What is Lean Retail (+ Why It Can Lead to Cost Savings)
With the advent of globalization, the Internet, and more recently, the proliferation of mobile technology into every aspect of our lives, there has been a remarkable shift in the world of retail from a product-centric to customer-centric model.
Whereas retailers once purchased merchandise largely based on the gut instinct of trend-savvy buyers and the push of whatever manufacturers tried to sell them, nowadays, they need to take a much more customer-focused and data-centered approach.
Customers are in control, and retailers who fail to accurately predict demand are doomed to fail.
What is Lean Retail?
In his book, Lean Retail & Wholesale, professor and author Paul Myerson defines the shift towards lean retail as “a dramatic change in the way products are ordered and distributed that is far more data-centric and focused on understanding and meeting customer demand.”
The impact of lean retail on supply chain management
The impact of lean retail practices can be felt throughout the supply chain.
- Using sophisticated forecasting and replenishment algorithms to buy and allocate just the right quantity of merchandise, and avoid keeping extra stock on the shelves. Intelligent demand management software is the key technology enabler of lean retail merchandise management.
- Finding ways to limit the handling of merchandise, including using cross-dock techniques in warehouses and “door-to-floor” methods in stores, where the merchandise gets where it is needed without ever sitting in storage.
- Fulfilling customer orders in the most optimal way possible for both the customer and retailer, keeping costs low while still meeting customer expectations for speed and quality of service. This may include in-store or curbside pickup of online orders (also called click-and-collect, or BOPIS) or shipping from stores. Modern order management systems can help retailers automate the process of selecting the optimal fulfillment location based on pre-defined criteria.
- Using visual merchandising techniques that accommodate the demand for products with minimal handling. In some stores, like warehouse clubs or other large-format locations, this may mean dropping a full pallet of stock for a high volume seller instead of hand stocking the item on shelves or pegs. It also means making room to keep enough stock on the selling floor so that fast sellers don’t need to be replenished too frequently. This may mean giving the item more room in its “home” location, or adding additional locations, for instance, at the end of an aisle, or near the checkout.
Why is lean retail so important?
Lean retailing techniques are all about reducing waste and growing the bottom line. Retailers are losing $1.75 trillion a year in overstocks, out-of-stocks, and returns, much of which is entirely preventable with a lean retail approach.
Inventory is retailers’ greatest asset AND liability. Nearly all of most retailers’ capital is tied up in their inventory, so it’s crucial to make sure that every item counts. Keeping a close watch on metrics like GMROI (gross margin return on investment), WHO (weeks on hand), stock turnover rate, full-price sell-through rate, and other inventory metrics are important to maintaining overall business health.
How lean retail impacts business goals and revenue targets
In the world of retail, seemingly small changes can have a massive impact on the bottom line.
Take, for example, a product that sells like hotcakes. You sell a full pallet of the item every week in most of your stores. Finding a way to shave off 10 minutes from the handling of that pallet (perhaps by working with the manufacturer to load the item in a store-ready display box, or by using cross-dock techniques instead of moving it to and from storage) can be hugely impactful.
10 minutes X 52 pallets a year X 100 stores = 52,000 minutes saved.
Assuming a labor cost of $20/hour (salary plus benefits), you saved the company over $17,000 a year, just by making one product a bit faster to stock.
Find another 50 or 60 items you can similarly optimize (a very small percentage of the average retailer’s SKU count), and you’re easily saving the company millions of dollars a year.
That’s only one example. How can you find other ways to lean out your retail business?
How to implement a lean retail strategy
When looking to implement a lean retail approach, the answers all lie in the data.
Set clear objectives and KPIs for the metrics we discussed above, and make swift moves to meet them. Don’t lose sight of the incremental impact that small changes can have on a large retail enterprise. Invest in the right demand management and analytics tools that will guide you to make leaner, wiser decisions regarding merchandise and supply chain, and make retail inventory optimization a priority in your supply chain management processes.
It’s true that the business of retail is part art and part science, but beware of leaning too heavily on gut instinct when making decisions that can have such a significant impact on the financial health and performance of the company.
Turn to the data, and obsessively study the behavior of your customers to make the right decisions about what products to stock, where, when, and at what price.