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Wal-Mart’s Efforts to Strategically Refocus its Business Models Surface in Business Media

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Among consumer goods and services focused supply chains, Wal-Mart clearly warrants special attention. The global based retailer continues to provide clout and sheer scale of operations that any producer, manufacturer, direct competitor or supply chain cannot ignore.   Wal Mart

This week, and for the first time ever, this retailer is hosting more than 500 manufacturers to spur more “Made in the USA” products that can be offered across Wal-Mart’s outlets.  The retailer has committed upwards of $250 billion over the next ten years to support more domestic sourcing of products, and is one of very few companies with the clout and influence to make something happen in this area.  Supply Chain Matters has previously complimented Wal-Mart on this initiative and we trust others will as-well. More on this topic in a later commentary.

Business media and indeed Supply Chain Matters have also called attention to troubling signs involving lagging sales growth in the U.S. along with other more visible issues. The retailer recently reported its fifth straight quarter of negative U.S. sales and reduced traffic.

For an in-depth perspective on what is really occurring behind the scenes, along with a renewed sense of urgency, we call reader attention to this week’s Wall Street Journal front-page article: Wal-Mart Looks to Grow By Getting Smaller. (paid subscription required)  

This article specifically profiles the retailer’s new CEO, Doug McMillon, described as a “Wal-Mart lifer” and his uncharacteristically new efforts directed at altering prior Wal-Mart business models in favor of more innovative approaches. In essence, the WSJ concludes that McMillon is looking beyond a traditional short-term focus in a concerted two-fold effort to bring the retailer into the next century of retailing.  These efforts have considerable supply chain and B2B business network implications in the months and years to come.

Described is a new sense of urgency instilled across the entire executive leadership team which includes increased piloting of new ideas. “For the first time in its history, Wal-Mart will open more smaller grocery and convenience-type stores than supercenters.” The WSJ cites internal sources as indicating that the retailer is evaluating plans to open free-standing liquor stores and adding more gasoline service stations in certain states. A test store near Denver allows shoppers to order groceries online and pick-up that order in a drive-thru. The notion of “everyday low prices” is giving way to “dynamic pricing” based on competitive market data.

In its latest fiscal year, the retailer plowed $500 million into its new online E-commerce business, including the addition of three new online fulfillment centers, and has plans to invest an additional $150 million in the current fiscal year. Last year, the retailer was cited as having the highest online sales growth, 30 percent compared to Amazon’s 20 percent gain. Wal-Mart now has upwards of $10 billion of total revenues coming from its online channels.

McMillon’s focus further remains on day-to-day operations of stores including smarter merchandising and in-stock inventory management along with cleaner stores.  The article notes that at a recent annual meeting of store managers, an executive admonished store managers to take more active ownership of stores and clean-up their operations.  If you have, as this author has, visited a Wal-Mart store of-late, you may have observed that stores are more disheveled with associates that exhibit a lack of caring about shoppers needs. Wal-Mart also has to come to grip with its ongoing labor management practices.  The WSJ makes note that earlier in the year, the National Labor Relations Board accused the retailer of unlawful retaliation against workers who took part in protests over working conditions.

Our community can well relate to the fact that keeping shelves adequately stocked was the primary emphasis of Wal-Mart’s prior RFID item-tracking initiatives, which yielded minimal impact and continual resets.

Whether Wal-Mart will succeed in all tenets of its current two-fold business strategy is certainly fodder for added speculation and water cooler debate. However, the continued clout and influence of the retailer on the ultimate success of supply chain and demand fulfillment initiatives is unmistakable, and thus, cannot be ignored. As a participant in Wal-Mart’s supply chain, your organization will again be tasked with many short and longer-term initiatives in support of these parallel efforts.

Keep in mind what is going on behind the scenes as a giant retailer attempts to change its culture and business models to meet the realities of the new era of retailing and customer fulfillment.

Bob Ferrari

© 2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.


A Candid Expose of Target Stores CEO Leadership: A Rebellion from Within?

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We call reader attention to a rather provocative but revealing expose published by the Wall Street Journal this week regarding U.S. based retailer Target Stores. The article: Retailer Target Lost Its Way under Ousted CEO Gregg Steinhafel (paid subscription required) outlines a story that portrays a sequence of events, even prior to last November’s massive credit card security breach, leading-up to several of the retailer’s executive team delivering a message to Target’s board. “If Mr. Steinhafel didn’t leave immediately, others would.”

The article observes that Target’s core hip image of creativity in merchandising, affectionately dubbed “Tar-zhay” took a back seat to rigid performance metrics under the leadership of CEO Steinhafel.  The premise outlined was that Target’s retail selections became more commonplace, similar to arch competitor Wal-Mart. Under the tenure of Steinhafel more retail store space was allocated to produce and grocery items as a sales growth tool.

For Target’s supply chain and online B2C strategies, suppliers, including smaller-sized ones, describe added pressures from Target’s buyers to wring-out additional costs. Target’s buyers stressed a placement system that awarded prime shelf space to highest and most cost attractive bidders. The retailer reportedly was slow to embrace online fulfillment and in 2001, outsourced its online web fulfillment operations to Amazon.com, only to bring it back in-house in 2011 after a two year internal development effort. Shortly after taking online B2C fulfillment in-house, the retailer suffered a series of highly public failures among highly marketed and promoted merchandise programs.

The article also points to Target’s 2013 feud with long time loyal supplier Procter & Gamble after discovering that Amazon was collaborating in establishing its Vendor Flex online fulfillment for Pampers diapers directly within P&G warehouses. When learning of the Amazon arrangement with P&G, Steinhafel ordered that P&G products be given less than ideal placement in Target stores for a period of a few months. That sent a buzz across the industry.

The WSJ further describes an ambitious but poorly executed move into Canada, opening 127 stores over a one year timeframe that has led to continued operating losses. In its most recent quarter, Target’s profits fell 16 percent having to ramp-up discounts to recover from consumer abandonment as a result of the recent massive credit card security breach. Lagging sales across newly opened outlets in Canada racked up an additional $211 million in losses. Target has experienced over a year and a half of declining store traffic while its online presence remains troublesome.

And then there was the coup de grace, with the highly visible credit card security breach involving the personal data of upwards of 70 million shoppers, which other media reports conclude could have been avoided from early warning signals and the company’s own installed security software.

Like any of these types of situations, there is always two-sides regarding perception of events. Steinhafel himself had 30 year tenure at Target and likely had full knowledge of the retailer’s corporate culture and management practices.  After the massive and highly visible cred-card security incident, he might have been a convenient scapegoat for the retailer’s series of missteps. What astounded us was the action of Target’s board in accepting the direct feedback of many others of the existing senior management team in the midst of this crisis environment, in essence allowing for anarchy from the management ranks. Too often when this situation occurs, it takes a very long time for a new CEO to establish his or her’s leadership presence and overcome parallel lines of communication to board members.

We applaud the WSJ for its in-depth and candid perspectives on Target’s senior management missteps. However, it may not help this retailer in timely efforts for recruiting a strong CEO leader who can establish a new direction.

Bob Ferrari


UPS Joins the Movement to Dimensional Pricing for 2015

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In early May, global package delivery provider FedEx announced a series of dimensional weight pricing changes related to both its FedEx Ground and FedEx Freight service units that are scheduled to take effect at the beginning of 2015.  This week, UPS has also announced its intent to implement dimensional pricing as well. effective December 29, 2014. The UPS pricing will be applicable to all UPS Ground and UPS Standard to Canada package shipments.

In its announcement, UPS indicates that current e-commerce shipping trends have resulted in a decrease of package density, causing cargo space to be less efficiently utilized in its network.  However, UPS neglects to mention the further implication of this trend, namely increased package volumes that result in increased revenues.  Once more, both carriers have implemented advanced technology that can optimize cube volume on any transport asset. With the shift toward dimensional pricing, both FedEx and UPS stand to gain considerable boosts in product margins since no substantial changes are required to handle today’s day-to-day volumes.

As noted in our prior commentary, the price to ship a bulky, but relatively low-cost item could rise significantly under these proposed changes, tipping the balance of free shipping and potentially deterring an online buying decision. For manufacturers and retailers, the implications are significant. Such a change can have a major impact on online shopping habits and could well derail current B2C online buying momentum. Supply Chain Matters recently viewed E-commerce retail sales data from IHS which indicates that in 2011, the top category of online merchandise sales was clothing and accessories, followed by other merchandise and electronics. Clothing certainly can be a candidate for dimensional pricing.

The proposed dimensional pricing change further implies a major revisit of packaging and transportation practices for bulky items as well as policies related to free shipping. Those bulky items may well be collapsed as much as possible into components, that is, if they can be.  Online retailers would more than likely be compelled to consolidate items as much as possible into a single shipment. The concepts of online replenishment of household or other day-to-day consumption items could well take on a far different market dynamic. Brick and mortar discount retailers such as Wal-Mart and warehouse goods retailers such as Costco, in-turn, have been handed a new opportunity in the area of shopping for low-cost but high bulk goods.

Again, major online retailers have considerable negotiating clout and no doubt, negotiations for 2015 package shipping contracts will be lively.  However, smaller online and other B2B and B2C providers will bear the brunt of the implications of dimensional pricing. 

For our consumer focused readers, the implication is that online free shipping may well become a practice of the past.

Bob Ferrari


Structural Changes in Retail Consumer Buying Trends Demands New Leadership and Investment Practices

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This author has penned a number of prior Supply Chain Matters commentaries offering evidence that fundamental structural changes related to consumer shopping habits are occurring in multiple retail sectors among developed regions. Recent reports of earnings from two very influential global retailers provide even more evidence.

Wal-Mart reported its fifth consecutive decline in U.S. sales adding concerns that consumers have opted for other brick and mortar or online options. According to Wal-Mart, traffic among U.S. stores has been declining for more than a year.  That is after multiple attempts to re-organize stores and merchandise stocking strategies. In earnings reporting, the retailer’s senior leadership continues to attribute this trending to pressures on household incomes. The current initiative is to accelerate plans to open 300 smaller retail outlets containing pharmacies and fuel filling stations while testing online grocery delivery. Sales in the smaller format grocery and convenience outlets increased 5 percent in the latest quarter.

This week, U.K. based Tesco PLC posted its sharpest drop in quarterly revenues in 40 years, declining 3.7 percent in the latest quarter. Somewhat similar to Wal-Mart, Tesco previously embarked on wide-scale initiatives to improve store selection and customer service. In February, the U.K. retailer announced a plan to invest $335 million in price incentives to more aggressively compete with discount chains.  However, according to a Wall Street Journal report, two other U.K. supermarket chains, J Sainsbury and Morrison Supermarkets also lost ground.  Ironically, Asda Stores, a unit of Wal-Mart, increased its market share. The WSJ further notes that Tesco shares have declined a quarter of their value since early 2012.

While geographic market nuances are always a factor, so are consistent discernable trend.  Evidence is reflected in quantitative and survey data and increasingly in retailer financial results. General and food retailers must address these structural buying trends occurring in their respective markets, and so must their supply chain organizations.  Big and massive distribution scale is being subsumed by smaller, convenient and personalized shopping that combines online with brick and mortar assets.  Businesses processes, technology and indeed management practices of the past no longer suffice.  The new focus is indeed smarter, personalized and more convenient shopping and supply chain response.

In a previous commentary that addressed recruiting the new era of retail and online fulfillment leaders, I argued that there are two leadership competencies that will differentiate tomorrow’s executive leaders in retail.  They are a deep understanding of social-media fueled marketing and Internet focused retailing, and a deep awareness, understanding and appreciation of end-to-end supply chain inventory deployment and fulfillment capabilities.  From our lens, recruiting for retail C-level executives has been too focused on classic merchandising, finance or traditional brand marketing.

The time clock continues to tick and the retailers and leadership teams that “get it” will outshine those that do not.

Bob Ferrari

©2014 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved


Logility Announces Acquisition of MID Retail

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Late last week, supply chain planning suite provider Logility announced that it had acquired privately-held retail industry focused allocation and merchandise planning software provider MID Retail.  The amount was undisclosed.

MIR Retail technology is directed at helping retailers synchronize merchandise financial objectives of inventory and margin with specific retail location to boost in-stock performance and profitability. The software includes inventory allocation and merchandise planning functionality support and the acquired entity includes named customers that include Abercrombie & Fitch, Big Lots, Bon-Ton, Orvis, Tuesday Morning and Urban Outfitters, among others.

According to the announcement, MIR Retail’s offerings will be integrated into and rebranded under the Legality’s existing Voyager Retail Optimization product suite, available as either a stand-alone deployment or as part of a broader supply chain initiative.

From our Supply Chain Matters lens, this acquisition appears to be a move by Logility to strengthen specific retail industry focused technology offerings and specifically position the company to be able to offer online and brick-and-mortar retailer customers the ability to support a consistent Omni-channel customer experience that can span a broader span of supply chain planning and execution capabilities.  We also view this announcement as an effort by Logility to offer a competitive offering to JDA Software in retail industry support.


Amazon Reveals More Evidence Related to Leveraging Kiva Systems Based Automation

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In March of 2012,Amazon.com agreed to acquire privately-held warehouse automation and robotics provider Kiva Systems in an all cash deal of $775 million. At the time, this was the biggest acquisition by Amazon since its 2009 takeover of Zappos.com, and added credence to the importance of this Kiva’s technology to Amazon’s online customer fulfillment strategies.

At the height of the 2013 holiday surge, when Amazon captured headlines with the announcement that it was prototyping delivery drones, our Supply Chain Matters perspective was that fulfillment center automation and how Amazon would leverage Kiva technology was the far more profound headline for online fulfillment teams to stay focused upon. A published Wall Street Journal article at that time reinforced this viewpoint and made note that Amazon had disclosed that it had 1400 Kiva robots already deployed in three of its fulfillment warehouses. An equity analyst from Janney Capital Markets was quoted by the WSJ as indicating that the Kiva technology “could help to pare 20% to 30% off the $3.50 to $3.75 cost of fulfilling a typical order...”

Last week, a posting published on Internet Retailer indicates that at Amazon’s annual shareholder meeting, CEO Jeff Bezos announced plans to have at least 10,000 robots deployed by the end of this year, as part of the E-tailor’s ongoing efforts to enhance same-day and weekend customer delivery capabilities. Obviously, industry insiders continue to connect the dots that point to Kiva technology as instrumental not to reducing margins and customer order fulfillment costs while helping to support more agile order fulfillment strategies.

The same robotics deployment plan can possibly be construed as a response to ongoing work stoppages involving worker disputes among Amazon global customer fulfillment centers.High volumeB2C firms operate within dynamic and seasonality driven environments where 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. 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. The comments affixed to the Internet Retailer posting provide ample evidence of the reaction to robotics.

 


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