Retail is one of the interesting businesses. It involves huge amounts of money selling goods to extremely large crowds, but with relatively low profitability. This low profitability, due to the huge revenue is, cash wise, sufficient to enable retailers to thrive in a performance level that would normally bankrupt other type of businesses.

When faced with the question of profitability most retailers explain the phenomena with the high cost associated with operating the business, primarily cost associated with location and marketing.

If one evaluates different retail types, by their average product margin, one will find that is a very wide span of types. At one far end there are retailers that experience average mark-up of 20-30% and on the other hand retailers with average mark-up of hundreds to thousands of percent. Considering that, one would imagine that profitability would also demonstrate this type of range. However, reality is that the ones with 20 to 30 percent experience profitability of 2 to 4% and the ones on the other hand of 6-8% (of course, in good years).

True, the cost structure is different, however doubtful that it explains this phenomena. What is common to a retailer on the low hand of mark-up and a retailer on the high end? The answer is – the mode they manage and operate their supply chain (with a bit of an advantage to the retailers on the lower end). They both experience similar effects – too high inventories for some items and insufficient for others. As the moneymaking resource for a retailer is the shelf space, the result is that this space is utilized inadequately.

When faced with these facts, retailers consider (and should consider) two elements:

The sad story is that both common views are incorrect. It is relatively simple, fast and low investment to improve overall availability and inventory turns (well in comparison to the expectations). Moreover, the effect of 1% is meaningfully greater. Here is a demonstration:

 

The result is 9% improvement in overall profitability, very far from 0.03%.

It is quite simple, using simulation tools to prove the viability and effects of the supply chain relevant solution to gain the confidence it is superior to the current mode of operations. As shortages in retail are ranging from 4-5% to tens of percent, the potential of jumping profitability is enormous. Shouldn’t you try it out?

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