P a g e 1. Hidden Costs in the Store Development Supply Chain. and what to do about it. Caliber Global: Opening stores globally, made easy

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1 P a g e 1 Hidden Costs in the Store Development Supply Chain and what to do about it

2 P a g e 2 For: Reading time: After reading: Professionals involved in store development; opening new stores and or remodeling existing ones. App. 10 min. You will gain a detailed insight into how to prevent the hidden costs associated with store openings and large remodels. The National Retail Federation (NRF) has revised their annual sales forecast upward and now expects a minimum of 4.5% growth towards the end of Whilst IHL s research indicated that 3,800 more stores are opening than closing in Translated, IHL s data shows that for every retailer that closed a store, two are opened 2. A PROSPEROUS PERSPECTIVE. Based on these numbers, multiple brands appear to have the luxury of expanding their businesses to new locations. There are many elements that contribute to the total price of a new store or restaurant that most do not realize. In this report, we examine some of the major hidden costs associated with opening a new store by focusing on the supply chain of store development. At the same time, you will gain knowledge of the best practices for preventing the hidden costs that can adversely affect your business. Before discussing the costs, it s first important to understand the two major strategies for opening new stores

3 P a g e 3 2 Distinctive Strategies In general, we can distinguish the following strategies for remodels and store openings: 1. Turn key -model Retailers outsource the buying of store materials (i.e. furniture, fixtures & equipment) to a general contractor (GC) and/or other external parties like interior designers, architects, etc. 2. In house -model Large retailers who open many stores annually often have their own internal store development departments to manage the purchasing and transportation of store materials Once a choice is made between either of these strategies, it tends to remain in use as the default business method. If stores are opening on-time and at acceptable cost levels, there is no compelling need to change. Nevertheless, it is important to realize that there are more advanced alternatives available on the market as both models have a set of hidden costs.

4 P a g e 4 Hidden inbound supply chain costs The two main areas in which hidden costs are incurred in the FF&E supply chain of new stores are: The opportunity cost of late and incomplete store openings; missed sales Transportation costs and surcharges In this article, we define hidden costs as expenses not normally included in the purchase price of a service. These are typically costs that are not easy to trace and calculate, hence why they can be referred to as hidden.

5 P a g e 5 1. The opportunity cost of a late and incomplete store opening Missing the opening deadline is the single biggest hidden cost of store development as it directly affects operational sale. Therefore, the most important store development goal for the general contractor or brand is to deliver the store on time and complete i.e. without a punch list (a list of outstanding construction work). In a F&B store, staff must be trained prior to the opening. However, if the equipment has not arrived, training is unfeasible. As a result, the staff have limited time to become acquainted with the equipment and efficiently manage the new systems. Consequently, the long-expected opening day can be a disaster. Waiting times increase which has a detrimental effect on customer experience. Equally, in fashion, stores that are not fully equipped with merchandise or that miss FF&E, can impede the display of merchandise. This can result in the underperformance of the apparel store. In both scenarios this can negatively impact operational sale volumes in the first week. Subsequently, realizing the forecasted quarterly and annual sales goals becomes difficult. Factors contributing to the hidden costs in store development There are many reasons why the opening of a store can be delayed and increase (hidden) costs, such as; Late supply Suppliers deliver goods after the negotiated delivery date Permitting problems Obtaining building permits and abiding local requirements GC planning creep A project facing serious delay because goods arrived late or damaged. Certifications of installations or fire-safety failures Obtaining permits is a lengthy process that needs planning Missing items Damaged items

6 P a g e 6 How to overcome these factors to reduce (hidden) costs? - Preventing late supply Suppliers may have various reasons to deliver goods later than planned. One common reason why materials arrive late is that shipments can become stuck at customs due to inadequate documentation and this entails high demurrage charges. To mitigate the risk of this frequently encountered hidden cost, ensure all documents are complete and present e.g. commercial invoices and packing lists. Moreover, country specific documents must be filled out and available. To support this process, suppliers must have sufficient logistical knowledge. For example, shipping to promising retail countries Saudi Arabia and Kuwait requires special documents e.g. SASO and KUCAS-forms. If the shipping department lacks the knowledge, cooperate with a shipping agent with extensive knowledge. Additionally, to prevent late supply, as a retailer (or GC if store development is outsourced) you must heavily invest in supplier management. A simple question such as where are my products at the moment? may take days to answer. One option is to use a powerful IT-platform integrating all parties in the supply chain to manage this organization. Good communication is crucial. Using real time reporting allows products to be tacked and traced. Additionally, it may notify the GC or brand the moment suppliers upload information late, mitigating the risk of re-ordering or the reproduction of goods and the related costs. To note; reproducing goods is inefficient as it costs both time and money and often the products must be shipped by express couriers and they may even have to be flown in. Additionally, planning in advance can also prevent late supply. For example, with trucking capacity issues particularly in the US, it s important to plan your drayage well in advance to secure equipment and drivers.

7 P a g e 7 - Solving permitting problems Permitting problems are related to obtaining building permits from the local authorities as well as fire safety and other local requirements for the site/location. A good way to avoid permitting issues is to outsource the obtaining of local permit requirements to a local expert agency. - Resolving the GC planning creep During construction, the GC should work as continuously as possible. Early or late material arrival can cause storage problems and construction delays which may result in costs for the brand. A GC who can control the supply of materials independently experiences less problems. Some retailers/brands choose to work with third parties that offer nearby small cross-dock centers, also termed Pop- Up Warehouses. They do this to support their GCs in just-in-time availability, targeting to reduce creep or even improve overall construction timelines. It allows the GC to order materials on call resulting in no issues with products arriving too early. In turn, products arriving late can be managed using the supplier management system. To note, when project volumes are high, having a system solution in place allows the GC to call-off goods more easily. It s good to realize there are other ways to organize store development processes - Avoid the hidden cost of missing items The number of different items (SKU s) involved to create a new store vary widely. We see projects with less than 200 items however, have also managed the supply chain for large and complex new store builds with close to 4,000 different items involved. A critical consideration is to apply consistent article identification throughout the complete supply chain. Imagine 5 articles being put on 1 pallet with 40 pallets necessary for a complete fit out. What if the GC needs to have 1 of these 5 articles to continue and nobody knows where to find it? The time it takes to retrieve the products is a serious (hidden) cost. Therefore, it s necessary to have a good identification system with goods being labelled unidimensional. Arguably, the best way to quickly retrieve the article is by utilizing a digital identification system.

8 P a g e 8 Sometimes a third party may place purchase orders with the retailers approved suppliers at their agreed prices. However, often the design drawing (DD) is also incomplete and when items are not drawn, they will not be ordered. Items such as fire extinguishers and garbage bins should all be included to ensure the GC can complete the store development on time and not incur hidden costs. - Avoid damaged items In addition to the proper identification, it s important that products are packaged suitably for transportation. The costs of damaged goods may seem apparent however, inadequate packaging is recurrently encountered, leading to damaged or scratched materials. The general contractor or site supervisor should check and notate any visible damage to the freight on the bill of Lading at the time of receipt. These remarks should be recorded in an unambiguous way, so everyone knows what actions to take. 2. Transportation costs and surcharges The second largest cost associated with opening stores regards transportation and surcharges. The most commonly used models for store openings and remodels are supplier or GC managed freight. However, what hidden costs are involved? The supplier/gc is not a logistics specialist and therefore is not aware of which specialized carriers are available in the market and most suitable for each journey. Suppliers can t leverage the entire materials volume to create bargaining power with the carriers and negotiate lower rates. Suppliers often are unaware of the restrictions/requirements on the job-site, resulting in problems upon delivery (e.g. trucks showing up without a tail lift, while there is no forklift available on-site). Each supplier manages their own logistics, ignoring the consolidation opportunities that may exist. When multiple shipments destined for the same location can be consolidated this can generate substantial savings on transportation costs.

9 P a g e 9 To organize shipments, a supplier may contact the forwarder, pay bills, prepare the documents, etc. Often suppliers charge a mark-up over the goods value for conducting these activities. Do you know exactly how much you are being charged? Suppliers may book more expensive freight options (e.g. expedited freight and courier services) to make up for delays incurred during the production phase. How to avoid these hidden costs: - Unbundle the transportation from the supplier/gc and outsource to an experienced logistics service provider. - Leverage your entire volume to negotiate better transportation rates (or even better, also leverage the total volume moved by your service provider). - Make use of consolidation opportunities that exist, combining multiple shipments on the same truck/container. - Ensure job-site requirements/restrictions are properly considered for the final mile delivery, avoiding issues and extra costs (e.g. so called waiting hours for trucks that cannot be immediately unloaded). - Ensure suppliers/gc s need to obtain authorization before booking expedited freight options. Whichever method you end up choosing, asking for an open book quotation/charging mechanism from your supplier or GC is key. You need to know exactly what is charged for handling and transportation, including all surcharges. This allows you to compare different quotations and find the highest saving opportunities.

10 P a g e 10 Conclusion Opening or remodeling stores is a complex undertaking with high risk and hidden costs. The single biggest, is the opportunity cost of missed sales if a store opens late. If demurrage or permitting problems are the causation, retailers must ensure the correct documentation is present. Outsourcing this task is a straightforward solution. To resolve a GC planning creep, nearby small cross-dock centers may be used to support construction operations. Overall, consistent article identification and adequate packaging can avoid the hidden cost of missing and damaged items. Transportation and surcharges are the second largest hidden costs. To reduce these, retailers may leverage the entire volume of goods to negotiate better rates or consolidate shipments. Employing an experienced logistics provider and asking for an open-book quotation will allow you to compare quotations and identify exactly what you are being charged for. No hidden costs, no hassle. IHL found that 42% of retailers have added stores while only 15% have gotten smaller

11 P a g e 11 About Caliber Caliber Global was established back in 2003 in The Netherlands. Whilst working for Starbucks EMEA, the founder and current CEO, Jeroen Scholten, got inspired to make global store development easier, faster and more efficient. Opening stores globally, made easy Caliber Global supports companies in the retail, hospitality, health and service industry to develop a fast, agile and efficient development supply chain. With an experienced project management team and suite of IT system clients gain control over their development process through visibility, clarity and regulatory compliance, thus leading to reduced cost and a hassle-free expansion. Our clients Caliber provides services to companies like Unilever, Starbucks, LBrands (Victoria s Secret, PINK, Bath & Body Works), Bloomin Brands (Outback Steakhouse, Bone Fish Grill), Rituals and many others. Over the last 14 years Caliber has managed the supply for over 6,000 store projects in more than 60 countries around the world. For more information check: