Retail Logistics: One Size Doesn't Fit All

Abstract

Low-cost retailers discovered the power of logistics; now even high fashion leaders are paying attention The problem? Different incentives and no cooperation Do not minimize costs at the distribution center Retailers in the US have seen a decade of unprecedented change. In the last 10 years there has been a flood of new retail space, with the top 50 retailers increasing their square footage by 55 percent. And not only are there more stores, but many offer similar products. The same brand of toothpaste can be bought at convenience stores, grocery stores, drug stores, supercenters, discounters, and warehouse clubs. Denim jeans can be found at the discounters and warehouse clubs, as well as at department stores, mass merchandisers, specialty stores, and other outlets. So much consumer choice puts tremendous pressure on retailers, with many historical leaders struggling in today's tougher environment. Of the 15 most profitable retailers in 1985, only 6 remained on the list by 1995. To survive in such a competitive market, it is no longer enough to buy the right goods at the right cost - retailers must also get them to the right place at the right time, and with the right operational costs. Doing this well requires the best possible logistics, combining the information that determines buying decisions with the product flows that get goods to customers most cost effectively [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. Many low-price retail leaders such as Wal-Mart, Sams, Price Costco, and Payless ShoeSource are famous for having built their financial success on logistical prowess. Take Wal-Mart. It sells similar product categories and sometimes identical products to fellow discounter Kmart. But Wal-Mart incurs non-product operating costs of about 18 percent, compared with Kmart's 24 percent. What drives the difference? To a great extent, Wal-Mart's ability to use its sophisticated logistical information system to give customers exactly what they want, and a product flow set-up that gets goods from supplier to store shelf with the lowest costs. Speedy restocking of goods, elimination of poor sellers, and promotion of successes also contribute to a clear sales advantage: Wal-Mart's discount stores register twice as many sales per square foot as Kmart. But it is not only discounters who use logistics as a competitive weapon. Consider the other end of the price-scale - high-fashion retailers. Some European shoe stores used to manufacture their entire collection in large, low-cost batches (mostly in the Far East) before the season started. Predictably, some styles proved popular and quickly sold out, while others needed huge mark-downs to sell. To avoid both problems, retailers now make only 60 to 70 percent of their goods in large batches. They then track early sales and use quick-response European manufacturers to produce smaller batches of fast-selling items - albeit at higher cost. But despite the higher cost, quick-response logistics have greatly improved overall profits through increased sales and fewer mark-downs. All manner of retailers are waking up to the power of logistics, realizing that they entail more than trucking and distributing goods. For without good information about sales and insight into customer needs, the finest distribution center and transport capabilities are likely to send the wrong thing to the wrong place at the wrong time. Effective logistics therefore require an efficient information system as well as good transport, distribution center, and store-handling capabilities. And that's just the start. Those who excel at logistics in today's environment use logistical expertise not only to survive, but to sustain real competitive advantage. They have discovered that just as one strategy does not work for all retailers, neither does one logistics system suit everyone. No longer a generic capability, logistics can be tailored to support each company's distinct strategy. …