Agenda. Introduction LCP Consulting Background the challenges facing retail boards Omni-channel development The Omni-channel toolkit Questions

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2 Agenda Introduction LCP Consulting Background the challenges facing retail boards Omni-channel development The Omni-channel toolkit Questions 2

3 Introduction LCP is a leading independent consultancy specialising in commercial supply chain management from strategy through to implementation We work with leading retailers and manufacturers to identify, specify and implement changes that will enable growth and support better customer service and lower operating costs Our head office is in the UK, but we work across Europe and globally LCP is independent of software suppliers and logistics providers; we bring objectivity and a broad market understanding We take a total business viewpoint in supply chains: End-to-end commercial supply chain management - strategy Multi-channel operations strategy, design and planning Operations and physical logistics design, development and implementation Purchasing & supply process re-design and planning improvement Shareholders and investors plotting a pathway for investment and realisation 3

4 LCP works with manufacturers, retailers and service providers..internationally Retailers Service Providers Manufacturers 5

5 Agenda Introduction LCP Consulting Background the challenges facing retail boards Omni-channel development The Omni-channel toolkit Questions 6

6 What s keeping retail boards awake? Continued pressure on consumer spending leading to price pressure as retailers battle to compete Rising commodity costs, coupled with environmental and ethical concerns leading to pressure on margins and the need to critically review global sourcing strategies Multi / Omni-channel retailing is increasing as technology continues to change the way consumers shop retails must adapt to compete or die The increasing costs of operating stores, changes in consumer behaviours and the growing online opportunity suggest that retailers will need fewer stores in future or will need to re-purpose existing stores The search for growth: new channels, new categories, international 7

7 as characterised by the dash for cash + + $: : + = Growth Margin Velocity Return Cash Show me the growth because the performance will follow! Find margin Increase responsiveness Maximise returns Release assets Release cash 8

8 Multi-channel retail is about growth + + $: : + = Growth Margin Velocity Return Cash Show me the growth because the performance will follow! Find margin Increase responsiveness Maximise returns Release assets Release cash On-line / multi-channel sales growth ~+15% Store sales LFL ~ -5% to +2% Have to be there or not in the game in the long term 9

9 but beneath this Multi-channel growth curve lies some major potential hurdles 1.Low total retail growth Must deliver compelling value or erode margin 2. The dash for multi-channel growth Pure play pricing benchmarks margin erosive Higher cost to fulfil margin erosive More demanding customers margin erosive 3. Inappropriate assets and capabilities Many have high redundancy and poor service economics 10

10 and the implications are scary Today 5 Years' Time Sales Channel Net Margin Channel Mix Sales ( m) Margin ( m) Channel Mix Sales ( m) Margin ( m) In Store 10% 80% % Click & Collect 7% 10% % Home Delivery 5% 10% % % % The gearing effect on total margin is negative Flat sales Combined with the inexorable growth of alternative channels Will leads to significant erosion of net margins Is this the elephant in the Retail Boardroom or a burning platform for Omni-channel transformation? 11

11 Agenda Introduction LCP Consulting Background the challenges facing retail boards Omni-channel development The Omni-channel toolkit Questions 12

12 Survey: the Omni-channel revolution LCP have recently published the results of a survey into Omni-channel retailing Why did we undertake the survey? Few have a clear understanding of Omni and what it means To understand the scale of the change and what it entails To test how retail boards are embracing the change Report credentials Independent research Board level retail executives in the USA and UK Supplemented by a panel of 4 UK based retail experts Graham Barnes (Supply Director Argos) David Wild (Former CEO Halfords & Group Supply Chain Director Tesco) Dino Rocos (Operations Director, John Lewis Partnership) Neil Ashworth (CEO, Collect+) 13

13 So how do we define Omni-channel? Multi-channel Retailing The development of retail operations in such a manner that enables the customer to transact with the business (browse, buy, return) through independently managed channels, including retail stores, online stores, mobile app stores and telephone sales Omni-channel Retailing A truly integrated approach across the whole retail operation that delivers a seamless response to the consumer experience through all available shopping channels, whether on mobile internet devices, computers, in-store, on television and in catalogues 14

14 Key findings Omni-channel is the new world for retail The majority view Omni as the only approach that deliveries a sustainable future for their businesses It requires new, flexible, operating models that are aligned to deliver a seamless customer experience, regardless of channel, whilst maximising sales and net margin The costs are high With total non-food investment in the UK estimated at > 5bn Return on that investment is unclear for some Current model immaturity means ROI is difficult to measure Some are investing in Omni just to compete Others have a clear view of inefficiencies within current multichannel operations and the need for change 15

15 Key findings /2 Fulfilment is still seen as a source of competitive advantage Speed of fulfilment remains a perceived differentiator However, many are questioning whether customers place greater value on convenience and consistency Bricks and Clicks retailers see the strength of maintaining the store at the centre of the customer offer Stores will be re-purposed for an omni-channel world Optimised assortment Highly trained store staff, acting as advisors / sales facilitators informing customer choices Alternative displays consuming less inventory and providing enhanced theatre Inter-connectivity with other sales and fulfilment channels Click & Collect will deliver the consistency and convenience that home delivery sometimes struggles to achieve 16

16 Key findings /3 Delivery will require alignment at board level Supply chain functions (Merchandising, Supply Chain, Distribution / Logistics) are critical to delivering omni-channel success With IT and Store Operations key enablers This is likely to see a re-balancing of board relationships between trading and supply chains functions The need to tightly integrate assortment with the channel and customer experience will mean that traditional functional boundaries will become increasingly blurred Supply chain professionals will need to become increasingly commercial in their outlook as a result Regardless of cost, Omni-channel is becoming the need to have model for the retail industry It has almost reached the tipping-point of change or fail 17

17 Omni-channel creates multiple potential channels Research the options and specifications Touch and feel Order Buy at Store Receive / collect Return Research Evaluate Buy Receive Return Press Store visits Price comparisons Via store At store Social media Friends Web search Home Courier Web sites on line Drop point Collect enquiry Call centre Office Brochures In store More than 900 permutations of the choices Client Research customer combinations during the Buying Process 18

18 Which means the fulfilment challenges are huge: Fulfilment routings, speed and timing Home delivery Drop points Store collection Return by alternative route Commercial options Reserve and collect Pay and collect Pay and deliver Service charges Range and choice Core range Extended range not in store Service differences by category / rate of sale Physical network Stock by location Point of fulfilment Speed of fulfilment Role of suppliers 19

19 Agenda Introduction LCP Consulting Background the challenges facing retail boards Omni-channel development The Omni-channel toolkit Questions 20

20 Omni channel toolkit So what supply chain capabilities do we need to build in order to deliver in an Omni-channel world? Channel Economics Optimised Fulfilment Seamless Returns Range and Assortment Planning Optimised Sourcing Managing the Basics 21

21 Channel economics Many retailers do not explicitly recognise the tension between fulfilment channels Omni channel success requires a deep understanding of economics by channel Fulfilment cost Achieved pricing Net vs Gross margin This provides a framework for decision making Roadmap for short term operational improvements Sets the direction for strategic decisions on infrastructure and store footprint Assists in decisions regarding inventory planning & positioning for value maximisation 22

22 Optimised fulfilment E-fulfilment operations are not always optimised Infrastructure has been adapted from traditional store replenishment models Many have chosen to outsource capability The focus has been on reducing lead time, not on improving efficiency Pure play operators, whilst enjoying rapid growth, have not optimised processes in parallel Carrier management remains a challenge The Omni channel winners will re-engineer their fulfilment operations to optimise activity across all channels - the industrialisation of the shed delivering best in class operating costs Optimisation of receipt, put away, storage, pick, pack and dispatch within fulfilment centres 3PL management and performance benchmarking Appropriate use of automation Productivity improvement at the packing bench Packaging optimisation (spec and process) 23

23 Range and assortment planning Multi-channel retailing has created fragmented sales channels and even more fragmented supply chains Bricks and mortar retailers have tended to respond to this by using a multi-channel approach: employing separate and distinct fulfilment operations for each channel There are some variants being employed, such as Endless Aisle and Hub and Spoke to attempt to improve stock availability across the chain, but these are not optimised models Omni channel models require the optimum positioning of range and inventory within the business in order to maximise net margin and product profitability Determination of which product characteristics drive inventory positioning Optimum assortment by channel Optimum inventory holding / replenishment strategy by Product / Channel Fulfilment channel hierarchies by product Home delivery vs Click and Collect vs Store Sales 24

24 Seamless returns The greater the percentage of sales satisfied via e-fulfilment (Click & Collect and Home Delivery) the greater will be the level of returns Returns rates for on-line shopping are typically in the range 20%-50% with some categories peaking much higher, e.g. swimwear Many retailers do not understand the pressure that this will place on their businesses Catalogue retailers have streamlined processes for returns but others have not Those Omni-channel retailers that optimise flows to provide a seamless returns offer to the customer whilst streamlining costs will gain significant competitive advantage Flow optimisation Rework processes / decision making tools Product re-marketing / disposal routes 25

25 Optimised sourcing The dash for gross margin led many retailers to offshore supply to China However, labour inflation, the global economic downturn, and retailer demands for reduced replenishment lead times changing this model Sourcing from other Asian / developing countries Use of Overseas Consolidation Centres (OCCs) to reduce fulfilment lead times and enhance flexibility Near sourcing (e.g. Turkey) to capitalise on lead time reductions In an Omni channel world, retailers need to develop methodologies to assist in understanding the optimum global sourcing and flow model for their product range Net margin / TCO segmentation Global inbound flow management Including optimised international replenishment flows Risk management Hedging of demand through dual sourcing De-linking of material commitment from manufacturing delayed configuration 26

26 Managing the basics Retail is Detail yet there are a number of fundamental disciplines that some retailers fail to land consistently and effectively Omni channel retailers need to deliver optimised performance across the whole business in order to compete Store stock file management Managing for Cash Lifecycle management Promotional planning In season management 27

27 In summary a new business operating model The Business Operating Model is the whole of processes and ways of working that links the business strategy and the execution to drive the commercial results Part of journey from Strategy to practical and realised change \Board direction and sign-off Business Strategy Define the operating model and the changes Design the building blocks for the journey Execute the different operational changes It defines and links an Operating Vision to Operational & Financial implications End-to end supply chain planning, optimisation and inventory management Integrated Omni-channel assortment management, bottom line focused sourcing & supplier collaboration Frequent Supply Chain Endto- En d Vendors International Logistics Customers Omni- Channe l mixed containers Demand driven UK DC network (operate per product type not channel) Overseas Consolidation Centres Suppliers Inventory Stores Assortment Direct Slow movers Offer extra services for franchisees Consistent service / experience Store friendly replenishment centralised International franchisees Products flows Demand order flows Direct 28

28 In conclusion Omni-channel is key for retail survival in a digital world Omni needs different set of business capabilities, strategies and tactics to deliver it requires and drives a fundamental change to the business operating model 29

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