Booming e-commerce industry presents new challenges for retailers, logistics providers
Date: Friday, February 2, 2018
Source: American Shipper
There’s an old mantra that the personal computing industry used to live by: every year, the computing power and memory of a PC would double, while the price needed to stay the same.
That persistently ambitious target was fueled by the sheer scale of sales in the PC industry. If you can sell a computer that’s largely the same to vast cross-sections of consumers, you can start to drive down the R&D and production costs of making the product better without increasing the price to the consumer.
Meanwhile, a funny thing has happened on the way to e-commerce becoming the fast-growing, all-consuming black hole of the retail world. That same sort of “more for no more money” concept has permeated the thinking of consumers when it comes to their expectations for online purchases of all kinds. Amazon, of course, is largely to thank for driving this phenomenon.
But no matter the cause, this expectation is placing extreme pressure on retail logistics practitioners: orders have to be fulfilled fast and free via multiple channels in a highly challenging delivery environment. The trouble is, it’s easier to shrink the size of a microchip than it is to erase the physical constraints of the real world.
In essence, retail logistics in the age of e-commerce has become a complex puzzle that needs constant solving, only there’s a different solution to the puzzle for each customer. And that reality just doesn’t scale very well.
Every company seems to have Amazon somewhere in its mind these days. At an industry conference a couple years ago, the moderator noted after a session on the impact of e-commerce that no one had mentioned Amazon during the entire session. A person next to me leaned over and said, “You don’t have to say out loud who this is about when everyone knows who this is about.”
But knowing who this is about and trying to solve the puzzle are two different things, especially when the retail world is so fragmented. At the top end, you have major North American retailers who are trying to stay in Amazon’s orbit, and the bottom end, you have a countless number of small, pure e-commerce retailers. In the middle, you have a vast group of midsized retailers—some national, some regional, mostly brick-and-mortar-based—trying to figure out what they and the market at large will look like in five years.
The puzzle of retail logistics can be hard to wrap one’s arms around, so let’s focus on a few areas where retailers across those three categories can focus their energy and resources.
• First, retailers’ investment must be funneled into inventory optimization tools that allow them to profitably fulfill orders across a range of ordering and pickup options.
• Second, they must be ready to write off past investment in technology that doesn’t help them compete today, and be ready to “metamorphosize,” not just evolve.
• Third, they must focus on logistics service-related differentiation that will be hard for Amazon to match.
• Fourth, they must change their mindset from a supply orientation to a demand orientation, mimicking Amazon to look at the customer needs first and working backward from there.
• Finally, adopt a mentality that high final-mile and delivery expectations from customers can be a differentiator if the right tools are used to surpass those expectations.
Inventory As Starting Point. It’s safe to say that nearly every retailer is more adept at taking an online order than they are at managing inventory in such a way to fulfill that order profitability.
This makes sense if you understand that the supply chain origins of most retailers are based on a familiar pattern of staging inventory, one based on the idea that products are mostly sold in stores. Goods are produced and then shipped to distribution centers, then to stores, where shoppers do the final-mile delivery themselves.
Applying that pattern to e-commerce doesn’t work, simply because the flow of inventory across multiple channels is a more complex proposition.
“Amazon and other large e-retailers appeal to consumers on product offering, price and speed of delivery,” said Hank Canitz, director of product marketing and business development for the logistics software provider Logility. “They are able to effectively compete in these areas due to economies of scale that lower operating costs. To compete against the ‘Amazons’ of the world, companies must find ways to simultaneously lower costs and improve customer service.
“Brick-and-mortar retailers are way behind in using algorithmic planning to optimize their extended supply chains,” he said. “With the amount of inventory and the number of stocking locations involved, there are huge gains to be made through demand optimization, allocation optimization, multi-echelon inventory optimization, and multi-mode transportation optimization.”
The need to know where to stage inventory to satisfy the different permutations of order and delivery by the end-consumer will set apart retailers large and small.
“Amazon’s disruptive effect has put two key strains on supply chain professionals: to ensure inventory availability across a broader network of distribution points, and get product to the consumer in days, if not less,” said Gary Barraco, director of global product marketing for the global trade management software provider Amber Road. “This effect bears down on every step of the shipment process to ensure reliability and accuracy. Smart logisticians are properly orchestrating the fastest and cheapest means of moving goods from factory to consumer.”
Reality Of Sunk Cost. Part of what plagues established retailers in the fight to capture a proportional share of online sales is a reluctance to give up on existing technology. Systems and processes that historically succeeded in underpinning traditional supply chains don’t necessarily work in an age where customer demands and expectations are so high and varied.
“Established retailers have for years denied reality about why the cost of two-day shipping is so high,” said Jett McCandless, CEO of logistics software provider project44. “New e-commerce retailers start with a fresh tech canvas and don’t have the high inventory costs. That new approach to retailing is challenging the status quo.”
McCandless said the first step comes in accepting what doesn’t work.
“The investments they made from a supply chain tech standpoint is a sunk cost,” he said. “Until they get to that point of realization, they keep building upon bad systems. Legacy technology, systems and process has created what we call information asymmetry. Meaning the information you have on a daily basis about each and every shipment is not the same as other members of your company, your suppliers or your carriers. The net result of all of this is a terrible customer experience.”
The information asymmetry created by older technology manifests itself in a few ways, McCandless said. Namely, poor visibility into goods in transit limits a retailer’s ability to meet consumer demand. Retailers also can’t proactively manage inventory levels, resulting in stockouts.
“The longer you wait, the more it’s going to cost you,” he said. “Amazon has changed the game for how retailers compete.”
Brian Bourke, vice president of marketing at SEKO Logistics, said technology investment is a core part of what it means to compete in retail these days. But he said retailers should start small and build gradually.
“A lot of people make the mistake of buying a Porsche when all they need to do is go to the grocery store twice a week,” he said. “There’s an intense movement to react and respond, and speed is important, but not haste. Keeping things simple allows you to do more complex stuff later by not burdening yourself with too many internal process changes.”
Bourke said retailers should be eager to embrace the challenge of the e-commerce era.
“Amazon is a real-life incarnation of Adam Smith and it’s beautiful,” he said. “They’re competition for everybody—the freight forwarder, the 3PL, the shipper—and that’s a good thing. Competition makes us better even if it’s a chaotic process.”
Customer Service’s Cure. Part of what has driven anxiety in the retail world is the fear that no individual retailer—even the biggest of the big—can compete with Amazon’s ability to invest in systems. But there’s a way for retailers, especially small, midsized and regional retailers, to outperform Amazon, to engage on a different battleground.
“I don’t think technology is a panacea,” said Guy Courtin, vice president industry and solution strategy for retail and fashion at Infor. “I don’t have something on my shelf that will solve all your problems. It’s a combination of change management and the need for leadership to take bold changes. You can’t just keep doing what you’re doing. I also do think the tools that are out there complement some of these possible changes.
“Like the notion of providing more visibility, a true network view of what’s happening. Does that solve the problem? Absolutely not,” he explained. “Does that lay the groundwork for some of those changes or cool things? I say ‘yes’. I know perfectly where my inventory is, where my demand is coming from. Now what do you with it? I don’t care if you’re Google, Infor, or McKinsey. We can’t do it for you. It’s up to the leaders of these companies to make the plans and execute on them.”
Courtin pointed to areas like value-added delivery services as one example.
“Say you’re a local or regional retailer,” he said. “Do I handle the delivery and not lean on UPS? It adds a layer of cost, but it adds a touch that Amazon can’t do.”
For instance, he said a retailer selling a high-end apparel item might consider white glove delivery as a way to differentiate. After all, a $1,200 branded purse might cost more than a refrigerator, but it’s as likely to arrive in a cardboard box as a $5 iPhone cover.
“Could (Amazon CEO Jeff) Bezos do white glove delivery of a luxury bag? Absolutely,” Courtin said. “But the Amazon value prop is an endless aisle, and supply chain savviness from point A to B. But it lacks the personalized aspect of retail.”
That’s just the tip of the iceberg, because truly sophisticated retailers will also start to look at customer service differentiation as a way to improve their own business and lower logistics and inventory costs.
One area where this could happen is in returns. Courtin said brick-and-mortar retailers have an average of roughly 15 percent inventory in their reverse channels at all times. Pure e-commerce retailers have as much as 50 percent.
“Is there an opportunity to do more than just take it back?” he said. “Maybe the retailer sends someone to pick it up to better understand why you didn’t like it. That’s a chance to build the customer relationship and upsell. And what can retailers and 3PLs do on the return side to enhance their services that Amazon can’t do?
“If I’m Home Depot and someone returns a drill they bought online, does Home Depot send a return drill to Black and Decker, do they restock it, or do they need to fix it? Who handles those different scenarios?”
Maybe there’s a chance to triangulate returns through a coordinated logistics and sales process that offers the return directly to another customer that’s willing to buy a lightly used product for a discount.
“Home Depot reduces their re-slotting fees, and they never touch that inventory,” he said.
All of these scenarios are imperfect at present, but they’re examples of the way retailers need to innovate on customer service with logistics as a key part of that innovation.
Supply To Demand. The struggle to keep up with Amazon’s supply chain innovations, from fast and (the perception of) free delivery to a seemingly endless product range, might lie in the way most retailers have traditionally viewed the act of getting product from source to customer.
Historically, the orientation was to develop products, find suppliers for those products, and have the logistics department figure out a way to get those products transported to stores.
“It’s demand chain management now,” Bourke said. “It’s not supply chain management anymore. It all starts with demand. Forget about setting up vendors. Start with demand and work backward.”
Amazon’s piercing focus on customer experience has meant that suppliers (in this case, not suppliers in the normal sense, but sellers on its marketplace) have no choice to but to meet the lofty levels Amazon expects.
This isn’t to say that retailers haven’t been demanding of their suppliers (in the traditional sense). But Amazon has been sharper at understanding demand patterns and translating that upstream through its supply chain.
If retailers want to remain relevant, Bourke said, they need to let demand guide their supply chain, rather than the other way around.
As an example, he pointed to EDI (electronic data interchange), a bedrock technology format upon which vast sections of the industry still rely.
“A lot of companies will say, switching from EDI disrupts our business process, instead of asking, what makes it easier for our customer?” he said. “Everything needs to be focused around on who you’re selling to. If the ‘keep things as they are strategy keeps winning out,’ it’ll be too late.”
Relatedly, Bourke has started noticing a fundamental change in the way retailers manage this challenge.
“One of the things that’s very commonly asked is ‘how do I create a distribution network to do two-day distribution across 99 percent of the country?” he said. “That’s a common request.
“But the other request is retailers talking to vendors about shifting supply chain risk and ownership to them,” Bourke added. “That is a huge shift—that’s upending 20 to 30 years of transpacific trade. It makes sense for the retailer and manufacturer. A lot of these suppliers would love to have and build their supply in U.S. to give them access to our market. Big brand retailers and department stores are demanding that shift.”
In practice, this means that a retailer would not take ownership of inventory from a supplier until that inventory is sold or delivered to a store.
“Think about what that does to the retailer’s balance sheet,” Bourke said. “How much inventory does Amazon own? There’s a clear delineation of transfer of ownership. We’re talking to retail vendors about how to set up a U.S. distribution model. For vendors, it’s a challenge—they have to come up with a new wholesale price that includes total landed cost for transportation, trade compliance. That’s all on the vendor. They’re coming to companies like ourselves that can help them through the process.”
McCandless of project44 urged beleaguered retailers to think about other ways they can use existing leverage.
“Amazon is a thin marketplace,” he said. “That’s where retailers need to go—leverage their buying power and the infrastructure they have. Having physical infrastructure has value, but it’s how you leverage it. Just evolving is not going to keep you competitive—it takes a metamorphosis.”
Perhaps, the most obvious area where retailers need to compete in the e-commerce arena is at the very end of the transaction.
Shipping costs and terms are where sales are often won or lost, and Amazon has proven adept at providing customers with options to suit their needs and willingness to pay for shipping.
First and foremost, retailers need to integrate final-mile logistics more tightly with freight and inventory optimization. There are a handful of new technologies that aim to help retailers better determine the cost to actually deliver products direct to consumers. Those tools enable retailers to decide whether they will bear the cost of that delivery, or whether they will pass it on to the consumer in some way.
The current desired state in the market is to provide consumers with a range of options for any purchase. That might mean, for example, shipping is free if the delivery window doesn’t matter to the consumer, $5 if they need it in four days, $10 in two days, and $25 in the next two hours.
Putting those decisions in the hands of consumers increase customer engagement, but it also allows retailers to fulfill orders profitably, and not simply succumb to the assumption that everyone needs every delivery within 24 hours and expects it to be free.
But providing that type of last-mile optimization isn’t easy, especially for small retailers lacking a large or experienced logistics department. It’s also difficult for large retailers who are accustomed to coordinating the movement of freight from port to DC and DC to store.
“For e-commerce stores, shipping not just a cost center, but it’s driving the business,” said Laura Behrens-Wu, founder of Shippo, a company that builds application programming interfaces (APIs) for retailers to compare parcel shipping rates. “Having the right shipping solution at checkout is such a big thing. It’s about how to convert customers online. Most online stores offer only one option. Amazon usually offers three and often gives exact delivery date.
Behrens-Wu’s company has largely focused on companies on the smaller end of the retail spectrum—those selling through marketplaces like Etsy or e-commerce platforms like Shopify. But there’s been increasing interest from larger retailers and suppliers interested in building direct-to-consumer channels.
“Direct-to-consumer brands have not started out building their direct-to-consumer distribution,” she said. “Even larger companies who have been selling to customers for decades are still figuring out direct-to-consumer, because it’s not the same as selling to retailers. Look at Dollar Shave Club—the innovation in the razor is the same, but it’s direct to customer. Gillette could do it as well, but figuring out the distribution is the hard part.”
And here again is where established retailers might think about where their advantages lie, and better leverage those advantages.
Like a physical distribution network that could be reconfigured to better fulfill direct-to-consumer orders. Storefronts that could be converted to showrooms and places to stage inventory. Layer on top of that a renewed focus on services that please the customer and enhance the supply chain, inventory optimization software adoption, and final-mile technology plug-ins to ensure customers have a comparable experience to Amazon at a profitable delivery cost to the retailer.
Retail logistics has always been a puzzle, but it’s never been so difficult to solve. The good news is, there’s a solution for most problems for retailers willing to unshackle themselves from traditional supply chain orientations and technology.
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