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Clothing Shops - A Case Study
Thursday 24th May 2018
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A very successful and profitable specialty retailer asked for help.

They had 'an offer they couldn't refuse' from their biggest supplier, to deliver direct to all their shops. Could there be a catch? Well yes, there could be. And was …

A classic case where everybody acted in good faith, yet the effect would have been to severely damage both supplier and customer.

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The Effect of Lead Time

We can now value time in any supply chain. Time has been the most overlooked - and often most important - part of the 3 way trade off between service level, inventory and lead time. Just knowing (for example) that each extra day of lead time reduces sales by x% or increases stock by y% (or some mix) put the issues in balance.

Until then, this client faced a trap which has caught many.

The suppliers offer was 'free delivery to all stores, once a week'. It will save you having to receive, warehouse, pick and transport goods from your centre.

The phrase 'once a week' wasn't in small print - there was no attempt to mislead. It was in 'mental small print' because managers had no way of trading off the clear and obvious benefits against the downside. Which was huge …

Weekly deliveries would have reduced sales by more than 10%.

Since specialty retailers charge a very high markup, their marginal profit on extra sales is very thick icing on what is otherwise a pretty thin cake. Conversely, reducing sales means no icing, and probably no cake either.

The offer was seen as 'saving logistics pennies yet reducing profit by pounds'. The company turned the supplier's offer down.

In passing, a good rule of thumb for long supply chains is that each day added to lead time adds 0.4 days to physical stock (and 1.4 days to committed stock) if the batch size stays the same. If you don't add the stock, service level will fall.

And if you do add the stock, leftovers and obsolescence will increase.
All this happens regardless of the accuracy (or not) of the demand forecast.

Doesn't seem fair, does it?


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