Wall Street financial analysts and commentators were quick to pounce on Amazon’s recent quarterly earnings announcement.  In the latest quarter (Q4-2011) that included the 2011 holiday buying season, Amazon revenues grew 35 percent, but income was down 57 percent.  Wall Street was very disappointed. Not only were Street analysts anticipating more revenue growth, they have been savage in questioning Amazon’s increased spending and margin erosion.  During the recent quarter, operating expenses were up 38 percent which surpassed quarterly revenue growth.

The other continual topic of speculation revolves around how many Kindle tablets did Amazon really sell during the holiday season.  Supply Chain Matters is just as guilty as others in speculating on the fulfillment wars of Kindle vs. the Barnes and Noble Nook reader, and of course, the largest shadow, Apple’s iPad.  For its part, Amazon remains rather coy in providing very general statements regarding Kindle sales.  The online retailer was quick to point out that Kindle was, by far, the best-selling Amazon holiday product in both the U.S. and Europe. Then again, Amazon visitors were bombarded with constant reminders about Kindle.  While some industry observers and influencers speculate that Kindle sales may have topped six million, the final authority will be Amazon itself.

We all know that Wall Street’s lens on strategy to results centers on the next 90 days vs. a longer-term perspective of market influence.  If all the doom and gloom were taken literally, a short-term investor would have the impression that Amazon executives are spending for the sake of spending.  History, however, provides a far more long term strategy being deployed.

Like the Cheshire Cat, Amazon has a far broader strategy at play and retailers and other online providers had better be paying attention since Amazon is often characterized as the most competitive company ever built.  According to Morgan Stanley: “Amazon is the Wal-Mart of our era but it’s better, in our view — Amazon.com is the combination of technology + logistics company, allowing it to participate in a transition of physical to digital retail supported by store-less (in Seattle) business model that leads to higher long-term economic returns.”

What should concern all is where Amazon is investing.  The latest earnings briefings indicate that Amazon continues to invest heavily in global based sales fulfillment centers.  The online provider has plans to deploy an additional 17 centers on top of the over 40 global fulfillment centers already in-place.  Headcount has increased 67 percent from a year earlier, and Amazon reports that the majority of people investment is in operations and customer support areas. Add physical distribution and logistics to a virtual network of incredible online IT, cloud and customer intelligence data infrastructure, and the evolving business model becomes clear.

While some retailers and online providers elect to outsource physical fulfillment, technology and services under a strategy of lowest-cost provider, Amazon blends strategies and technological capabilities together as an unstoppable force in physical and digital based fulfillment of customer needs.  While some retailers such as Target are becoming more aggressive in product and price differentiation, Amazon can have the ability to leverage each of its tools and capabilities to always be the lowest-cost alternative.

Supply chain senior managers and strategists should heed the long-term game plan of Amazon rather than Wall Street’s convenient short-term outlook.

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and Supply Chain Matters, All rights reserved.

Prediction Four in our Supply Chain Matters 2012 Predictions for Global Chains outlines a year of turmoil among three specific industry sectors, one being the Retail and B2C segment. More empowered consumers armed with smarter mobile devices continue to make a profound impact on this industry sector, and the results of these impacts again manifested themselves in the 2011 holiday buying season.  A recent Wall Street Journal article again re-iterated that showrooming is an increasingly bigger problem for retail chains ranging from Best Buy to Barnes and Noble, while at the same time being a boom for online retailers such as Amazon.

Retailers have no choice but to respond with alternative strategies to restore some balance of power and recent announcements from major retailers Target Corporation and JC Penny have provided some initial indicators for alternative strategies being explored.

Target has emphatically stated that it will not allow its brick and mortar stores to be utilized as a showroom that consumers utilize, only to later buy an item at an online site offering the most attractive price. This latest statement is on the heels of a rather disappointing 2011 holiday sales period for this U.S.  major retailer.   The retailer issued an urgent letter to its major suppliers suggesting that special differentiated products be made available only to Target. Where special products could not be made available by suppliers, Target is seeking assistance in matching the lowest available price for that item. While Target has had a history of influencing its suppliers to provide Target exclusive products, this new iteration appears to be an effort to expand this initiative.  In its reporting, the WSJ noted that designated Target suppliers will have little choice but to cooperate with the initiative or run the risk of losing a significant volume customer.

Meanwhile, retailer JC Penny’s new CEO Ron Johnson, who was the former chief of Apple’s retail stores, will unveil this week a sweeping re-alignment of that retailer’s brick and mortar merchandising strategies.  In an effort to make JC Penny stores a destination,  major stores will be partitioned into a variety of specialty shops, with the high traffic center of the store being turned into a “Town Center” hang-out or experience center similar to the Apple “Genius Bar”.  In addition to these physical store changes, the retailer is eliminating most all previous sales markdown efforts in favor of a lower price every day pricing strategy.  Here again, there is a strategy of differentiation among branded goods and making it more difficult for consumers to price shop particular items.

Supply Chain Matters fully anticipates that other big retailers will also follow with differentiation strategies, but the real impact will involve individual suppliers, who after many months of efforts to consolidate overall product offerings, may find themselves under pressures to once again provide product offerings for individual retailers.  That could also have negative inventory connotations.

As more retailers fire more salvos in the war with online providers, the implications cascading across supplier networks could well negate any previous cost and operational efficiencies.  If these same retailers do not invest in supply network efficiencies and more enhanced supplier replenishment initiatives, the overall goal may be for naught.

Bob Ferrari

In late November this author penned a guest commentary on the Infosys Supply Chain Management blog that outlined our belief that retailers should anticipate different supply chain fulfillment capabilities for the upcoming 2011 holiday buying season.

Because of the reality of a rather challenging year of supply chain disruptions in 2011, we warned on the possibility of retailers not having the most popular and desired products the consumer wanted because suppliers would fall short of meeting holiday demand spikes.  We just posted an updated guest commentary, The Real Headline for the 2011 Holiday Buying Season- Need for Balancing Retailer Online and Fulfillment Process Investments, noting that initial evidence thus far, particularly what occurred at Best Buy again drive home the premise that investments in multi-channel operations (MCO )and responsive supply chain inventory management are often the best complement to effective multi-channel and online commerce plans.

Please share your own comments and observations on the Infosys Supply Chain Management blog..

Bob Ferrari

Disclosure: Infosys Limited is one of other named sponsors of this blog.

This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.

Readers are welcomed to review our previous series of postings.  These include:

 The full listing of 2012 predictions

Predictions One and Two.

Prediction Three

Prediction Four: Three specific industry sectors will be especially affected by significant supply challenges or turmoil in 2012.

In 2011, we correctly predicted that two industry sectors, B2C and Pharmaceutical/Healthcare would be especially affected by process impacts. For 2012, we predict the continuance of significant supply chain challenges within our 2011 selected industries and we add High Tech / Consumer Electronics as a third industry facing significant supply chain challenges.

B2C Sector

The B2C sector will continue to be impacted by the momentum of online multi-channel commerce and a more technology empowered consumer who demands multiple buying options and service experiences. Retailers have quickly come to discover that their supply chains need to have the ability to respond and execute holistically across all consumer buying channels, including online, in-store, vendor direct-ship, or combinations thereof.  Even as we pen these predictions, the headlines for Black Friday and Cyber Monday 2011 indicate an online traffic increase of a whopping 43 percent.  What has become even more apparent is that added investments in online and mobile capabilities and web tools in 2011 must also be complimented with investments in advanced supply chain inventory management and multi-channel commerce fulfillment technology.

While Amazon has become the unstoppable goliath of online commerce and fulfillment capabilities, an announcement by Google in early December 2011 could provide for some industry disruptive dynamics in the coming year.  Google entered talks with select major retailers and shippers to affix its product search capabilities with a one-day quick shipping option.  The capability was pitched to retailers such as Gap, Macy’s, OfficeMax and others. When shoppers place an order on retail web sites, Google’s quick ship would include the capability to scan available store and regional inventories for one day ship fulfillment execution. If adopted, Google has the clout to well become a supply chain fulfillment enabler by the 2012 holiday buying season.

When the dust settles after the 2011 holiday buying season, retailers and online commerce providers will be challenged in 2012 to continue to augment their back-end supply chain fulfillment competencies to seamlessly support multiple buying channels.  By Q4 2012, the holiday focused buying surge will make the notions of Black Friday and Cyber Monday meaningless since consumers will leverage online and mobility tools at will when bargains or available inventory of in-demand hot products are evident.

Pharmaceutical and Healthcare

An article published in Strategy and Business in mid-November re-iterates that the Pharmaceutical industry must fundamentally re-think its supply chain.   The article notes: “There is minimal communication, little effort toward mutual improvement, and no real desire to pursue efficiency gains.”  That reality manifested itself in 2011 as certain Pharmaceutical and Generic Intravenous Drug supply chains failed to deliver on-time and reliable supply, and we do not anticipate any recovery until the latter part of 2012, if at all. Frankly, the industry has shown no public signs of resolving a myriad of supply chain issues involving the increased complexity of a global supply chain involving generic and contract manufacturing relationships. Rather than a mentality that views supply chain as a burden of cost centers, the industry must embrace supply chain efficiency and responsiveness, disciplined and meaningful sales and operations planning as a competitive differentiators. Hospitals, pharmacies and healthcare providers who have faced severe or ongoing shortages and /or allocation of life-saving chemotherapy and intravenous drugs will continue to be challenged in securing reliable supply. Reliable price control, grey market and counterfeit drugs also remain as threats to overcome in an increased environment of scrutiny and regulatory oversight, and a more empowered set of customers.

The year 2012 will be the first major test of former blockbuster drugs losing patent protection and having to compete with high volume generic drug producers. Pfizer’s highly successful cholesterol reducing drug Lipitor will lose its patent protection and the end of 2012.  To hold market share, the company plans to sell Lipitor directly to patients at generic prices.  Pfizer has partnered with Diplomat Specialty Pharmacy to mail the drug directly to patients via online prescription fulfillment.  A dual tier pricing model would be maintained, with generic pricing for Diplomat and higher pricing for existing Lipitor channels. According to a Wall Street Journal article, if successful, the implication would be a distribution model that no major drug maker has implemented to date. Meanwhile, generic drug producers Ranbaxy Laboratories, based in India and Watson Pharmaceuticals plan to produce and distribute generic versions of Lipitor during 2012.

High Tech and Consumer Electronics

We have added High Tech / Consumer Electronics because of the residual impacts of the devastating monsoon related floods that impacted Thailand and other Southeast Asian nations in the fall of 2011.  There are all indications that a significant shortage of hard disk drive components and production capacity will extend to the mid-2102, possibly to through the end of the year.  The production of electronic devices such as laptops and personal computers, storage appliances and disk arrays destined for data centers or cloud computing facilities, and other consumer electronics devices that include a hard disk will all be impacted.  While some large hardware and storage OEM’s will manage to buffer the impact with their buying power and supplier leverage, others may fall short. Readers should not be surprised to hear of well-known brand names impacted by disruption and turmoil during the year.  Prices, both component and finished goods related, will also spike in 2012.

The Wildcard

A fourth wildcard industry mention for 2012 is the Aerospace industry.  A huge backlog of customer orders has caused major OEM’s Airbus and Boeing, along with key component suppliers, to have to aggressively ramp-up planned production output levels.  Boeing itself has a $332 billion order book and has plans to ramp existing production over 30 percent in the coming three years. Its 787 Dreamliner program is three years plus behind schedule, and must ramp-up a second final assembly facility in South Carolina. Airbus, as of October, reported a current backlog representing more than seven years of production output.  Aircraft engine maker Rolls Royce will be opening its first external production facility in Singapore.  Any further major industry glitches, or negative consequences from the Eurozone financial crisis could cause this industry to also be challenged by disruption and turmoil in 2012.

This concludes Part Four of our Supply Chain Matters 2012 Predictions.  In Part Five, we will explore our Prediction Five, where the supply chain control concepts will come to the forefront, and Prediction Six, the increased adoption of cloud computing and managed services adoption in 2012.

In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.

Bob Ferrari

© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.

The following is a Supply Chain Matters guest commentary contributed by Arun Kumar P., a Principal Consultant at Infosys Limited, who is also a contributor to the Infosys Supply Chain Management Blog and consulting team.

The past few years have seen the increasing adoption of buy-online-pick-up-from-store initiatives at several grocery retailers in the United States. What began as a value-differentiating concept in a commoditized industry is more than just an idea today. However, if online grocery is to evolve into a broad-based business model with an alignment of capabilities, maturity of processes, and adoption of technologies, much more needs to be done. The consumer-facing front-end must borrow from leading e-commerce practices while the back-end fulfillment model must evolve by adapting warehousing best practices.

Cheerleaders of the online grocery business model point to its success in Europe and argue for its expansion by delivering orders to homes. Critics contend that this model cannot be effective in the US. Both miss the broader picture.

While it is true that Europe has taken the lead in enabling online grocery shopping where population density also allows home delivery, the keys to the successful adoption of online grocery are located elsewhere. Lost in these debates is the comprehensive understanding of linkages across the true view of consumer desires, alignment of retail grocers, and perspective of solution providers. Therein, I believe, lies the true platform for success.

True View of Consumer Desires

The first step in the journey towards online grocery commerce is to understand the consumer view. Why does she/he prefer online grocery shopping, and what are overall consumerexpectations? The answer, simply put, is that online grocery shopping translates into a time-saving method of fulfilling a domestic requirement that is not only repetitive but is also driven by set buying patterns. The consumer desires that the shopping experience mimics real-life. For instance:

• Retain the ability to search and compare items before adding them to the cart
• Expecting that the retailer to be sensitive to the varied storage, packing and handling requirements (e.g., maintaining chilled, frozen and ambient conditions; separating seafood from cleaning liquids, etc.)
• Access to the latest pricing and promotion campaigns
• With some items, the consumer  may prefer flexibility to order in one unit and pay in another (order bananas by dozen or lobsters by item, but pay by pound for both)
• Support for customization and enhancement (icing for birthday cakes and suggestions of themed cutlery)
• Convenience of picking items from the store at the time of choosing

Alignment of Retail Grocers

Retail grocers must move away from a ‘figure as we go’ approach when it comes to defining a comprehensive online strategy. A common refrain from retail grocers that I have heard is ‘we embarked on an online journey because our competition was doing the same’ or ‘my competitor has a pilot project going and so will I’.

A better approach is to first acknowledge and align with the consumer view listed above and then articulate the strategy. An execution plan across the elements of people, process and technology can follow.

People Element

Successful order fulfillment can be enabled through better workforce management and enabling existing store associates to pick customer orders during low traffic (morning) hours. Over time, these associates gain an insight into consumer preferences, enabling them to make ‘smart’ substitutions and offer suitable choices to store shoppers when asked for help. This is a vivid example of online grocery enablement facilitating cross-sell and upsell transactions with store shoppers.

Process Element

Detailing of process elements is beyond the scope of this blog. However, it must be highlighted that all business processes must be geared towards creating a unique online buying experience for the consumer. And the order fulfillment process within a store must combine the best practices of order orchestration, pick planning, item picking, item substitution, catch weight handling, order staging, and payment processing activities.

Technology Element

The right approach to technology requires an assessment of the current landscape within the enterprise and an analysis of solution options. Retailers are flexible on the former, but are skeptical of the latter – and rightly so – as we will see next.

Perspective of Solution Providers

Retailers desire innovative solutions that articulate business value. Surprisingly, product vendors still seem to lack the required perspective while extending their solutions to online grocers. Classifying solutions as ‘web capture’, ‘OMS’ and ‘WMS’ during customer interactions is the first mistake. It forces vendors to charge license fees for functionalities that will not be used. After all, when was the last time a grocer wanted a real-time count of lettuce on the store front? Product vendors must realize that standard definitions cease to apply when a process flow encompasses activities as diverse as order capture, order orchestration, and order fulfillment. A modular solution with powerful integration capabilities may just be the answer.

For now, it may be in the retailers’ best interest to consider a hybrid approach – the use of the package solution to meet a significant portion of needs, complemented by custom offerings from third party-integrators. WMS-lite anyone? Or SaaS?

To conclude, there is no doubt that online grocery is here to stay. It offers convenience, enhances loyalty, and deepens consumer connect. For retail grocers, deriving an online strategy from the consumer’s view and aligning the operational and technology dimensions is not only a viable differentiator, but the right platform for sustained success.

Please Note: Infosys Limited is one of other named sponsors for the Supply Chain Matters blog.

On the eve of Cyber Monday we have provided a guest blog commentary on the Infosys Supply Chain Management blog on updating how retailer multi-channel operations (MCO) capabilities will be challenged in the current 2011 holiday buying season.

We had noted previously that while overall holiday shopping sales will not increase significantly overall, the real story will be reflected on how both online and physical retailers capture the interests and buying motivations of far more tech-savvy and mobile empowered consumers. The initial indicators of retail and online activity are indeed reflecting a more empowered consumer and are testing back-end supply chain fulfillment capabilities.

Readers can view the full commentary at this link.