making demand driven retail a reality · to out of stocks total $93 billion, according to the 2008...

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WhitE papEr Making DeManD Driven retail a reality

Making Demand Driven retail a reality

�© One Network Enterprises. all rights reserved.


the retail industry today

It is a universally accepted fact that customer satisfaction is

the corner stone for success. In the retail industry, customer

satisfaction translates to customers being able to find the

desired product on the shelf when they want and at the

right price. At One Network, we understand that though this

sounds straight forward, it has been a major challenge for

the retailers and suppliers alike. Retail supply chains today

operate in dynamic environments in which conditions change,

often on a daily or even hourly basis, and require continuous

collaboration and execution adjustments across the business

network. Product lifecycles are becoming shorter, the network

of trading partners is in constant motion and yesterday’s best

practices will offer no competitive differentiation tomorrow.

One Network is the only solution that recognizes that a

supply chain is in fact a network and should be treated as

one. It offers an integrated Demand Driven Replenishment,

Distribution, Manufacturing and Transportation solution that

spans across customers, suppliers, carriers, and the different

internal departments and manages all functions from the origin

of supply to the point of consumption. Since it is built on state

of the art technology, the implementation can be deployed

one service at a time with sophisticated integration to legacy

applications, while providing visibility between the processes.

This is in contrast to the number of disparate processes today

such as store operations, procurement, logistics and vendor

processes that are disconnected, and incomplete.

Recent research done by Wharton’s Fishman-Davidson Center

for Service and Operations Management found that,

“Nearly 30% of the time, the computer said there

was a positive inventory but somehow the retail

store couldn’t find that inventory.”

This indicates there clearly is a retail store operations problem,

either because of the inaccuracy in the inventory management

processes or systems, or because there is misplaced

inventory. Moreover, the research reports,

“If stock outs of preferred brands occur two or three

times in a row, U.S. shoppers are more inclined than

their European counterparts to switch stores”.

Unfortunately, in such situations the stores often assume

everything is fine while they are in fact losing customers and

enormous amounts of revenue. Sales lost to competitors due

to out of stocks total $93 billion, according to the 2008 store

systems study produced by Retail Information System News

(RIS) and research partner IHL Group.

A joint study by Grocery Manufacturers Association (GMA),

Food Marketing Institute (FMI) and Comite International

d’Entreprises a Succursales (commonly known as International

Committee of Food Retail Chains or CIES) revealed that the

world wide out of stock levels average 8%, causing 4% loss

of sales for a typical retailer. These numbers translate to a $32

Million loss for every $1 Billion in sales.

Sales lost to competitors due to out of stocks total $93 billion,

according to the 2008 store systems study produced by Retail

Information System News (RIS) and research partner IHL Group.



The out of stock problem is even more pronounced in the case

of retail promotions. The study revealed the out of stock levels

for promoted items average 16%, establishing the fact that

the situation is even more critical for retail promotions. If the

demand for promotions is not forecasted accurately and there

is insufficient time to reorder the product, then the item is out

of stock for the rest of the promotion. This is particularly true

for weekly promotions.

Retailers have traditionally tried to solve this problem by

buffering against the variability in demand. However, instead

of reducing the out of stocks, this approach only resulted in

increasing the inventory and operational costs. The experts

at Wharton reason “The conventional wisdom that more

inventory leads to less stock outs does not hold true. Rather,

inventory appears to reach a critical mass; when there is

too much inventory and too large a “back room,” stock outs

actually begin to escalate because employees literally can’t

find products or often misplace the products they need to

restock the shelves.”

The conventional wisdom that more inventory leads to less stock outs

does not hold true. Rather, inventory appears to reach a critical mass;

when there is too much inventory and too large a “back room,” stock

outs actually begin to escalate because employees literally can’t find

products or often misplace the products they need to restock the

shelves.”

Wharton’s FishMan-DaviDson Center

One Network collaboratively worked with a large U.S

grocery chain and one of their suppliers to increase on-shelf

availability while reducing store and DC inventory. As a result

One Network gained significant insight into the retailer’s

and supplier’s pain points and the reasons for their inability

to solve out of stock problems. It was discovered that the

supply chain problems do not begin and end at the store. In

fact, one of the major problems is the lack of transparency

between the different tiers of the supply chain – stores, retail

distribution centers (retail DCs), and suppliers. Today, the retail

DCs that supply the stores are blind to actual product sales,

and hence will not be prepared when a large order is received

from the store. Furthermore, we noticed orders generated

from the store to the retail DC are one time orders, and do not

provide visibility into future demand. In the same way, the

supplier cannot anticipate changes that need to be made to its

manufacturing and deployment cycles in response to changes

in demand from the retailer.

“



Why traditional systems are unable to solve retailer’s problems

From our investigation, we found that the retailer had deployed

“best in class” point solutions utilizing intelligent algorithms.

However, the retailer was still facing the above-mentioned

problems because the solutions were not looking at the

holistic problem and addressing the root causes (see Figure

1: supply chain challenges with traditional systems).

To begin with, the systems operated in silos providing no

visibility between the various internal planning and execution

systems or those of the supplier. There were several systems

generating different forecasts at different levels. A retail

DC level forecast was generated to predict the number of

products that each retail DC should carry, and a category level

forecast was generated to predict financial plan and Open-to-

Buys. These forecasts never matched as they were generated

by different systems, were disconnected, and were expressed

in mutually exclusive units of measure. The supplier created

yet another forecast during the Sales and Operations Planning

(S&OP) process, ignoring the retailer’s forecast and product

consumption, but focused on the supplier’s financial targets,

current contracts, and promotion plans, thereby increasing the

inefficiencies and inconsistencies between the systems.

Figure 1: supply chain challenges with traditional systems

Bull Whip Effect of Demand, Supply and Lead Time Variability.

Traditional Supply Chain Solutions Inadequate. Enterprises compensate for data latencies and demand supply variabilities by increasing inventories and using complex models which further exacerbate the problem.

3

2

Silo-ed Enterprises with Disparate Systems1

Supplier / Co-Manufacturer Manufacturer / Service Provider Distributor / Retailer

Supply Chain Challenges with Traditional Systems



The biggest problem was that the most important forecast

– the store forecast – was not generated by most retailers, and

when it was generated it was not visible outside the four walls

of the store. Additionally, the store forecast was only used to

calculate the immediate next order, and did not provide further

visibility into the demand.

Andre Martin, the seminal author of DRP, in his latest book,

Flowcasting the Retail Supply Chain, (Factory 2 Shelf, 2006)

states,

“You only need one unique sales forecast to drive

a retail supply chain. The retail store is both the

beginning and the end of retail supply chains…. If

you forecast at the retail store, the need to forecast

anywhere else in the supply chain completely

vanishes.”

A store level forecast predicts exactly what the retail shelf will

sell, when it will sell, and how much it will sell.

To accurately predict demand, sales at the retail shelf should

drive the forecast and the future replenishment needs of

the store. What the store needs should drive what the retail

DC needs to ship to the store and what the retail DC needs

to order from the supplier. This should continue until the

entire supply chain demand is calculated based on the store

demand.

Sadly, with the current disparate systems, the retail DC has its

own independent prediction of what it needs to provide to the

stores. The supplier DC has its own independent prediction

of what it needs to provide to the retail DC and so on, making

each independent forecast increasingly inaccurate.

One of the most important data points needed to calculate

the demand at each tier is the “time-phased projected order

quantity”, i.e., the future order quantities calculated for an

extended time horizon. While the store forecast predicts

the consumer demand, the order quantity translates this

consumer demand into demand at each upstream tier by

using balance on-hands, on-order quantities and actual point

of sale movement, to avoid out of stocks at the shelf. It is

imperative that these order quantities are calculated for an

extended time horizon, enabling the retailer and/or supplier to

order and/or produce the accurate amounts of goods for the

future orders. Unfortunately, the retailer’s prevailing ordering

systems are single point ordering systems generating one and

only one order - the immediate next order. This explains one

of the reasons why these systems are not able to ensure the

product availability at the retail shelf.

You only need one unique sales forecast to drive a retail supply chain.

The retail store is both the beginning and the end of retail supply

chains…. If you forecast at the retail store, the need to forecast

anywhere else in the supply chain completely vanishes.”

anDre Martin, FloWCasting the retail supply Chain

“



During the project, it was discovered that not only did the

retailer’s current systems not address the existing gaps in the

processes, they also did not provide any visibility between

the individual processes – store-operations, procurement,

replenishment/distribution, and vendor processes. Without

the visibility into the retail store data such as daily balance on-

hands and store forecast, the incumbent upstream processes

can neither detect changes in the demand patterns, nor

respond quickly to these changes. Moreover, the retailer did

not have any visibility into the supply availability from

the supplier.

Recently, with the surge of repository solutions, the retail

industry saw an increase in so-called “collaboration” and

“demand visibility” solutions. These solutions require that

separate integration be developed to share the information

between the retailers and suppliers, resulting in additional

development time and cost overhead. Such integration also

increases the latency between demand changes and when the

changes become visible to the supplier.

Category Forecasting System

Forward Warehouse Inventory Management System

VMI System

Deployment Planning SystemInbound Replenishment System

Master Product Scheduling System

Category Forecasting System

Promotion Planning System

ProcurementSystem

DC Inventory Management System

VMI Collaboration System

Logistics System

Analytics System

DC Forecasting System

Store Operations(POS)

Store Ordering System

Store Inventory Management System

Back Room Operations System

LEGEND

EDI and Other Integration Systems

Private Label Manufacturing

Supplier Forward Warehouse

Retailer’s Disparate Systems

CORPORATE DC STORE

Figure 2: silo-ed traditional systems – cause for lack of real time visibility & communication



The cost to the supply chain as a result of the inefficiencies

and inconsistencies of the existing systems infrastructure is

amplified when you consider the overhead costs of operating

and maintaining several disparate systems. The retailer

and the supplier taking part in the project had 10 different

systems – 4 forecasting systems, 1 procurement system, 1

store ordering system, 1 analytics system, 1 VMI system, 1

replenishment planning system and 1 deployment planning

system -to solve this quintessential problem of retail shelf

availability and its causes.

These systems were not seamlessly integrated with each

other, and there were significant latencies associated with the

information flow between them. The physical time lag is the

time associated with picking, packing, transportation, and

receiving and hence cannot be avoided. But, the information

latency associated with converting consumer demand to an

order, an order to a shipment and the supplier response time

to fulfill the demand can be substantially cut down by using a

single system that can address all the existing problems.

Moreover, the repository systems available in the market

provide visibility to problems through historical analysis,

but do not help the retailer to proactively solve the problem

through projected planning, real-time sensing of changes in

execution, or rapid response through interactive re-planning.

For example, if there is an un-forecasted increase in the

demand and the product is stocked out, these systems will

make the historical stock outs visible to the supplier but they

will neither calculate future (or projected) stock outs nor will

they predict the effect and create, prioritize, execute an order

to satisfy the projected increase in the demand.

Repository systems available in the market provide visibility to problems

through historical analysis, but do not help the retailer to proactively

solve the problem through projected planning, real-time sensing of

changes in execution, or rapid response through interactive re-planning.



how one network can help

In 2002, a group of seasoned supply chain practitioners,

retail and logistics pioneers, and computer scientists came

together to create a collaborative end-to-end solution suite

from the ground up. This was unlike any of the prior band-

aid solutions that failed to produce meaningful results.

The One Network Platform provides an integrated suite of

network services for demand planning/forecasting, advanced

replenishment, demand driven procurement and/or VMI

systems, appointment scheduling, and integrated logistics

planning and execution. At One Network, we understand that

each retailer is unique in how they manage their businesses,

work with their partners, use their current systems, and would

architect their future solutions. To cater to these different

requirements of the retailers and to reduce their total cost of

ownership, One Network uses Software as a Service (SaaS)

architecture (see Figure 3: one network solution). With this

architecture, each solution is offered as a service that can be

availed independently or in conjunction with other services.

Furthermore, supply chains gain an almost immediate time-

to-value from shorter development cycles, a benefit of the

solutions being available as services. The One Network

Platform incorporates the ability to seamlessly integrate with,

supplement, and add value to legacy applications. In our

collaboration project with the retailer and the supplier, we

were able to integrate with the existing forecast, VMI, and

procurement systems and augment them with our OneNetTM

and Collaborative Replenishment services in an almost

negligible implementation time of 6 weeks. One Network

represents an efficient and collaborative solution integrating

the retailer and supplier on one network.

Supplier / Co-Manufacturer

Enterprise

ExtendedEnterprise

Multi-EnterpriseMulti-Party

1. Multi-Party and Multi-Enterprise Network Services

1. Extent Current Enterprise Infrastructure

2. Create new or truly end-to-end processes (BPM - business process management)

SaaSPaaS

2. Service Orientation

Massive Scalability and Elasticity

LEGEND

SaaS - Software as a Service

PaaS - Platform as a Service

The One Network Solution

Figure 3: one network solution



One Network’s solution generates a single store forecast. The

demand at each upstream tier in the supply chain (called time-

phased order forecast) is calculated from the demand and

inventory at the tier beneath it. Order forecasts are converted

into cost efficient shipments, i.e., rail, ocean, or truck loads

based on the destinations and delivery times. These data

measures are not “estimated” but are actual execution values.

Unlike most existing systems, there is no guessing or

heuristics. Except for the store forecast, which is statistically

and collaboratively derived (see Figure 4: Forecast at the

item-store level), every data measure is precisely calculated

using actual data from the execution transactions, and takes

into consideration the supply, capacity, policies, and time

constraints. The store forecast generated using standard

statistical algorithms is continuously amended as the actual

point of sale data determines changes in demand trends.

This approach significantly improves the forecast accuracy,

store orders, and visibility to demand variability throughout

the supply chain, consequently reducing the number of out of

stocks. Moreover, these sales forecasts and order forecasts

are calculated for 52 weeks, providing visibility into the future

demand and enabling the reduction in safety stock inventories.

The out of stock and inventory accuracy problems are further

addressed by One Network’s exception processing. Advanced

analytics continuously and interactively create alerts providing

visibility into forecast errors, current and projected out of

stocks, and inaccurate inventory measurements (see Figure 5:

DC and store out of stocks). The projected out of stock alert

lists the out of stocks that will occur in the future. The solution

precisely answers the questions – which items at which

stores/DCs will stock out and when, what revenue will be lost,

and what actions need to be executed to avoid the stock out.

With mutual visibility, and access to this information and the

processes and transactions, the retailers and the suppliers can

act to avoid the projected out of stocks and lost sales. The

exception processing incorporates workflows to resolve the

corresponding exception.

Figure 4: Forecast at the item-store level

10© One Network Enterprises. all rights reserved.


For example, One Network addresses the inaccuracy of the

inventory management systems using alerts and workflows.

The inventory accuracy alert is triggered when there is

demand and inventory for an item but no sales. The alert

and the corresponding workflow are immediately sent to

the appropriate parties at both the retailer and supplier to

investigate potential root causes, correct the problem, and

report the cause for future evaluation. Using the corrected

inventory values the One Network system re-plans the supply

network and potentially generates and executes the required

new orders ensuring product availability at each level of the

supply network.

One Network has also pioneered solutions for scarce supply

allocation and promotion execution. We apply the agile

manufacturing concept of “postponement” in a retail scenario

to look at the last minute demand at each store and optimally

allocate the available product. This ability to prioritize, promise

or cancel orders based on the latest demand and supply

view is especially beneficial in the case of scarce supply,

promotions, new product introductions, and extremely

volatile items. Mike Griswold and Lora Cecere from AMR

reveal that “18% to 24% of promoted items are unavailable

to consumers”. One Network further solves this promotion

predicament with “Continuous Demand Management”. We

make use of classifying events to determine what constitutes

a demand change, continuously identify these changes,

and automatically react to each instance. These classifying

events differentiate noise from a legitimate change in the

demand (due to promotions, new product introductions, etc.)

and hence ensure the accuracy of promotion forecast and

execution.

Figure 5: DC and store out of stocks

11© One Network Enterprises. all rights reserved.


The characteristic that makes One Network’s solution suite

superior to the traditional systems is that all the above-

mentioned functionalities are tightly integrated. As shown in

Figure 6, with One Network, the retailer and the supplier get a

holistic view of the entire supply chain. Each retail process has

immediate access to all the data inherent in the supply chain,

such as store forecast, point of sale, and balance on-hand.

How does One Network achieve this? We call our secret

recipe - “Platform”. Platform is the underlying architecture

on which One Network solutions are built. As Andre Martin

points out, “one of the fundamental requirements is to be able

to model the retail supply chain from the store-shelf to the

factory.” We embed each of the supply chain data models in

the platform, making them accessible to the different network

services residing on top of it. Since all One Network solutions

are built on the same platform, there is no time or information

lost through extracting, transforming, and loading the data

from one disparate application to another. The solutions

extend from store operations to production planning, and

replenishment to transportation, making One Network the only

solution suite that integrates planning with execution.

One Network uniquely enables each of these services to be

deployed independently and in a very short implementation

cycle. If a retailer and a supplier are interested only in the

historical and future visibility across the supply chain, they can

deploy the OneNet service only. OneNet provides retail data

such as store balance on hand, point of sale, store forecast,

policy information to the suppliers while providing the supply

availability information to the retailers. It also comprises

“discovery services” which detect missing information or

optimize policy information such as safety stocks, and reorder

quantities. However, OneNet can work in concert with the

Collaborative Replenishment service and other services to

deliver additional value.

Figure 6: the retail supply chain view

1�© One Network Enterprises. all rights reserved.


The capabilities of a truly collaborative network and the

potential results demonstrated during the project were exciting

to both the retailer and supplier (See Figure 7: Benefits

of repository solutions compared with one network).

Working together as a team, the retailer, supplier, and One

Network transformed the way supply chains collaborate

defining common processes, policies, performance

measurements, and user interfaces. For the first time the two

trading partners had access to the same set of data, alerts,

analytics, transactions, planning tools, and user interfaces to

optimize the responses to changes in demand or supply.

Furthermore, because the system is designed collaboratively

they shared a common perspective on the priority of the

issues, the ability to analyze and determine the root cause,

and take the corrective and/or preventive action. Most

importantly, this system not only provides visibility into the

issues but empowers the supplier and retailer to solve these

issues efficiently, effectively, rapidly, and profitably.

20

40

60

80

100

BE

NE

FIT

Repository Solutions

Visibility into historyVisibility into history and future

Visibility and replenishment from factory to store

Visibility and comprehensive supply chain activities

OneNet OneNet + Collaborative Replenishment (CR)

OneNet + CR + Manufacturing + Trans.

SOLUTIONS

Benefits of One Network vs. Repository Systems

Figure 7: Benefits of repository solutions compared with one network



summary

The experts at Wharton observe,

“In any industry, there is a company that is the best.

But, in retailing, there is no clear company to follow.

There is no Toyota in retailing.”

The success of any retailer or supplier hinges on addressing

the problem of shelf out of stocks and related causes

– forecast inaccuracy, transactional data inaccuracy, and

the poor visibility of transactional data across the different

processes and tiers. One Network has the best capabilities

to solve these issues and improve the customer satisfaction

while reducing the inventory and operational costs. With our

accurate single store forecast and calculated time-phased

projected orders, and a comprehensive platform incorporating

planning, exception processing, and execution,

One Network will be instrumental in creating the next

Toyota of retailing.

Our retail out-of-the-box solution includes the following

network services:

• Demand Planning and Store Forecasting

• Forecast Dis-aggregation

• Demand Driven Replenishment

• Last Minute Allocation

• Dynamic Order & Shipment Prioritization

• Continuous Demand Management

• Appointment Scheduling

• Demand Driven Transportation

• OneNetTM

• Collaborative Replenishment

• Demand Sensing and Translation



Corporate headquarters us

One Network Enterprises

4055 Valley View Ln

Dallas, TX 75244

Tel: +1 972.385.8630

Email: [email protected]

Web: www.onenetwork.com

international headquarters

One Network Enterprises (Europe)

Mayfair House

14-18 Heddon Street

Mayfair

London, W1B 4DA

United Kingdom

Tel: +44 (0) 203.355.1646

Email: [email protected]

Web: www.onenetwork.com

To understand the One Network Platform and obtain detailed information on

each of the network services and our retail supply network solution, please

contact us at:

Email: [email protected]: 1-866-302-1935 (us) 972-385-8630 (international)

making demand driven retail a reality · to out of stocks total $93 billion, according to the 2008...

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