BUSINESS INTEGRATION STRATEGY

Business Integration is a strategy of expanding a companies profile into manufacturing or retailing based on company's current portfolio. There are a few integration strategies which we will discuss in this topic as mentioned below :

1. Forward Vertical Integration
2. Backward Vertical Integration
3. Horizontal Integration

FORWARD VERTICAL INTEGRATION

This can be defined as a business strategy that involves forward integration where in the company expands into direct distribution and sales of its products. An equipment manufacturer wants to retail their products through their branded stores instead of giving them to a third party retailer is a good example for forward integration.
A manufacturer would take this strategy for the below benefits :
- Have complete control on inventory movement from manufacturing to retailing
- Increase profit margins
- Pass on the benefits of portion of the retailer margin to end customers by retailing goods on competitive price
- Remove middle men to improve supply chain efficiency
- To gain better control on market and product segment
- To improve customer experience
- To better understand and fulfil customer needs

This is very effective in retail when manufacturer wants to open Category Killer stores.
Please refer to blog on Types of stores to understand category killers

BACKWARD VERTICAL INTEGRATION

This can be defined as a business strategy that involves backward integration where in the an organisation expands into manufacturing of its goods. A retailer wants to manufacture their products is a good example for backward vertical integration.
A retailer would take this strategy for the below benefits :
- Cut on additional margin cost levied by the manufacturer
- Improve the quality of the products
- Improve control on supply chain and timely supply of goods
- Become more competitive in the respective product segment
- Gain better control at times of higher demand for products in market
- Ensure hindrance free supply at times of shortage of component parts or raw material

HORIZONTAL INTEGRATION

This can be defined as a business strategy that involves expansion of business by acquiring other players in the same or similar field or discipline. A company acquires huge stakes in a competitor's company or takes over the competitor's company for the below benefits is known as horizontal integration :
- Increase the market share
- Enter new market
- Create a monopoly
- Gain better control over the product segment
But this strategy is quite risky for both the organisation and the consumers. A successfully monopoly could lead to disaster because of increase in product pricing and lack of competitors to stimulate innovation in the product line. If the take over transition has frictions leading to loss of talents and resources, this can cause huge damage and financial loss to the parent organisation.

E-COMMERCE KILLING BRICK AND MORTAR RETAILING !! IS IT REALLY HAPPENING !

Many have argued and even a few are convinced that Online shopping revolution will kill E-Commerce but it has so far not happened. Yes people are vastly shifting from Brick and Mortar to Online to buy products but how many people are satisfied with their online shopping experience is a big question mark.
The answer lies in the reality we see around us, if customers shopping online are satisfied with the experience then why do we still have a huge crowd walking into shopping malls and department stores ! E-commerce will increase the customer's spending because of products made easily available but it will not kill BNM (brick and mortar) due to the follow reasons :

1. WE ARE SOCIAL BEINGS
2. DELIVERY COMPLICATION
3. SECURITY
4. EXCHANGES
5. SUSTAINABILITY
6. COMPETITIVE RIVALRY
7. SUPPLIER BARGAINING POWER

1. WE ARE SOCIAL BEINGS

We human like to socialise, meet people and have a new experience. All that we own and the importance they carry depends on the experience that we have got out of them. With that being said, how much do we enjoy shopping online in front of a computer. To be frank we don't enjoy or get an experience of shopping from it. We just buy online because we get better discounts or choices. In India we have got into the new practise of physically checking out an electronic product like TV or a mobile in a shop and then compare the prices online. Later we end up buying online since we get a better deal. But online retailers cannot sustain forever through discounts which we will discuss under sustainability. The top selling products of online retailers in India is electronics, in particular mobiles. This means we are still attached to buying our daily needs form Brick and Mortar stores. And people still prefer to buy product such as clothing, health and beauty, furniture and grocery from brick and mortar stores.

2. DELIVERY COMPLICATION

This is one key factor that causes a lot of discomfort to buy from online. We end up giving our office address to receive products from online retailers because we cannot make ourself available at the house awaiting a delivery. At the same time, we don't have the privilege of replacing a product then and there when received damaged and incorrect. And when the product is found faulty after a few days of use, we again need to wait for the pick up of the product and the replacement. Reverse logistics is a very expensive process for an online retailer and it directly takes a toll on their margin, so on a long run this will be discouraged by online retailers causing a lot of discomfort to the customers. Also for a country as big as India, online retailers will end up investing heavily on their Hubs and distribution centres increasing their logistics expenses.

3. SECURITY

Though this area has had a drastic improvement over the recent past, it is still open to hacks and insecurity. Online purchases of larger amounts are still not preferred by consumers and are also not encouraged by banks in India causing a huge hurdle.

4. EXCHANGES

As discussed in delivery complications, exchanges are still a complicated process while shopping online for both the retailer and the customer. It causes a lot of inconvenience and involves a lot of time and money. Taking back a faulty product or a wrongly delivered product from customer's place is highly unprofitable for an online retailer leading to unsustainable business model with respect to reverse logistics.

5. SUSTAINABILITY

This is an area yet to be unearthed. Currently online retailers are attracting customers through elusive discounts and better choices. But how long will an online retailer be able to sustain the customer base through promotions is a big question because this involves high compromise on operating margins. So far none of the Indian online retailer has attained break even or even come closer to attaining the same. This means the current business strategy is unsustainable because investments will not pour in without returns to share holders. An unprofitable business model cannot be a sustainable business model.

6. COMPETITOR RIVALRY

Unlike Brick and Mortar stores where the rivalry is restricted to a catchment or area, the rivalry for

online is has a wider bandwidth due to all the competitors having complete and easy access to the entire market or country. This triggers red ocean business strategy to be adopted by rivals to kill one another for market share. Exactly what happened and is continuing to happen between Amazon and Flipkart in India. Such rivalry is usually fought through heavy discounts causing an unsustainable business model which will force small players to quit the business model and it can also lead to Monopoly is smaller markets which is unhealthy for the market and the consumers. This will make sustainability of the players in the market difficult in long term and could lead to customer dissatisfaction and breach of trust.

7. VENDOR BARGAINING POWER

Currently the online market is on a peak growth phase in India and entering maturity phase in a few

developed nations. This ensures that the vendor bargaining power is low and online retailers/ market place have an upper hand. This enables better fund flow and relaxed payment options for retailers thereby enabling higher discounts that are specifically given by online retailers on top of vendor discounts, there by reducing the price even when turnover is low. But when E-commerce market matures similar to Brick and Mortar market then the vendors will have better bargaining power or will come on par with that of online retailer's there by tightening the free flow of fund and stabilizing market price of their products there by reducing discounts. This may lead to exit of online retailers who rely on discounts for sales push.

CONCLUSION

Below is the statistics of E-Commerce contribution to retail industry in USA from 2011 to 2015 and it is no way closer to the current market fear that E-commerce will kill Brick and Mortar. The fact is that Brick and Mortar stores are closing down because of inept management of business operational, market saturation, fund crunch and ballooning costs that need to be cut to retain profitability. Brick and Mortar model of retail is very much a viable business which will be profitable when managed efficiently over the years to come, even with the launch of new technologies like augmented reality and virtual reality.

Source : www.internetretailer.com

Eventually Retail Industry will emerge to be OMNICHANNEL where free movement of customers is encouraged between multiple channels during their shopping phase before finalizing their purchase. Hence E-commerce will only help retailers to improve their turnover and maintain competitive edge but it will not kill Brick and Mortar business model of retail, Never, Ever - DOT.

GATE KEEPER MARGIN

Gate Keeper Margin is a retail term used to set a Fixed Margin level below which the margin should not drop i.e. the minimum expected 'net profit after tax' a retailer expects to make from the sale of goods or service.
This can be defined at SKU location level or at department location level and used as a alert mechanism or a hard stop mechanism.

We can use GKM to arrive upon our suggested selling Retail for every SKU listed in the merchandising system as calculated below :


Suggested Retail = [Unit cost x (1+{Vat rate/100})]/[1-(GKM/100)]
                            = [1800 x(1+{14/100})]/[1-(25/100)]
                            = [1800x1.14]/[0.75]
                            = 2025/0.75
                            = 2700 Rs.

So the retailer should sell the product at a minimum of 2700 Rs. To ensure the GKM is maintained at 25% Retailers can use this to put control on the Purchasing Cost based on the recommended retail price and GKM agreed

The below formula can be used to arrive at the GKM or Fixed Margin obtained from unit retail and unit cost of a product

GKM = [Unit Retail - (Unit cost x (1+Vat rate/100))]/Unit Retail

THREE TIERS OF SUPPLY CHAIN IN RETAIL

Retail industry is a very complicated and sensitive network bound by people and machine. Any gap or lapse in process will lead to collapse of the complete supply chain. That's why its right said, "Retail is Detail". We need to plan, do, check and act (PDAC coined by William Edward Deming) in every segment of the supply chain. To implement PDCA process we also need to understand the classification or tiers in retail supply chain. We can define 3 tiers in any retail supply chain i.e. a supplier's supplier to a customer's customer.
1. Supplier Relationship Management (SRM)
2. Internal Supply Chain Management (ISCM)
3. Customer Relationship Management (CRM)


1. SUPPLIER RELATIONSHIP MANAGEMENT
SCM deals with the overall planning and assessment of the third part logistics or players involved in the sourcing and procuring of products by the organisation. This could involve manufacturers, suppliers, wholesalers, distributors and local vendors. SCM opens up the doors for closer ties with a few suppliers to uncover the potential of doing business together which will be mutually beneficial. Some of the health checks that can be done to review the relationship with the supplier in terms of SCM can be done through the below ratios and reports :
- Stock fulfilment ratio
- Payment report
- Supplier purchase report
- Supplier sales report
- Vendor Managed Inventory
- Vendor - Retailer performance report
- Demand Forecasting Report

2. INTERNAL SUPPLY CHAIN MANAGEMENT
ISCM covers all the internal movement of goods within the organisation over which the management has full control on. These involve the processes of internal distribution, replenishment and storage. The primary goal of Internal supply chain management is to satisfy the CRM's demands and manage reverse logistics.
Reports to monitor efficiency of internal supply chain management are :
- Distribution centre fulfilment report
- Distribution centre performance report
- Store Returns report
- Inventory ageing Report
- Replenishment Report
- Demand Forecasting Report

 3. CUSTOMER RELATIONSHIP MANAGEMENT
CRM deals with the processes involved in the interface between an organisation and its customers. In retail it covers Point of Sales/Service, Customer Loyalty Program, Website, Marketing activities and customer data analysis & analytics to forecast customer demand. It is CRM that defines the demand to be fulfilled by ISCM.
Reports to monitor efficiency of internal supply chain management are :
- Customer Churn Report
- Market Research Report
- Sales Reports
- E-commerce website analysis report
- Competitor Analysis report
- Market Basket Analysis

Overview of processes involved in the three tiers of supply chain management

SRM	ISCM	CRM
Sourcing	Strategy Planning	Marketing and market study
Negotiation	Demand Forecasting	Competitor Analysis
Supply Collaboration	Supply Planning	Sales analytics and analysis
Deals and Contracts	Reverse Logistics	Point of Service
Supplier Performance Review	Demand Fulfilment	Omni channel management

INVENTORY CONTROL AND PRODUCT LINE ANALYSIS

With increase in competition and customer demand, the product line has become infinite for Hypermarket retailers. Managing and analysing the SKUs (stock keeping Units / Items) have become a challenge. Few techniques can be used in analysis and classification of SKUs. We shall discuss the same in the below :


1. ABC Analysis
Methodology used in classifying the product range into 3 categories such as
-  'A' category products where tight inventory control is required because they contribute a lot to the profit of the organisation in terms of return on investment and sales. Regular perpetual inventory  checks are required to ensure minimal shrinkage. Reordering points are frequently amended to match the market demand
-  'B' category products are the ones with good inventory control deployed but there is no need for regular perpetual inventory checks. They contribute a good value to your sales as well
-  'C' category products are the ones with less inventory control and contribute a low percentage to sales. Retailers usually keep them in the product line due to customer requests or for clearance
This methodology uses Pareto's principle where in 20 % of the inventory contributes to 80% of the total sales value. It is also known as the 80-20 rule
Please do not confuse ABC analysis with Activity Based Accounting. These are two different terms and have their own importance in operations.


2. HML Analysis
Its a simple way to classify the products based on the selling price of the product i.e. 'H'igh value , 'M'edium value and 'L'ow value products. It helps in understanding what percentage of these stocks are held by us


3. VED Analysis
These are 'V'ital, 'E'ssential and 'D'esirable products that has to be maintained in our inventory. This is used in the field of pharmacy where inventory is based on the criticality of the drug and in spare parts store where criticality is based on the parts that ware out more often and needed on immediate basis for replacements


4. FSN Analysis
This methodology is used to identify the product sales i.e. 'F'ast moving, 'S'low moving and 'N'on moving. Please do not confuse this with ABC analysis. FSN analysis is based on the quantity of inventory flow for that particular product, it doesn't not evaluate the contribution of the product to sales value. It evaluates the contribution of the product to the sales quantity. In case of manufacturing the classification is based on consumption of the product


5. SOS Analysis
This is a simple way to monitor the seasonal products through the year lying in our inventory. They shift between 'S'easonal and 'O'ff-'S'easonal based on the seasonality. This is done to ensure the product is purchased and sold before the season expires or to ensure enough stock is kept on hand to facilitate sales during the beginning of the season. This method is critical with respect to seasonal fruits and vegetables


6. SDE Analysis
Methodology used by retailers in procurement side of the business operations.
- 'S'carcely available products are the ones which are imported and are not available locally. The supply does not meet the demand and it is difficult to procure due to its short supply. Hence extra caution and monitoring is required by the buyers to get the products on hand from the manufacturers
-  'D'iffult to procure products are those manufactured domestically but difficult to procure due to distance from supplier/manufacturer, short supply or less number of suppliers available in the market
-  'E'asy to acquire products are the ones that are locally available in plenty and the supply meets the demand


7. GOLF Analysis
This is the hybrid of SDE analysis where in procurement of inventory is classified based on :
-  'G'overnment supplied inventory
-  'O'rdinary available products which has supply meeting the demand, the product is easy to procure and is available within the country
-  'L'ocally available products from local vendors, these are usually perishable products with short shelf life procured locally within the state/city limits
-  'F'oreign source is required for the supply of the product

ORDER CONTROL

We will discuss in brief the different types of order management :

1. Make to Order
2. Make to Stock
3. Assemble to Order
4. Engineer to Order
5. Configure to Order

1. MAKE TO ORDER (MTO)
Manufacturing of the actual product starts only after the order is placed by the customer. This method is used in customer designer products where product is made as per the customer's requirement from start to finish. Such products are expensive and it will be a combination of the base product and the customisation needed by customer. Demand fulfilment is slow in this case compared to regular demand fulfilment rate. The advantage with make to order is that there is no excess storage cost involved after completion of the manufacturing because a customer order is already available in advance.

2. MAKE TO STOCK (MTS)
In this scenario, the products are manufactured well in advance as per the forecasted market demand.
The products once manufactured are partially stocked in warehouse and the rest is made readily available to the customer at the shop floor. The sold products are then replenished form the stocked inventory. Demand fulfilment is immediate but this also involves storage cost and also the risk of over manufacturing because we don't have a firm customer order prior to manufacturing unlike MTO. Manufacturing cost of such products are low as they are standardised with very minimal to no change in the product line.

3. ASSEMBLE TO ORDER (ATO)
This is a hybrid of MTS and MTO process. In this model product components are manufactured and kept ready. Only the assembling of the final product is done as per the customer's requirement after the customer's order is placed. This strategy can be used by manufacturers when there is a variety of finished products made available from the relatively same set of components. Manufacturers will have a subassembly line to cater to such orders upon customer's requirement, such that both the manufacturing and storage cost is reduced for the manufacturer without compromising highly on demand fulfilment rate unlike the case of MTO

4. ENGINEER TO ORDER (ETO)
This is a highly customised process as per the customer requirement. There is no defined based product unlike MTO. The product will require reengineering of the existing product or engineering a new product all together as per the customer's requirement. Fulfilment rate is very slow due to complications in the process. Usually such scenario are used to manufacture a reengineered product of an existing product or a working prototype for new product. Cost of manufacturing in very high and highly skilled manpower would be required for the process as this will involve more of human skill and not a regular assembly line setup

5. CONFIGURE TO ORDER (CTO)
This is a hybrid of ATO process wherein customer is given more flexibility and the visibility is given to the component level for the customer to choose from. Based on the configuration chosen by the customer the final product costing is calculated and assembly begins. In this way high customer satisfaction and productivity is achieved, its a win-win situation for both manufacturer and the customer. A simple example will be a computer where in customer can choose this RAM , ROM and Chipset configurations before purchasing the product and the quote for the final product is given by the manufacturer based on the configuration setup. Once the final product is agreed upon, the retailer or the manufacturer will have the product assembled as per the chosen configuration

PRODUCT LIFE CYCLE IN RETAIL INDUSTRY

In Retail Industry the buying and merchandising team classifies their products into categories based on sales and product life cycle. This gives them the edge to price the products and stay ahead of their competitors in assortment planning and pricing. Before we get into product classification, we will discuss the various phases a product goes through right from launch to phase out.

1. Launch
2. Growth
3. Maturity
4. Decline

Prior to launch, all the products will go through a product development lifecycle and procurement process which we will discuss in detail in separate blogs.

1. Launch

This is the first Phase a product goes through in Retail market and as the name suggests it is the launch of the product. In this phase the product is new to the market and it is still untested. This is the phase where the product needs huge advertising and marketing push through hoardings, commercials and test samples. Hence usually newly launched products are priced a bit towards the higher side to accommodate these additional costs. The main goal for a company in this phase is to create a positive vibe for the product in the market and attract customer through awareness. At times due to high marketing cost, the company can incur loses which can only be recovered from the other phases but this phase is a zero compromise phase for every product. So we are left with no option other than to invest in marketing at proportionate level expecting future returns.

2. Growth

The second phase sees the growth of the product and the benefits of the marketing activities carried out during the launch. We can observe the market response and demand for the product in the market. This will help us evaluate whether the product will be a hit among its consumers and sustain the competitor's pressure or not and if yes then how long. Marketing for the product does continue but on a lesser scale and price for the product is revised based on its demand in the market. A sudden drop in price during this phase will impact the product's sales and image among its consumers. Usually pricing will see a marginal drop or remain static from its launch price.
This phase also sees increase in gross margin for the product due to drop in marketing cost and production cost. If the product has a successful launch then the growth phase will see the product peak in its market share and have a better reach to its consumers.

3. Maturity

As the name suggests, when a product enters this phase, it is already well establish and enjoys a good market share but it does come with its own challenges. By now a handsome volume of your customers have used the product and given their feedback based on which the sales would have peaked. The product's sales volume will be in its peak. The faster the product reaches maturity the longer the product can sustain in the market because the product can enjoy the market share up till competition heats up.
But this stage is also full of challenges like :
- Clones being introduced in the market by competitors at lower price slabs. The company has to reduce prices to compete with the competitors and retain its customers in this case
- With more competitors offering similar product will force us to reduce the price of the product leading to drop in price
Due to heavy competition from competitors the product will lose the market share, so we need to differentiate the product form the competitors through improvisations and making the product better. This usually leads to a partial first phase again i.e. through marketing and re-launching the product with better features to maintain the market share gained and to stay one step above the competition.
If the product is not re-launched then the product will hit Saturation in market share and hit the decline phase

4. Decline

With increase in competition and better products being launched in the market for the same price, the product will eventually get into its decline phase. The continuity of manufacturing the product will be dependent on the available market share and cost of production. Retailers will try to penetrate lower end markets and new markets by selling the products for lower price. Retailers provide discounts on the product to liquidate the existing stocks and ultimately the product will be phased out by the retailers from the market.