Last week, the Wall Street Journal provided yet more of the reality for the new world of online customer and Omni-channel fulfillment in an article focused on Home Depot (paid subscription required).
Supply Chain Matters has featured a number of prior continuous commentaries reflecting on home improvement retailing and specifically Home Depot’s investment in supply chain capabilities that have made a discernable contribution to revenue and profitability growth. Previous Home Depot major investments were related to directly to the retail store experience and included modernized store replenishment centers and online mobile terminals for store associates. The strategy must now focus in a new direction.
The specific WSJ article opens with the following introduction: “Home Depot Inc.’s newest location is 10 times bigger than its average store, stocks three times more items and has no customers. It’s an online distribution center, for a company that seems the unlikeliest of Internet retailers.” It goes on to report that in 2014, Home Depot will open two customer fulfillment centers and just one U.S. store, a stark signal of the retail industry’s drop in retail store traffic in favor of online shopping, including home improvement items.
While online sales accounted for 3.5 percent of Home Depot’s total retail sales in 2013, online sales are growing much faster. There are upwards of 6000 items offered online vs. 35,000 in a typical store. According to the WSJ, in 2014, the home improvement retailer is investing upwards of $1.5 billion for supply chain and technology related investments to link its stores and online fulfillment centers. That includes methods for assisting customers in the pickup or direct delivery of heavy bulk items such as appliances and fixtures, along with re-vamping store space for online order pickup and return centers.
Contrast that to reports from major retailers that invest solely on online web site capabilities without considerations for supply chain needs. Too many retailers still believe that physical brick and mortar and online sales can be supported by two different inventory pools and separate fulfillment processes. That is fast becoming an expensive proposition both in the context of customer service and cost.
The Home Depot report is yet another reminder of the need of traditional retailers to internalize the ongoing implications of a much more information empowered consumer who is now very comfortable with online fulfillment and expects the supply chain to perform in an individual delivery experience.
Supply Chain Matters has been continuously alerting our readers to the ongoing labor disruption incidents occurring at Amazon’s customer fulfillment centers located across Germany, with implications to other global regions. The last reported work stoppage involving German based fulfillment centers occurred at the height of the 2013 holiday buying period, obviously strategically timed to capture the attention of Amazon management. Labor union officials vowed to continue with protest efforts.
The Wall Street Journal reported that yesterday, hundreds of German workers again walked off the job and staged an all-day strike at the Amazon fulfillment centers in Liepzig and Bad Hersfeld. According to this report, at day’s end, Amazon estimated that less than 650 workers among both locations took part in this work stoppage and customers were not affected. This was reported to be the second work stoppage incident thus far in 2014.
The issue involves an ongoing dispute as to whether temporary or full-time workers at Amazon’s German facilities should be classified as retail and catalog workers, which garners a higher pay scale in Germany. German labor union Verdi has been targeting Amazon, and had previously organized a number of other work stoppages in 2013 which included four continuous weeks of work stoppages that occurred in mid-June. Verdi has since garnered solidarity support from a number of U.S. labor unions in this ongoing protest effort.
In early January, the first-ever union election was held among technical workers at an Amazon warehouse in Middletown Delaware, but was unsuccessful when election ballots were counted.
As we have previously opined, labor unions continue to target high visibility global B2C retail customer fulfillment firms such as Amazon or Wal-Mart. During the highly promoted 2013 Thanksgiving and Black Friday shopping days, workers at a number of U.S. based Wal-Mart retail stores staged an organized protest.
Because these firms operate within high volume, dynamic and seasonality driven environments labor requirements are often flexed based on volume, while a core group of workers is retained to support defined steady-state fulfillment needs. Supply chain operations and fulfillment teams in these B2C environments seek maximum flexibility in labor costs and workers are increasingly becoming more interested in seeking a more influential voice in such compensation and hiring practices. At the same time, Amazon’s reported initiatives in developing and deploying advanced robotics within fulfillment centers along with drones for delivery does not help in calming such agitation. That continues to attract the attention of organized labor and these types of incidents targeted to the most visible industry players will obviously continue. At some point, there will have to be a meeting of minds since a pure anti-union stance does not bode well in today’s era of social media amplification of headlines.
The “Amazon effect” has many faceted dimensions.
Supply Chain Matters was invited to attend Oracle’s Industry Connect Conference held in Boston at the latter part of March. The conference drew a large compliment of attendees, featured three industry tracts, along with a focus on program management. We enjoy attending industry focused events because they provide a keener sense of industry-specific challenges, viewpoints and perspectives. We encourage technology and services providers to host more such events.
Due to a commitment to attend another event, we devoted the majority of our limited time focused on the Retail industry tract of speakers, but did manage to catch a cross-industry panel discussion featuring the theme of the Customer Experience. One clear theme brought out by this panel was that nearly every industry sector is adjusting to more demanding and more personalized experience factors concerning customers. Healthcare consumers now have many more choices for an healthcare provider and with a new emphasis on wellness, consumers have higher expectations as to the healthcare experience. Retailers are of course, continuing to deal with the shift of information power to the side of online and mobile-based consumers. Fellow blogger and panelist Vinnie Mirchandani pointed to the trend of mass customization of products as the antidote to commoditization.
We attended a Retail focused panel discussion of executives representing Deckers Outdoors and Scheels moderated by Susan Reda, Editor-In-Chief of Retail Stores Magazine. One statistic shared was that 73 percent of shoppers want an empowered shopping experience. A retail presence provides the opportunity to connect the passion of consumers with the passion for brands. Both retail executives provided clear examples of how their retail brands concentrate on the consumer experience, community outreach and provide a focused destination for consumers. As an example, Scheel’s is a sporting goods chain that features a ferris wheel, deli restaurant or fudge in any one of its 25 retail outlets. Community outreach includes sponsorship of local athletic or recreation events. A further common theme was a recognized need for the creation of a singular leader for Omni-Channel operations that span both brick and mortar and the online customer fulfillment experience.
Another insightful session titled How to Counterbalance Instinct with Data-Driven Insights, delivered by John Bible, Senior Director of Retail Data Sciences at Oracle, contrasted two distinctly different approaches to retail. Bible contrasted Amazon’s retail strategy initiatives as those posed as a software engineering problem contrasted to brick and mortar retail brands whose retail strategy focuses on the retail experience and destination. We found that comparison rather insightful. Consumers have tendencies toward cognitive biases and have tendencies shop based on existing beliefs and group dynamics such as consumer feedback on products. The notion of the “wisdom of crowds” is a rather real consideration. An important conclusion was that decisions supported by time-series forecasting and planning can no longer keep-up with constantly changing buying trends. Instead, decisions need to be supported by more-informed insights
Inditex, the parent company of fashion retailer Zara continues to invest in that retailer’s fast fashion capabilities.
The Wall Street Journal recently reported (paid subscription) on a $209 million investment in a new logistics hub, the tenth distribution center within Spain, which will be capable of distributing approximately 500,000 garments per day to over 6000 retail stores located within 87 countries. A further investment of $680 million has been directed for a logistics upgrade for various distribution centers including the Cabanillas, Spain hub.
Inditex continues to invest heavily in Zara’s competitive differentiator, namely the ability to quickly be able to turn any new fashion trend into finished garments in a matter of a few weeks. These latest investments on agile distribution hubs provide an added boost to back-end execution and store stocking needs. Zara is further in the process of changing its retail strategy, investing in larger retail footprints while closing smaller footprint stores and these new investments in faster logistics have been planned to aid in this strategy change.
In January of 2013, Supply Chain Matters reiterated our observations that that companies whose senior management team has a solid grounding and understanding in principles of operations and supply chain management can often have their supply chain serve as a competitive differentiator for business outcomes. The two founding business principles of Zara are:
- Give customers what they want
- Get goods to customers faster than anyone else
Few global specialty retailers have been able to match Zara’s success. Even as the Eurozone countries endured a long period of severe economic recession, Zara managed to maintain its admirable record of consistent revenue growth and sustained profitability. A leadership culture that fundamentally understands that supply chain agility, responsive logistics and valued people do matter in sustaining a competitive industry advantage.
Supply Chain Matters provides our readers periodic updates to current examples of how supply chain snafus can impact business performance.
We specifically have provided ongoing commentaries related to Lululemon Athletica and its prior sourcing and production snafus of its most popular line of yoga pants for women. Readers will recall that in March of 2013 this global B2C online and brick and mortar specialty retailer was forced to both recall and stop selling its most popular line of women’s summer yoga pants after discovering that the “sheerness” of the fabric allowed too much to be seen underneath. The CEO was compelled to publically apologize to customers for the problem and a short time later, announced her desire to step down from her CEO role due to personal reasons. Later in 2013, both a new CEO and Chief Products Officer was brought on-board, unfortunately too late to make any influential impact regarding the 2013 holiday buying period.
This week the specialty retailer reported financial results for its quarter that ended February 2. Revenues were up 7.3 percent but sales excluding newly opened stores dropped by 2 percent. Profitability was nearly flat with the earnings reported in year earlier quarter. Lululemon management again indicated on the conference call with equity analysts that forecasted revenues in the first half of this year will be constrained because the retailer did not order enough seasonal merchandise to accommodate demand for its products. Orders for seasonal merchandise were placed 6 to 9 months prior. The company’s stock was down over 13 percent this year but has rallied on the latest earnings news.
A summary of reported earnings reported by the Wall Street Journal noted: “Lululemon changed its CEO and chief merchant, beefed up its supply chain staff and implemented new controls, but suffered weaker sales over the past year after a long run of fast growth.” The publication further quoted the new CEO of Lululemon as indicating; “We are chasing some product… We can’t move as much product as we’d like on such a short lead time.”
While Lululemon is making its much needed investments in its supply chain capabilities, our general and specialty apparel supply chain readers are fully aware that 6 to 9 month lead times in today’s dynamic world of fashion and online commerce occurs at a far faster clock speed. Retailer Zara, a division on Inditex as long has been the benchmark in supplier responsiveness and apparel supply chain agility, moving from new product design to in-store inventory in a matter of a few weeks.
From our lens, it would seem that Lululemon has further work to do around supplier responsiveness with a far tighter connection of product design, consumer and supply chain response.
A lot has been written and spoken by general media regarding the massive credit card data breach that occurred within retailer Target’s IT systems. Many have labeled this incident as one of the largest retail data breaches in history as personal information concerning upwards of 40 million shoppers was breached by hackers. Would such a massive breach cause consumers real concerns in their online buying patterns?
We urge our Supply Chain Matters readership to take the time to read the published Bloomberg Businessweek artcle: Missed Alarms and 40 Million Stolen Credit Card Numbers: How Target Blew It.
By our lens, the article is a superior example of journalism directed at seeking out what might have occurred, especially since this incident is one that many of the impacted parties are reluctant to publicly speak about. The authors spoke to more than 10 former Target employees and outline a set of events leading-up to the breach, and shortly after this breach. Upon reading the article, one can get the impression that incident appears to have been very preventable. It reports that while the data breach occurred around the November 30th timeframe, the data did not actually move out of Target’s network until two days later, instead being stored on an internal server. Once more, security systems alerted to a potential data breach.
Six months prior to the incident, Target installed a $1.6 million malware detection system from FireWire, along with engagement of a security systems monitoring firm out of Bangalore India. The technology reportedly performed the way it was designed to perform, alerting Target’s IT and security staffers of a potential intrusion among the retailer’s systems. According to the authors, nothing happened. The article states: “Target has said that is was only after the U.S. Department of Justice notified the retailer about the breach in mid-December that company investigators went back to figure out what happened.” Once more the article concludes: “Not only should those alarms have been impossible to miss, they went off early enough that the hackers hadn’t begun transmitting the stolen credit card data out of Target’s network.”
Obviously, what actually occurred and why mitigation and response efforts were not initiated after technology alerted to the breach, is a matter that Target and its internal investigation will no doubt uncover. Earlier this month, Target’s Chief Information Officer voluntarily resigned allegedly as a result of this incident.
We wanted to call reader attention to the events outlined in the BusinessWeek article because they are events that retail and manufacturing supply chain operational teams can well relate to. During critical periods of customer fulfillment such as the holiday buying surge when so much of a company’s revenue and profitability results are at-stake, management leaders are often reluctant to be receptive to bad news, especially when such news implies communicating that mission critical systems may need to be temporarily brought to an offline condition to deal with a major problem. Supply chain and B2B/B2C focused IT teams know darn well the adage “if it ain’t broke, don’t’t fix-it” often applies, especially when it implies shutting down customer fulfillment to fix a problem. According to the BusinessWeek article, Target had information security staff numbering 300 people, and that the breach could have been stopped without any human intervention. According to the report, Target staffers had elected to turn-off auto deletion of malware in favor of a human decision. That could be understandable if there were processes in-place to quickly assess, upwardly communicate and deal with such a threat and make the appropriate management decisions for how to both deal with an information security threat while continuing to maintain customer fulfillment. Target’s internal investigation should hone in to this very area,
Reports indicate that Target has already incurred upwards of $60 million in expenses directly related to the retailers response to the credit card information breach. The retailer if now reported to be considering an investment of upwards of $100 million in new point-of-sale and other technology, perhaps RFID enabled, to manage the security of customer credit cards. That is an incredible amount of money coming from an incident that reportedly could well have been avoidable.
There are many lessons to be garnered from the incident at Target, lessons that will reverberate further in the weeks and months to come. We urge supply chain and B2B fulfillment teams to harvest the lessons of the Target incident, especially in the context of management response systems.