Increasing speculation and reports indicate that Amazon may well be piloting its own air freight transportation services to accommodate needs for timely customer fulfillment.
Supply Chain Matters introduced the possibility of parcel delivery alternatives in our earlier September-October commentaries reflecting on the implications of parcel carriers FedEx and UPS again increasing rates and surcharges for both this year and for 2016.
An initial report of Amazon’s involvement in secretive air freight services came from a posting by Motherboard which referred to operation “Aerosmith” launched in September from an unknown corporation and run by Ohio-based aviation services provider Air Transport Services Group (ATSG). The report indicated that the unnamed company had leased four Boeing 767 air freight aircraft and was operating out of the Wilmington Air Park near Columbus Ohio, a former DHL air freight hub. According to the Motherboard commentary: “the airport has two large runways that can land aircraft as large as a 747, and hosts eight industrial facilities ranging from 74,000 square feet to 1.1 million square feet. An on-site administrative facility has 104,000 square feet of office space.”
Parcel carriers DHL, FedEx and UPS all denied to Motherboard that they were involved in “Aerosmith”.
Amazon provided the following statement to the online site: “We’ve long utilized air capacity through a variety of great partners to transport packages and we expect that to continue.” That statement was interpreted as not denying that the online e-tailer could be the unnamed ATSG customer.
The report was subsequently echoed by Business Insider and most recently, a published report from the Columbus Dispatch. Amazon founder and CEO Jeff Bezos is also an investor in Business Insider, and the fact that this online publisher echoed the Motherboard report without denial is an important data point. The latter Dispatch posting provides even more perspective by pointing out that in the past few months, Amazon has announced capital projects across Ohio amounting to more than $1 billion in capital investment. That includes two large-scale distribution centers in central Ohio, a wind farm in northwestern Ohio and three data centers in central Ohio. The global retailer already has existing customer fulfillment centers in Louisville Kentucky and Indianapolis Indiana, both of which are about a 3 hour drive from the Wilmington Air Park air freight facility.
Upon reading all of these reports and connecting the dots, Supply Chain Matters is of the view that there may well be substance to this building speculation that Amazon is piloting its own air freight capabilities. If this effort does come to fruition, it is far more meaningful than the currently hyped Amazon drone delivery effort. Several fully loaded 767 air freighters dedicated to Amazon customer delivery needs is significant and meaningful scale especially when considering the current hub to be located in close flying distance to major regions of U.S. population concentration. The UPS Worldport air hub is located near Louisville, adding more significance to potential strategic selection by Amazon.
This development will be important for retail industry supply chain teams to monitor over the coming weeks and months. Alibaba’s business model already includes the need for owned parcel logistics and transportation services across China removing the need for dependence on public carriers. Amazon has already invested in large-scale, high-volume package pre-sorting centers and an extension into dedicated air freight is a logical extension. If these investments turn out to provide far more cost-effective services than existing parcel carriers, then it’s a whole new ballgame.
Thanksgiving and Black Friday Shopping Shopping Volumes Indicate Consumers Favoring Online Fulfillment
As we pen this Supply Chain Matters commentary on Cyber Monday, there is building evidence that retail shoppers have made a strong preference for online vs. physical store shopping this past weekend. The implication is that B2C focused logistics and parcel carriers will indeed experience increased volumes of activity during the current 2015 holiday surge.
Data from multiple sources reinforce consumer’s increased preference for online shopping leading up to and including the Thanksgiving and Black Friday shopping events. Adobe Systems indicated that consumers spent an estimated $4.45 billion in online activity for both the Thanksgiving and Black Friday period, an increase of 14 percent from the comparable 2014 period. Adobe’s database includes tracking across 4500 U.S. sites. Adobe further indicated that more than half of the Black Friday online activity originated in mobile devices. The trend toward more mobile based devices was reinforced by IBM, which reported that mobile devices accounted for 57 percent of online activity.
Global media analytics company comScore Inc. reported desktop origin online sales the for the holiday season-to-date, as $23.4 billion, a 5 percent increase from the comparable 2014 period. Desktop online sales during Thanksgiving were reported as slightly over $1 billion, a 9 percent increase, while online sales for Black Friday were noted as $1.65 billion, a 10 percent increase over 2014. Shopper-Trak, which utilizes cameras to monitor physical shopping activity, indicated that U.S. shoppers spent an estimated $12.1 billion at brick and mortar stores during the two holidays, a decline from last year’s activity.
A National Retail Federation (NRF) survey conducted yesterday (Sunday) reinforced that an estimated 103 million shoppers elected online shopping while 102 million elected shopping in physical stores.
The trend thus far should not be a surprise since many retailers have influenced their merchandise promotions to favor online activity. As an example, Wal-Mart reportedly posted a majority of its door buster promotions online, before offering them in physical stores. Similarly, other traditional retailers placed more emphasis on online promotions, offering pick-up in-store or direct free shipping options to consumers. Retailers demonstrated aggressive promotions as-well and offered them towards the beginning of last week.
The open question is obviously how online volumes transpire for the remaining holiday period in December, and whether total holiday purchase activity exceeds that of last year. As we indicated in an earlier commentary, shopper sentiment survey data this year indicated that consumers would elect to perform the bulk of their holiday purchases by this weekend. The will be more headlines in the days to come and supply chain teams need to exercise diligence in the assumptions and time period of reported data. The final analysis obviously comes at the conclusion of this year’s surge.
In most cases, supply chain teams should now have fresh data indicating where consumer demand and specific hot categories reside. Inventory adjustments can likely be predicated toward more emphasis on online channel fulfillment.
On the logistics front, parcel delivery networks are now surged to their maximum point as last weekend’s and todays online purchases make their way to consumers. We anticipate that next week, data from FedEx, UPS and other providers should reinforce the increased shift toward online shopping.
For B2C and retail supply chains, dedicated planning efforts throughout the year to prepare for the holiday surge period are about to meet the stress test. The Thanksgiving holiday is the stress test for food focused and grocery supply chains. The Black Friday shopping holiday that follows has promotional activities already underway this week, and in a matter of hours, online and in-store consumers will be seeking out the best bargains that extend through the Cyber Monday shopping holiday.
Last year, parcel carriers and logistics providers reported peak surges over the Black Friday weekend and during the first two Mondays in December. This year, parcel carriers expect a rather busy period, anticipating anywhere from 10 to 15 percent in increased parcel shipping volumes through the end of December.
As Supply Chain Matters has noted in prior commentaries, retailers once again have a lot at-stake. Last year’s activities were hampered by logjam and disruption of inbound and outbound holiday focused export inventory among U.S. West Coast ports. Approaching Black Friday this year, indications and evidence reflect that retailers are this year deep in inventory overhang, and such inventories need to be sold. Other data indicates that consumers will be unforgiving and will shop early for the upcoming holidays.
As we enter the holiday, there is a report posted on ZD Net indicating that Amazon has forced automatic individual account password resets with a number of registered users raising speculation that the online retailer may have been hacked in the area of mobile device access.
The next few days are obviously crucial for achieving revenue and profitability expectations for all stakeholders, retailers and carriers alike. If consumer promotions extend further into December, the stakes will obviously be far higher.
In the meantime, enjoy the Thanksgiving holiday with family and friends. Rest as best you can an d give thanks for family, friends and relationships.
We extend a Thanksgiving holiday wish to all of our U.S. based and other global readers for continued blessings.
Stay tuned to Supply Chain Matters for our continuing commentaries related to the 2015 holiday surge events including early insights as to supply chain performance.
While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One- global supply chain activity during the year, and Prediction Two- trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three- the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four- wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
Global consumer goods producer Nestlé S.A. plans to start cracking down on slavery and human rights labor abuses identified during a recent year-long investigation of the firm’s seafood supply chain.
According to a published report by Food Safety News, the abuses concern impoverished migrant workers from Asian countries who are reportedly sold or induced into virtual slavery to catch and process fish, which then ends up in seafood supply chains via fish farms and other manufactured products. The stated abuses are rife among Asian suppliers which provide Nestlé with raw materials for the company’s shrimp, prawns and Purina brand pet foods.
Verite, an independent investigation firm that focuses on supply chain labor conditions looked into six production sites in Thailand. Three were noted as shrimp farms, two were ports of origin, and one was a docked fishing boat. According to the investigative report, these sites were identified as being linked with the fishmeal (or fish feed) used on farms producing whole prawns for Nestlé. There were reportedly indications of forced labor, trafficking and child labor, as well as deceptive recruitment and pay practices and exploitative and hazardous working conditions. Many of the fishermen were from Myanmar, Laos and Cambodia.
Verite has conducted ongoing investigative efforts directed at fishing and aquaculture supply chains and a general overview of supply chain labor conditions can be reviewed in a published research report.
For its part, the global consumer goods giant indicated on Monday that mitigating the situation would not be quick or easy, but that the company was hoping to make significant progress in the months ahead. The plan will focus on ten key activities designed to prevent suppliers from engaging in practices leading to labor and human rights abuses. Nestle pledged to immediately implement the plan, continue activities through next year and publicly report on the progress in its annual report.
The FSN report further cites The Associated Press as recently reporting that more than 2,000 “fishing slaves” from several Asian countries had been rescued from a remote island in Indonesia, some after being held for years, beaten and kept in cages. The AP tracked the fish to supply chains used by Walmart, Kroger, Sysco and others and involving pet food brands such as Iams, Meow Mix and Fancy Feast. In addition, nine people were arrested in connection with that incident, and two cargo vessels were seized.
No doubt, with one of the world’s largest and most prominent consumer packaged goods producers implicated in an independent investigation for alleged slavery and labor abuse practices deep within its fisheries and seafood supply chain, there will be attention brought to resolving such practices over time. Nestle has been lauded for taking active proactive stances in addressing a number of supply chain sustainability and social responsibility challenges, and Supply Chain Matters believes that seafood will be another example of such proactive efforts.
The key, however is recognition that the problem came about because certain producers sought out lower-cost sources of seafood supply, particularly for pet food purposes. It resides in deeper tiers of seafood supply chains in certain parts of Asia. The rest of the global CPG industry and fisheries stakeholders themselves need to come together in a concerted industry-wide effort to add more light to intolerance for such labor abuse practices, with focused efforts and incentives directed at resolving such practices as quickly as possible.
Consumers themselves need to be aware that such labor abuses exist in certain fishery-focused supply chains within Asia and to favor human and pet food producers producers who are taking positive actions to label food origin and who are actively committed to eliminating any supply sources that harvest food with abusive labor practices.
Supply Chain Matters has always been of the belief that history provides valuable learning, especially when business process improvement and technology deployment are being considered. Thus, we wanted to call attention to a commentary featured on Strategy + Business, Navigating Retail’s Last Mile, that reflects on important learning related to online fulfillment. (Complimentary account sign-up required)
The authors revisit the past 16 years of last mile retail efforts of the late 1990’s and early 2000s, when most online start-ups struggled with the trade-off between speed and consumer choice. The commentary argues that early start-ups such as HomeGrocer, Kozmo and Webvan focused on speed at the expense of variety.
The premise is that many of the same challenges persist today, often with added Omni-channel complexities. In essence, the argument is:
“the fundamental economics of the last mile haven’t changed. Companies have to offer a solution with costs equal to or lower than the customer’s willingness to pay (the “cost to serve’)”
In its analysis, the authors conducted research on the “cost to serve” for an array of retail models including traditional physical store, curbside pickup, crowdsourced shoppers, white glove delivery and pure-play e-commerce. This was supported by a survey of 2000 online U.S. shoppers regarding shopping preferences.
Our readers are welcomed to explore the specific examples, which from our perspective, provide excellent examples of what’s involved in an effective “cost-to-serve” tradeoff analysis.
Supply Chain Matters advises readers to focus on the two key takeaways that were provided over the Strategy+Business two decade timeline. The first was clearly summarized: “The pursuit of speed without an understanding of cost led to the demise of many of the early last-mile players” Many of us in the industry analyst community have observed this lesson being replayed again over the last 2-3 years, as online retailers discovered the hard way, the unexpected hidden expenses of fulfilling online consumer demand where consumers ordered more frequently but with lower average order sizes. Often, this reflects the dynamic tension among sales and marketing and supply chain as dynamic online programs are deployed without accurate awareness or knowledge of the associated cost factors.
We would like to offer another supplemental important takeaway based on our observations of online fulfillment history. That would be that technology has also come a long way, particularly in the ability to analyze and predict cost-to-serve across various customer fulfillment channels. Technology providers have leveraged in-memory and other information management technologies that can span supply chain and customer management applications towards needs for more informed and contextual based decision-making. Teams should therefore be focusing technology strategy toward supporting more intelligent fulfillment capabilities that can provide various cost-to-serve decision-making contexts as was described in the article’s examples.
The final takeaway was that consumer behaviors will continue to change and evolve. Rather than constantly reacting to such changes, instead lead customers to online fulfillment that makes the most economic sense. The authors point to determining the most appropriate model for last-mile delivery of their goods and create a value-proposition that builds on inherent strengths. If you think about it, that is exactly what retailers such as Alibaba, Amazon, Best Buy, Restoration Hardware and Wal-Mart are currently deploying. Build on the inherent strengths that you have and lead consumers to attractive fulfillment options.