The Space on Shelf Drives the Supply Chain
What is new, is the optimisation of the shelf space, and the usage of the allocated space to drive the supporting Supply chain, thereby creating a DEMAND led supply chain, that restricts the In-Store stock levels to that sufficient to meet the demand before the next refill or shelf replenishment is actioned.
The application of the principles and practice of JUST-IN-TIME at shelf level.
Throughout the civilised World, there is intense competition for space close to urban areas. Developers want to invest in land because there is a finite amount of it and (apparently) non-finite demand. The fundamentals of economics being what they are, land prices had little choice but to rise. Land for retailing, as a subset of all available land, has been the battleground where the heavy artillery of the major retailers and a host of other out of town retailers have been exchanging fire.
How can they afford to pay millions of pounds for the land on which they must then spend further millions on converting to a huge car park with a small shop in one corner?
One of the answers is of course, that whilst they may only be showing a 3 - 8% return on sales, a massive chunk of their cost is swallowed by infrastructure overheads. Those overheads expand but marginally when a new superstore opens. The new turnover may look expensive to buy in terms of local costs, but it is gained at scarcely any cost to inventory (except on the shelves) and with only variable cost increases in the systems, distribution and administration chains.
Nevertheless the local costs are considerable, and so we return to the question of space and space management. The obvious sources of wasted space have already been tackled, - warehousing (sometimes a separate floor above the sales area) has been reduced severely - sometimes below sensible levels - in the great race to squeeze every available square foot (perhaps given 1992 that should read square metre) of selling space from the investment.
So what is the next step? Reduced car parking? Multi-storey car parking? No! Neither of those will permit optimum footfall to be achieved - it would be a customer disincentive. What about inside the store? Aisle widths, gondola heights, horizontal access freezers?
Aisle widths are a function of peak hour traffic flows plus trolley sizes, and short of putting up traffic lights inside the stores, or stacking potential shoppers in a holding pattern round the external perimeter of the store (sometimes known as a queue) to await a shopping slot, there's not much they can do.
So is the subject of space management a subject in which only the retailer can be expert? Is it just another way of using computer graphics to paint pretty pictures on a screen, and test the colour co-ordination of the manufacturers' marketing department?
The answers to all these questions is a clear NO! Although you might be forgiven for believing that the form is more important than the content from the way the subject is presented.
Space management has moved from an art practised (but not nearly perfected) by every salesman and retail store manager, to a religion, the precepts of which were etched on tablets of stone (in head office) and applied in military fashion without proper heed for local conditions. The usage of EPoS technology shows that there is no average store in practice, and strict application of the rule of averages will produce an average result certainly a result which is significantly sub-optimal.
The methods presently used to assess shelf quantities are a function of four things.
1. The average rate of sale of that line for the average store of that size;
2. Manufacturer case contents - in general a full case is the minimum replenishment quantity;
3. Shelf replenishment frequency
4. Facings and total shelf capacity
Deciding replenishment frequency and shelf capacity is an iterative process. The actual rate of sale is also a variable, so if three of the four factors take part in this iterative process, what about the remaining factor?
What about the manufacturer case quantity? Is it the right quantity, is the product primary packaging the right size? The historical acceptance of 12's 24's and 48's as case quantities might not produce the optimum cost.
The rule of the highest common factor is on the way out - the rule of the lowest common denominator is on the way in. It will affect every manufacturer's strategic thinking on packaging lines in R & D and on space utilisation.
The major retailers have substantially reduced their inventory levels through centralised distribution. The balance remaining gets small by the month. Packaging is the next big area of opportunity.
The cost of space may be greatest in the supermarket, but it is not exactly free in the manufacturer's own supplychain. If a manufacturer is a supplier of products which sell at a rate which does not put them in the baked beans, petfoods, cornflakes or toilet rolls class, then they must protect their continued existence on the highly pressurised space on shelves in supermarkets by giving their products the opportunity to fulfil their profit potential. If they penalise that potential by flabby packaging performance, they run the danger of arriving at the top of the hit-list of disappearing brands, making way for higher added value, better packaged alternatives.
It is important that manufacturers' R & D departments brand managers, advertising agencies and design consultants remember the need to take a practical view of life.
A comment made to us by a retailer of a well-known supplier:
`They must be silly (we euphemise) if they think that by doubling their carton size we will give them more facings. I told them to stop all future deliveries or pay me my costs of re-handling at the store - or go back to the previous size` End of quote.
The future will be space management and the single major variable influence on it - packaging.
Shelf space management is another form of logistics and herefrom we shall be analysing the effect it has on the Supply chain.
In simplistic terms - Shelf Space Management is the science of obtaining a greater throughput of product through the smallest possible amount of shelf space with the objective being to maximise the profit potential.
The elements are:
1. Delivery cycles, or the frequency by which product is received in store whether that be from supplier or from retailer central warehouse.
2. Stockholding, the amount of time that a product spends in the retailer's system of storage.
3. Shelf replenishment, the number of times that the shelf space that a given product occupies, is refilled, whether that be daily or weekly, or multiple refills during the day.
4. Throughput, the amount of product items that are sold through the shelf space allocated during a given period.
It is fair to say that with the expansion in product range offered by the retailers, the modelling of this area of the supply chain will assume a far greater level of importance to the retailers and therefore, by default, the manufacturers. Retailers are being forced into expanding, or altering the mix of their product ranges, to improve the "FOOTFALL" and therefore their financial performance. When you combine this goal with the fact that the volume of shelf space available, currently and in the future, will be limited, the emphasis on shelf space management will alter quite significantly, and will have to be combined with modelling techniques which reflect the performance of the associated logistics.
The fact of the matter is that, the smaller the amount of shelf space allocated to a product, without any detrimental effect on the sales generated, will provide a greater profit potential.
There are however, some very fundamental factors which have to be considered in the allocation of shelf space, which can affect the maximisation of the profit potential for that fixture, being:
1. The opportunity for the consumer to see the item and therefore allow access to purchase.
2. The allocation of the product to the correct shelf. Merchandising tests have proved that allocating a product to the incorrect position on the shelf or to the wrong shelf can have a detrimental effect on its performance.
3. The correct price. If the recommended retail price or the price at which the product is being offered in the store is materially different to that of the retailer's competition, then there is a possibility that the consumer will buy elsewhere.
4. Does the product form a material part of the range mix and therefore must be allocated shelf space irrespective of profit performance.
5. Does the number of facings allocated provide sufficient impact for the consumer to be attracted to purchase the product.
6. The minimum amount of space allocated to a product must not have any detrimental effect on the sales performance of the product.
There are various ways in which more space can be created on the shelf, and without undertaking an exercise to implement mass product de-listings, this can be achieved in three ways:
1. Replace existing product with physically smaller competitive brands or private label.
2. Less facings to a product category, which will create "empty holes" in the fixtures which can now be filled with "Value Added" products, which will not only increase the "Footfall" but also increase the fixture profit potential. It is also a valid method of creating space in which "New Products" can be launched.
3. Optimisation of product cube/packaging. There is sufficient evidence within the packaging industry to demonstrate the efficiencies which accrue to the supplychain of re-evaluating the cube optimisation of products, whether they be new, mature or still a marketing concept.
The following exercise demonstrates the point:
Examine an oblong 250gm margarine tub. The product on shelf has the following dimensions:
Cubic volume 439.45 cubic cms
If the lid of the tub is removed, the dimensions of the packaging excluding the lid are:
Cubic volume 312.55 cubic cms
A major difference, the increase in the amount of shelf space occupied by the area of the lid is the difference between the above two calculations, or 126.90 cubic cms - 28.8% of the total cube occupied by the product packaging.
The implications of this under utilisation of the shelf space goes a lot further than just the shelf space, as the space the product occupies in the Roll cage (Combi); the trunking vehicle; the storage areas; will also be affected incurring higher direct product costs and therefrom lower direct product profitability.If the above example could be converted into a higher cube efficiency, and the same exercise was conducted on all the products of the manufacturer, the effects on the supplychain would be:
* less space occupied on shelf
* smaller transit cartons for the same volume of product
* greater pallet stacking capacity
* less forklift movements
* less pallet apertures
* more cartons will fit into a roll cage (combi)
* more cartons will travel in the delivery vehicle
* less roll cages required
* smaller fleet of vehicles
Let us now examine our belief that shelf space management and therefore the space on shelf will ultimately drive the supply chain.
For many reasons, the role of the retail shelf will be increased from just a point of stockholding for display and sale of product purposes, to that of determining the structure and size of the resources required to support the selling space allocated to the product category.
Firstly, the example of the changes in the shape of Yoghurt pots has created a reduction in the amount of space required to hold the same volume of product. The whole profile has changed from that of a vending machine coffee cup to a more squat squared shape - our American cousins call it a "SQUILINDER" or squared cylinder. The cube reduction is 18.4% which will have created the opportunity to optimise all the areas previously mentioned above.
Another element is the ability of the retailers, utilising very sophisticated scheduling models, to plan the physical shelf space replenishment cycles. Some retailers replenish:
UHT milk Up to 6 times daily
Toilet Tissue Up to 7 times daily
Snack foods Up to 4 times daily
Very few products are replenished less than twice weekly
A further element is that of reducing the In-store stocks of products to the absolute minimum, which creates a number of "Knock-On" effects on the supplychain.
With less stock in store, this creates a need for more frequent deliveries, and therefore smaller dropsizes, which changes the product mix on drops, whether that be from the manufacturer or the retailer's own central warehouse.
With the increase in the number of deliveries, this will require more sophisticated scheduling of deliveries and perhaps the move to overnight deliveries. If JIT is to become a reality it can only be effected if the available hours of delivery are extended.
This will, in turn, require from retailers and manufacturers alike, a greater degree of sophistication:
Sales Based Ordering
Warehouse Optimisation Systems
Real time Inventory Management
Supply Chain Optimisation
Customisation of Service
just being a few of the methods and techniques which will have to become standard.
There can be no alternative to the need to resource the elements of the support infrastructure, within the supplychain, in order that the weekly sales and refill cycles can be balanced to provide the minimum space on shelf for products.
Produced by: Andrew Hayman, Director, Ryder Strategies
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