The Supply Side: Welcome to the supply chain revolution

by The City Wire staff ([email protected]) 339 views 

There have been few major changes in the physical retail supply chain that has served big box retailers for more than three decades. But as more consumers shift to online shopping and the “omnichannel” retail model becomes the norm, experts say the old supply chain model is beginning to see fundamental changes.

E-commerce sales are growing at a healthy clip and are expected to account for more than 10% of total retail sales by 2016. As much as 60% of all retail sales originate online even though they may be completed at a brick-and-mortar retail store.

“Changes in retail are being driven by technology advancements and that we can’t control. Retailers, their vendors and third party logistics partners had better be aware of these changes and make better use of technology themselves,” said Anníbal Sodero, assistant professor supply chain management at the University of Arkansas.

Sodero said third-party logistics providers and those who can supply final mile services have a huge market opportunity as this shift continues. John Larkin, a transportation analyst with Stifel Nicolaus, recently spoke on the shift in the supply chain. Larkin predicts that transportation miles will be shorter as suppliers and retailers move individual item inventory closer to end-users versus stocking retail stores.

He and Sodero said there are also key advantages for suppliers as they shift to serve the growth of omnichannel – consumers using various methods and devices to research, purchase and receive goods – retailing.

“Search costs are lower in the virtual retail world and firms can position inventory somewhere upstream in the supply chain which helps them gain a lot efficiencies and the main reason they are able to offer lower prices,” Sodero said. “Better yet, the omnichannel model allows for larger assortment possibilities, endless aisles.” 

He said the Amazon model is becoming more mainstream for retail. Amazon has worked in recent years to balance its network and move product easily between fulfillment centers which are now located on the edge of major urban cities. He said this inventory consolidation has helped Amazon gain efficiencies and make use of fuller truck loads. But the retailer also slows down delivery in some cases when the consumer can afford to wait. 

“They are now giving bonus dollars back to the consumer if they can wait an extra day. They also have the capability to deliver in one hour in Manhattan given their closest fulfillment center,” Sodero said.

In a move toward this new model, Sodero said other retailers are playing catch up. He said Wal-Mart operates two separate inventory and delivery systems – one for physical stores and one for e-commerce. However, he sees the tests and trials underway at Wal-Mart from shipping to lockers to site to store, home grocery delivery and the in-store pickup for online orders as moves that allow the retail behemoth to leverage its physical size.

Sodero said the separate systems are the easiest way for Wal-Mart to balance its inventory, but to be true omnichannel the systems would need to be merged. In so doing, Sodero said there could be huge efficiencies gained. He said there is more risk in owning the inventory and storing it down the supply chain near the consumer, which is the present retail supply chain model.

Sodero expects more retailers including big box stores, to move toward drop shipments in the future which is a direct shipment from the supplier to the end-user. He said drop shipments are a “powerful weapon” for retailers.

“Instead of stocking inventory in a retail store you can keep inventory upstream which also provides for lower safety stocks and lowering the uncertainty that exists at the retail stores,” Sodero said. “The downside is the lack of inventory visibility and loss of control of the service to the end-user.”

He said there are opportunities for third-party logistics (3PL) providers to partner up and give the retailers the inventory visibility they need and guarantee quality service to the end-user.

Dan Sanker, CEO of CaseStack, a third-party logistics firm based in Fayetteville, recently told The City Wire that suppliers are already shifting inventory into multiple regions so they can be closer to the end-user. CaseStack uses technology to provide the inventory visibility and tracking the products through each phase of the supply chain.

Challenges for 3PL providers going forward are the cost of infrastructure expansion to service higher demands and sourcing the qualified tech talent, Sanker said.

Sodero said final mile of delivery is the costliest part of the supply chain, comprising about 25% of the total expense. He said the Uber model for the final mile holds much opportunity for new players in the supply chain. The Uber model uses crowd-sourced consumers to pick-up and drop-off ordered items to customers at a far cheaper rate than traditional courier and short-distance shippers.

Sodero said more retailers are signing on to the Uber-like final mile service and he expects to see more it in the future.

Larkin said final mile is also a challenge for transportation providers whose pricing models have been built on long hauls. He said the demand for final mile delivery will only increase and carriers need to figure out how to take advantage of the change.

Another area of concern voiced by Sodero is the inventory inaccuracies that exist with the traditional retail supply chain. Integrating big data should help, but Sodero’s research found that only a few retailers are integrating social media and other big data into their forecasting models. He said 25% have not yet begun to apply big data and a vast majority are just now starting to make initial investments in this area.

“Inventory inaccuracies are still a huge problem for the retailer and the suppliers and arguably a big problem for customer service. Using point of sale data (POS) has been the main source of inventory planning for a long time. But POS data is truncated and it depends on the ability one has to position inventory and then sell it. By bringing social media and other key factors such as weather events, the retailer and supplier should be able to do a more thorough job of forecasting and ultimately getting inventories in balance with demand,” Sodero said.

Wal-Mart’s new Retail Link 2.0 being slowly rolled out to suppliers over this year is the retailer’s attempt to do a better job of sales forecasting and keeping better track of its global replenishment systems.

Sodero said suppliers and other supply chain partners have to do their homework and they also must become more integrated as the supply chain of the future will be an open system dependent upon unique and advanced technology.

“Suppliers have to integrate from the top to bottom of the chain and then within their companies. It’s going to take more investment in technology for most if they are able to become more responsive and agile so that they can bring products fast to wherever they are required,” Sodero said.