CRF6 - Identifying strategies to reduce impact of retail sales volatility

Summary

This project investigateds the impact of retail sales volatility on the cost structure of a red meat (lamb supplier). Cost savings in the order of 3% of total variable costs or $500,000 per annum were to be achievable.
The sales patterns of two USA retailers illustrated that retailers who adopt HI-LO promotion strategies experience high levels of sales volatility compared with those pursuing an every day lay pricing (EDLP) approach. High levels of sales volatility lead to demand forecasting challenges which in turn are translated down the supply chain to suppliers. In the Coles Supermarkets integrated supply chain any additional costs borne by the supplier – in this case CRF (Colac Otway) – are reflected in total product costs.
The analysis showed that Coles lamb forecasts at the product level are accurate within ±5% 10% of the time; within ±10% 25% of the time; within ±20% 46% of the time meaning that 54% of the time forecasts were over ±20%. 
Suppliers such as CRF however need to manage within these constraints and still aim supply product as ordered to the retailer. In CRF's case product was supplied 73% of the time. Undersupply was prevalent with 3 products. 
Vacuum packing is the main mechanism by which CRF was able to manage ordering volatility, with vacuum packed product ranging from 20-40% of product supplied. Vacuum packing however has a number of cost implications: higher packing and carton costs; labour and reworking, inventory costs, and increased capital expenditure.
This analysis suggested that if the system could be improved to the situation where (say) 5% of product is vacuum packed, providing a reasonable buffer, then cost savings of over $500,000 per annum could be realised.