Deep-dive analysis uncovers the potential to increase net margin by more than 5 percentage points.
A leading international nonfood retailer was facing increasing operational complexity. Serving millions of customers every week and sourcing its merchandize from a large number of suppliers globally, the company was also rapidly scaling up its online sales.
The client asked for McKinsey's help to redesign its supply chain to manage complexity and boost overall performance.
The team took a staged approach, working closely with the client to understand the company's profitability targets and growth ambitions. Key project phases included a detailed evaluation of current supply-chain performance, recommendations for the new supply-chain organization, a pilot phase, and implementation.
Drawing on the client's rich internal costing data and relevant industry benchmarks provided by our team of experts, the evaluation phase uncovered several opportunities:
- Savings from applying a total cost perspective to supplier selection: The client had a sizable pool of suppliers in low-cost countries, but not all buying decisions reflected the total cost. Secondary factors such as freight were often disregarded because buyers' incentives were based on gross margins.
- Performance improvement from shortening internal clearance processes: While overall lead times from product design to delivery were in line with the industry average, internal sign-off typically took longer than actual manufacturing, sometimes as long as several months.
- Value creation through more systematic order management: Our analysis revealed that inventory costs were high because of a lack of short-term forecasting. Large initial orders and early arrivals of supplier deliveries to the client's warehouses often necessitated big markdowns in order to clear out excess inventory.
To capture these opportunities, the team recommended a set of substantial changes to the client's supply-chain-management approach. To increase operational flexibility, the team developed a value-based product segmentation, looking at criteria such as average shelf life, rate of sales, sales predictability, and volumetric information. The range was divided into segments such as core products, seasonal products, and trend-driven items. The segmentation helped shape recommendations for a more adaptive supply-chain approach:
- for fast-moving core products, establish a fast-track approval process, domestic sourcing, and accelerated replenishment cycles
- for segments with high sales predictability, keep reduced inventory
- for selected slow-moving items, introduce separate warehousing in dedicated delivery centers
The product range was thus broken down into meaningful categories, and specific changes to supply-chain operations at the product-category level were developed.
The proposed supply-chain approach offers substantial operational improvement opportunities. Compared with best-in-class retail players, the new supply-chain model improves performance on a range of operational metrics:
- lead-time reduction by a factor of 3 to 5, depending on the category
- inventory and markdown reduction by 2 to 4 percentage points
- logistics-cost reduction as a share of sales by up to 1 percentage point
Achieving these supply-chain efficiency improvements holds the potential for a net margin increase of more than 5 percentage points.