Today’s business headlines include the reporting of Amazon’s latest operating results for the March-ending Q1 quarter. The global online provider and Omni-channel disruptor reported a net sales increase of 15 percent to $22.7 billion, but also a net loss of $57 million. There was a $1.3 billion unfavorable impact related to foreign exchange rates throughout the quarter. Operating expenses increased nearly 75 percent, prompting The Wall Street Journal to opine that: “Amazon again spent nearly all the money it took in.”
In essence, Amazon is spending and investing in all forms of projects and today’s predominantly short-term focused investors are growing ever more impatient with the timing of a big reward. Once more, Amazon has forecasted the potential of an operating loss, or small profit gain for its upcoming quarter.
An area that has captured Wall Street’s attention is revelations about the often secretive cloud computing support Amazon Web Services (AWS) business operating unit which was finally revealed. AWS revenues were reported as $1.57 billion in the quarter, up a whopping 49 percent, and at an annual run rate of nearly $5-6 billion for the year. Once more, this has been in a fiercely competitive sector with many global enterprise technology players duking it out for market-share dominance. Once more, operating margins for AWS are tracking at nearly 17 percent compared to nearly 4 percent for retail online fulfillment. Retail fulfillment continues to have pressures related to distribution center rollouts as well as the net effects of free shipping offered to Amazon Prime customers.
The high AWS product margins categorizes this business as growing faster than Amazon’s online fulfillment business, although considerably smaller overall, but the difference in margins have now captured the interest of Wall Street, and most likely the community of activist investors.
Among online customer fulfillment highlights for the march-ending quarter were:
- The launching of both Amazon Dash Button, a small button that Amazon Prime customers can place in their home to automatically reorder frequently used products. Supply Chain Matters recently called attention to Procter & Gamble as one key participant in this program, which might have prompted a reaction from Wal-Mart.
- A complimentary offering, Dash Replenishment Service (DRS) enables connected devices to directly order replenishment supplies. Early participants in DRS include Brother, Brita Quirky and Whirlpool.
- The launching of Amazon Home Services, a new marketplace for on-demand professional pre-packaged services
- Amazon’s Prime buying service celebrated its tenth anniversary with tens of millions of members across the globe.
- The opening by Amazon China of an Amazon International retail store on Tmall, featuring thousands of imported products and an expansion of Amazon Global Store offered in China to over one million items.
A common and troubling theme in today’s U.S. business climate has been activist investors surrounding well-recognized internally focused producers including names such as Apple, DuPont, Procter & Gamble and others. The HJ Heinz-Kraft Foods acquisition announcement continues to have far reaching implications for other consumer product goods producers and their respective supply chains.
The question now becoming apparent is whether Amazon’s growth track record contrasted to profitability performance opens the door to activist actions as well, particularly when it concerns the potential of AWS.
What’s your view? Will Wall Street activist investors surround Amazon as-well?
© 2015 The Ferrari Consulting and Research Group and the Supply Chain Matters© blog. All rights reserved.
Recent postings appearing on the Natural Resources Defense Council (NRDC) and Mother Jones note that the industrial processes used to make our jeans and sweatshirts require loads of water, dirty energy, and chemicals, which often get dumped into the rivers and air surrounding factories in developing countries. China of course, is a major global source of fabric production. According to the NRDC, almost 20 percent of the world’s industrial water pollution comes from the textile industry, and China’s textile factories, which produce half of the clothes bought in the United States, emit 3 billion tons of soot a year.
NRDC recently hosted an award ceremony in Shanghai to recognize 33 Chinese textile mills which completed NRDC’s Clean By Design program in 2014. Four prominent apparel retailers and brands, Target, Gap Inc., Levi Strauss and Co., and H&M participated in the program, handing out certificates of achievement and inducting some star mills into a newly created Clean by Design Hall of Fame.
The effort to get to this point is described as starting five years ago under the umbrella of green supply chain initiatives, providing practical tools to reduce production and environment impact while saving money. Today, NRDC’s Ten Best Practices provides what are described as practical improvements, low cost and offering quick payback for producers.
In terms of results, NRDC indicates that its Clean By Design practices delivered, on average, savings of $440,000 in the first year, with the top five mills saving more than $880,000 – with a payback time (return on investment) of only 14 months.
The NRDC blog posting further describes efforts underway to increase awareness to broader amount of skeptical fabric and textile mills in China as well as to involve more global based buyer brands as sponsors.
Since getting the word out is important to this effort, Supply Chain Matters is pleased to spread awareness of this program to our global and China based readers. We also extend our Tip of the Hat to those retailers who are actively supporting these current efforts.
Survey of Retail and CPG CEO’s Reflects Today’s Realities of Higher Costs Associated With Online Customer Fulfillment
A new joint study of senior retail and CPG industry CEO’s conducted by PwC under the sponsorship of JDA Software confirms what many in our supply chain community have believed; the increasing profitability challenges being brought about by the higher costs associated to today’s online customer fulfillment demands.
This study, The Omni Channel Fulfillment Imperative, reinforces that an enormous amount of money, energy and time is being spent by retailers and consumer goods manufacturers to improve their Omni-channel fulfillment capabilities. While this may not be surprising given the current business environment, the report reveals an unexpected and disturbing fact: only 16 percent of companies openly indicate that they can fulfill Omni-channel demand profitably.
The survey itself included a reported 410 retail and consumer goods companies from eight different countries. The authors included some CPG company’s views in order to gain perspectives from both ends of the customer fulfillment supply chain, along with the reality that may CPG firms have increased their direct online fulfillment presence. Nearly 51 percent of responses were reportedly weighted toward the classification of top 250-1000 retailers, while 22 percent represented the top 250 retailers.
Supply Chain Matters had the opportunity to speak with Wayne Usie, Senior Vice President of Retail Industry at JDA Software about this study and its messages. Usie aptly pointed out that most retailers remain optimistic for top line revenue growth, they are acknowledging that their firms originally designed their supply chains around the bulk movement of goods from suppliers, through distribution centers and eventually to stores and consumers. Today’s business demands of Omni-channel and online customer fulfillment require a far different set of capabilities. The other important insight is that in their original design that emphasized distribution center centric flows, retail supply chains can often mask the true source of customer channel demand. That has a significant influence on how to plan and efficiently position inventory associated with today’s Omni-channel dynamics.
From our lens, other important perspectives brought forward by this study was the indication by 71 percent of CEO’s polled that Omni-channel fulfillment was a top priority for retail business. Keep in mind that merchandising and sales strategies have often been top priorities for retail businesses. This different perspective, we believe, is the new reality of online and Omni-channel reflecting that the fulfillment supply chain has become an important focus.
Other profound findings were the indication that 67 percent of CEO’s believe that the cost to fulfill orders across channels is increasing, and that 88 percent (a near total consensus) cited transportation and logistics as a fulfillment capability that needs the most attention. Supply Chain Matters believes that this is a reflection of the continued high costs trending of free or same-day shipping that is impacting retail supply chains, especially those with lower product margins. Much of the survey data reflects the threats brought about by global online retailers such as Amazon, Wal-Mart. The major global package carrier’s increase in rates and the shift to dimensional-based freight pricing this year has not helped and probably added even more concerns and needs for alternative methods.
Question 9 of this survey queered on likely internal challenges likely to occur over the next 12 months. Indications were remarkably equally balanced and also from our lens, point to many supply chain related implications including inventory management, effectively integrating physical stores with online business models and failing to consistently meet customer expectations across all channels. Reflecting on such a listing, we believe that the data is yet another revealing indication that not all customers can have the same fulfillment service-level dimensions, hence the need for more discernable supply chain segmentation strategies, aligned to expected customer service and business profitability needs.
The complete PwC Survey as well as a summary infographic can be accessed at this web link. (some registration information required). A further perspective of the survey can be garnered in a posting authored by Wayne Usie on JDA’s Supply Chain Nation blog.
Supply Chain Matters will reflect more on the effects of Omni-channel retail in our live coverage of the upcoming JDA FOCUS 2015 conference occurring later this month.
Disclosure: JDA Software is a Lead sponsor of the Supply Chain Matters blog and a client of its parent, The Ferrari Consulting and Research Group LLC.
The term Predictive Commerce has been brought forward in the context of connecting up and downstream, Omni-channel product demand sensing with an integrated, single-model, end-to-end supply chain planning and execution. In some sense, it can be viewed as an enhanced iteration of demand-driven supply chain response capability for complex distribution and long-tail product demand environments. Supply Chain Matters is of the view that this capability warrants further consideration by supply chain and sales and operations planning (S&OP) teams, in the context of a transformative effort requiring careful thought and investment.
Predictive Commerce was most recently brought forward in a recent published white paper from supply chain planning technology provider ToolsGroup, titled Predictive Commerce: Helping Companies Return to Growth.
This paper defines such capability as:
“Predictive Commerce is a strategy that enables this shift (in planning methodologies) and revolutionizes the way companies think, see and plan their end-to-end supply chain. It connects supply chain strategy, planning and execution into an end-to-end planning process. The key technology enabler is a single underlying model”
This paper describes examples of predictive commerce applications that include real-time product demand sensing linked to dynamic replenishment processes. The example brought forward is a large coffee shop brand, namely Costa Express, leveraging machine telemetry feeds from 3000 self-dispensing coffee machines to trigger coffee bean, cups and flavored syrup replenishment needs among supporting distribution replenishment centers. In another retail industry example, product demand sensing is linked to dynamic replenishment and product segmentation to minimize last mile delivery costs by utilizing existing channel inventories. A further example is connecting product demand sensing and predictive orders with the needs for transportation capacity and optimization.
We concur and re-iterate that the most important takeaway for industry supply chain teams to ponder is that Predictive Commerce or other similar type capabilities that fuse supply chain planning and execution in a single information model require a transformative strategy that brings together such capabilities. This is particularly important in an environment where legacy applications or ERP backbone systems were implemented under the notions of planning and execution being two separate hierarchical processes and data sets that fed different information streams back and forth. Today’s Omni-channel and online fulfillment demand streams are far more concentrated in SKU level and location specific planning and execution dimensions. That implies a single data model with far more granular data and information streams as well as requirements to plan inventory investments at multiple tiers of the supply chain.
The good news is that advanced information technology now available in today’s marketspace can provide such capabilities in a less disruptive manner. A single data model approach opens far more enhanced capabilities in leveraging analytics and deeper supply-chain wide intelligence. It further paves the way for the ability to leverage more predictive and prescriptive planning methods for supporting near real-time customer fulfillment execution requirements.
In addition to technology, there are important people and business process elements to consider in such a transformation. Business processes, whether internal or externally focused, need to be well understood by all participants and have an “outside-in” perspective. Deep collaboration among customers and suppliers is essential. Do not neglect the change management and skills impact for people in managing an overall supply chain environment. Especially those that are driven by complex by faster-moving, exception-driven events vs. day-to-day sequential business processes.
Predictive Commerce can indeed be a meaningful competitive differentiating capability for distribution and online fulfillment sensitive supply chains. Such a capability requires a transformative strategy, often aligned with supply chain segmentation. It is indeed a “crawl-walk-run strategy anchored in people, process and advanced technology.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Disclosure: ToolsGroup is a current client of Supply Chain Matters ® parent, the Ferrari Consulting and Research Group LLC.
When a report directly impacting supply chain strategy is featured as a front page article in The Wall Street Journal, we are certainly going to bring it to Supply Chain Matters reader attention. When that report correlates with other related reports, namely supplier squeeze or bullying tactics, rest assured we will bring it to greater industry supply chain visibility.
We have previously featured reports of supplier bullying strategies involving certain consumer product goods supply chains, and quite recently, supplier squeeze tactics among certain commercial aerospace supply chains.
Today’s WSJ report (paid subscription or free metered view) indicates that last month, Wal-Mart began an effort to place increasing pressure on its North America based suppliers to cut the cost of their products. According to the report, the retailer is telling suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. Apparently new executive leadership is embracing the concept of supplier squeeze in order to lower existing prices at retail stores. Wal-Mart recently raised salaries for store associates which have added a new cost burden. Further reported is that this effort has already caused renewed supplier tensions among suppliers who are already attuned to the retailer’s relentless focus on inbound cost. The new tensions for suppliers are that they potentially have less control on the way their individual branded products are marketed to Wal-Mart consumers.
This new WSJ report revisits a previous report of Wal-Mart’s current dealings with well- known consumer products goods provider Procter & Gamble and its cash cow product, Tide laundry detergent. The retailer recently began merchandising Henkel’s Persil laundry detergent directly aside of Tide in a move that the WSJ now clearly declares was an attempt to pressure P&G to lower the price of its market-leading laundry detergent.
Yesterday, Amazon released the news of a Dash Button, a physical version of its 1-click ordering. An Amazon Prime member sets up the device to correspond to a certain product and places the physical device in a convenient place (perhaps inside the cupboard or cabinet where household products are stored). When the supply runs low, the user can press the button to order more of that product, which directly communicates with Amazon via a Wi-Fi connection. It is literally an electronic Kanban replenishment system in a B2C setting. A total of 255 products from 18 brands are reported as being available through the Dash Button program and surprise-surprise, P&G and its Tide detergent is noted as a participant. That may well be another motivation for Wal-Mart to place direct pressure on its most longstanding and loyal supplier partner. This is also not the first time that P&G and Wal-Mart have openly sparred over P&G’s collaborative efforts with Amazon.
As survey methodology often depicts, a single data point is an observation, a second similar data point is of interest and a third data point within a short period of time is the early indication of a building trend.
Supplier squeeze tactics are often prevalent in times of significant economic stress when preservation of cash is a critical corporate objective. Industry supply chains experienced many forms of such tactics during the great recession that began in 2008-2009 and some suppliers actually succumbed to bankruptcy as a result. Today, global supply chain activity and output as manifested in the J.P. Morgan Global Manufacturing PMI Index has recorded 27 months of consecutive expansion. Thus, motivations for current supplier squeeze tactics have taken on different motivation, perhaps more related to short-term Wall Street and consequent stockholder expectations. In any case, it is by our lens, a concerning trend with the potential to provide setbacks to efforts towards deeper collaboration and/or partnerships with suppliers. Consider that Wal-Mart has embarked on a multi-billion dollar initiative to influence suppliers to source more products within the United States. Wal-Mart gives, and then takes-away.
A short-term business outcomes perspective can permeate across the many levels of the value-chain and procurement teams and financial senior executives need to be reminded of the consequences for longer term supplier partnerships directed at product, process and customer fulfillment innovation. Focus on the P&G dynamics with Wal-Mart, both rather savvy and determined business partners who have experience in good and not so good times, and in the savvy of push-back. Many suppliers, particularly smaller scope suppliers do not have the leverage of a P&G, and thus, there resides the current risks in supplier management.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
In January of 2013, during the National Retail Federation’s annual conference held in New York, Wal-Mart made a significant and noteworthy announcement. Bill Simon, the former head of Wal-Mart’s U.S. group announced plans to buy an additional $50 billion in U.S. sourced products over the next ten years.
Since that time, Wal-Mart has continued on a broad strategy to encourage its existing or new suppliers to source more products within the United States. The retailer also broadened its monetary commitment. Such efforts have included hosting open supplier summits where suppliers can learn from one another while pitching new product ideas to Wal-Mart buyers.
Last week, Chain Store Age featured a posting indicating that this global retailer is now in the process of planning for another supplier event to be held in early July. In the report, Cindi Marsiglio, Vice-President of U.S. manufacturing indicated before a meeting of targeted suppliers: “Second to price, customers care where their products come from. Our customers want to buy products closest to their communities.” Categories being singled out include baby and infants, food and consumables as well as pet care.
The Wal-Mart U.S. Manufacturing event is currently planned for July 7-8 in Bentonville Arkansas. Event details are still being worked out with registration expected to be opened in April. More information can be garnered at the following Wal-Mart web link.
Supply Chain Matters continues to applaud Wal-Mart for both its large monetary commitment and far-reaching efforts to promote further sourcing of U.S. manufactured products. We urge current or perspective U.S. suppliers to take advantage of such a program.