INTEGRATE, SYNCHRONISE AND OPTIMISE

White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE Improved performance in the supply and retail chain, through smart use of data and exchange of information

Contents 1. Introduction...3 2. Forecasting is critical for the quality of shop stock...4 3. From static to dynamic delivery schedules....7 4. Planning makes shop staff perform better...9 5. Information from the chain determines stock levels in distribution centres...11 6. Supplier determines retailer success... 13 7. Full lorries thanks to improved transport planning... 15 8. Information from the chain improves warehouse planning...17 9. Forecast information leads to better slotting....19 10. Optimised order picking using mechanisation... 21 11. The right person in the right place in the distribution centre....23 12. Retailers, it's over to you!...25 13. List of abbreviations...26 14. Contact details for VOCS partners... 27 INFORMATION SUPPLIER DISTRIBUTION CENTRE 5 8 SHOP 2 3 9 10 11 4 CUSTOMER 6 7 GOODS White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 2

1 INTRODUCTION Suppose you could achieve increased sales and a bigger profit margin, without additional stock in your shops and distribution centres. Or that you could utilise your staff and lorries even more efficiently and reduce operational costs. Or perhaps you think that all options have been exhausted? Nearly all retailers can optimise their performance, simply by improving the way in which they use the information that already exists in the organisation or chain. That is the conclusion reached by four partners who have joined forces under the name VOCS: Vanderlande, Ortec, Centric and Slimstock. Silo mentality In practice, while we do see retailers achieve improvements through optimisation in certain sub-areas, the bigger optimisation gains to be had are missed because of a so-called silo mentality. For instance, while many retailers do use forecast information to calculate the amount of stock needed in a shop, such information is not utilised to schedule staffing levels more efficiently, adjust delivery schedules, manage order pickers more efficiently or to improve arrangements with suppliers. ISO By Integrating systems, and therefore data, Synchronising processes and then Optimising (ISO) everything, retailers can increase sales and reduce costs. Businesses that apply this method are able to set new standards and, with it, achieve ISO 2014.vocs status. Thinking and operating across the chain This white paper covers eleven sub-areas and the opportunities that exist for organising processes in these sub-areas more efficiently and effectively, by fundamentally considering the chain as a whole, rather than individual links. It is up to you to identify these opportunities and put them into practice, not only reducing costs, but also achieving a better return on your working capital. Reader s guide The icons in the graphic of the retail supply chain (see adjacent) signify where optimisations can be made in accordance with ISO 2014.vocs. Each icon represents a chapter in this white paper. Chapters 2, 3 and 4 cover optimisations in the shop. The remaining chapters cover the distribution centre and associated transport in greater detail. Chapters are organised such that they can be read individually. However, to get an overall picture, simply read the white paper in its entirety. The various abbreviations used in this document are explained on page 26. 3

2 FORECASTING IS CRITICAL TO THE QUALITY OF SHOP STOCK As a retailer your goal is to sell as much as possible, regardless of where your customers are, preferably with as great a profit margin as possible, and with minimum chain costs. This goal will only be achieved if the right items are available in the right quantity, at the right time and at the right location. By 'right' stock level we mean not too little, nor too much. Empty shelves will result in lost sales and dissatisfied customers. Over-stock will result in obsolete items that can only be sold when heavily discounted, need to be returned or, in the case of food in particular, will be thrown away. Of course, this is in addition to the fact that carrying the stock involves capital outlay. Omni-channel retailing The right stock at the right location involves having the stock in the shop with the greatest sales opportunity. The emergence of omni-channel retailing also brings the opportunity to sell items that are not physically in the shop. In this case, customers need to have access to stocks held centrally and in other shops, both in the online shop and the physical shop. The financial crisis and shift in sales from physical shops to online shops creates additional pressure on the assortment and level of stock. After all, falling shop sales leads to reduced stock rotation. This is often the precursor to reduced profits and opportunities for innovation. The stock left in the shops must, after all, be discounted over time, while it continues to occupy expensive shelf space. Omni-channel retailing lets retailers broaden and deepen the assortment with reduced risk, as parts of the assortment need only to be held at a single location. However, this requires a completely different management model. Forecasting and big data Forecasting is needed in order to determine how much stock is needed, at which location, and when. The appropriate forecast can be determined fairly accurately using, for example, till (Point-Of-Sale) data, historical sales patterns, seasonal patterns, trends and promotions. Local and national patterns, and patterns at both item level and aggregated level are also taken into account. The vast amount of data collected by retailers makes it possible to make even more accurate and reliable forecasts. Examples of such data are the click and search behaviour of consumers or the number of 'likes' that an item gets on Facebook. Retailers must actively follow, analyse and, where possible, influence consumer behaviour on the internet - social media, price comparison websites, etc. - and use the resulting information as additional input to their forecast. White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 4

Safety stock The unpredictable nature of customer demand means that stock levels based on expected demand should be supplemented with safety stock. The safety stock level will depend upon, for example, lead time, desired service levels, unpredictability of demand and supplier reliability. Should an item be always available, or is it acceptable that customers may occasionally miss out? Modern systems allow different service levels to be set for each item or item group. When the optimal stock level has been calculated, it must be compared to the minimum presentation stock needed to achieve a satisfactory shop display or to any maximum shelf stock. Differentiating and increasing flexibility Each sales channel, i.e. each (web) shop, has its own sales pattern. An item purchased by customers of Shop A, may well remain untouched by customers of Shop B. This may be due the demographic breakdown of customers near the shop and the personal preference of shop staff when advising customers or, for example, due to competition. Many retailers stick to a rigid assortment for each shop or group of shops. Current systems allow POS data to be used to differentiate the assortment by shop. Another consideration is the product lifecycle. It is difficult to estimate how much stock of a new product each shop needs to hold if the product has not been sold before. Good software can help in this respect. Timely depletion of stock at the end of the product lifecycle is also a consideration. Retailers are often too optimistic at the start and end of the lifecycle, leading to over-stock and, ultimately, obsolete stock. A smart concept like ship-from-store makes it interesting to fulfil online orders from shops, in particular for high-value items at the end of their lifecycle, and so achieve maximum value from the residual stock. Retailers who are flexible in this way can avoid items remaining unsold in a shop, while demand still exists in another channel. A sound strategy for pricing and promotion, or optimising discounts, is essential in this respect. Which items should be in the sale, and what discounts should we offer? Forecast as input The primary purpose of a forecast is to enable the right level of stock to be calculated for each location, at any given time. A good forecast often forms part of a stock optimisation system. A stock optimisation system can be used to create a forecast for each shop, which in turn can be used to adjust the assortment and stock levels. 5

All other activities in the chain have a sole purpose: to ensure that the calculated stock levels are actually achieved. Strangely enough, forecasts are not very often used in the rest of the chain, for example in transport planning, staff planning, warehouse management and supplier management. Retailers miss out on many opportunities here. OPTIMISATION OF SHOP STOCK Central functionality Stock optimisation software And information exchange using ERP POS Online shop White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 6

3 FROM STATIC TO DYNAMIC DELIVERY SCHEDULES Optimal shop stock levels play an important role in the way in which the shops are supplied. Turnover rate is a key factor in this. In sectors with fast turnover, for example the food sector, daily deliveries are a real option and may, for example in the case of fresh produce, even be a necessity. In sectors with relatively slow turnover, for example fashion, deliveries once or twice every week are often adequate. Transport costs are another important consideration. The fuller the lorries, the lower the transport costs. The trick is in finding the optimum balance between delivery frequency and the utilisation of lorry load capacity. The breakdown of the assortment may also impact on the delivery frequency. In the food sector, retailers use different distribution networks and delivery schedules for non-perishable produce, fresh produce and frozen produce. Static delivery schedules Creating an optimum delivery schedule presents a huge challenge, especially in fast turnover sectors. For this reason, such retailers use a static delivery schedule: the timetable. This involves each shop taking delivery at a specified time. The advantage of this is that the whole chain knows what happens and when. The distribution centre knows when each lorry has to leave and the shop manager knows when the shelf stackers will be required. However, a static delivery schedule also has its limitations. For example, it does not take into account promotional weeks, the introduction of new collections, shifts in the market due to the opening or closing of competitors' shops, or public holidays. In short, a static delivery schedule creates the illusion that it has advanced clarity into how many lorries, order pickers and shelf stackers are required at any given time but, since the actual volumes vary from week to week, these resources are in practice not used optimally. In the event of an increase in demand, there is also a real risk of shelves in the shop being empty before the next delivery. Dynamic delivery schedules With a more dynamic delivery schedule, you can adjust and optimise shop deliveries according to expected sales figures and the required stock level on a quarterly, weekly or even daily basis. Transparency of the forecast can help a lot with this. Creation of a dynamic delivery schedule involves not only specifying the day, but also the time at which a shop is supplied. The challenge is to schedule the deliveries for all shops over the day and week in such a way that the load is distributed as evenly as possible over the whole chain. A new delivery schedule every week A dynamic delivery schedule requires retailers to be very flexible. It requires flexibility in planning activities on the shop floor, in the distribution centre and with transport. Luckily there are some excellent systems available for exactly this challenge. If the dynamic delivery schedule is drawn up far enough in 7

advance, all of the stakeholders will have enough time to prepare. There are also planning systems that can help in drawing up dynamic delivery schedules. A key input for them is the forecast from the stock optimisation system. So, there is nothing stopping retailers setting up much more dynamic shop deliveries. The result? Fewer lost sales, improved utilisation of lorry load capacity and reduced transport costs, as well as improved distribution of workload in the transport and distribution centre, something which contributes to the goal of minimising chain costs. OPTIMISATION OF DELIVERY SCHEDULES Central functionality And information exchange using ERP Route planning APS (Replenishment) software Stock optimisation WMS White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 8

4 PLANNING MAKES SHOP STAFF PERFORM BETTER Most retailers experience busy and quiet times. Retailers often know exactly when it will be busiest in their shops. POS data and historical sales figures provide a clear record of how many items were sold at what time and on which day. Footfall counters at shop entrances also show how many people were in the shop at any given time. This information can then easily be used to calculate how many people left the shop without making a purchase, perhaps because there were no staff available to assist. Despite this, such information is currently rarely used for staff planning purposes. To stay on top of the challenges surrounding planning, many retailers use flexible contracts. But how do you decide which employees should be given a full-time contract, and which an 8, 4 or 0 hours contract? And are these employees appropriately qualified? Planning starts with forecasting The challenge with staffing is the same as that for stock: it is about having the right people in the right place at the right time. By 'right people' we mean people with the right qualifications, from cashiers and shelf stackers to team leaders. With an ever increasing number of shops serving as collection or returns points for web shops, it is important, for example, to have enough service staff on-hand when online customers visit. Too many staff will result in people becoming 'idle' as they have nothing to do, and will incur unnecessary staff costs. Too few staff will increase the risk of customers leaving without making a purchase, resulting in retailers losing sales. Optimal resource planning starts with a forecast, not only of expected sales, but in particular of expected customer volumes. An analysis of footfall counter information and POS data will indicate how many customers visit a shop and buy something, broken down by the time of year, week and day. The delivery schedule and transport plan create additional input, indicating, for example, when a lorry will arrive to replenish stock, as well as the number of pallets or roll containers to be delivered. Identifying activities When the forecast and delivery schedule become available, the task is to translate the expected customer numbers and deliveries into workload. How many man-hours are required on the tills in order to serve all of the customers? How much time is needed to unload a full lorry? And how should the man-hours be distributed over the day? Doing this for each day, week and year will show the capacity required at any given time. This nearly always results in a significantly variable graph with big peaks and troughs. The next step involves determining the staffing level required throughout the day. How many cashiers and shelf stackers are required, and for how long? The challenge is to plan shifts of different lengths according to the peaks and troughs as effectively as possible. Many retailers only use 8 and 4 hour shifts and plan staffing levels on the basis of peaks in workload. This inevitably results in people being idle before and after the peak times. Peaks at the end of the day can often easily be addressed by introducing other shifts. Retailers who look further ahead can determine exactly how many staff they need on a full-time, part-time or flexible contract. 9

Flexibility through involvement The final steps involve drawing up rotas and implementing the schedule. When drawing up rotas it is important to establish the competencies each employee has, together with a list of activities they can/cannot perform. It is also a good idea to take into account individual staff preferences. By giving staff access to, and allowing them to express preferences regarding, rotas (via the internet or an app on their smartphone), retailers can often achieve more than they thought possible. For example, employees on a 40 hour contract may be able to work 44 hours one week, and 36 another. A lot of employees are willing to do this, even if it involves working less attractive hours, as long as they have more involvement. Finally, accurate implementation of the staffing plan is important. This involves recording activities, fine-tuning the plan on the day where necessary, monitoring performance indicators and ensuring an error-free payroll system. Staff exchange Retailers do not often respond adequately to the actual workload. Standard systems are available for drawing up rotas and implementing staffing plans. These planning systems are tailored fully to specific retailer situations and are provided with input from the stock optimisation and transport planning systems. Retailers can make further advances by integrating the staffing plans of different shops. Staff can be shared between neighbouring shops where, for example, one shop has its sales night on a Thursday and the other on a Friday. One step further would be the creation of flexible pools of staff, who are prepared to work at different branches. Staffing is a considerable expense and any saving will have a direct impact on profit margins. OPTIMISATION OF SHOP STAFFING Central functionality And information exchange using ERP POS Staff planning software WMS TMS White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 10

5 INFORMATION FROM THE CHAIN DETERMINES STOCK LEVELS IN DISTRIBUTION CENTRES In principle, the sole purpose of a distribution centre is to replenish shop stock. While a single national distribution centre is adequate in most retail sectors, in some sectors multiple distribution centres are used, for example a few regional centres for high-turnover products and a central one for slower moving items. Where a web shop is used, there is often also a fulfilment centre. Integrated stock management The challenge is to minimise the total stock held in the chain, without impacting on availability in online or offline shops. This is especially true in the current climate where cashflow is under pressure and working capital is required to invest in the development of new channels. This requires integrated stock management, but a great many retailers do not actually implement such a system. There are still retailers who try to optimise stock levels in the distribution centre, without considering stock in the rest of the chain. Integrated stock management starts with optimisation of stocks at shop level. If you know what will sell tomorrow, you know depending on delivery schedules and supply times what you need to deliver to shops today, what should have been delivered to the distribution centre yesterday and what should have been ordered from suppliers the day before yesterday. Of course, this includes web shop stock too. Aggregation of sales data from the different online and physical shops, combined with information about current stock levels, gives an idea of the level of stock that needs to be held in distribution centres in order to be able to replenish shelves in the shops effectively. Central or regional stock locations Retailers with regional distribution centres for fast-moving items and central distribution centres for slower moving items, must continuously monitor item turnover rates. Items that are currently slow-movers and stocked centrally, may become fast-movers and vice versa. The answer to the question as to which items should be held in a regional or central distribution centre depends on, for example, the stock and ordering costs. If a supplier requires a retailer to take delivery of a full pallet of a slow-moving item, the overall stock level may become unacceptably high if it is held in all regional distribution centres. Delivery schedule as a prerequisite Distribution centres need to hold enough to replenish shop stock. POS data, i.e. the input for an accurate forecast, is essential for this. Retailers who use a single integrated system to manage stock at both shop and distribution centre level, usually have this information available. 11

The delivery schedule also has a significant impact on shop stock levels. Retailers who supply all shops every day need to hold less stock than retailers who only supply shops once or twice a week. Stock optimisation at distribution centre level usually results in a series of purchase requisitions for purchasers. This information is of interest to the warehouse management system, which can use it to forecast the workload for goods receipts and storage. OPTIMISATION OF DC STOCK Central functionality Stock optimisation software And information exchange using ERP WMS TMS White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 12

6 SUPPLIER DETERMINES RETAILER SUCCESS Fulfilling purchase requisitions from the stock optimisation system is no guarantee that there will be enough stock in the distribution centre to replenish shop stock. If a supplier delivery is late or incorrect, there is a real risk that this will result in empty shelves or, in any case, lost sales. At a time when retailers are expanding their assortment and, at the same time, reducing time-to-market, supplier performance has an ever increasing impact on the returns on stock held. Close cooperation with suppliers is required where, on top of this, stock rotation falls as a result of diminishing sales and the emergence of e-commerce. Supplier management still often involves one-way traffic. Retailers place an order, agree a delivery time and wait for the goods to be delivered. In order to improving supplier performance, however, retailers need to start creating a clear order and delivery schedule, sharing information and measuring performance. Order and delivery schedule A good order and delivery schedule leads to a stable chain and a more evenly distributed workload in the distribution centre. Creating an order and delivery schedule starts with a forecast of annual volumes based on the retailer's forecast. Next the optimal order quantity (Economic Order Quantity or EOQ) needs to be calculated for each supplier. This will then serve as the basis for determining the order interval. If the warehouse planners indicate the most convenient day for receipt and the supplier issues a supply time, the stock managers can calculate when the order needs to be placed. Finally, an agreement needs to be reached with the supplier about how the transport is organised. Usually the supplier arranges transport, but it may be more efficient and, therefore, cheaper for the retailer to collect goods on the way back from shop deliveries. Vendor Managed Inventory (VMI) goes a step further. Here, the supplier schedules deliveries on the basis of stock levels and forecast information provided by the retailer. It is better to share expected purchase levels than POS data, which some retailers still consider sufficient. After all, suppliers must analyse and interpret such POS data themselves if they wish to use it as input for decision making. Any such interpretation will, however, always be less accurate than the retailer's own interpretation. Besides better information about seasons and trends, retailers also have details of stock shortfalls and surpluses within their own supply chain. Performance measurement A clear order and delivery schedule will only work if it is implemented properly. Most retailers, however, currently pay little or no attention to measuring the performance of their suppliers. This is a little bewildering, as measurement of performance is an absolute prerequisite to improving such performance. Better, in this respect, does not generally equate to faster. Reliability of deliveries is at least as important as speed. A high degree of reliability leads to a more stable chain and ultimately to reduced levels of safety stock. 13

In order to measure supplier performance, ERP or WMS systems need to record several data sets separately (i.e. one must not be overwritten by another): the initial order placed by the retailer, including the order date, order quantities and the required delivery time; the confirmation from the supplier, including modified quantities and delivery time, where applicable; the ultimate delivery, with actual quantities, delivery time and the quality of delivery. It must also be possible to indicate why a discrepancy has arisen. If it is the retailer who requests delivery at an earlier or later point in time, then this discrepancy should not be attributed to the supplier. In a streamlined operation, it is also important that suppliers label their shipments and send an electronic ASN (Advance Shipping Notice) in advance using EDI (Electronic Data Interchange). Using an SSCC (Serial Shipping Container Code) label on pallets will ensure a smoother and simpler goods receipt process in the distribution centre, especially where measurements show that the supplier is reliable and that every shipment does not need to be checked in detail. Combining orders Supplier management can produce even more opportunities if several suppliers choose to use the same logistics service provider. In such cases it can pay to combine orders for the suppliers concerned into a single full lorry load, allowing the logistics service provider to utilise 100% of the load capacity. This will generally lead to more frequent deliveries, reduced safety stock and an improved service level. Overseas deliveries can also be optimised by bundling orders in the country of origin into full containers. Intensive collaboration with suppliers enables the processes in the transport and distribution centre to be streamlined extensively. Of course, in practice this is not possible with every supplier. For this reason it makes sense to investigate alternative solutions for small suppliers. The number of suppliers can be reduced by, for example, ordering such items from a wholesaler. Input from ERP or WMS Creating an order and delivery schedule requires a stock optimisation system, which uses POS data aggregated at supplier level as the input. The warehouse management system (WMS) must provide information about the best delivery times. The greatest challenge, however, is the measurement of delivery performance. The ERP system or WMS must be able to measure supplier performance and present this information in a clear manner. These systems are currently not used sufficiently for this purpose. OPTIMISATION OF SUPPLIER PERFORMANCE Central functionality And information exchange using WMS ERP software Stock optimisation BI White Paper INTEGRATE, SYNCHRONISE AND OPTIMISE ISO 2014.VOCS Version 1.0 - February 2014 14

7 FULL LORRIES THANKS TO IMPROVED TRANSPORT PLANNING The outbound flow of goods from the distribution centre are recorded in a delivery schedule for shops. A predefined delivery schedule does not necessarily mean that each lorry will deliver to the same shops every week. On the contrary, sales will vary from week to week, so the volumes for transportation will vary accordingly. Adhering rigidly to a fixed itinerary may result, for example, in lorries being half full one week, and there being too little space another week. Prerequisites and available resources Transport planning is complex as the planners have to take into account a wide range of factors. This is especially true for retailers. Consider for a moment the arrangements with shops about unloading times and time windows or other restrictions on transport in city centres, which often vary from local authority to local authority. The composition of the assortment can also impose restrictions, for example in terms of the conditions (temperature) under which products must be transported or the option to transport products together. The availability of resources also has an impact on transport planning. How many drivers are available and what qualifications do they have? How many vehicles and of what type can we use? Finally, planners must take account of the road network where are the usual traffic jams as well as legislative and regulatory issues such as restrictions on driving hours. These are all determining factors in arriving at an optimal itinerary. Fewer empty kilometres When, however, retailers start implementing dynamic transport planning, they have the option of considering even more factors, in addition to variable volumes. First of all there are the unexpected 'disruptions', for example a shop requiring an urgent delivery or an unforeseen traffic jam. Another opportunity to reduce the number of empty kilometres arises in planning return freight, for example by having a lorry collect a shipment from a nearby supplier after its last stop. The reverse is also possible: a lorry from a supplier, that has just unloaded at the distribution centre, may be able to be reloaded immediately with a shop delivery. This will only be possible when transport and warehouse planners work together closely and exchange information about itineraries to shops, supplier shipments and activities in the distribution centre. Retailers planning dynamically also have the opportunity of improving the utilisation of lorry load capacity by calculating the best loading arrangement for lorries. The input for this is comprised of information from the warehouse management system on item weights and dimensions. Retailers with bulky products especially can take advantage of this, for example DIY stores and furniture shops. Retailers that supply shops with roll containers or pallets may benefit from warehouse management systems that provide stacking instructions for stacking pallets and roll containers. This can provide additional benefits by, for example, directing a pallet of toilet paper or kitchen roll to be stacked on top of 15