Managing the apparel omnichannel cost-to-serve

GS1 UK
GS1 UK is a community of over 30,000 members working in retail, foodservice,
Contents
healthcare and more. GS1 UK is one of 112 independent, not-for-profit GS1
organisations operating across 150 countries worldwide. GS1 UK helps everyone
involved in making, moving and trading goods, automate and standardise their
supply chain processes using the common language of GS1 global standards.

1. Executive summary 5
Cranfield School of Management
Cranfield has been a world leader in management education and research for 50
years, helping individuals and organisations learn and succeed by transforming 2. Ever wonder where your margin went? 6
knowledge into action. We are dedicated to creating responsible management
thinking, improving business performance and inspiring the next generation of
business leaders. We work to change the lives of our students and executives by
encouraging innovation and creative thinking, as well as the drive to succeed and 3. What did we do? 8
make a real impact on their organisations.

4. Why don’t we understand the cost-to-serve? 10

LCP Consulting
LCP Consulting is an award-winning customer-driven supply chain and business
operations consultancy. We help leading retailers and brands operate more 5. Where does the money go? 16
profitably and compete more effectively by taking an end-to-end customer-
driven view of supply chains and operations. With over 20 years consulting
experience, we have a deep understanding of how supply chains can make major
contributions to overall business success. LCP have developed a proprietary Cost-
to-Serve® methodology to support retailers in understanding the net profitability 6. How do you influence your cost-to-serve? 22
of their customers, their products and the service promises that they make.

7. What’s the impact of GS1 standards? 26

8. Where to now? 30

Copyright information 9. Appendices 32

This document and all subject matter outlined within this document remain the copyright of GS1
UK Limited or contractors directly associated with it. Copyright covers all methodologies, analysis,
approach, data modelling and project specifications outlined within this document, in part and in
whole.

Disclaimer
GS1 UK has reviewed the content of this document thoroughly. All statements, technical information,
recommendations, schedules and costs (where specified) are believed reliable, but the accuracy and
completeness thereof are not guaranteed or warranted unless otherwise stated.

2 3
 1 Executive summary
Online is the fastest growing retail market in the UK and Europe with apparel accounting for 20% of
total online sales – and it’s predicted to grow even more. But this growth in sales is leading to lower
margins as apparel retailers grapple with the added costs of serving the omnichannel shopper.

As apparel retailers strive to increase sales and market share, understanding how costs build up
at every functional link along the supply chain – the cost-to-serve – is fundamental for securing
sustainable growth in omnichannel retail. Unlike the traditional average cost route, this demands a
granular, end-to-end approach to reveal the total cost of servicing each individual customer with a
specific SKU, at the designated level of service – reflecting the true cost of handling.

Working with LCP Consulting and Cranfield School of Management, GS1 UK has analysed the cost data
of apparel retailers and brands to identify how the industry can sustainably manage the cost-to-serve.

Unpicking the complexities of managing the apparel cost-to-serve

Modern retail operations have largely been developed with each new channel being tacked on to the
existing business. Yet, as customers expect to interact across many different channels, the supply
chain needs to become more interconnected. It’s also now common for retailers to rely on the services
of third parties. But this comes at a cost – reducing the visibility and control retailers have over their
supply chain activities and overheads.

The “anytime, anywhere” culture of omnichannel shoppers has increased the sales opportunities for
retailers, but has led to fierce competition as the market becomes increasingly volatile, particularly
around peak trading events.

Knowing where expenditure is building

This paper shows how most expenditure occurs downstream, from the warehouse to the customer.
But these costs are largely driven by a retailer’s service proposition – a necessary investment in
securing retail customers and considered a value added cost area, although if mismanaged, it can lose
businesses money.

Additionally, any mistakes made upstream, in the planning, development and sourcing processes can
significantly impact work load and expense further downstream, creating non-value added costs.

Controlling the cost-to-serve to maximise profitability

Retailers can better manage their cost-to-serve by improving information flows to support the
seamless movement of product throughout their supply chain and by adjusting their value proposition.

By improving the flow of information, retailers can reduce errors at functional links and product
handover points. And by improving product information and connectivity of data across partners,
retailers can reduce errors and delays along the supply chain, support more accurate planning and
understand their cost-to-serve.

With this clear understanding of their true cost-to-serve, retailers can ensure their value proposition
is properly balanced – aligning their service offer to what the customer truly wants while ensuring
sustainability of their margins.

Standards that deliver impact

In our research, we’ve also identified the impact of GS1 standards on resolving the issues retailers face
while managing their cost-to-serve. Using GS1 standards brings quantifiable cost and time savings
along the entire supply chain, helping businesses achieve an estimated reduction of 20-30% across
total operational costs.

4 5
2 Rapid globalisation and the rise of omnichannel
have transformed the retail landscape. While
the industry continues to shift and adjust,
serve involves comprehending all the end-to-end
processes needed in completing a customer
delivery, including the management of returns
retail sales’ growth is becoming increasingly and collecting a product’s revenue. Essentially,
dominated by online shopping through a it’s determining the total cost of servicing

Ever wonder where your

growing number of channels and fulfilment each individual customer a specific SKU, at the
models. According to the Centre for Retail designated level of service to reflect the true
Research, online continues to be the fastest cost of handling. This is in contrast to the more

margin went? growing retail market in the UK and Europe with

apparel1 accounting for 20% of total online sales.
frequently used average cost approach, which
doesn’t distinguish the different product and
customer characteristics.
Looking forward, the majority of apparel retail
growth will continue to come from online Once there’s a clear understanding of how costs
channels. Forecasts from Mintel (see appendix 1) build up, retailers can make effective trade-offs
suggest online will grow at an average of 13% in their commercial and operational decisions
year on year until 2021, outpacing the total – based on the real business value and profit
market average of 4%. But is it all good news impact.
for retailers?
By identifying the main drivers of cost across
Before multichannel and omnichannel, channels, customers, products and business
ecommerce largely functioned as a separate operations, retailers can address key retail
entity to the core retail business, siloed with its questions:
own resourcing, stock pools and KPIs. But, as
the channels and touch points along the supply
“How do promotions impact
chain have now increased, and the lines between
my profit and why?”
stores and online have blurred, ecommerce has
become ingrained into business as usual. While
omnichannel is just shopping in the customer’s
eyes, the retail back-end is still adjusting its
systems, processes and operations to cater to “How does profitability vary
the new normal. across my channels?”

By opening up borders and improving the

customer experience, online represents a huge
growth opportunity for retailers. But it can also
represent an increase in costs, capital investment “How much are my delivery
and overall structure, while requiring significant service and customer proposition
changes in the way businesses measure success really costing me?”
and understand their profitability.

Managing the costs of growth and “How does the way I buy and
maintaining profitability flow products affect my profit?”

In today’s increasingly competitive market,

retailers are striving to increase sales and market
share – but to ensure longevity, this must be
“How much do non-value added
done both profitably and sustainably. The key
tasks cost me operationally?”
to achieving this, is understanding where and
how profit is made, and the costs that build up
at each step of the supply chain – or in other
words, understanding the cost-to-serve. “If my channel mix changes, how
does my cost profile change?”
Because cost-to-serve encompasses all
functional areas in the supply chain, it requires
a new approach – one that gives a shared
understanding of revenue, cost and profitability 1
 eferences to apparel within this report cover the clothing,
R
across the business. Understanding the cost-to- footwear and accessories industry.

6 7
3 We’ve identified how apparel retailers and
brands can manage or reduce the total cost-to-
serve in omnichannel supply chains through:
The cost-to-serve elements in a typical
apparel supply chain

l E
 stablishingthe key challenges in
understanding and managing the cost-to-serve

What did we do? in apparel retail

l R
 ecognising the key cost areas and levers
Primary source

at each stage of the value chain

l I dentifying
the benefits of GS1 standards Plan
on the cost-to-serve

From our research, we’ve discovered that as

new channels are emerging, many retailers are Design
struggling to measure their cost-to-serve. The
service offer has evolved but the financial cost
structures and systems that now measure the
business as a whole, are still playing catch up.
Sample
This applies across retail as a whole as recent
research from the IGD supports – 54% of retailers
don’t know or understand their true cost-to-serve
– but for the purposes of this paper we’ll focus
on the apparel sector. Select

By recognising the key cost areas and levers,

we’ve identified the areas with the greatest
opportunity to improve processes and reduce Source
omnichannel operational costs. Successful
omnichannel retailing requires increased
interoperability across systems, channels and
trading partners. With increased interoperability Produce
there’s also a greater demand for standards
across supply chain functions. Supply chain
standards provide a common means of
communicating products and activities in the
Inbound
supply chain enabling internal and external
partners to work together more efficiently.

The research output

Warehouse
Beyond the cost of the garment itself, as an apparel
product undergoes the development process from
raw materials through to a garment in the hands
of a customer, at each stage of the supply chain Outbound
it will accrue certain costs. By conducting retailer
interviews and analysing their cost data, our
research has identified the cost build-up along the
retail supply chain and the challenges that retailers
Store/customer
face in harnessing these costs.

So what does the apparel supply chain look like?

By mapping out the key steps across a number
of retail models, including department stores, Reverse
vertical brands, fast fashion brands and pure play
online retailers, we’ve developed a view of the
typical apparel supply chain.

8 9
4 All retailers and brands we interviewed,
struggled to provide a complete view of their
operational costs. In response to this challenge,
Third party and supplier management

Managing third parties and supplier

relationships has long been a challenge
more than half of them are currently reviewing
their systems, processes and KPIs to establish for retailers, both in guaranteeing inbound
compliance and ensuring effective information

Why don’t we understand the

this end-to-end view.
flows to support sales and availability.
In understanding the challenges businesses However, as more activities along the supply

cost-to-serve?
face in managing their cost-to-serve, three key chain are outsourced to external partners,
elements emerged: how retailers work with third parties becomes
critical in managing operational costs.

Suppliers are increasingly asked to deliver

directly to customers, effectively representing
the face of the brand for online orders.
Upstream, the basic issues of compliance
Network have not gone away and nor has the lack
complexity of inbound visibility that presents so many
issues for supply chain planning and logistics
operations. Downstream, delivery traceability
and service performance measurement are
essential to the delivery of the proposition
and customer experience.
Market Lack of Internal organisational structures
volatility visibility
It’s not just connectivity between retailers
and their associated third parties that drives
complexity and potential cost into supply
chains. Often the siloed internal structure of
retail organisations presents its own issues.

By definition, supply chains are made up of

Network complexity component parts and it’s the effectiveness of
communicating and aligning the objectives
Since the development of online shopping
between those links that can make or break
and rapid onset of globalisation, the number
supply chain efficiency. All the interviews
of touch points along the retail value chain
highlighted opportunities for more
has grown exponentially. Retailers need to
collaboration, while aligning departmental
manage operations across an increasingly
KPIs as a means of driving all parties towards
complex network. Upstream apparel retailers
one common omnichannel goal.
and brands are developing wider ranges with
a larger number of suppliers located across Aside from aligning the roles of head office
multiple continents. Further downstream they’re buying, merchandising and supply chain,
responding to an increasingly demanding set of the store also has a critical role in the supply
customer expectations and distributing through chain. No longer solely the outpost for sales
a growing network that involves new channels, – stores now play a role in delivering the
business models and markets. omnichannel proposition. To factor this into
the cost-to-serve calculations, new store
Stores are no longer the end point of the supply
processes must be reflected in store KPIs,
chain – on the contrary, today, stores function as
tracked and properly accounted for.
mini distribution centres and receiving depots.
Returns are now often the biggest supplier, For example, a conflict can occur on a click-
presenting both significant processing costs and and-collect order, when a customer orders an
inventory displacement issues. item on the web for collection at a store – but
who gets credit for the sale and who rewards
The key drivers of network complexity include:
the sales assistant for serving the customer?

10 11
 Buying and Marketing, stores
from new customers discovering the retailer Market volatility
Warehouse through a new channel, and the operation
merchandising and online
would be able to bolt on services priced The omnichannel apparel landscape is not
at a premium to serve those customers. only complex but subject to increasing market
Typical KPIs/targets l Intake margin l L
 ogistics cost l C
 ustomer The reality though is usually very different. volatility. Expanding their networks to include
as % of sales satisfaction Shoppers who previously only had the option more suppliers, third parties and customers
l Store availability have opened up new sales opportunities
of stores and catalogues are now making
Pick and pack rate l I ndividual channel/
Markdown reduction
l
the most of multiple channels and choose for retailers. But this has also led to greater
l store sales
l L
 abour cost the most convenient shopping journey with variation in product flows, customer demand
reduction a significant impact on net margin, given the and competitor activity, by affecting the level
higher online fulfilment costs. of control retailers have over the activities and
costs within their supply chain.
May detract from l O
 perational cost of l S
 ervice level l O
 mnichannel sales While retailers cannot control the path to
focus on holding and handling quality/delivery opportunities purchase that shoppers choose, they can “Volatility is our highest cost area
excess inventory balance the service level promises they
l S
 tore friendly l Inventory integrity
make, to manage the impact on network and
due to the increases it requires on
l C
 ross channel full deliveries
l N
 et margin infrastructure. The outcome of this trade-off capacity and resourcing.”
price sell-through
potential l P
 ick and pack maximisation is retailer specific, and visibility of the way
Cost-to-serve interviewee
accuracy costs build through different stages of the
l Store overstocks operation is crucial in understanding the
decisions to be made. The key drivers of volatility are:
Retailer KPIs and their impact on omnichannel goals.
Customer behaviour

Omnichannel has empowered the customer

As illustrated in the table above, the Ten years ago there was one main route to with the choice and flexibility to shop
KPIs can often detract from the retailers’ market. Now with access to product growing “anywhere, anytime” and placing greater
understanding of the cost-to-serve by being exponentially there are multiple routes – pressure on price, service and speed of the
insular in their focus and may not align to and the options are growing. According to retail offering. As the customer becomes
omnichannel goals. research from Barclays, in 2016 the average more demanding, this increases competitor
retailer offers 7.2 delivery and collection activity – influencing retailers to be more
“Previously we only looked options but by 2019 this will increase to 10.1. reactionary in their activities and raising the
at intake margin as that was But, while retailers are selling through more bar on their service offer. All of which comes
channels, the growth in distribution options at a potential cost to the bottom line.
considered the key driver. Now hasn’t always been met with a corresponding
each channel has a different level increase in sales. This has fragmented Changing product life cycles
of profitability; selling an item off distribution channels while making it
Since the rise of omnichannel, all retailers
challenging for retailers to create cost
the shelf floor has a vastly different efficiencies and drive volume through any
interviewed, discussed the challenge in
accurately forecasting their sales. In addition
return to click-and-collect through channel in their network.
to the growth of new channels, the apparel
one of our partners.” Network and infrastructure sector is moving towards increasingly shorter
Cost-to-serve interviewee
product life cycles and more ranges per year,
When executing the business plans and meaning companies cannot rely on sales
service proposition, it’s the network and history alone to accurately forecast demand.
Service proposition logistics operations that come under scrutiny.
In many ways the logistics operations have Increase in peaks and sale events
Retailers are providing increasingly complex to bear the brunt of potentially poor upfront
offers to their customers, from same day Black Friday and other extreme sales driven
planning, inbound visibility and supplier
and name day to free delivery and click-and- events lead to volatility in product flows,
compliance.
don’t-collect. But when establishing their particularly where price matching occurs.
omnichannel service offerings, retailers need To add to that mix, retailers are often For those who engage in price matching,
to ensure they balance their desire to match also hindered by single channel legacy competitor sale activity creates unplanned
competitor activity and customer wants with systems, which now face lengthy overhaul spikes in their sale and fulfilment operations.
what they can sustainably deliver. programmes to bring them up to speed. In
an ideal world, online sales growth would
be purely incremental business growth,

12 13
 At these times the demands placed on the Lack of visibility
infrastructure often exceed capacity, and the
operational cost of the required workarounds Visibility is a common issue in all the cost-
impacts heavily on the profitability of sales to-serve challenges. At a macro level, the
driving events. complexity and scale of the omnichannel
network disguise activities and their
“We need an additional 400 people corresponding costs within the retail value chain.
to cover Black Friday, so we have This happens for two reasons:
to stagger the HR increase over
1. Many activities in the value chain are now
a few months. A counter cyclical conducted by external suppliers or third
peak just doesn’t exist. We only parties
use our full capacity for four days 2. Retailers are still acquiring systems and
of the year.” processes to support a single view of their
customer, inventory and estate across all
Cost-to-serve interviewee channels

In working with third parties or external

Supplier performance
stakeholders, all interviewees identified “black
Upstream, managing supply flows can be holes” where they had little to no visibility of
just as complex as trying to harness volatile entire processes along the supply chain. These
customer demand patterns. Not all suppliers included production, third party distribution
can guarantee consistent availability of their activity, concession partner sales and inventory
products. As a result, where inbound flows levels, and customer returns. This makes it a
are unpredictable, retailers drive up safety challenge to accurately manage inventory, plan
stocks to meet their own customer demand. capacity and resourcing to avoid unexpected
The additional cost of inventory holding is costs and, ultimately, provide the promised level
felt throughout the supply chain, due to the of service.
costs of handling, storing and maintaining
It was also highlighted that inbound logistics and
“Logistics are totally dependent
inventory, or potentially through markdowns. on inbound forecasts, but they are
customer returns are key areas where visibility is
Poor supplier performance can also lead to impaired. Return levels in apparel are particularly always wrong!”
delays in getting stock to the shop floor and high in comparison to other categories due
takes up resources on unnecessary tasks that to the personal nature of the purchase and Cost-to-serve interviewee
add to the retailers’ cost-to-serve. Inbound challenge of fit in securing a sale.
compliance was identified as a big challenge, Down the far end of the chain in reverse
Vertically integrated retailers were able to
yet one that is critical for ensuring speed in logistics, retailers are typically unaware of a
effectively monitor sourcing processes – up
the flow of product. customer return until it turns up on their door
until the purchase order was placed. From
there, they had little knowledge of the goods’ step. By not having visibility of returns, retailers
“Almost a quarter of inbound status until they were ready to ship. And also are unable to track the number of times an item
deliveries fail quality control lack the connectivity between retailer track and is bought and returned before it finally stays
sold.
checks, which can lead to a two- trace systems and third party freight forwarder
systems to support effective inbound planning.
week delay in processing the Additionally, many retailers are estimating what
No retailers interviewed had the granular cost
insight to account for the journey a product can
delivery and product just sitting stock they actually receive based on a loose make back and forth from customer to retailer,
on the warehouse floor.” calculation of the orders’ value converted into and were relying on intake margin rather than
volume based on average cost price – further exit margin to inform their decision making.
Cost-to-serve interviewee complicated as it becomes spread across many
weeks.

14 15
5 To identify the areas that drive the biggest costs for retailers, a cost-to-serve ready reckoner
tool was created to understand the cost build-up along the supply chain. Taking into account the
volumes and business mix of various retailers, we’ve analysed the functional areas to determine
the processes that incur the greatest cost and opportunity for the business.

Where does the money go? Operational costs

The mix of costs incurred by different retailer types:

Retailer A Retailer B
Volume/value Vertical branded
apparel retailer apparel retailer

Head office, design, QC,

Head office, design, QC,
26% buying and merchandising
buying and merchandising 31%

4% PO placement (ordering)

PO placement (ordering) 5% 3% Warehouse inbound

Warehouse inbound 4% 1% Payment

Payment 1%

24% Warehouse outbound

Warehouse outbound 19%

Store inventory
12% management

Store inventory
management 28%

Home delivery/click-and-
30% collect

Home delivery/click-and-
collect 12%

Retailer A is a high volume retailer with more stores than Retailer B has a much higher proportion of online sales and
Retailer B and higher costs in store inventory management. so incurs the cost of home delivery and click-and-collect.

16 17
The mix of operational costs we collected shows Examples of non-value added costs: Value added costs Examples of value added cost areas:
downstream costs make up the vast majority
of operational expenditure. But, this doesn’t
definitively indicate a problem area. There’s a
5%-25% – range of Retailers compete through product ranges,
service offer – particularly around delivery and Brands used to offer
sharp increase in cost from warehouse outbound disputes on inbound returns – and through promotional activity. an average of two
Investment is often part and parcel with
where supply chain processes become more
detailed and therefore more expensive. For receiving orders satisfying a retail customer – and, certain costs collections per year,
are necessary to fulfil the retail service offer. But,
example, downstream shipping takes place in
packs or single units while upstream retailers
Source: Cost-to-serve interviews
how a retailer manages or mismanages these nowadays this is 18
ship containers. As we get closer to the can determine profitability. We identified three
Source: Priscila Queiroz Guimarães Wiegandt Ceglio, 2013
customer in the supply chain, the expectations
on service levels increase, which also drives up 2 hours – average time key choices that can affect cost:

costs. spent to manage each l W

 idth

l L
 ast
of range
mile promise Returns cost the UK
Through assessing the retailers’ cost data and
interviews, it became clear that to manage
inbound dispute l P
 eak management industry £690 million
downstream costs, retailers need to look not
only at their downstream processes but at the
Source: GS1/Cranfield EDI calculator
Width of range per year
implications of activity upstream – adding to the Offering a broad range and delivering Source: JDA CEO Viewpoint 2016
workload and cost further down the chain.
£0.30 – average cost per consistent newness can be a source of
competitive advantage for a retailer.
The research identified two cost types that drive
up expenditure along the supply chain:
unit to relabel product But, it also drives up costs. Arguably, the
Average returns rate
operational costs to develop a style in
l N
 on-value added costs that result from errors
Source: Cost-to-serve interviews 100,000 units are not too dissimilar from
one with only 1,000 units. But, when the
for apparel is 38%
or process inefficiencies along the end-to-end
chain range broadens while total volumes remain Source: Cost-to-serve interviews

l V
 alueadded costs relating to how a retailer
 0.40 – average cost per
£ unchanged, economies of scale are affected.
The resource requirements also increase
manages their service proposition unit to hang product in significantly due to the higher product  ach year Black Friday
E
Non-value added costs store development and sampling demands. In
addition to this, sourcing a broader spectrum sets new records as the
of product generally means more suppliers
Poor supplier compliance, operational process
inefficiencies and data inaccuracy create
Source: Cost-to-serve interviews
to manage. This can lead to poor point of biggest UK shopping
avoidable costs by delaying the process of
origin consolidation and greater complexity in
day of the year
product moving through the supply chain.
Receiving non-compliant deliveries can also
 -4 days – average
3 inventory management and moving product
through the chain – all of which impact
lead to additional tasks like addressing disputes, time per delivery spent margins.
Number of delivery vans

relabelling and repackaging product, correcting
invoices and shipping mismatches or even relabelling inbound Last mile promise
used on Black Friday
product recalls – all of which drive up the
operational cost of processing stock in and out
product Further to product range, service level is
another value added cost area – particularly compared to the rest of
the year – 4:1
of the warehouse. Source: Cost-to-serve interviews
when considering returns. The process
of fulfilling an item for free only to have it
Poor data management upstream can impact returned, also for free, is essentially a sunk
the accuracy of labour and resource planning cost to retain customers and encourage online
Source: Cost-to-serve interviews

downstream – under or over estimating supply sales. However, with returns on the rise there’s
will add to a retailer’s costs either through a greater need for retailers to manage the
wastage or a missed opportunity. costs related to delivery proposition, such as
a free returns offer and processing returned
stock.

18 19
 Key cost drivers

Primary source

Plan
UPSTREAM
l Supplier integration
Design l Range breadth/SKU
proliferation
l Product development
Sample and sourcing hit rates
l Accuracy of production
planning
Select l Point of origin
consolidation
l Resource and labour
Source planning

Produce

Peak management Inbound

The popularity of peak sale events, like
Black Friday, places pressure on retailers to
participate or miss out on sales. Meeting the
demands of these extreme peaks requires Warehouse DOWNSTREAM
retailers to scale up operations for a limited l Poor supplier compliance
period. To do this, they need to have flexibility
in terms of internal capacity – which is costly l Operational process
to maintain outside of peak – or they need to Outbound inefficiencies
work with third parties or other partners to
meet the increase in demand. This involves l Courier and other fulfilment
connectivity of planning between internal
l Peak promotions
functions, such as marketing and logistics, Store/customer
external couriers, drop ship vendors and l Returns processing
suppliers – impacting on infrastructure
investment requirements and labour planning. l Master data integrity
Reverse

20 21
6 Identifying the supply chain areas where costs
build up is important. But understanding the
levers to control that build-up can be the
Like reducing service promise or peak sale
proposition, the tactics to influence proposition
strategy can be actioned fairly swiftly. A
difference between making profit or not. company can change their minimum order
The levers can be summarised under two key spend for home delivery, charge for more

How do you influence your

themes: expensive fulfilment options or choose not to
participate in Black Friday. These can represent
1. Levers that improve the flow of information quick wins for a company in managing the

cost-to-serve?
leading to accurate planning, efficient use of cost-to-serve. However, these tactics will
resources and minimising non-value added ultimately detract from the service offer which
tasks: – if they’re no longer meeting the needs of their
customer – could come at a cost to sales. The
l Supplier relationship management and
levers to manage the operational costs and
collaboration
influence information flows are more long term
l Inventory management and centralisation in their implementation – but, as they focus on
improving processes and removing inefficiencies,
l Data integrity management will add rather than detract from the service
offer and ensure that what is promised to the
l System integration
customer can be sustainably delivered.
l Internal structure

2. Levers that relate to a retailer’s proposition

strategy and how they choose to compete
or differentiate themselves in the market:

l S
 ervicepromise and proposition
management

l Peak management

l Investment in infrastructure

“Rather than having sophistication only in our supply

chain, we also need sophistication in the customer
ordering process. 65% of click-and-collect is delivered the
next day, although only 50% pick it up on the first day. We
don’t have the systems to offer choice so everyone just
gets it tomorrow. Instead of investing to increase capacity,
we’d be better off investing in dynamic fulfilment and
name day click-and-collect to better align capacity and
demand with customer behaviour.”
Cost-to-serve interviewee

22 23
 Key theme Lever Supply chain cost impact areas Description and tactics

Product development

Range and inventory

Supplier compliance

Origin consolidation
Operational process

Returns processing
and sampling

management

management
management

management

management
management
Master data

Third party
Fulfilment
Improved Supplier relationship Retailers are more dependent on third parties and suppliers to meet customer demands, creating
information management and a greater need for collaboration to ensure both parties are working towards compatible goals.
flows collaboration Key tactics include:
- Joint management of performance measures
- Benefit sharing models
- Collaboration through vendor managed inventory
- Co-opetition – where retailers form strategic alliances

Inventory management How retailers manage and distribute their stock can create cost efficiencies by improving stock
and centralisation allocation, sell through and optimising logistics routes:
- Centralising inventory holding or using systems to enable a single view, allow retailers to
maximise their existing stock holdings to fulfil all channels
- Improving stock record accuracy minimises the resource required to manage and locate stock
within store, improves the accuracy of stock ordering and reduces overall working capital
- Consolidating and warehousing stock, relative to where their customers and stores are located,
to reduce logistics costs

Data integrity Improved data quality reduces errors or delays in the supply chain and supports management
management accurate decision making:
- Reduces relabelling and repackaging on inbound deliveries
- Fewer invoice and shipping discrepancies
- Improved resource planning for warehouses and stores

System integration System integration reduces silos and enables retailers to:
- Eliminate unexpected deliveries at inbound
- Effectively plan for peak
- Manage stock outages
- Measure end-to-end performance

Internal structure By understanding the impact of their decisions on the efficiency of other areas of the business,
different departments can ensure their activities support a strong net margin. This can be achieved
through:
- Increasing cross functional collaboration
- Establishing common KPIs that align to achieve consistent goals

Proposition Service promise and To what extent do you follow the competition? Understanding where your customers’ priorities
strategy proposition management lie in terms of range, price, speed and convenience and aligning your offer to their needs can
reduce excessive costs that arise from trying to be all things to all customers.

Peak management Linked to proposition management, by having sight of the cost and net margin implications, and
a clear end goal for participating in peak events, retailers can assess the ROI of peak sale activity
and make more informed decisions on their offer. By improving information flows with external
stakeholders, retailers can also reduce the costs of working with third parties during peak periods.

Investment in Retailers can reduce costs by investing in systems and processes to create process efficiencies
infrastructure and optimise transport and logistics routes. This includes investing in consolidation centres,
offshore warehouses, automation or RFID. These require capital investment, however with a clear
understanding of the volumes and service levels a retailer needs to deliver and their associated
costs, retailers are equipped to assess the service payback.

24 25
7 As UK retailers and brands are embracing
globalisation and omnichannel retailing, there’s
an increased uptake of supply chain standards
from the apparel market. This is demonstrated
by the continuous growth in membership of
GS1 UK and the growing number of retailers
What’s the impact of GS1 standards? who state GS1 standards are a requirement of
trade, as well as the growth of standards-based
CAPTURE

supply chain technologies. To improve the efficiency in tracking items

as they arrive at different locations, there are
GS1 standards help businesses identify items different methods of automating how systems
in their supply chain, capture this information can capture identifiers in the supply chain.
in a machine readable format and share data
automatically with trading partners. GS1 standards provide a consistent method for
the application of barcode imagery, ensuring
businesses use one way of labelling their
products to trade with various partners all over
the world. While barcoding is commonplace
in retail, further efficiency savings can be
achieved through the use of Electronic Product
Code (EPC) enabled RFID (Radio Frequency
Identification) technology.
IDENTIFY
RFID refers to the use of radio waves to read and
How a product, location or asset is identified is capture information stored on a tag attached
a basic building block for any supply chain. And, to an object. Because the technology does
as an increasing number of internal and external not require line of sight of the item, it enables
systems now rely on how items are identified in the automation of inventory management
the supply chain, an internal number is no longer processes. RFID tags are also able to store more
a suitable solution. To ensure interoperability, information on each tag – enabling the tracking
businesses need a system of unique of each and every product in the supply chain.
identification that can work across their global
network – whether this is for use with third
party logistics partners, selling in concession or
franchise arrangements or online marketplaces.

The GS1 system of standards enables the

unique identification through the provision of a
global company prefix. This company number
then enables the creation of Global Trade Item SHARE
Numbers (GTINs) for each product line and
Global Location Numbers (GLNs) for stores, With the use of consistent data sets, this
warehouses or even shelves in the distribution information can then be shared with trading
centre. With these unique numbers businesses partners using technology that automates this
can avoid issues of data conflict, increase their exchange of data.
system compatibility and improve their stock
visibility. The GS1 standard for communicating
transactional data is Electronic Data Interchange
(EDI). EDI refers to the sending of electronic
messages between two computer applications –
commonly used within the industry for invoices,
orders and advanced shipping notifications
(ASNs). As these messages are sent in a
structured format they can be composed and
understood by two trading partners’ systems
without the need for manual intervention or re-
keying information.

26 27
The impact of GS1 standards on the challenges and levers By applying GS1 standards of EDI and RFID, companies can reduce operational costs by 20-30%.
Furthermore, there is an overall reduction in working capital through more accurate planning and
Having identified the challenges in understanding the cost-to-serve and the levers to minimise these, distribution of product – ensuring the right product is in the right place at the right time.
we applied GS1 standards to the key operational areas, to assess the potential benefits that standards
have on the cost-to-serve. Adoption of GS1 standards supports the key levers of data integrity, system
integration and investment in infrastructure. From this foundation, retailers are then able to improve Range of cost savings from applying GS1 standards
supplier relationships, better manage their inventory and have the data necessary to inform their
service proposition and manage peak trade. 35% 50% Purchase order placement (ordering)

Network Standards mitigate complexity by providing a common business language 35% 50% Warehouse inbound
and consistent ways of working. They help reduce network complexity by:
complexity l Supporting systems’ integration
45% 60% Payment
l Making it easier to work with third parties by reducing the burden of
dealing with different requirements of multiple trading partners
l Future proofing investment in infrastructure by adopting standards-
10% 15% Warehouse outbound
based technologies
30% 40% Store inventory management
Market Standards give retailers the data and tools to react to market changes with

Operational costs
flexibility and agility – specifically, GS1 standards help reduce volatility
volatility through management of peaks and supplier performance.
10% 20% Home delivery/click-and-collect

In order to scale up a business to meet the demands of peak on peak,

retailers must have the basics in place in terms of data quality and systems
to support the efficient movement of products. This is supported through 20% 30% Total operational cost savings
unique identification and EDI to automate and speed up the order-to-cash
cycle.
3% 7% Stock holding reduction potential
Supplier collaboration is critical to minimising the impact of macro factors
on supply and demand. The use of GS1 EDI standards enables greater and Disclaimer: These costs and savings are indicative only. Every organisation has their own specific measures to consider.
more accurate information sharing between suppliers and retailers, allowing
product flow to more closely align with changes in the market.
Purchase order placement and ordering Warehouse outbound (including warehouse
inventory management)
l £
 14 per order saved through EDI
Lack of A common language of standards uncovers critical data across the supply
chain – improving data quality, helping retailers better manage inventory l R
 educed time spent managing supplier l 8
 0% time saving in warehouse inventory
visiblity and enabling them to meet their service promises in a sustainable way. interactions count time through RFID
Adoption of standards based technologies, like EDI and RFID, help trading l R
 educed time spent re-keying order Store inventory management
partners understand the flow of activities occurring outside their own information
business and obtain a more granular view of the activities within their l R
 educes inventory count time in store
organisation supporting overall data integrity. l H
 ighest cost saving opportunity for
retailers with broad ranges and separate by 90%
The use of RFID can improve inventory management by increasing visibility
and accuracy of stock files through enabling weekly or even perpetual purchase orders per channel l A
 chieves stock file accuracy of 95%
stocktakes.
Warehouse inbound l G
 ives retailers confidence to reduce safety
Having visibility of the key activities and costs in their operations gives
retailers the data necessary to make informed decisions on the value and l £
 12 per order saved through ASNs stock levels, reducing overall inventory
impact of their service promise. Serialisation, using RFID, allows the product holding by 3-7%
l I mproved inbound planning accuracy
journey to be tracked from supply to customer and return, measuring the
impact of their omnichannel fulfilment processes. l 7
 0% time saving on receiving pallets Home delivery/click-and-collect
labelled with RFID
l S
 upports interaction with third party
l L
 evel of inbound volume determines carriers to reduce parcel management
Cost savings from applying GS1 standards the potential cost saving related costs
Using GS1 standards has quantifiable cost and time savings across the supply chain. Using industry Payment l R
 FID helps speed up the cash-to-cash
cost data, operational costs have been analysed through the ready reckoner tool to assess the cycle and the processing time for
quantifiable benefits of GS1 standards. Working from a baseline of 0% use of EDI and RFID, we’ve l £
 8.50 per invoice saved
returns management
calculated the cost saving ranges that can be achieved through 100% adoption. l R
 educed disputes

28 29
8 The apparel retail market is a fast moving and
competitive environment. The complexity of
products, in terms of the variety of sizes, fits
and colours offered, drives specific challenges
for online channels and for managing inventory
in order to ensure maximum full price sales
At a foundational level, retailers should consider
the levers that can support internal process
improvements to increase efficiencies and
reduce costs before looking to external systems
and integration improvements. Aside from
establishing efficient foundational processes
across channels and the greatest returns on it’s not until the internal organisation and
inventory. KPIs are aligned across functions that a single

Where to now? Understanding the cost-to-serve is now critical

to the success of apparel retailers. Margins are
effective conversation can take place within a
retail organisation to steer towards any possible
reduction in the cost-to-serve.
increasingly under pressure and particularly
sensitive to changes in delivery channels, Looking to the future, as retailers rely more
customer demand and competitor activity. It’s an and more on suppliers and other third parties
essential requirement for organisations to reflect to fulfil a transaction, the need for seamless
carefully on the cost-to-serve, and consider how communication flows and external collaboration
future changes can influence operational costs increases. The trend for co-opetition – where
across the end-to-end value chain, including retailers form strategic alliances – will increase
suppliers and third party partners. as retailers realise they can cooperate with
the competition to create economies of scale.
So how do we get there? Already, brands within the FMCG market have
successfully collaborated on transport to enable
One of the virtues of the ever changing UK cheaper and more frequent deliveries. And in
apparel retail landscape, and the dawn of apparel, emerging services like Asda’s “To You”,
customer driven supply chains, is the pace and are helping other retailers widen their parcel
impetus for change that this drives. Looking distribution network while driving footfall into
forward to the future provides a perspective Asda’s own stores.
on what the build towards an aspirational
supply chain world might look like, underpinned One thing is certain – in a world of disruptive
by foundational requirements to guarantee competition, it’s those retailers who understand
sustainability and scalability, while allowing their cost-to-serve and the impact of different
businesses to manage their cost-to-serve. products, propositional and business decisions
on their bottom line, who are best placed to reap
the benefits and drive profitable growth.

Now
Soon
Internal process
improvements Future
Internal systems
Reviewdata entry and integration
processes External systems and
improvements
integration improvements
Standardise identifiers Invest in infrastructure
Integrateinternal and
Align organisational Centralise inventory external systems to enable
structures and KPIs holding end-to-end visibility
and seamless two-way
Review sustainability of Integrate internal systems information flows
service proposition
Collaborate with suppliers Createan environment
Investin key supplier of co-opetition
relationships

30 31
9 Appendices
Appendix 2. The research process
The research sample Cost-to-serve interviews

To ensure the findings of the research were A series of interviews were carried out
sufficiently representative, we approached a across this cross section of apparel retailers
cross section of apparel retailers, including: exploring:
Appendix 1. Apparel sales forecast
l Vertically integrated own brand apparel l The
shape and structure of each of their
retailers supply chains
l Traditional department stores l The
cost drivers within each supply chain
% share of
Apparel Apparel Apparel online sales/ l Value end, fast fashion apparel retailers
process step and the associated levers
online sales offline sales total sales total sales l The
organisational owners and related KPIs
l Pure-play online retailers
across the different supply chain processes
l The
main supply chain challenges they face
Year £m sales % change £m sales % change £m sales % change over the next three to five years
l The
use of GS1 standards or equivalents
2010 £49,434 £49,434
today
2011 £53,144 8% £53,144 8% Additionally, the interviews provided insight
into the levels of supply chain complexity,
2012 £8,072 £46,512 -12% £54,584 3% as well as the broader strategic challenges
currently faced by retailers. The insight
2013 £9,337 16% £48,531 4% £57,868 6% 16.1%
received has supported the development of
2014 £10,691 15% £50,349 4% £61,040 5% 17.5% the point of view presented in this paper as to
the causes of difficulty in understanding and
2015 £10,647 0% £53,062 5% £63,709 4% 16.7% subsequently managing the apparel cost-to-
serve in the omnichannel environment.
2016 (est) £11,072 4% £55,530 5% £66,602 5% 16.6%

2017 (fore) £13,194 19% £56,146 1% £69,340 4% 19.0%

Appendix 3. Ready reckoner tool inputs
2018 (fore) £14,781 12% £57,524 2% £72,305 4% 20.4%
Cost drivers
2019 (fore) £16,572 12% £58,569 2% £75,151 4% 22.1%
Calculations
l Numberof orders/
2020 (fore) £18,488 12% £58,969 1% £77,456 3% 23.9% Outputs
number of order lines
2021 (fore) £20,485 11% l Number of shipment
notices l Costs breakdown
Source: Mintel, the purple boxes are calculated based on available data. l Number of invoices – Order delivery
l Inbound logistics – Invoicing
– Receiving items – Logistics
– Proof of deliveries – Warehousing
l Warehouse management – Store inventory
Outbound logistics www.gs1uk.org/
l
readyreckoner – Returns
l Store delivery
l Store
inventory
management
l Customer deliveries
l Returns management

32 33
Acknowledgements
We would like to thank the apparel retailers and brands who shared their time and knowledge with us
to inform this report.

This report was a product of a research partnership between GS1 UK, LCP Consulting and Cranfield
School of Management under the guidance of Professor Richard Wilding OBE.

Report authors: Jaclyn Broomhead (GS1 UK) and Laura Morroll (LCP Consulting).

Cost-to-serve ready reckoner tool: Vahid Mirza Beiki (Cranfield School of Management) and Soroosh
Saghiri (Cranfield School of Management).

Other contributors: Ricky Jones (GS1 UK), Mark Gillott (GS1 UK) and Daniel Harvey (LCP Consulting).

References
Barclays and Conlumino, “Chain Reaction: forces shaping the retail supply chain today”, 2016

IGD Supply Chain Analysis, “Cost to Serve infographic”, 2016

Priscila Queiroz Guimarães Wiegandt Ceglio, “An Approaching of Social Classes: How ready-to-wear
changed society and its relationship to fashion”, Istituto Marangoni Fashion & Design School, 2013

Allwood et al. “Well Dressed: the present and future sustainability of clothing and textiles in the
United Kingdom”, University of Cambridge Institute for Manufacturing, 2006

GS1 UK, “EDI Cost savings calculator”, 2010

RFID Journal, “RFID ROI calculator”, 2015

GS1 UK et al. “GS1 UK cost savings ready reckoner”, online tool, 2016

34
Contact us
GS1 UK
Staple Court
11 Staple Inn Buildings
London WC1V 7QH

T +44 (0)20 7092 3521

F +44 (0)20 7681 2290
E info@gs1uk.org

www.gs1uk.org

GS1 UK is a company limited by guarantee and registered in England and Wales under
company number 01256140. Registered office: Staple Court, 11 Staple Inn Buildings,
London WC1V 7QH. VAT number GB287940215. J346870-10/16