Taking a Lesson from Big-box Retailers: The World's Distribution Pros

The proliferation of “big box” retail outlets across the suburban landscape has been part of the retail environment for more than a decade. As population target demographics have shifted away from urban centers into suburban areas, retail organizations have capitalized on this trend.

This blog post will examine how retailers have adopted a business model that presents unique challenges in terms of the development of distribution and infrastructure systems to support this growing retail phenomenon.

In order to differentiate from traditional retail concepts one has to comprehend the unique characteristics of this type of store. One of the more interesting features of this type of store is that the store serves as both a warehouse and a retail space. Unlike traditional retail outlets, you will not find the clerk heading to a backroom to find an item for the client.

The term “big box store” is generally used to describe a store belonging to a franchise chain (such as Wal-Mart or Costco). These stores have a similar physical resemblance to one another: generally they occupy locations larger than 70,000 square feet and usually consist of rectangular shaped buildings with a flat roof, usually made of steel with walls and floors made of concrete block slabs in a masonry floor. These stores are generally in a suburban setting in proximity to major highway interchanges. These buildings are designed to allow for merchandise display and to give the consumer the impression of large volumes of inventory and selection.

Why Has the Big-box Retail Model Flourished?
Big-box retail practices evolved from a series of academic marketing studies conducted in the early 1990s. Among the most notable studies is a key marketing research document published in 1994 titled Minimizing Technological Oversights: A Marketing Research Perspective, which stated that “retailers can often affect sales volume of a product by increasing the shelf space allocated to that product.”

Generally speaking, big-box retail stores are divided between general merchandisers such as Wal-Mart, and category killers such as Staples, which specialize in one type of product (e.g., office products). Among the several reasons for big-box success has been the sheer volume-buying power that these corporate retail organizations can leverage, which makes it difficult for traditional independent retail organizations to compete. Also, the relative low cost of building outlets in areas where retail land is inexpensive, and where populations have higher levels of per capita income, makes this a successful retail business model.

Consumers Have Created a Battle for Market Share

Retail consumers have expectations of increased levels of service based on product availability, product selection, and competitive pricing. The big-box model has been replicated by several retail organizations, resulting in a battle for consumer retention. This is particularly true in an environment where customers can go online, order merchandise, and simply pick up the items in the store. This is an attractive option during the busy retail buying season when sale items are more difficult to acquire.  Also, customers know they can venture elsewhere in search of similar products and services in a highly competitive and price-driven environment, The organizations which can fulfill and exceed customer expectations will inevitably capture market share.

Manufacturers Outsourcing Distribution
Manufacturers have increasingly outsourced the distribution of products to third-party logistics (3PL) service providers. This has enabled manufacturers to focus on their core competencies while providing the retail market the ability to capitalize on the expanded areas of distribution service such as VMI (vendor-managed inventories) and just-in-time (JIT) inventories.

This has provided retailers with the ability to adjust for variability in demand, and to pass on the burden of forecasting inventory to the distribution channel specialists. David Bourque, in his article From Manufacturing to Distribution: The Evolution of ERP in Our New Global Economy, amplifies this point:
ERP-distribution software has integrated SCM functionality into its existing functionality to navigate through the complex global manufacturing environment. SCM software maps five processes into one solution: planning, sourcing (obtaining materials), producing, delivering, and returning final products if defective. These processes help to track and manage the goods throughout their entire life cycles. In addition, ERP solutions are used to manage the entire operations of an organization, not only a product's life cycle. This gives users the broad capability to manage operations and use the SCM functionality to manage the movement of goods, whether components or finished product.

IT Has Provided Retailers with Increased Supply Chain Data

a) ERP-Distribution Systems
ERP-distribution software encompasses both SCM and ERP together, and is designed primarily for retail, logistics, and distributors. Among the key benefits is the ability to reduce time for warranty processing.

b) Point of Sale (POS)

Advances in POS technology provide retailers with information to track sales demand by SKU (stock keeping unit), the ability to transfer inventories from one retail outlet to another (since one store in a particular location may have more demand for a particular item) and the ability to track the progress of shipments from the factory to the distribution and retail outlet.

c) Transportation Management Systems (TMS)
A TMS enables retailers to efficiently manage delivery schedules from the distribution centers to the retail outlets by developing a sophisticated supply chain network whereby store deliveries follow a fixed schedule, alternatives can be developed for variations in demand, and adjustments can be made to the quantity of merchandise to a specific retail outlet or by SKU.

Alternatively, by optimizing transportation activity while a carrier is on a scheduled route completing deliveries on the return leg of the route The backhauling of unsold merchandise and returned merchandise for can be sent directly from the retail location to the distribution center and back to the manufacturer for distribution or vendor return. A TMS will also enable a retail organization to select the best rates from either a private carrier or common carrier over a given route, and enable effective route planning. One other benefit of deploying TMS technology is the ability for organizations to cite improved management of transportation and distribution resources as part of an overall green sustainability effort this can counter unfavorable media coverage of big box retailers.

d) Warehouse Management Systems

Through the use of other technology based tools such as WMS (Warehouse Management Systems) which have enabled retailer’s efficiencies in order fulfillment and replenishment, and in effective use of inventory movement and storage space within the retail location. This results in efficiencies in minimizing order backlogs and developing audit trails in the even of inventory reconciliation to improve loss prevention capabilities.

e) Product Lifecycle Management (PLM)
PLM is another technology tool which has helped retailers track the entire lifecycle of a product through development and introduction to the market, throughout the sales process, and finally to product maturation where discounts can be applied to adjust for decreased demand (as well as helping identify slow-moving inventories that can be discounted and sold at a clearance price, as opposed to returning as a credit against a purchase order from the manufacturer).

f) Analytics
Retail organizations have been using analytics embedded within ERP to examine trends related to ordering patterns within consumer behavior. Additionally, promotions and sales can be organized according to market segments based on demographic data from which price points can be established, and styles and patterns arranged.

g) Radio Frequency Identification (RFID)
RFID is another technological innovation that has enabled retail organizations to manage their resources and improve customer service. At the retail outlet, items are tracked as they would be in the warehouse, thus improving inventory control. The receiving of inventory is another process which is conducted rapidly and efficiently through the use of RFID tags and is extended from the manufacturer to the retail distribution process right through to the POS. In-store display and merchandising is another benefit of RFID: as merchandise is sold, inventory is tracked and can be linked by a min/max order calculation to send a purchase requisition for reordering merchandise. At the cashier customer orders can be processed rapidly, and RFID contributes to loss control, since any unchecked merchandise will trigger an alarm.

Some Final Thoughts
In parts of North America there is a grassroots movement which is attempting to limit the growth of big box retail stores within their communities. This movement claims that the big-box model contributes to the decline of independent business, and that it also contributes to wasted use of green spaces and open land, as well as contributing to urban sprawl.

Regardless of your opinion with respect to big-box retail practices, they are a key component of our retail economy. As big box retailers have emerged over the past decade, costs have been reduced for a number of high-end priced goods due to diminished marginal pricing.

This segment of the retail model requires many of the IT solutions that the vendors in our database provide. The use of these software solutions has been a key contributor to the success of this retail market over nearly two decades. If you are interested in learning more about the retail/ERP-distribution environment and the software solutions and vendors that support this environment, the TEC Vendor Showcase is an excellent place to begin. Here you can also obtain white papers, comparison reports, and information on each of the applications and software vendors that support this activity.
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