilst reducing working capital.
Retail today is a truly international business.
Advanced information systems allow the application of new
logistics concepts such as VMI, ECR, CPFR and electronic
marketplaces.