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There is a New Phase of Online and Omni-Channel Fulfillment

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From time-to-time as developments warrant throughout the year, we publish various succinct research advisories to clients and blog readers focused on specific industry, line-of-business, functional or technology trending that warrant specific attention for both management teams and supply chain management professionals. Normally our advisories are included within regular blog posts, but when significance warrants, and content length dictates that we provide deeper insights, we will now provide these advisories in our Research Center as complimentary downloads.

There have been several phases related to the ongoing explosion of online commerce and its impact on retail and B2C focused industry supply chains. Take note that 2016 marks the beginning of the newest phase, namely impacting the long-term presence of brick and mortar retail.

The watershed events have been recent Q2 financial performance results from various retailers, and more specifically, last week’s public acknowledgement by broad based merchandise retailer Macy’s that declining foot traffic makes the cost or value of real estate and physical store operations a new determinant of long-term strategy. The initial shockwave came in January with Wal-Mart’s announcement that it would close 260 stores globally, including 154 across the United States as part of comprehensive strategic alignment of strategy. By June, there is additional discernable evidence of  this new phase.

In our Ferrari Consulting and Research Group Research AdvisoryThe Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, we address background, the iteration of phases and including the tenets of this new phase, along with actions to consider.

Our only requirement for this complimentary research advisory report is that readers fill-out an electronic download form that requires some basic information. To download the report, access our Research Center from the top menu, double-click on the words Research Advisory- August 2016 on the right-hand side and complete the form.


The U.S. Postal Service Has Reached a Critical Crossroads

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This week, the United States Postal Service (USPS) reported its financial performance for the latest quarter, and from our lens, there are distinct indications that the agency has reached a critical juncture in its ability to be a sustaining competitor and service provider to the world of online fulfillment. As the agency handles more and more package volumes, its transportation and operating costs have risen significantly. Readers, those residing in small and medium as well as large businesses, need to continue to be aware of the implications of this trend.  USPS Delivery_sized

In September of 2014, Supply Chain Matters declared that the USPS had suddenly changed the industry dynamics of parcel shipping, online commerce and customer fulfillment.  The agency established a whole different dynamic for B2C/B2B online commerce by aggressively reducing parcel shipping rates and by declaring to online retailers and businesses that the USPS intended to be a parcel transportation and last-mile delivery partner in the ongoing explosion of online. Suddenly, e-retailers who wanted to maintain attractive free shipping options discovered a potential new alternative to control costs of such programs, and entities such as Amazon were quick to make leverage.  Both FedEx and UPS were not all that pleased with the pricing move and began logging protests claiming foul, even though both relied on the agency for completing more costly last-mile delivery needs.  However, both were forced to deal with a different competitive landscape in terms of rates and customer alternatives.

Then we viewed the evidence of the results from the all-important 2015 holiday fulfillment quarter, as the agency actually surpassed UPS in total delivered packages. USPS letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. UPS reportedly delivered 612 million packages as compared to its initial forecast of 630 million. The postal agency offered the equivalent of as many as 25,000 Sunday delivery routes, up from a normal 4000 pattern.  In essence, the USPS became the de-facto go-to carrier for Amazon’s needs for Sunday deliveries. Financially, the agency recorded its first quarterly profit since 2011, earning $307 million, a significant milestone.

In the latest June ending quarter, while total revenues increased 7 percent, the agency reported a controllable loss of $552 million compared with a year-earlier controllable loss of $197 million. Overall volumes were down slightly while package volumes increased 14 percent, an indication of offsetting declining volume in standard mail. The agency reports that it is now delivering to one million additional addresses across the U.S..

In the latest quarter, operating expenses increased 12 percent. The agency’s CFO indicated that transportation and compensation costs continue to rise despite strict cost controls, and according to The Wall Street Journal, the majority of compensation cost increases were related to the growth in package volumes.  Further noted was that transportation costs rose in part due to added air freight expenses to meet customer expectations.  According to a statement from the Postmaster General, while a recent package rate increase helped to boost revenues in that segment, it was not enough to offset rising costs. By the way, the principle air freight services provider to the agency is FedEx, who obviously benefitted from increased USPS package volumes.

From our lens, the USPS cannot continue to sustain its growth in package deliveries related to current and more expanded online commerce package volumes without investments in newer equipment, systems, and more flexible people resources. Most current delivery vans are over 20 years old and added package volumes are obviously taking a toll on these trucks. The agency is close to awarding contracts in evaluating new delivery van prototypes with larger cargo capacities while consuming less fuel, but the timetable obviously needs to accelerate.  Most of the agencies inter-city and cross-country surface delivery needs are established with external transportation firms or independent trucking contractors. As noted, air freight resources are contracted as well.

Scalability of this model does not equate to added efficiencies and cost control. As a government agency, beholden to the U.S. Congress, there are obvious political constraints.  Some in Congress want to be rid of direct government ownership yet many current and retired postal workers as well as associated contractors are voters who expect their interests to be considered. Add to this a heightened and highly partisan Presidential campaign environment and readers can get the picture.

The agency and its associated postal workforce have proven viability as an option in package delivery and last-mile fulfillment. The latest TV commercials depicting USPS vans branded with virtual retail branding has purposeful meaning for online consumers. But, the crossroads has been reached in terms of added scalability without losing additional monies.

It is time for the U.S. Congress to act.  Either allow the agency to manage, invest and compete as an alternative e-commerce delivery provider or take action on other options.

The analogy is perhaps a teenager that proves to his or her parents that they have finally grown-up and matured, and desire to launch on a chosen career, and seek the support to do so. So is the situation with the USPS and the Congress. The crossroads is at-hand.

In the meantime, businesses need to stay aware to the implications of these trends especially in the light of continual evidence indicating that supporting online customer fulfillment has become more expensive with every passing campaign.

Bob Ferrari

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

 


Statistical Evidence Suggests There is Indeed an Inventory Overhang with Two Potential Causes

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Business media has of-late pointed out that that overall inventory levels among retailers and manufacturers has been unusually high, which is impacting both current procurement activity as well as logistics and transportation trends.

We at Supply Chain Matters decided to have a detailed look at the data to extract some insights

The most accepted and readily available measure of any inventory overhang is the inventory-to-sales ratio. The generally accepted definition of this ratio equates to the amount of total amount of inventory that businesses report has compared with the amount of goods that they have sold in a particular period of time. In essence it represents total business inventories divided by total business sales.  A ratio value in excess of one would indicate how much more inventory is available to support existing sales levels. During times of severe recession, such as which occurred during the years 2008-2009, the ratio is high. During good economic times when sales are robust, the ratio should be lower.

For U.S. related activity, the U.S. Census Bureau calculates and reports this ratio.  We downloaded adjusted historic data with a start year of 2008, just prior to the prior severe global recession, with values up to and including May of this year. (The last reporting value).

There are three different variants available from the U.S. Census:

Total Business (Adjusted)

Total Manufacturing (Adjusted)

Total Retail Trade (Adjusted)

For purposes of our analysis, we elected to analyze and share Total Business and Total Retail Trade.  However, we elected to sort and present this trending data by month, which we believe would be far more of interest to our supply chain, manufacturing and product management reading audience.  This is because inventory is managed continuously in daily, weekly or monthly dimensions.

Indeed, the data does present some insightful trends.

Our first figure is Inventory to Sales Ratio-Total Business Activity (Adjusted), 2008 to Date.

Inv_Sales_Tot_Bus_2008_2016_Sized

 

First, notice the distinctive spikes in the ratio for the early and late months of 2009, when the global recession took a severe toll on businesses. The average ratio across all of 2009 monthly values was 1.34, with the highest values ranging from 1.48 to 1.43 during the first-half of that year. What we further noticed was the ratio began a steady creep upwards beginning in November 2013 (1.33) thru May 2016. The average ratio value for the five months of 2016 was 1.41, rather close to the spikes in early 2009. Notice further that the spike in the ratio extends across all months

So what happened?

Again, we do not portend to be trained economists but it would seem by our knowledge of supply chain events that there were two rather significant events that occurred in the designated latter period. One was the U.S. West Coast port disruptions that extended from the latter-half of 2014 well into the first-half of 2015. The other was the ongoing boom of online commerce that has impacted retail channels, resulting in a boom in the construction of new online fulfillment distribution centers.

We further analyzed the ratios for Total Retail Trade (Adjusted) for the same period of 2015 and the first five months of 2016.

Inv_Sales_Total_Trade_2008_2016_Sized

Notice that the 2009 spike was far larger and that a somewhat similar pattern of current creep is manifest in the 2015-2016 data. The average ratio for Retail Trade was 1.46 for 2015, and 1.52 for the five months in 2016. While not to the 1.6 levels of 2009, the trend is indeed worrisome.

We therefore suggest that with more and more products being offered online, and with consumers expecting immediate availability and delivery, it would seem that inventory levels have risen to the challenges in the explosion of online.

We conclude with the following takeaways:

  1. There is indeed strong evidence of a building overhang in inventory levels. Supply chain, procurement and sales and operations teams need to take a hard look at inventory trending in relation to supporting expected sales volumes.
  2. The U.S. West Coast port disruption appears to have provided its own impacts in ongoing inventory management. Whether that resulted in increased safety stocks, changed global transportation patterns or continued concerns, the ratio creep correlates in timing.
  3. The ongoing explosion of online commerce, online consumer demands for immediate availability, and the added build-out of new fulfillment centers seems to have a direct correlation to ratio creep timing, however there may be other factors at-play. Bottom-line, inventory levels are indeed creeping up to concerning levels, despite all the current advanced planning and technology tools currently available. It may further explain why global PMI indices have trended more toward contraction levels.

We encourage our readers, particularly those of economic and/or academic backgrounds to weigh-in on the above. What do conclude from the current high levels of inventory overhang?

Bob Ferrari

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

 


The Online Bombshell- Wal-Mart Elects to Acquire Jet.com

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When it comes to development and deployment of advanced technology, organizational decisions often come down to the basic options of either build internally, insuring all nuances are supported or acquire externally.  That is our context of yesterday’s stunning announcement from global based retailer Wal-Mart that it has signed a deal to acquire Amazon rival Jet.com for $3.3 billion.

This deal is being billed as helping to jump-start Wal-Mart’s existing Omni-channel retail strategy including wider deployment and uptake of Wal-Mart.com and many initial signs point exactly to that strategy. Citing data from Dow Jones Venture-Source, The Wall Street Journal reports that this is the largest deal ever paid for a U.S. e-commerce start-up let alone one of the largest acquisitions involving an unprofitable, one-year old start-up. Retail industry readers well know that Wal-Mart has been known for its conservative organizational culture as well as its tendencies to build capabilities to match internal business processes. This week’s announcement is therefore quite significant in its statement of intent.

By immediately announcing that Jet.com’s founder and CEO Marc Lore will now jointly lead both online sites in strategy and future development, CEO Doug McMillan sends a clear message of serious intent to boost online presence and compete directly with Amazon.  However, by our lens, the open question is whether the existing Omni-channel strategy for leveraging Wal-Mart physical and online assets and capabilities will prevail.  The immediate key is the announcement that both sites will remain independent entities but with common leadership and direction. By our lens, that provides the opportunity for a two-phased strategy, Wal-Mart.com leveraging an Omni-channel strategy that leverages global scale of physical and online while Jet.com caters to more upscale shoppers seeking alternatives to amazon and other online retail sites.

Already noted by business and industry media is the distinctively two different corporate cultures represented by both organizations including supply chain and technology expertise. Marc Lore’s intent with Jet.com was to consistently undercut Amazon prices by anywhere from 5-15 percent leveraging pricing software that factors shipping distance and logistics costs in pricing. The stated mission and values of Jet.com are to work collaboratively with retail partners and suppliers and the online provider has been cited by others for its trust and value in people. A similarity to Wal-Mart is in leverage suppliers to hold the burden of inventory ownership and cost, but Jet claims to share the mutual benefits.  Wal-Mart brings considerable resources in physical logistics, distribution and fulfillment center operations along with existing global carrier relationships. The latter will come into play during future holiday buying surges.  Amazon is already well underway in owning its own logistics and parcel transport capabilities for surge periods.

Marc Lore has garnered a reputation as a talented and savvy e-commerce executive. His previous online venture, Quidsi, Inc. operated the successful sites diapers.com and soap.com. That online entity was acquired by Amazon for $550 million in 2010 after Amazon tried unsuccessfully to directly compete. As we see it, Mr. Lore’s new challenge is his abilities to leverage the abilities of one of the globe’s largest retailers in a culture that has not had a consistent track record in deployment of advanced technology.  Readers might recall Wal-Mart’s prior efforts to leverage RFID technology as a competitive advantage. Wal-Mart’s prior track record with acquisitions has been mixed as-well.

As always, time and subsequent events will provide the ultimate determinant for the success of this acquisition. In the meantime, the landscape of B2C e-commerce will be far more interesting and dynamic in the months to come.

Bob Ferrari

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

 


Ocean Container Industry Gross Overcapacity Looms Larger for Holiday Fulfillment Period

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August marks the traditional start of the peak transportation period leading up the October thru December peak holiday fulfillment period involving both traditional and online retail channels. Today we feature two Supply Chain Matters commentaries addressing two separate but important trends that will make the forthcoming period far different and perhaps far more challenging for industry supply chain teams. The first was our prior posting, Amazon’s continued strategic and tactical efforts in deploying owned logistics, transportation and last-mile delivery capabilities.

In this posting, we highlight a recent report echoing the currently gross overcapacity conditions concerning global ocean container fleets, a situation which supply chain and procurement teams need to pay close attention to in the coming weeks. Container_Term

Global Trade Magazine reports that certain industry alliances involving ocean container shipping lines have now suspended shipping services available for the current peak holiday global shipping season. In this report, Why are Shipowners Parking Containships?, the publication observes that in ideal world, ship fleets would be fully utilized during this upcoming peak holiday period as goods make their way from Asian based suppliers and manufacturers to global markets in-time for the forthcoming holidays at the end of this year. Instead, the G6 Alliance has suspended transpacific service resulting in five of its six vessels being idled while the Ocean Three alliance suspended its Manhattan Bridge service idling nine container ships. The report cites Drewry Shipping Advisors proprietary data indicating that over 300 container vessels, with a combined capacity of over 800,000 TEU’s were idle by early July, at the start of this year’s peak shipping period.  The report further implied that the ongoing peak period is rather weak and resulted in the decisions by shipping alliances to idle vessels much earlier in the season. More importantly, the report speculates that carriers are not only moving to park unused capacity earlier in the peak period, but further attempting to boost spot rates up by increasing load factors on remaining active vessels.

This commentary further declares:

As deliveries of new ships continue, carriers are starting to run out of options on how to deploy them even their largest ships in today’s over-supplier market.

The above is the obvious red flag to industry supply chains as the overcapacity crisis now reaches an extreme stage. Compounding the problem is the opening of the expanded Panama Canal that occurred in June, causing ships with 4500-5000 TEU capacity to be now idle as carriers begin to route their largest vessels directly through the canal.

For industry supply chain and services procurement teams, particularly those directly related to the retail industry, the coming peak season obviously requires very careful planning of inventory and capacity needs. Those that have a higher reliance on spot market movements and rates need to be especially vigilant in the coming months, particularly if inventory movement needs relate to supporting post-peak market needs in the January-March period. By the end of the year, the overcapacity situation involving ocean container lines should be even more of a challenge that can impact transit times as well as vessel availability.

Thus, it remains critically important for industry supply chain teams to pay close attention and double-check all planning related to inventory requirements and transportation servicing needs. This advice includes teams who have outsourced much of their transportation planning and execution needs to third-party providers. While there may be an assumption of predictable rates, industry dynamics are changing quickly, and along with this, vessel availability and global shipping transit times.

Technology can certainly aide in this area, particularly that which tracks spot ocean container shipping rates and vessel availability trends. But in the end, you cannot afford to assume that your transportation partners totally have your back, especially if you are an organization that dwarfs the shipping needs of far larger global retail or manufacturing enterprises. Small and medium businesses are often subject to the mercies of the spot market.

Insure your organization does its homework, constantly checks and validates planning assumptions and keeps a keen eye on spot market transportation rates. Consider using technology that can assist in navigating these unchartered waters.

Bob Ferrari

 


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