Centralization as a key to visibility and profits

The key feature of the retail industry and luxury goods in particular is the large variation and seasonality of sales. This seasonality is compounded by the high number of SKUs and the turn over in these SKUs by season and geography. Fashion apparel is a stark example of this with last seasons’ fashion quickly becoming obsolete or dead stock. Similarly product variations by geography (smaller clothes sizes in Japan vis a vis Western markets) pose a problem in fulfilment as well as losses from excess inventory or stock outs.

This variation and seasonality leads to the well known bull whip effect wherein standard demand with only small variations in demand at the retail or point of sale grows into large variations as demand moves upstream into the supply chain (distributors, wholesalers, aggregators etc).  This ultimately results in supply chain inefficiencies of excess stocks/ stock outs growing as we move more and more upstream.

The Dunhill experience in centralisation

A selection of  SKU variations for a single product

Dunhill had a similar problem wherein small variations in demand at retailers magnified as the demand moved upstream. With over 30% of sales coming in from its wholesalers, the variation of demand at wholesalers was far more than that at the retailers end.  Some of the problems experienced by Dunhill other than stocking and storage was the complete lack of visibility of inventory across all stocking locations. With sales spread across 120 retail stores worldwide, this posed a huge logistical problem in fulfilling demand in an efficient (both in cost and lead times) manner. A strategy adopted by Dunhill to address this was “Centralization”. This included:

·         Centralisation of distribution – One distribution centre in Paris to service the US and European market and one distribution centre in Hong Kong to cater to the APAC market

·         Centralisation of merchandise planning and inventory management operations

This has resulted in increased profitability (“up 5% since implementation of centralisation initiatives launched” as per Rachel Brain, Merchandise Director), reduced inventory levels, lower dead stock and improved supply chain agility.