Led by advances in information technology, retailers are laser-focused on operational and cost efficiencies. Highly evolved demand planning systems drive integrated sales and operations planning; control towers improve visibility; and digital twins, simulation and artificial intelligence optimize supply chains. Yet in the face of prolific investments in supply chain technology and resources, U.S. retailers have failed to achieve significant cost savings.
Retailers have made significant investments in supply chain I.T. over the past decade. From 2010 to 2020, SAP alone collected over $223 billion in revenue. But a review of overall U.S. retail finances during that time suggests that supply chain technology investments have failed to deliver significant improvements in operating performance.
From 2011 to 2020, the combined retail sales of Walmart, Target, Kroger, The Home Depot and Dollar General increased from $590 billion to $904 billion — an average annual growth of 3.6%. Over the same period, cost of goods sold (COGS) as a percentage of sales varied from 25.62% to 26.17%, a narrow range of 55 basis points, with COGS as a percentage of sales peaking in 2017 and 2018. The ability of these retailers to manage COGS reflects the effectiveness of supply chain I.T. investments in helping to manage vendor and sourcing costs.
A look at selling, general and administrative (SG&A) costs paints a different picture. From 2011 to 2020, average SG&A as a percentage of sales increased 144 basis points, and was the primary factor in a 98-basis point decline in operating profit. In retail, payroll is the largest controllable expense. While detailed payroll information is not available for major retailers, some indication of the prevalent trends can be found in Bureau of Labor Statistics reporting. From 2011 to 2020, U.S. retail store operations staffing dropped by 17.5% (12.1% if 2020 is excluded due to COVID-19). During the same period, U.S. supply chain, warehouse and transportation staffing increased by 10.2%. The most pronounced increases were in management roles (16%). The wage differential between supply chain and store operations, with store operations offering lower wage rates, drives a net overall increase in retail payroll.
Supply chain I.T. will continue to be a critical retail enabler going forward. To ensure that retailers reap the cost benefits of I.T. investments, they should adopt the following best practices:
Understand organizational cost of ownership — including recruiting, payroll and retention costs of new skill sets required to support new technologies.
Make “total cost of ownership” more than a catch-phrase or a spreadsheet. Build and maintain robust TCO models that incorporate organizational costs and historical performance.
Build and maintain cost-benefit models and analyses.
Hold internal business partners and I.T. vendors accountable for committed benefits, costs and TCO. Consider value-share contractual agreements with I.T. vendors.
Focus I.T. investments on core competencies. Last-mile delivery is a core competency of Amazon; does every retailer need to invest in last-mile technology as a core competency, or would they be better served buying that competency?
Outlook:
In 2022 we can expect retailers to accelerate the pace of retail supply chain I.T. investment. While some technology investments are competitive table stakes, retailers would be wise to focus on investments that improve financial operating performance. Retailers need to leverage I.T. to improve future internal supply chain operations in the same way that I.T. has driven historical gains in sourcing and cost of goods sold.
