Supply Chain View

My recent vacation in Morocco has inspired this post about the requirements for holding inventory in the retail supply chain. As I strolled around the souks – the traditional markets and shopping districts of North Africa and the Middle East – I reflected on the sheer quantity of stuff in the shops. Whether it was the heavily developed tourist souk of Marrrakech (all souvenirs and faux antiques) or the local-dominated souk of Meknes (traditional dress-up clothes and contemporary fashions), the quantity and variety of products in the stores was astounding.

Everything your heart desires

The typical experience in one of these stores goes something like this: after a quick check on what language he – almost invariably he – should be speaking to his customer, the storekeeper will notice that you are looking at a particular item, let’s say a rug. The rug will come off the wall and you will be given a pitch about the quality of the materials, the workmanship, the authenticity of the design, the use of natural dyes, how easily it will roll up and fit in your luggage, and so on. You nod and say “but I was looking for something a bit smaller, about so big”.

Immediately, from one of the groaning shelves come at least half a dozen more rugs in the size you want, draped out over every surface in the tiny shop. You mull over for a moment. “I like the colours on this one, but something more like the pattern on the one you showed me first.” Another five rugs come from nowhere. “Hmmm, this one looks OK, but do you have one that’s woven, rather than tufted, like the one on the wall?” Another six items are rapidly displayed. There’s nowhere to move in the shop now and you start to wonder exactly how many carpets there can be in the store.

And so it goes on. From watching Moroccans shop for wedding clothes in one souk, it seems that this isn’t just a tourist’s experience.

Make the sale from stock

This is my interpretation of what is going on here.

1. High gross margin product – something of an assumption on my part, but informed by an unscientific survey of my fellow tourists. The large gap between what many were prepared to pay for goods, and the discounts available through hard bargaining suggests that much of the time traders can achieve quite a high gross margin. So although stockturns are very low and value of inventory at retail price is high, cash tied up may be relatively low due to low cost of goods purchased.
2. High cost of losing a sale – this is an extremely competitive market. There are many alternative outlets, each with a similar range of products. In the local market there is scope for a long-term customer relationship and loyalty, but for tourist products this is not possible. If the storekeeper cannot fulfil a requirement immediately from stock, he will lose the sale (probably to a competitor), and that high margin with it.
3. Long leadtime relative to customer’s requirements – actual leadtimes are difficult to determine (storekeepers were not particularly forthcoming), but we can make some deductions. First, apart from a few handicraft workshops and tailors, there are no obvious production sites close to the sales outlets. Similarly, any wholesalers there might be are not located in the retail areas. So leadtime will at the very least be determined by the transport time from one of these sites. In addition, my experience is that if a customer wants a variant that’s not in stock, his tactic is to flannel for 5 minutes while an assistant runs to a friendly competitor to find a suitable item (and a deal is struck to share the margin). This leads me to believe that supply leadtime (whatever it is) is so much longer than the customer’s desired leadtime (immediate) that the storekeeper is compelled to keep stock.
4. Market expectation of range – we are very fussy, aren’t we? As consumers we have been educated to expect to get exactly what we want – colour, size, material, style: every detail perfectly atuned to what we have in mind. Whenever this happens, product ranges balloon.

Roots in the past, lasting legacies

What we see in the souks of Marrakesh is a slightly modernised version of what traders in the region have been doing for centuries. In the past, luxury goods were traded over long distances and attracted high prices in their destination markets – long leadtimes and high gross margins. These are also the historical roots of modern retailing as we know it, and the lasting traces of these conditions are still visible in the attitudes of retailers today.

The view of the generalist supply chain professional is usually that stock holdings in retail outlets represent a great opportunity for removing inventory waste (the cost of which is often underestimated or hidden within retail reporting mechanisms).

The view of the retail professional is that the stock in the outlets represents their opportunity to make a sale. They know that the visual impression on a customer of a rich variety and depth of stock contributes to sales and customer relationship. Sales being the key measure (prioritised even over margin and profit) they fear loss of sales from stock-outs. The souk legacy lives on.

Keys to understanding: supply and market

What’s interesting is that even the back-of-an-envelope analysis of the souk trader above – no real quantification, very basic research – provides enough insight to understand what is driving business decisions. As always the rule is to combine professional experience with real critical thinking (“engage brain when applying principles”).

Making a real effort to understand the market side helps too. A few years ago when I first worked with a retailer I struggled to convince managers that industrial supply chains held lessons for their business. The beginning of a productive relationship was an engagement with their genuine and rational demand-side concerns.