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The Tech Twist to the Amazon-Whole Foods Acquisition

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Over the coming days Supply Chain Matters will feature both our own and invited guest commentaries regarding last week’s blockbuster announcement that Amazon intends to acquire the Whole Foods grocery chain for $13.7 billion.

In this posting, we update our readers on rather interesting added developments, to state the obvious. Whole Foods Austin The Tech Twist to the Amazon Whole Foods Acquisition

A report published by The Wall Street Journal, Get Off Amazon’s Cloud, (Paid subscription required) once again reinforces the extent of the cutthroat competition that Wal-Mart and other retailers now have with Amazon. The report indicates that Wal-Mart is instructing software and other technology suppliers to the global chain to refrain from utilizing Amazon Web Services (AWS) as the backbone Cloud platform. The report notes:

Wal-Mart , loath to give any business to Amazon, said it keeps most of its data on its own servers and uses services from emerging AWS competitors, such as Microsoft Corp’s Azure.”

That is certainly an unexpected boost for Microsoft as well as AWS competitors such as Oracle, Blue Cloud, IBM and others. Other technology providers catering to retailer software technology needs further confirmed specific retailer requests to prefer Cloud platforms other than Amazon’s.  We have similarly heard of such concerns shared by certain vendors in their retail customer interactions.

The concern is access to sensitive customer or other fulfillment or supply chain related data. That makes sense. However, AWS, along with other Cloud platform vendors must adhere to certain regional and global data security standards associated with certification standards. But that is not going to appease retailers who after last week’s announcement, are not going to trust anything related to Amazon supported services.

The obvious benefactors are software and Cloud applications providers catering to retail industry needs who elected to outsource Cloud infrastructure to providers other than AWS. That would include B2B Business Network and EDI messaging support providers as well as transportation and logistics Cloud-based providers. After today’s WSJ report, product marketing teams of Cloud infrastructure platform provider will likely re-double their efforts for targeting retail industry, including all its supporting elements.

Another Whole Foods Suitor?

While on the subject of Wal-Mart, JP Morgan indicated in an investment advisory that this retailer is likely the only other retail chain that can make a counter-bid to acquire Whole Foods, but there are likely other overriding factors such as clashing corporate cultures, Whole Foods customer whiplash and a potential bidding war with Amazon that would likely make such a move unlikely.

A posting published by Business Insider provides added details of the JP Morgan analysis. The sum total of the JP Morgan argument is why play defense when it’s better to stick to offense:

Given Walmart’s 20%+ share in grocery, why should the company spend $14B+ on what it’s already good at (selling food via brick-and-mortar) when the money instead could be used to expand and improve Jet.com and Walmart.com? Jet.com is Walmart’s urban/millennial alternative to Amazon Prime, and Walmart.com is in many ways the ‘forgotten man’s’ alternative to Prime.”

From our lens, that is a powerful argument and a likely indication that there will not be a counter bid.

Many of the post-announcement opinion commentaries speculate what Amazon will do to leverage a well-respected grocery retail chain.  From our lens, we advise readers to consider all the supply chain, customer fulfillment and customer intelligence capabilities of Amazon applied to a leveraged online and physical retail grocery presence. Picture a Whole Foods store augmented with an added, automated customer fulfillment storeroom complete with Kiva robots sorting and staging online orders for parking lot pick-up. Think of the possibilities of the virtual Amazon fulfillment button affixed in our kitchens that electronically transmits the grocery shopping list to an online order available for one-hour pickup.

The possibilities are endless and the threat is real.

Stay tuned for continuing commentary.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

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The small parcel transportation and delivery industry, under the lead of United Parcel Service (UPS), once again elected to add yet another business challenge to online retailers. Only this time, Supply Chain Matters anticipates structural shifts in online business practices likely to occur because of this move. UPS Natural Gas Van 300x177 UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

This week UPS announced a series of delivery surcharges timed to the busiest online fulfillment period in the United States, that being the period between the Black Friday shopping and Christmas holiday period of 2017. UPS plans to impose a 27-cent per package surcharge on all ground packages destined to U.S. residential addresses between the period of November 19 and December 2, a period that includes the Black Friday and Cyber Monday online and in-store shopping holidays. Likewise, surcharges will be imposed for the period that includes December 17 through December 23, the traditional last-minute holiday shopping surge period. For this period, the surcharge amounts to an extra 27-cents for each ground shipment, 81 cents for each next-day air, and 97 cents for two or three-day delivery. Again, these surcharges only apply to package deliveries to residential addresses, as opposed to business.

UPS further announced added dimensional package surcharges of an additional $24 to the existing surcharge of $70 for packages weighing more than 150 pounds or exceeding certain large package dimensions. Further included is a peak surcharge of $249 per package for “overmax” packages.

The motivation for the new UPS pricing actions is obvious, to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. More than likely, rival FedEx will also initiate similar pricing actions. The effect for online retailers is yet another assault on their business margins, already stressed by the increased cost factors for online fulfillment needs. While dominant online retailers such as Amazon and Wal-Mart have the financial and market power to buffer such increases with sheer market influence, that may not be the case for all other online retailers.

An obvious behavior continually reinforced by online consumers is their reluctance to pay for shipping, and thus Free Shipping remains the ultimate determinant for online shopping cart execution. We therefore anticipate that the effects of this week’s UPS pricing actions will be added motivations by many online retailers to either permanently change online buying behaviors or explore added parcel delivery alternatives. That most likely will include planning holiday related online merchandise promotions even earlier than Black Friday. Online retailers with brick and mortar presence will follow Wal-Mart’s lead in incenting online customers with free shipping or added discounts to pick-up online purchases at local retail outlets or receiving lockers. The U.S. Postal Service will likely see added package volumes during the busiest holiday periods, with the added risk that the service will not be equipped to handle such a surge or be able to recover added costs. Third-party logistics services firms, who are already marshaling resources and services to handle the need to support online purchases of larger-sized goods such as appliances, furniture and like will also benefit with increased holiday volumes, as well as opportunities to negotiate added services to online retailers. Like China, we could well observe the formation of independent parcel delivery entrepreneurs similar to an Uber or Lyft type of on-demand transportation, supported by advanced routing and dispatching technology.

In other words, if the intent of small parcel carriers was to somehow permanently change online buying trends, they will indeed get their wish.  However, as what occurred last year when Amazon demonstrated the prowess to implement its own parcel transportation and last-mile fulfillment capabilities, online retailers will have little choice but to explore other more cost-effective options to protect their margins. That will open the door to new industry disruptors.

From our Supply Chain Matters lens, the takeaway from this latest industry development is the continuing industry dynamics as to which business entity, or which supply chain or customer fulfillment partner stands to gain higher margins and profits from the ongoing explosion of online commerce. It involves the realities that consumers have become patterned to shop for the best online deals offering free or reduced shipping, regardless of time-period. Same or next day delivery is becoming part of this expectation.

At the same time, there is the reality that online fulfillment shifts the cost burdens from that of operating physical stores, where consumers take-home their purchased merchandise, to an online era that requires ever more expensive pick, pack, and parcel transportation costs. The forces related to financial gain ultimately lead to added structural changes and to new winners and losers in the weeks and months to come.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Exploding Demand for Warehouse Space- Thorough Analysis is Wise

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Some concerning news crossed our Supply Chain Matters news desk that compelled a blog commentary. That news is that warehouse space acquisition across the United States has reached its highest level in over 16 years.

This data comes from CBRE, one of the largest global commercial real estate services and investment firms. CBRE reports that almost half of the 167 million square feet of new U.S. warehouse space currently under construction, the equivalent of over 70 million square feet is already pre-committed to new tenants. The tenants are described as primarily E-commerce, third-party logistics and retail industry users, no doubt responding to exploding needs for online fulfillment capabilities.  Warehouse 300x200 Exploding Demand for Warehouse Space  Thorough Analysis is Wise

Further noted is that current ratio of space under construction that is pre-leased stands at 43 percent, which exceeds the 17-year average of 38 percent. Obviously, the ratio signifies a healthy momentum and zeal on the part of online logistics and customer fulfillment teams for warehouse and fulfillment space acquisition.

We are of the view that such space trending and building momentum should be viewed with a cautionary lens. Here is why.

As a long-time industry supply chain analyst, my view of warehouse space has been admittedly as a skeptic. Warehouses, particularly very large ones, are monuments and reflections of inefficient supply chain inventory and customer fulfillment management. However, the boom in online B2C and B2B fulfillment has added a newer dimension for warehouse space, namely a tradeoff of overall physical retail space for that of warehouse space. A further market influencer is no doubt Amazon, which continues to consume new warehouse and distribution space. Adding to the challenge for some brick-and-mortar retailers is the need to simultaneously support both traditional store inventory replenishment and growing online fulfillment needs.

For the most part, prior warehousing and distribution strategies were predicated on supporting physical store or distributor inventory replenishment needs. Warehouses were maximized for vertical height vs. square footage, reflecting maximum inventory storage in a concentrated dimension.  Replenishment orders, for the most part, called for pallet-loads of inventory and merchandise shipped to individual retail stores or wholesale distributors. Inventory could thus be stacked higher in warehouse racks, with automated material handling cranes and equipment providing the bulk of warehouse pick automation.

Online fulfillment centers support a different strategy, namely far higher numbers of individual online orders that feature single cartons or packages. Thus, today’s specialized online customer fulfillment centers are now highly automated examples of end-to-end inventory flow-through, where bulk inventory is received and stored in building flow-through configuration, and where pickers or robots, perform pick and pack needs, while highly automated conveyors flow individual shipments to the other end of the building for actual shipment to online customers.

Online fulfillment is a trade-off of required real-estate square footage with the assumption that the customer fulfillment center assumes the real-estate burden of physical stores or distributors. Thus, the need for fewer overall physical stores, but new investments in customer fulfillment logistics and lower-density warehousing that focusses more on order volume productivity. The one continually changing variable will always be assumptions for inventory needs.

Where this tradeoff is tricky is in the cost and footprint of overall physical space, as well as the cost of such space.  Real estate market supply and demand dynamics can often inflate real-estate and subsequent leasing costs, especially when retailers like Amazon and Wal-Mart are leading the charge. As we all know, today, the cost of capital continues to be rather low. What if that changes over time, particularly in the costs of large footprint warehouse space vs. that of traditional shopping mall or retail space. The other looming challenge is the increasing costs included in online fulfillment, including added inventory, transportation, and logistics costs.

Such trends are complex and the takeaway for supply chain and online customer coordination and fulfillment professionals is that major decisions on real estate cannot be made in isolation.  They are not the context of a supply chain functional decision alone. Rather, thorough, rigorous business-wide analysis and review as to longer-term strategic business implications is very important. By our lens, the firm’s CFO and the head of supply chain are key stakeholders as well as stewards for such decisions.

The last thing that retailers need or desire is to tradeoff cheaper fixed or variable physical store real-estate and store operating costs for even more expensive online fulfillment costs. Likewise, supporting traditional stores and online needs with different or redundant footprints is no longer efficient nor cost affordable. Compounding the strategy are decisions to entirely outsource online customer fulfillment to an experienced 3PL, but here again, logistics providers are subject to the same market supply and demand dynamics.

At face value, exploding demand for warehouse space is not surprising. Such dynamics are the elation of warehouse design, construction, automated systems and real-estate providers.

Thorough analysis of the cost and service tradeoffs for implementing a widescale online customer fulfillment model is a business-wide joint responsibility involving multiple stakeholder inputs.

 

Bob Ferrari


Wal-Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

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Global retailer Wal-Mart held its annual meeting of stockholders last week and declared that the world’s largest retailer has  “started to invent the future of shopping again.” CEO Doug McMillon declared: “we are going to make shopping with us faster, easier and more enjoyable.”  Wal Mart 300x199 Wal Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

We would quickly add that this is a tall and expensive order in today’s turbulent retail industry environment.

In prior commentaries, Supply Chain Matters has praised Wal-Mart’s emphasis on leveraging the retailer’s vast brick and mortar presence as a more effective extension of an overall omni—channel business strategy. What seems clear from the strategy that continues to unfold is that Wal-Mart will indeed leverage its significant physical presence as an extension of an online shopping experience. In that vein, the retailer is currently testing the deployment of automated online order pickup stations in stores, actual pick-up stations in select store parking lots, and what the retailer’s terms as “Jet Fresh” delivery, which provides deliveries of household groceries one 1-2 days. Regarding the latter, company management indicated that the service is currently available to about half of U.S. households.

Stockholders were updated on the retailer’s continued commitment to source $250 billion in products within the United States along with meeting a goal to source $20 billion of products from women-owned businesses. Further mentioned were initiatives to source more local and sustainable products and to reduce greenhouse gas emissions across the supply chain by 1 giga ton by 2030.

CEO McMillon boldly declared: “We will compete with technology, but win with people”, adding that workers should not fear increasing automation that will change the work involved in retail.  He added: “We will be people-led and tech-empowered” indicating: “I don’t think we should be afraid of changes.  Instead, I think we should recognize that we’ll be able to learn, grow and change together.”  He went on to state that associates need to be lifelong learners and: “The secret of our success will always be our people.”

Uplifting and motivating statements indeed, but from our Supply Chain Matters lens, there are still brute realities to the current Wal-Mart strategies.

The first and obvious was a realization that prior attempts to build a competitive online presence met with very mixed results. That ultimately led to the bombshell acquisition of Jet.com for a sum of over $3 billion. Since that time, Jet.com founder Marc Lore has been given total license to revamp and improve the retailer’s online presence and associated capabilities. That includes more widespread utilization of Jet.com’s price optimization algorithms, as well as lower prices for merchandise that is ordered online and picked-up at a local Wal-mart store.

As many retailers are now fully aware, investing in online fulfillment capabilities is not a cheap proposition, and many of the touted online initiatives already deployed and talked about are examples of these efforts.

And then there are realities of a changed, people and technology-driven business model that CEO McMillon touched upon. He acknowledged the needs to create new jobs in data science, machine-learning, systems engineering and mobile app development. At the store Associates level, being tech-driven brings new realities as well in terms of added training and personal skills development to be able to be an extension of an extensive omni-channel customer fulfillment environment.

Other open questions come to mind.

The first is a building compensation gap from top to bottom. Business media has disclosed that online czar Marc Lore was compensated in $237 million last year, nearly ten times more than CEO McMillon’s $22 million in compensation. Thus the compensation gap from CEO to store associate grows significantly wider and profound.

It remains widely believed that Wal-Mart has staffed its retail stores with a predominance of part-time vs. full-time staffing.  While starting salaries were recently boosted to a minimum of $10 per hour for retail associates, that level does not provide the financial means to invest in more individual technical skills.  Those possessing such skills will likely be able to find jobs that provide far higher compensation levels. Part-timers need to find other jobs to financially make ends meet, again leaving little time for personal skills development.

Another reality is that the online world remains highly competitive, especially when it comes to Amazon. We have previously highlighted that Amazon and Wal-Mart have been in head-to-head negotiations with major suppliers for lowest priced supply of inventory.

On the very week of Wal-Mart Annual Meeting, Amazon announced a lower Prime membership fee for low-income shoppers which are Wal-Mart core customer group. Lowest income shoppers, those currently obtaining government assistance will likely be eligible for $5.99 monthly Prime membership that includes free shipping. Likewise, Amazon announced an Amazon Cash program earlier this year that allows customers to add cash to their account balances at more than 10,000 locations across the U.S. The online giant continues to step-up its merchandise offerings in lower-cost apparel and in a wider variety of household groceries and local food and grocery outlets.

 

The good news is that at least one large retailer, Wal-Mart, can portray an optimistic strategy of future omni-channel capabilities. On the other hand, there remains an ongoing learning that former methods, practices, and corporate culture are all subject to change in the new world of retail and in retail supply chains.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Technology’s Impact on Industries Recognized as More Profound- Is the Supply Chain Prepared?

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A change is underway across many industry sectors, one that was profound implications for businesses and their associated supply chains. Investors are now realizing the threat of new digital based business models, and CEO’s are some of the recent casualties for businesses deemed to be laggard.  Supply Chain Matters submits that the added question is whether the supply chain is prepared. SCM 250 76 Technologys Impact on Industries Recognized as More Profound  Is the Supply Chain Prepared?

Over the past several days, The Wall Street Journal has published two opinion commentaries that reinforce a message that CEO’s must grasp the implications of technology on their businesses and on their industries like never before. The casualty list is growing.

The first profiles J. Crew CEO Mickey Drexler, (Paid subscription required) a fashion genius noted for building brands such as Banana Republic, Old Navy and Madewell. Drexler, who is further recognized for:” … redefining Gap in the 1990’s and transforming J. Crew into a household name, is now scrambling to keep the company he took private in a leveraged buyout from ending up in bankruptcy.” In this report, Mr. Drexler readily admits that he missed the biggest trend of all- “how quickly technology would change the retail industry.” The commentary goes on to observe that today, retail competitors with high-tech, data-driven supply chains can copy styles faster and move them into retail channels in a matter of weeks. Posed is the question: “Who would have predicted that in 2017 the No. 1 online retailer of clothing to millennials would be Amazon?”

A second WSJ commentary, CEO’s Must Grasp Tech Like Never Before, (Paid subscription also required) opens with the statement: “Investors and boards long obsessed with quarterly profits are now hunting for leaders to make big, fast bets to fend off upstarts shooting for the moon.” Observed is the recent sudden replacement of the CEO at Ford Motor, as well as other CEO’s whose companies have faced tech-heavy competitive disruptors within their industry. This commentary observes how some manufacturers and retailers are making big bets on disruptive, tech-driven businesses, protecting them as they develop and willing to absorb losses in the short-term.  The prime takeaway seems to be that today’s new business leaders are caught between the proverbial rock and hard place. While activist investors continually call for more short-term profitability and dividends, other investors are becoming more consumed with industry disruptors who are becoming more prevalent and visible. The theme is that CEO’s must possess the rare skills of being able to nurture new disruptive businesses while maintaining an existing business. One example provided is General Electric and its nurturing of its Digital Business unit. The commentary concludes with the observation that the advantage of bigger companies in this transition, is the manufacturing and supply chain infrastructure sufficient to deliver newer businesses and products globally.

Given the themes that regardless, the supply chain plays a critical enabling role, Supply Chain Matters feels compelled to add some other thoughts.

Industry supply chains are once again caught in the web of the need to continue to reduce overall value-chain costs, while at the same time, having the ability to nurture the required capabilities for digital transformation. From our specific lens, one of the most destructive forces underway in some industry settings is the zeal of zero-based budgeting techniques.

The same messages related to CEO’s and their ability to grasp tech trends and move toward new digital-based business models more quickly equally applies to senior supply chain leaders. That requires added investments in supply-chain wide process innovation, along with needed skills and augmented talent. To do this, supply chain leaders must be able to effectively communicate a dual-mission, one that can support ongoing needs for added productivity and costs-savings for existing traditional businesses, while investing in the new capabilities that will make digital based models more successful. In some cases, supply chain leaders will serve as a communicator and change agent for the broader senior management team.

Leaders can make such tradeoffs if they are willing to communicate and contract with the CFO and CEO on a parallel cost savings and investment plan.  As an example, for every dollar of cost savings achieved, a certain amount of such savings can be put aside for re-investment in required new capabilities in people, process, and technology. Likewise, senior management incentives and bonus plans must reflect parallel capabilities, that of building a new business while managing the needs of existing business.

Another equally important risk is one of complacency in timing.  One criticism that this independent analyst has of certain top-tier analyst firms is their tendency to context certain technology changes in rather long timing windows.

As an example, by 2025, eight years from today, a certain technology will become more mainstream in utilization. From my lens, such generalizations are a dis-service to industry leaders. Such predictions are much to generalist, serving to protect the brand or aura of the industry analyst firm in terms of prediction accuracy than to depict more boldness and detail related to a technology’s impact. A current example relates to Internet of Things (IoT) focused technologies and its impacts to traditional businesses. By our research lens, for some industries, the disruption brought about by new IoT driven business models will come sooner, rather than later, and despite current challenges in data security and standards.

Technology’s impact on businesses is indeed accelerating, and potentially more CEO’s will pay the price for not recognizing the timing, and for not moving the business fast enough to stay ahead of the challenge.  The same risks apply to supply chain leaders who opt for the conservative path of driving added cost savings regardless of external threats.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


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