The Retail Industry in Mexico.
Is one of the most important activities in the country, employing more than 5 million people and having over 1.6 million points of sale in the country (including informal commerce). Currently, the industry is involved in fierce competition, since the offer has increased dramatically and every day, the needs of the consumers become harder to satisfy because of the variety of opportunities for consumption that a single customer may have. The answer from the retail companies to these changes has not evolved at the same rate and typically they
have focused on price and promotion strategies.
The industry presents growth opportunities for those companies capable of understanding the consumer and executing critical business practices:
- Focus on segmented category management in accordance with the consumer and that guarantees an adequate offer for each opportunity for consumption.
- Develop logistical capabilities and visibility of information in order to guarantee the lowest possible cost getting the supply to the shelf.
- Support a strategy for efficiency in the chain, and thus, an attractive value offer for the consumer.
STRUCTURE OF THE INDUSTRY
The companies that configure this industry are divided into: Department Stores, Supermarkets, Specialty Stores, Price Clubs, Wholesalers, and Grocery Stores (informal commerce).
The indicators that are generally used for these types of companies are
- Market share
- Sales volume
- Sales per square meter
- Sales per employee
- Sold out products
- Sales margin
- Days of inventory
- GMROI
CHALLENGES AND TENDENCIES
It is common for the companies in this industry to focus their efforts on “better buying” (cheaper). Additionally, those undergoing growth usually do it under a strategy that assumes that whatever is working in one market, will work in the next one. However, the current opportunities consist in finding a profitable growth strategy that involves market intelligence, category management, differentiated buying and replenishment strategies, and efficiency throughout the chain.
Given this, the challenges and tendencies facing these companies are:
Challenges
- Generation of differentiated value for the client (assortment, price, quality, service)
- Profitable growth by store
- Reduction in merchandise costs
- Reduction in operation costs
- Optimization in working capital
Trends
- Competition: a) Greater and more diverse in its offering. b) New formats (more specific segmentation).
- Consumers: a) More informed, with more options and greater causes for consumption. b) Vision of product purchase “commodity”.
- Processes: a) Centralization of key functions (Logistics, Purchases, category management). b) Outsourcing of non-key functions (Transport).
- Information: a) Use of internal and external information, in real time, for better decision making.
Our Experience
Sintec has developed numerous projects within the Retail Industry in Latin America, including supermarkets, Department Stores, Specialty Stores, and Convenience
Stores.
We Design and implement solutions together with our clients
The reach of our projects has impacted the Value Chain of a number of companies and has touched on Strategic, Tactical and Operative elements. We know the challenges of the companies in this field in Mexico and the tendencies of the Industry; thus, with our solutions we are able to generate economic and strategic value for our clients.
Solutions adapted to the particular problems of the company in the short term, using the available resources and infrastructure. Additionally, we propose future scenarios that can be achieved in the medium and longterm.
This is supported on a particular focus, adapted for each organization, in terms of design and implementation of our solutions.
SINTE C SOLUTION
Our solution involves the entire value chain (from suppliers to consumers) and covers various levels of business perspectives: Strategic, Tactical, and Operative;
FOR COMMERCIAL / OPERATIONS DIRECTORS
At the Strategic level, we help our clients define the Value Offer (assortment, price, quality, and service) for the consumers, based on the identity strategy that the business has decided to implement, understanding the profile of their target consumers and their needs depending on each reason for purchase. Due to the number of transactions, the diversity of consumers that converge in the stores and the dynamism of the merchandise in the retail industry, defining a segmented value offer is not a trivial matter. The methodology we use to help our clients contemplates the following:
1. Understanding the profile of the consumers: based on relevant characteristics (Ex. SEL, Sex, Age, Occupation, Reason for purchase, among others).
2. Needs for each profile: consumer needs and their priorities
3. Store segmentation: depending on the profile of the consumers.
4. Analysis of merchandise profitability: sales, contribution, operation costs and inventories,
5. Analysis of merchandise purchases: dependency of purchases, role of the merchandise, and industry tendencies.
6. Definition of the Value Offer in each segment or cluster of stores: portfolio, store layout, and operation strategy.
We also help our clients to understand the adequate growth based on the market they service. We incorporate market intelligence to understand under what store formats and what positioning must be operated to achieve profitable growth.
On the Tactical level, we increase the profitability of our clients by category
management and activities corresponding to “push marketing” that must be
carried out at the sales point to achieve customer preference.
OUR METHODOLOGY CONTEMPLATES:
1. Category Definitions: Based on the understanding of the dependency on purchasing merchandise (complementary and substitute) by the consumer and his decision priorities.
2. Definition of the Role and Objectives of the Category: In accordance with the perception of the customer about the category, this could be defined as “Hook”, “Basic” or “Impulse”. Based on this, we support our clients in defining the sales objectives and profitability that each category must reach.
3. Category Dynamics: Referring to the variety of sku’s that the category must contemplate and the logic to broaden or purge it, the price point that must be observed, and the promotions that should be carried
out, as well as the space assigned to each sku in the category and consequently, the level of inventories.
4. Push Marketing: Elements of activation that must be present at the point of sale to guarantee visualization of the category by the consumer: pricing, promotions, POP material, and special or temporary spaces.
At the Operational level, we help our clients define operational and service activities for each department and the methodology to increase their effectiveness:
1. Operational activities: Are those in which the consumer perceives a low aggregate on human contact; however, they must be carried out with the greatest efficiency since these are elements of the buying process. (Boxes, packaging merchandise for self-service, display location, etc.)
2. Service activities: Are those in which human contact is valued by the consumer, given the nature of these activities (assistance in product use, special packaging, etc.). There must be a balance between the amount of
service and the expenditures incurred.
FOR LOGISTICS / SUPPLY CHAIN DIRECTORS
At the Strategic level, we help our clients to define the distribution network that will achieve an optimal flow of merchandise from the suppliers to the points of sale, reducing total distribution costs and increasing the level of service throughout all of the nodes in the chain.
There are clear characteristics in the retail industry that make these types of initiatives necessary: The distribution network has a great number of nodes between the suppliers and the points of sale. A healthy balance between service and inventory levels in the chain is crucial for the profitability of the business. The logistic / distribution costs are a significant percentage of the operating costs, and thus, the profitability of the business.
Our methodology contemplates the main elements that will allow us to generate:
1. Base Model: Current network, flows, restrictions, capabilities, costs.
2. Alternate Scenarios: Business case for each one.
3. Executable Implementation Plan.
We also define the most convenient distribution strategy for the company. We establish which products must go through the distribution centers and which should be sent directly to the supplier of the store. For the products that go through the DCs, we establish the benefits of centralizing the delivery; which products can be stored and which fall into the modality of cross docking.
Additionally, we optimize the layout of the distribution centers, taking into account the dimensions of the products and the desired levels of inventory. We define the required position, storage equipment and handling of materials, staff and performance indicators.
On the Tactical level, we achieve the alignment of customer demands with the capability of the company to satisfy these, through merchandise planning that generates and reconciles financial, product and point of sale plans and that works as a starting point for generating a plan for replenishing that would guarantee the desired level of service. This replenishing plan contemplates the movement between DCs and points of sale, a plan for inventories throughout the chain and a purchasing plan with the suppliers.
Two of the main elements in our methodology are Purchasing strategy and Inventory strategy and planning. Not all of the products behave in the same manner (basic, seasonal, perishable, etc.), and not all of the suppliers
deliver in the same manner (centralized delivery, decentralized, delivery time, etc.); thus, it is critical to establish a strategy for purchasing and inventories that contemplates, not only product classification (high/low
rotation, contribution, etc.), but also a series of basic elements:
1. Purchasing: centralized vs. decentralized.
2. Delivery: replenishment by the supplier vs. DC vs. cross docking.
3. Merchandise allocation: pre-allocation, post-allocation, collaboration with suppliers.
4. Season: short/long, single purchase vs. replenishment options.
5. Service: availability of products depending on importance/contribution.
We also help our clients to reduce logistics costs through transportation planning and programming. This planning determines the optimal frequency of store replenishment and based on this and the transportation capabilities, we generate optimal dynamic routes that ensure the established level of service at the lowest possible cost.
At the Operational level, we increase the productivity of the receiving process at the stores by synchronizing receiving operations. We design practices that ensure the alignment between the processes and shipments from the DC, in order to achieve receiving and display on the sales floor in the shortest possible time.
Benefits
• Increase in sales
• Reduction of merchandise costs: a) Logistics costs of the supplier. b) Reduction in shrinkage.
• Reduced operations / distribution costs: a) Store. b) Storage. c) Transport. d) Inventory control.
• Reduction of working capital
• De-investing in assets (Delay investment)
BUSINESS CASE
Background
Group dedicated to department store commerce, with 50 points of sale in the main cities of the country. It has a variety of 80,000 products (sku´s) on its sales floors, of which 50% are products that can be replenished (catalogue) and the other 50% are seasonal products (non catalogue).
Problem Description
Confronted with an environment of increasing competition, the Group decided to implement a Low Price strategy (EDLP) for the consumer, in order to eliminate the variability in the demand characteristic of an offer (Hi-Low) strategy and position itself on the market as the company with the best prices for the public. However, the Group needed to operate at lower costs in order to fulfill these objectives, and even though they had begun a strategy of centralized distribution, this had not resulted in lower costs.
Solution
We designed a Supply Strategy for stores, looking to solve two problems that were detected during the diagnostic analysis:
1. Shortage of products on the sales floors.
2. E xcessive expenditures in the merchandise supply process from the supplier to the store shelves.
The solution carried out contained the following elements:
Buying catalogue merchandise:
- Two buying strategies using pull methods: Centralized replenishment (95% of sales) and replenishment through the supplier (remaining 5%).
- System for managing indicators with clear responsibilities on the part of sales, planning and department heads.
Buying non catalogue merchandise:
- Two buying strategies based on commercial forecasts and feedback.
1. Pre-allocation to stores (Short seasons or merchandise which can be replenished by the supplier).
2. Post-allocation (Single purchase for long seasons).
Distribution:
- Design of the Distribution Center.
- Centralization of receiving operations in stores (counting and labeling).
- Fixed frequency of visits to stores, in order to ensure service.
- Negotiation of logistics discounts with suppliers.
Store operations:
- Defining standards for layout in reception areas in stores.
- Receiving practices that increase the speed of supplying the sales floor from a minimum of 3 days to hours.
- Reduction in reception costs.
Benefits
- Product availability in 99% of cases at points of sale, sales increase of 20%.
- Savings of 2.4% / sale.
- Reduction in Working Capital of 47% in 5 years.
About Sintec
Sintec is the leading consulting firm focused on generating profitable growth and developing competitive advantages through the design and execution of holistic and innovative Customer and Operations Strategies. Sintec provides a thorough and unique methodology for the development of organizational competencies, based on three key elements: Organization, Processes and IT. Furthermore, Sintec has successfully carried out more than 300 projects on Commercial Strategies, Operations and IT issues with more than 100 companies in 14 countries throughout Latin America. Our track record of more than 25 years makes Sintec the most experienced consulting firm in this area of expertise in the region.
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