2. Retail as a driving force in Ukraine’s SCM Ministry of Transport and Communications October 31 st, 2008 Construction and retail as driving forces in Ukraine’s SCM Oleg Kalensky Strategic Marketing & Development Director UVK Group of Companies

3. Retail – a driving force of our civilization A country’s potential (in many aspects) – its retail, giving impulse to many other markets & economy sectors Logistics (thru SCM concept) – veins and arteries of retail Retail is a margin management business Gross margin (at purchasing)30% - Shops costs12% - Logistics costs6% …(head office costs, discounts costs, marketing costs etc.) The European Logistics Association: a latest market trend – re-structuring of retailers’ costs from own logistics management in favor of value added services:  specialized (under regional demands) packaging  manufacturers’ stock management  joint (with manufacturers) planning, forecasting, and goods movement flow  adaptation of products to consumers’ tastes Construction and retail as driving forces in Ukraine’s SCM Retail = …

4. As the retail market develops, the following issues become even more topical:  guaranteed deliveries  high level of stock management  professional organization of distribution center(-s)  intra-chain distribution Outsourcing logistics services enables retail chains to focus on the core business (such cases include Ramstore, Auchan, Metro). A.T.Kearney’s studies: SCM outsourcing can give 15-25% optimization of logistics costs Retail – Logistics Operator interaction (chronology of outsourcing):  international forwarding  in-bound delivery  warehouse operations (50% European retailers outsource 35% operations)  SCM Construction and retail as driving forces in Ukraine’s SCM Retail + Logistics = ?

5. Retail market players:  consumers  retailers  financial institutions  FMCG suppliers  FMCG manufacturers  logistics operators  developers  State’s legislative bodies  State’s regulating agencies The right approach for improvement: Consumer -> retailer -> FMCG supplier / manufacturer -> 3PL-operator / developer -> the State Construction and retail as driving forces in Ukraine’s SCM Retail + Logistics + ? = Success

6. The Ukrainian retail today:  over 1,000 POS’s  over 150 retailers (20 are top operators)  all retail formats and commodity categories exist Key retail:  29 nation-wide and regional operators  over 800 POS’s  appr. 10% of gross retail turnover (in $) 2007: $32 bln market volume (4.3 times more than in 2000) +23% to 2006 (‘like-to-like’) Construction and retail as driving forces in Ukraine’s SCM Ukrainian Retail = …

7. Effective and efficient SCM is based on DC’s conception with these benefits (direct and indirect):  goods on shelves increase (+1-2% of turnover in DC)  better discounts from manufacturers due to direct supplies to DC (-3-4% of prices)  costs reduce due to processing of goods through DC (up to -1% of prices, depending on a centralization extent and IT system)  stocks in shops get optimized  goods turnover increase, while stock management becomes more effective  guaranteed availability of goods in shops while peak periods and promotion activities  assured quality of goods due to centralized quality management  costs reduce due to a better pattern of suppliers’ relationships management Construction and retail as driving forces in Ukraine’s SCM Outsourcing SCM = Strengthening Retailers’ Competitive Market Advantages

8. Pro’s of outsourcing: (1)“all specialists are employed by LSP’s” (logistics is a “narrow” market) (2)often retailers’ top managers lack logistics proficiency (3)no need to heavily invest in own warehouses, transportation etc. (but in shops and working capital) (4)sharing services due to LSP’s network (5)“critical mass of shops” for centralization of supplies system (6)“change management” (in many aspects 3PL has been the first to implement up-to-date managerial technologies – WMS, quality management etc.) (7)focus on the core business Construction and retail as driving forces in Ukraine’s SCM What 3PL Brings for Retail?

9. SCM means: (1)timely deliveries (2)safety of goods (3)management of costs (4)stock management assistance (5)high / low season flexibility (6)high-quality operations assets (warehouses, vehicles, IT etc.) Just-in-time -> Just-in-sequence Construction and retail as driving forces in Ukraine’s SCM What a 3PL-Operator Must Be?

10. P.O.C.K.E.T.S. – 7 areas for a retailer to deal with: (P)rice (O)perations (С)ulture (K)ey item promotion/product (E)xpense control (T)alant (S)ervice Current problems: (1) retailers put on hold payments to suppliers (2) suppliers halt deliveries (3) USD / UAH rate increase -> dollar importers increase prices (4) lowering consumer’s buying capability (5) banks stop financing programs Construction and retail as driving forces in Ukraine’s SCM What to Do in the Crisis?

11. Goal – maximizing earnings from 1 sq. m of shopping area. End-consumers’ prices cannot be changed! Healing means (1) optimization: - material (to get rid of non-profit assets) - financial (long-term financing, suppliers’ crediting) - HR (in-house processes revision, bulk personnel, multi-functionality) (2) marketing – consumer orientation (comfort, loyalty, in-store communications, private labeling) (3) purchasing (tough negotiations, retro-bonuses) (4) conservative assortment policy (5) new technologies (bar-coding, self-checkout, shelf ready pack, merchandizing, personal shopping assistant, online retailing) (6) outsourcing (of non-core activities) Construction and retail as driving forces in Ukraine’s SCM How Should Retailers Save the Retail?

12. 3PL market volume = $230-250 mln (2007) Annual growth = up to +25% (year-on-year, since 2005) 12 key market players 3PL and CEP operators possess the utmost flexibility Viewed tasks: (1) optimization (processes + financing sources) (2) marketing (client orientation, retention) (3) further development (operations assets) (4) more coverage & deeper penetration (in distribution) (5) penetration of new segments (temperature logistics, street retail, HoReCa) (6) more focus on value-added logistics (7) high time to decide on a strategy: aggregation or specialization (8) HR management (9) quality, quality, and quality again Construction and retail as driving forces in Ukraine’s SCM Is Logistics Ready to Shift for Retailers?