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After graduating from the University of Nottingham with a degree in Finance, Accounting and Management, I took two gap years where I carried out voluntary work (Citizen’s Advice Bureau), an internship...
Hemal Dave, Finance Analyst
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Finding the best route
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We look at how business modelling helped Marks & Spencer drive cost savings out of the logistics business of its Outlets operation.
Cost control. Always desirable, in the current climate essential. Even more so in retail supply chains, where fashion trends, economic cycles and even weather patterns can quickly erode razor tight margins.
And how important is cost control if you are already operating with significantly reduced potential for margins? And what if your supply chain logistics costs – the second largest operating cost in the business –weren’t wholly within your control, and you had little visibility as to what was really driving your cost position?
This was the problem facing Richard Fox when he was appointed Head of Outlets and General Merchandise Trading at M&S. Richard had inherited a successful Outlets business that had enjoyed a period of considerable growth since its inception in 2000 and planned to continue to grow through stores expansion. However in an increasingly capital constrained environment, Richard instead refocused the strategy to increase the proportion of business unit excess product handled by Outlets, albeit at lower margin. Achieving the forward sales plan would now involve a disproportionate increase in product volumes, which in turn would attract greater logistics costs, allocated to Outlets by the Main Chain. Richard was keen to unlock the cause and effect relationship between decisions taken by the Outlets business and the logistics charges levied. With improved visibility, he would be in a position to more proactively and strategically manage his cost base.
Richard turned to us for help. Richard needed a rapid and focused response, as he suspected there were cost savings opportunities to be realised within the current financial year. He also required an independent and objective factor to bring together a cross functional team pulled from Outlets, Main Chain Logistics, Finance and 3rd Party Logistics providers. He was also looking
for an element of risk share, and Berkeley were prepared to put fees at risk in anticipation of identifying quantifiable and realisable savings opportunities.
In just seven weeks, we developed a fully costed, dynamic model of Outlets’ supply chain that allowed M&S to develop and test various hypotheses and interventions. By isolating the principal drivers of logistics cost, and determining the degree to which Outlets had control over those drivers, a number of alternative operating scenarios could be played through the model. In this way, an optimal series of interventions could be planned for – adjusted for implementation challenge and risk – and clear targets established for the logistics costs that should follow.
Furthermore, with this modelling capability established, real logistics costs could be tracked and any variances to plan quickly investigated. The capability developed was not just useful to answer a onetime strategic question; rather it represented an ongoing toolset to enable better planning and execution.
The approach paid off. A £300k savings opportunity was identified that could be realised within the next six months, building to an overall savings figure of £3m over three years. In addition, the cross functional approach surfaced a significant risk to the profitability of the Outlets business. A company-wide SAP implementation was forcing changes to how suppliers were to be dealt with, resulting an earlier transfer of stock to M&S. The knock-on effect to Outlets would be an additional £1.6m increase in stockholding costs as they would be forced to take ownership of stock earlier. Outlets would have to renegotiate its terms of business to mitigate this increase. Had this linkage been missed, the savings opportunity would have been halved!
Richard commented, “I had worked with Berkeley before and had had a good experience. They were top of mind when it came to needing effective support to drive a difficult project in tight timescales. The team engaged with us really well, and the approach taken enabled us to identify and qualify real, and significant, opportunities for cost savings. I got excellent value for money from this engagement”.
Finding the best route