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Pay Close Attention to the Rising Costs of Online Customer Fulfillment

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 The added costs for fulfilling online orders are likely to increase over the coming months because of the current boom in overall demand for large-scale distribution and warehouse space across the United States as well as other regions.

Reuters reports that real estate investment trusts (REITs) that weight their portfolios towards warehouse and distribution real estate holdings have now become the favorite of Wall Street interests because of the current pent-up demand for additional space from retailers. The report specifically mentions logistics real estate services provider Prologis, which counts Amazon as its largest customer, as raising rents a record 20 percent in the first three months of this year. The report cites Morningstar data as indicating that fund ownership in real estate investment firms such as Prologis and Duke Realty Corp. has increased 30 percent or more in the last quarter.

The trend was further reinforced by a recent announcement from the world’s largest commercial real estate services and investment firm, CBRE Group that indicated that- “Voracious global demand for e-commerce fulfillment centers fueled a 2.8 percent year-over-year increase in prime logistics rents globally, led by double-digit percentage gains in U.S. coastal markets.”

According to a recent CBRE report, six of the top 10 markets with the fastest growing prime logistics rents globally were within the United States. Among what CBRE ranks as the Top 10 Global Logistics Hubs by Prime Rent Growth:

  1. Oakland
  2. New Jersey
  3. Inland Empire
  4. Midlands, United Kingdom
  5. Santiago Chile
  6. Ciudad Juarez Mexico
  7. Los Angeles- Orange County
  8. Dallas- Fort Worth
  9. Seoul South Korea

The Wall Street Journal recently published an infographic indicating current areas of warehouse space under construction across the U.S… That mapping indicates the largest double-digit increases in construction of warehouse space focused in the Dallas-Fort Worth and Houston areas, Los Angeles and Inland Empire, Chicago, Atlanta and Greenville/Spartanburg SC areas.  From our lens, that data would indicate broad geography coverage for online fulfillment needs.

And, cost increases are not just confined to warehouse and distribution space.

We have brought reader attention to increasing rate increases by the major parcel transportation and delivery firms, including added surcharges and handling fees. As consumers continue to purchase online items that are larger, more bulky and heavier, there has been increasing demand for logistics delivery services. That is providing opportunities for traditional less-than-truckload (LTL) carriers who are increasingly being called on to provide additional delivery services to support online purchases of hard line goods. This will likely require some LTL providers to invest in augmented technology and logistics assets, which will add to rates charged.

As we have further highlighted, the largest high profile retailers such as Amazon and Wal-Mart continue to aggressively invest in more internal and owned resources in augmenting their own parcel transportation, logistics and last-mile delivery networks under the banner of premium, free shipping services. That is obviously part of the reason for the current building and investment boom underway. A continued competitive battle fueled by multi-billion investments adds to the supply-demand imbalances and speculators to drive up costs further.

However, other retailers with limited financial resources are now faced with the realities of even more increasing cost challenges associated with online customer fulfillment. No doubt, something will have to give.  Either retailers will become more creative in prime, no-cost free- shipping membership programs that can offset the effect of added fulfillment costs or the largest retailers with financial scale will become more dominant retail fulfillment platforms.

Our takeaway for retail and B2C focused supply chain organizations and procurement services teams is to up your game in supply chain network modeling and strategy implications.  Insure that you factor the real possibilities of more added costs in distribution, logistics, transportation and inventory carrying costs. The coming months may well be very challenging, including the upcoming 2016 holiday online fulfillment surge which will more than likely test limited capacity in certain key areas, forcing teams into more costly alternatives.  Be wise, be pro-warned, and conduct rigorous scenario based planning.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Visibility to Wal-Mart Business and Supply Chain Strategies Again Front and Center

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Wal-Mart, the world’s largest retailer held its annual meeting at the beginning of this month, and business and general media has provided lots of subsequent news coverage.  Wal_Mart Store

During the annual investor meeting held on June 2nd that included upwards of 14,000 attendees, Wal-Mart CEO Doug McMillon urged employees and investors to reimagine the future of the retail landscape. He further added that the retailer is picking up the pace of change, and from the overall supply chain lens, winds of significant change remain evident for many months to come. Such a change will place added burdens on suppliers to insure that Wal-Mart maintains both its global leadership role but also its needs to added profitability.

Many published reports related to Wal-Mart over these past two weeks point to the retailer as being at an important crossroads in terms of its long-held dominance in pricing and convenience. We call particular reader attention to a published Economist article: Walmart- Thinking Outside the box, (Paid subscription required) which provides an in-depth perspective on strategies and business needs.

From an online perspective, Amazon continues as the dominant online retail platform, providing online shoppers with both competitive price and convenience.  With further expansion in household consumables, grocery and other foods, Amazon will increasingly encroach on the Wal-Mart customer. Wal-Mart itself has invested a reported $10.5 billion within new information technology to enhance its online web presence and fulfillment capabilities.  In January, both existing IT groups were also merged together into one singular group. Yet, industry media reports that online sales slowed to a 7 percent growth pace during the first quarter, below company and investor expectations.

CEO McMillon observes that his team has paid very close attention to current retail industry trends including the growth of online, and that his firm will dominate by executing a strategy that leverages the combination of online as well as physical distribution and retail store presence. Stores will serve both as a retail destination as well as an extension of online in customer pick-up and returns.

Within physical stores, the retailer has invested $2.7 billion in higher wages and employee training, but at the same time, consolidated its physical retail footprint by closing 269 stores. Efforts are once again underway to spruce-up stores, clean-up aisle clutter and include more fresh produce offerings. The retailer further announced that over the coming months, Wal-Mart will return to an aggressive pricing strategy, promising to once again reduce prices on a number of offered items.

This leads to the supply chain challenge that is currently underway, namely, to compensate for all of the added investments in operations and online capability, suppliers will have to divvy-up additional cost and price savings. In a sense, this is nothing new for Wal-Mart’s suppliers; however it appears as though it is taking on more aggressive dimensions. We initially highlighted stepped-up supplier pressures in April of last year, and consequent supplier push-back attempts in September.

One of the largest and most loyal suppliers to Wal-Mart has been global consumer packaged goods producer Procter& Gamble.  The business relationship has extended for decades and today, P&G garners in excess of $10 billion in revenues from Wal-Mart alone.

Today’s edition of the Wall Street Journal features a front-page article: Wal-Mart and P&G: A $10 Billion Marriage Under Strain (Paid subscription required) that provides added insights into supplier relationships with the retailer. Over year ago, Supply Chain Matters highlighted a similar WSJ report on the intense competitive pressures of both firms, when the retailer elected to offer Persil, a European branded laundry detergent alongside P&G’s Tide branded detergent across Wal-Mart’s retail stores.

This latest report indicates that both firms: “are increasingly butting heads as both try to wring more revenue out of their slow-growing businesses.” The retailer in-essence is pressuring for reductions in prices for best-selling goods as it furthers efforts to invest in new capabilities, while P&G is attempting to protect both volume and profitability of its largest brands.

One other revelation brought out was that unlike all other suppliers, P&G does not have a contract that governs supplier agreements. Rather, both parties rely on in-person relationships, emails and handshakes to address supply programs and other particulars.

Returning to the broader Wal-Mart supplier community, the retailer’s new U.S. chief executive is reportedly spoke directly with suppliers in February and delivered a stern message concerning needs to work more on inefficiencies. The WSJ cites indicates that several people that attended indicated that the retailer expects “healthy tensions” will suppliers and will be “maniacal about managing costs.” The U.S. CEO is further pushing his procurement team to fight more aggressively in negotiations with suppliers and all buyers are now required to attend a workshop conducted by a U.K. based negotiations consultancy.

We suspect that some of our readers who reside in supplier organizations doing business with Wal-Mart may have already encountered the effects of this renewed supplier management efforts.

Thus is the evolving strategy of Wal-Mart, evolve quickly in the new era of retail by leveraging all existing assets, fight for every consumer in price and convenience, invest aggressively in needed new capabilities and garner any and all compensating cost reductions and efficiencies from existing suppliers to meet required financial bottom-line outcomes.

In some sense, the more things change, the more an organization can revert back to prior methods. In the end, we continue to question whether pounding suppliers is counter-productive, since process, cost and product innovation comes from all tiers of any supply chain in joint collaboration efforts.

Bob Ferrari


FDA’s Emerging Regulations for Reduced Sodium Intake in Food Implies Broader Transparency

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Earlier in the month, the U.S. Food and Drug Administration (FDA) issued long overdue guidelines targeted at cutting the daily salt content for both packaged food products as well as restaurant meals. When implemented, such guidelines are obviously going to impact food related supply chains, but a proactive approach could lead to both business and market opportunities.

The voluntary FDA proposal is directed at reducing the daily salt intake of consumers from the current average of about 3400 milligrams per day to a level of 2300 milligrams per day over the next decade. The new guidelines are an effort by the Obama administration to influence the food industry toward reducing the amount of ingredients such as sugar and fats within prepared foods in order to improve overall consumer health and consequently reduce medical costs.

These guidelines, as proposed, give food producers two years to begin cutting sodium levels in products, and up to ten years to make further cuts. The impact is expected to fall primarily on prepared-foods supply chain ecosystems.

As our food industry readers well know, salt is a fundamental ingredient in food, serving as both a form of a preservative as well as an enhancer of taste. Regarding the latter, taste preferences vary across the globe, within specific ethnic groups and within certain geographic regions.

In order to ascertain some industry perspectives on these guidelines, Supply Chain Matters had the opportunity to recently speak with Anton and Dagan Xavier, co-founders of product information dissemination provider Label Insight, a Chicago-based cloud-data start-up whose clients include the FDA.

Both of those gentlemen reminded us that previous efforts directed at reducing certain fat content of foods has led to some added augmentation with salt. One example is low-fat yogurts which both some perspectives, two-thirds of brands have high sodium content. Many readers are probably very aware of the high salt content that current exists in fast-food and other restaurant chains.

Never-the-less, reductions in sodium levels are happening around the world, with the United Kingdom leading in these efforts almost a decade ago. There have been many successes and from the lens of both Anton and Dagan, it all boils down to being transparent and open as much as possible. Actually, according to Dagan, it is broader than sodium and more about supply chain transparency.

An analogy that came to mind regarding Label Insight’s efforts in this area is that this provider provides performs something similar to an underwriter’s laboratory form of certification service. Founded in 2008, this provider’s tag line is that: “We are the brains behind grocery data” collecting, managing and transforming product information for food producers and consumers. While knowledge of product composition exists with food producers, other knowledge resides with farmers and suppliers. Label Insights analyzes products beyond just the label, to include generating over 15,000 attributes – such as nutrients and allergens – per product. These attributes come together to create a deep understanding of a product and can be customized to meet data views requested by retail, government and industry initiatives.

Both noted that consumers are seeking far more transparency in food ingredients, a requirement that manufacturers, retailers and food service providers have to respond to.

Our discussion further touched upon legacy global brands vs. new, more nimble brands that are now catering to global consumer’s desires for healthier foods, broader supply chain transparency and information dissemination. These up and coming brands have the advantage of setting the benchmark in more-timely product formulation innovation and information dissemination. However, bigger more global packaged and bulk consumer product goods producers have the experience in global distribution at-scale.

Moving forward, call for far healthier foods with great taste will come from a combination of efforts addressing higher sensitivity to consumer needs, more agile product formulation, and supply chain transparency. Those producers who cannot adapt will likely find themselves at a disadvantage to nimbler brands and product producers who recognize a fundamental change in consumer and regulatory preferences, and who can meet such needs in market-share growth.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Supply Chain Matters Highlights from ISM 2016- Part One

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This supply chain industry analyst just returned from attending the Institute for Supply Management (ISM) 2016 annual conference held earlier this week. This is the conference where purchasing and supply management professionals gather for added learning, education and insights related to supply chain management and in particular, supply management’s role in contributing to required business outcomes.ISM 2015 Conference Logo

I walked away from this particular conference with many positive impressions, some of which will be shared in subsequent Supply Chain Matters commentaries.

Overall attendance was impressive as well as the profiles of those attending.  I was especially pleased on observing the many Millennials in-attendance, more so than I have observed in the many supply chain conferences this author has attended over the years. That is indeed great and a testament to perhaps the growing attraction to careers in supply chain management. Praise to ISM’s conference planning teams for putting together an overall agenda that featured many topics related to do’s and don’ts of procurement management as well as a number of panels that addressed skills, talent and career management topics. In that light, I also had the opportunity to hear from five of this year’s 30 Under 30 Rising Supply Chain Stars which was equally impressive.  More on that will also be forthcoming in a subsequent posting as-well.

One very impressive presentation I would like to highlight was presented by Ian Hope Johnstone, Head, Sustainable Agriculture for Global Operations at PepsiCo. His presentation addressed how this global based food and beverage producer is advancing sustainability in agricultural practices across a spectrum of farmers.  Further addressed was PepsiCo’s ongoing Sustainable Farming Initiative(SFI).

In a previous commentary addressing the global and industry supply chain ramifications of the recent COP21 Paris Climate Agreement, this author came to a realization, that the recent ground breaking COP21 Agreement on stemming global climate change provides both a profound call to action as well as a significant opportunity- an opportunity for bolder collaboration and joint goal-setting to not only address greenhouse gas reduction imperatives and to saving our planet, but the imperative of sustainable business itself.  It literally should change our perspectives and goal-setting for sustainability strategies surrounding industry supply chains, moving such initiatives beyond functional to line-of-business level efforts. Through Supply Chain Matters, my hope is to provide specific examples of such efforts, and clearly I can now cite PepsiCo’s ongoing efforts as a benchmark example of the context of business sustainability.

PepsiCo’s sustainability umbrella is indeed broad and includes sustainability needs related human, environmental, talent and global citizenship initiatives. No doubt the firm’s dynamic Board Chairperson and CEO, Indra Nooyi has been a guiding and important C-Level sponsor for such efforts and resources. Within the firm’s 2014 Sustainability Report, Ms. Nooyi articulates very powerful statements that communicate the broader requirements for sustainable business. One of those statements is here noted:

Weaving sustainability into the very fabric of our organization is a way to help future-proof our business for the changing world around us.”

PepsiCo’s sustainability umbrella therefore extends beyond procurement and umbrellas the entire value-chain and the many dimensions of doing business.

In his presentation, Johnstone highlighted the compelling need that food production must double by 2050 amid constrained land environments, an aging farm population and the ongoing climate changes impacting our globe today.  Once more, he validated that consumers are highly influencing sustainability needs, being much more demanding of health conscious and protein-based foods, along with demanding visibility to where particular food products are sourced.

From the procurement lens, PepsiCo’s Sustainable Farming Initiative is both consumer and supply chain facing linking the two toward common objectives. The Procurement criteria now include a diamond visual that includes Service, Quantity, Price and recently added Sustainability as buying criteria. Sustainability includes security of supply over a much longer-term window, ten or more years in many cases. Noteworthy was PepsiCo’s procurement team efforts in listening to and collaborating with various farmers on efforts required to reduce water consumption, smarter agricultural practices and respecting the data ownership needs of farmers.

This global food and beverage producer clearly recognizes that no one corporation can succeed in farming sustainability without actively working with other consumer products producers such as Land of Lakes, Kelloggs, McDonald’s Unilever and others in an industry consortium for addressing common standards in sustainable farming practices and in consistent water and land conservation and renewal practices.

For further information, our readers can review PepsiCo’s dedicated sustainability web page.

In our Part Two commentary I will address some other personal highlights from this year’s ISM annual gathering.

Bob Ferrari

 


Chipotle Feels the Financial Impact of its Ongoing Food Safety Crisis

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This is a Supply Chain Matters update commentary regarding Chipotle Mexican Grill, specifically efforts to address its ongoing food-safety challenge that not only threatens the restaurant chain’s value to its brand and to its investors, but on perceived quality risks in its farm to fork supply chain.   Chipotle logo

This week, the restaurant chain posted its first quarterly financial loss as a public company amid a nearly 30 percent reduction in same store sales. Total revenues were down 23.4 percent while net income dropped by $122.6 million. Operating margin dropped to 6.8 percent from just over 28 percent a year earlier due to what was described as higher marketing, waste and food testing costs.

In a previous February commentary, we observed that the restaurant chain had entered a new critical phase, one focused in rebuilding its brand integrity along with assuring that food safety practices were re-addressed across the supply chain and within its individual restaurants. In our mid-March commentary, we highlighted reports that seemed to put a different twist to the ongoing crisis. At the time, The Wall Street Journal citing informed sources, reported that the restaurant chain considered stepping back from the food safety changes touted back in February. Rather than conduct high-resolution DNA testing on a multiple of inbound supply ingredients, the plan was apparently to test only certain foods. Further reported was that the chain’s beef supplies would be pre-cooked in centralized kitchen facilities to insure that E.coli was eliminated, and then packaged in vacuum-sealed bags and shipped to local outlets where the product could be marinated and grilled.

We speculated that the decision to scale back DNA testing may have been brought about by further process and supply chain focused analysis.  Yet, the restaurant chain later announced the hiring of a noted meat industry food safety expert to be its new director of overall food safety.  We questioned whether such decisions for scaling back testing should have been made so early in the process, without the insight or input of the chain’s newly hired food safety expert, and without allowing more time to address consumer concerns regarding uncertainty in food sourcing and handling practices.

Our stated belief was that restoring consumer trust in a badly damaged brand is not a one-time marketing or financial budgeting challenge, but rather a systemic management challenge to address quality and food safety practices among all farm to fork processes and activities.

The chain has since stepped-up training within local restaurants on food safety and food handling practices as well as the assistance of a field leadership program to assist local managers in managing and auditing food safety and handling practices.

Chipotle’s co-CEO, Steve Ells indicated to investors that rebuilding trust with customers would take some time. While we found that that admission insightful and somewhat overdue, we were taken back by a subsequent statement:

We will continue to make it our top priority to entice customers to return to Chipotle through effective promotions and marketing, and when they do return, we’re committed to providing the very best experience that we can to help ensure that they will keep coming back.”

Not a mention of testing and assuring consistent food safety practices as the top priority.

Further noted in business media reports are even further changes in food preparation and sourcing practices after apparent customer feedback indicated a decline in the quality of certain ingredients. Customers complained that produce or lettuce no longer tasted as it should. For instance, now the chain claims to have refined its washing of lettuce which will once again allow local restaurants to cut lettuce locally while still ensuring that it is safe. Similarly, bell peppers will be blanched and sliced in local restaurants rather than the previous change to do so in central kitchens.

On a positive note, customers apparently have endorsed the process for cooking organic beef in vacuum sealed bags within central kitchens because the meat is now perceived to not as dry to the taste.

As Chipotle customers may now be aware, the chain is attempting to incent customers to return by offering free burritos and other promotions. Over 5 million free burrito offers were issued followed by a direct mail promotion distributed to over 20 million households. Judging from the customer traffic statistics to-date, the chain’s most loyal consumers may not be completely convinced as of yet to return, although data seems to point to return by some not as loyal but cost conscious customers. One equity analyst has indicated that couponing is a short-term rather than a more sustainable strategy for restoring traffic.

In recent weeks, both Glass Lewis & Co. and Institutional Shareholder Services, both influential proxy advisory firms have weighed in on management. ISS is recommending a vote against re-election of certain current Chipotle board members at the upcoming annual stockholder meeting in May. The firm questions whether the ongoing food safety issues have exposed a flawed board succession process that nominated directors who have the management skill sets to keep pace with a chain’s size and complexity. Further stated was a failure of risk oversight by the firm’s Audit Committee.

Glass Lewis has reportedly taken issue with the board’s pay-for-performance model. As we noted in our March commentary, senior executive bonuses were recently changed to be pegged to increases in the firm’s stock price alone. ISS has also opined that the majority of discussion with major investors has focused on improving share price and changing executive compensation as opposed to addressing food safety.

The reality of losing the trust of loyal customers is indeed an ongoing challenge and Chipotle management must by our lens, have as its collective top priority means and methods to address food safety and quality from farm to fork. Management compensation not directly tied in some fashion to that goal, and management briefings and direction-setting that continues to lead with marketing and sales tactics are not going to convince this past Chipotle consumer that issues have been addressed and the quality and safety of food is industry-leading. Apparently we are not alone in that perception.

Bob Ferrari

© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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