For B2C and retail supply chains, dedicated planning efforts throughout the year to prepare for the holiday surge period are about to meet the stress test. The Thanksgiving holiday is the stress test for food focused and grocery supply chains. The Black Friday shopping holiday that follows has promotional activities already underway this week, and in a matter of hours, online and in-store consumers will be seeking out the best bargains that extend through the Cyber Monday shopping holiday.
Last year, parcel carriers and logistics providers reported peak surges over the Black Friday weekend and during the first two Mondays in December. This year, parcel carriers expect a rather busy period, anticipating anywhere from 10 to 15 percent in increased parcel shipping volumes through the end of December.
As Supply Chain Matters has noted in prior commentaries, retailers once again have a lot at-stake. Last year’s activities were hampered by logjam and disruption of inbound and outbound holiday focused export inventory among U.S. West Coast ports. Approaching Black Friday this year, indications and evidence reflect that retailers are this year deep in inventory overhang, and such inventories need to be sold. Other data indicates that consumers will be unforgiving and will shop early for the upcoming holidays.
As we enter the holiday, there is a report posted on ZD Net indicating that Amazon has forced automatic individual account password resets with a number of registered users raising speculation that the online retailer may have been hacked in the area of mobile device access.
The next few days are obviously crucial for achieving revenue and profitability expectations for all stakeholders, retailers and carriers alike. If consumer promotions extend further into December, the stakes will obviously be far higher.
In the meantime, enjoy the Thanksgiving holiday with family and friends. Rest as best you can an d give thanks for family, friends and relationships.
We extend a Thanksgiving holiday wish to all of our U.S. based and other global readers for continued blessings.
Stay tuned to Supply Chain Matters for our continuing commentaries related to the 2015 holiday surge events including early insights as to supply chain performance.
While industry supply chain teams continue efforts in achieving their various 2015 strategic, tactical, and operational line-of-business business and supply chain focused performance objectives, we continue with our series of Supply Chain Matters postings looking back on our 2015 Predictions for Industry and Global Supply Chains that we published in December of 2014.
Our research arm, The Ferrari Consulting and Research Group has published annual predictions since our founding in 2008. Our approach is to view predictions as an important resource for our clients and readers, thus we do not view them as a light, one-time exercise. Thus, not only do we publish our annualized predictions, but every year in November, look-back and score the predictions that we published for the year. After we conclude the self-rating process, we will then unveil our 2016 predictions for the upcoming year.
As has been our custom, our scoring process will be based on a four point scale. Four will be the highest score, an indicator that we totally nailed the prediction. One is the lowest score, an indicator of, what on earth were we thinking? Ratings in the 2-3 range reflect that we probably had the right intent but events turned out different. Admittedly, our self-rating is subjective and readers are welcomed to add their own assessment of our predictions concerning this year.
In the initial posting of this Predictions Score Card series, we looked back at both Prediction One- global supply chain activity during the year, and Prediction Two- trends in overall commodity and supply chain inbound costs. In our Part Two posting, we revisited Prediction Three- the momentum in U.S. and North America based production and supply chain activity, as well as Prediction Four- wide multi-industry interest in Internet of Things.
We focus this commentary on our prediction for industry specific supply chain challenges.
2015 Predictive Five: Noted Industry Supply Chain Challenges
Self-Rating: 3.5 (Max Score 4.0)
Our prediction called for specific supply chain challenges in B2C-Retail, Aerospace and Consumer Product Goods (CPG) sectors. Additionally, we felt that Automotive manufacturers would have to address continued shifting trends in global market demand and a renewed imperative for corporate-wide product and vehicle platform quality conformance measures while Pharmaceutical and Drug supply chains needed to respond to added regulatory challenges in 2015.
B2C and Retail
In 2015, global retailers indeed were challenged in emerging and traditional markets and in permanent shifts in consumer shopping behaviors. Consumers remained merciless in their online shopping patterns seeking value and convenience. The price tag of the U.S. West Coast Port disruption was pegged at upwards of $5 billion for the industry and the inventory overhang effects remain as we enter this year’s holiday surge period. In August, we contrasted the financial results of both Wal-Mart and Target that presented different perspectives on the importance of integrated brick and mortar and online merchandising strategies and strong, collaborative supplier relationships. Both of these retailer’s performance numbers pointed to an industry that continues to struggle with balancing investments in both online and in-store operations and a realization that significant change has impacted retail supply chains.
A stunning announcement during the year was the October announcement from Yum Brands that after a retail presence since 1987, the firm will split-off all of its China based Kentucky Fried Chicken, Taco Bell and Pizza Hut restaurant outlets into a separate publicly traded franchisee based company. The move came to insulate the company from the turbulence that has beset its China operations from food-safety scares, stronger competition and Yum’s own operating missteps, which provide important learning for other retailers. Other general merchandise retailers continue to struggle with the inherent challenges of China’ retail sector, especially in the light of a possible contraction in China’s economic climate. Global current shifts have further dampened global retailer attempts to gain additional growth from emerging market regions.
Amazon, Google and Alibaba continued their efforts as industry disruptors with Alibaba setting a new benchmark in one-day online sales volume, processing and fulfilling upwards of $14.3 billion in online sales during the 2015 Singles Day shopping event across China. Last year, online retailers acquired important learning on the higher costs associated with fulfillment of online orders, which will be crucial in managing profitability during this year’s holiday surge period.
Consumer Product Goods
Consumer’s distrust of “Big Food” continued front and center this year. We predicted that the heightened influence and actions of short-term focused activist equity investors, applying dimensions of financial engineering or consolidation pressures among one or more CPG companies would continue to have special impacts on consumer goods industry supply chains with added, more troublesome cost reduction and consolidation efforts dominating organizational energy and performance objectives. The year has featured quite a lot of consolidation and M&A activity as larger CPG producers attempted to buy into smaller, health oriented growth segments. One of the biggest announcements that rocked the industry was the March announcement that H.J Heinz would merge with Kraft Foods, orchestrated by 3G capital and financed in-part by Berkshire Hathaway. In a article, The War on Big Food, published by Fortune in June, a former Con Agra executive who now runs a natural foods company is quoted: “I’ve been doing this for 37 years and this is the most dynamic disruptive and transformational time that I’ve seen in my career.”
Indeed, the winners or survivors in CPG will be those more nimble producers who can lead in product innovation, satisfying consumer needs for healthier, more sustainably based foods, while fostering continuous supply chain business process and technology innovation. This industry will remain challenged in 2016.
Our prediction was that Industry dominants Airbus and Boeing and their respective supply ecosystems will continue to be challenged with the needs for dramatically stepping-up to make a dent in multi-year order backlogs and in increasing the delivery pace for completed aircraft. Dramatically lower costs of jet fuel that were expected in 2015 would likely present the unique challenges of airline customers easing off on delivery scheduling, but at the same time insuring their competitors do not garner strategic cost advantages in deployment of newer, more fuel efficient and technology laden aircraft. These predictions indeed transpired and both aerospace dominants have now announced aggressive plans to ramp-up supply chain delivery cadence programs over the next 3-4 years for major new commercial aircraft programs. The lower cost of jet fuel indeed motivated some airlines to adjust or postpone certain aircraft delivery agreements but not in significant numbers. The other significant industry development was the continued struggles of Bombardier in its efforts to deliver its C-Series single aisle aircraft to the market, which could have provided an alternative for certain airlines. This aircraft producer recently sought a $1 billion loan from Canadian governmental agencies in order to sustain its development and market delivery efforts and complete C-Series global certification sometime in 2016.
We predicted that Middle East and Asian based airlines and leasing operators will continue to influence market dynamics and aircraft design needs and that indeed occurred. Emirates, Ethiad and Qatar clashed with American, Delta and United over the future of international air travel, competing aggressively with large fleets of new, lavishly appointed jets and award-winning service. But the US legacy carriers believe that competition with the Middle Eastern carriers has become inherently unbalanced with large government subsidies to fund such investments. Emirates is now the world’s largest operator of both the Airbus A380 superjumbo and the Boeing 777-300ER and continues to pit both Airbus and Boeing on developing newer long-haul, technological advanced aircraft, while other carriers seek faster delivery of more efficient single-aisle aircraft to service growing air travel needs among emerging markets.
Supply issues did manifest themselves in 2015 with reports of under-performance in the delivery of upscale airline seating, the continuous supply of titanium metals, and the effects of the massive warehouse explosions near Tianjin China. However, most were overcome.
At the time of prediction in December of 2014, an unprecedented and overwhelming level of product recall activity was occurring across the U.S. This was spurred by heightened regulatory compliance pressures, driving product quality and compliance as the overarching corporate-wide imperative. At the time, a New York Times article cited that about 700 individual recall announcements involving more than 60 million motor vehicles had occurred in the U.S. alone in 2014. Indeed General Motors and other global brands remained under the regulatory looking glass throughout 2015 and the one dominant issue remained defective air bag inflators. We predicted that supplier Takata would continue to deal with its ongoing quality creditability crisis and indeed in November, long-standing partner Honda announced that it would sever its relationship with the Japan based air bag inflator supplier.
While we predicted that GM would especially be under the regulatory looking glass in 2015, the big surprise turned out to be Volkswagen and the ongoing crisis involving the installation of software to circumvent air pollution standards in its automotive diesel engines. This crisis is still unfolding with implications that could amount to potentially billions of dollars, not to mention a severe credibility jolt to the Volkswagen name in the U.S. and globally. We may have erred on this particular prediction, but who would know that such a development would have such far-reaching global implications for product design and regulatory compliance for the entire industry.
Finally, China’s auto market was expected to grow by 6 percent or 20 million vehicles in 2015. However, economic events over the past few months and a far more concerned Chinese consumer may well mute such growth and market expectations. In November, GM announced that it would import a Chinese manufactured SUV sometime in 2016, the first to enter the U.S. market.
In our next posting in our look back on 2015, we will review Predictions Six through Eight
In the meantime, feel free to add to our dialogue by sharing your own impressions and insights regarding these specific industry challenges in 2015.
Supply Chain Matters has always been of the belief that history provides valuable learning, especially when business process improvement and technology deployment are being considered. Thus, we wanted to call attention to a commentary featured on Strategy + Business, Navigating Retail’s Last Mile, that reflects on important learning related to online fulfillment. (Complimentary account sign-up required)
The authors revisit the past 16 years of last mile retail efforts of the late 1990’s and early 2000s, when most online start-ups struggled with the trade-off between speed and consumer choice. The commentary argues that early start-ups such as HomeGrocer, Kozmo and Webvan focused on speed at the expense of variety.
The premise is that many of the same challenges persist today, often with added Omni-channel complexities. In essence, the argument is:
“the fundamental economics of the last mile haven’t changed. Companies have to offer a solution with costs equal to or lower than the customer’s willingness to pay (the “cost to serve’)”
In its analysis, the authors conducted research on the “cost to serve” for an array of retail models including traditional physical store, curbside pickup, crowdsourced shoppers, white glove delivery and pure-play e-commerce. This was supported by a survey of 2000 online U.S. shoppers regarding shopping preferences.
Our readers are welcomed to explore the specific examples, which from our perspective, provide excellent examples of what’s involved in an effective “cost-to-serve” tradeoff analysis.
Supply Chain Matters advises readers to focus on the two key takeaways that were provided over the Strategy+Business two decade timeline. The first was clearly summarized: “The pursuit of speed without an understanding of cost led to the demise of many of the early last-mile players” Many of us in the industry analyst community have observed this lesson being replayed again over the last 2-3 years, as online retailers discovered the hard way, the unexpected hidden expenses of fulfilling online consumer demand where consumers ordered more frequently but with lower average order sizes. Often, this reflects the dynamic tension among sales and marketing and supply chain as dynamic online programs are deployed without accurate awareness or knowledge of the associated cost factors.
We would like to offer another supplemental important takeaway based on our observations of online fulfillment history. That would be that technology has also come a long way, particularly in the ability to analyze and predict cost-to-serve across various customer fulfillment channels. Technology providers have leveraged in-memory and other information management technologies that can span supply chain and customer management applications towards needs for more informed and contextual based decision-making. Teams should therefore be focusing technology strategy toward supporting more intelligent fulfillment capabilities that can provide various cost-to-serve decision-making contexts as was described in the article’s examples.
The final takeaway was that consumer behaviors will continue to change and evolve. Rather than constantly reacting to such changes, instead lead customers to online fulfillment that makes the most economic sense. The authors point to determining the most appropriate model for last-mile delivery of their goods and create a value-proposition that builds on inherent strengths. If you think about it, that is exactly what retailers such as Alibaba, Amazon, Best Buy, Restoration Hardware and Wal-Mart are currently deploying. Build on the inherent strengths that you have and lead consumers to attractive fulfillment options.
Global commercial real estate firm CBRE Group Inc. has released a research report indicating that over the next decade, 20 markets worldwide—including South Florida; Santiago, Chile; Bajio, Mexico; and Philadelphia—are set to emerge as global logistics hubs.
The concept of emerging global logistics hubs was brought forward to in the book, Logistics Clusters, Delivering Value and Driving Growth, authored by Yossi Sheffi at MIT’s Center for Logistics and Transportation.
According to the CBRE research report, while global hubs will continue to best meet the needs of companies with international supply chains that encompass the sourcing, manufacturing, distribution and sale of goods, there are 20 specific regional hubs that are poised to become major players in the network for global trade. Although they currently serve as central processing locations for regional supply chain networks, the report cites a number of factors are shifting the dynamics of international distribution and catapulting some regional hubs into the supply chain spotlight. We have attached the report’s infographic that names these various hubs.
The CBRE research points to significant logistics investments, such as the ongoing expansion of the Panama Canal, regional industry production cluster, such as those manifested in the automotive sector, the ongoing impacts of Omni-channel and E-Commerce, and evolving trade agreements as major impetus factors for these new emerging logistics centers.
In the latter, the report cites The Trans-Pacific Partnership (TPP) as a potential trade agreement that will have drastic effects on global trade routes and manufacturing demand in Asia. Supply Chain Matters has recently published our initial impressions of the impacts of TPP.
For the implication of e-commerce’s impact on customer fulfillment and supporting logistics, the report indicates:
“In the past, a network of regional centers that fed into the local supply chains with 3-4 day delivery time coverage of the region was sufficient to meet service standards. However, compressed service times—in many cases, to overnight or same-day delivery—has reshaped the supply chain and has often resulted in distribution direct to the consumer from a global or large regional hub. The Eastern Pennsylvania region, anchored by Philadelphia but fueled by the growth of the Lehigh Valley, is an example of a hub that has been transformed by this new technology. This mid-Atlantic location enjoys access to over100 million people within a one-day drive, including key metropolitan areas such as New York, Washington, D.C., and Boston.”
“E-commerce shipments are smaller in size and require more technology and expertise to execute efficiently. As a result, modern logistics facilities are being developed in the traditionally strong logistics hubs of Tokyo, Seoul and Taipei. Brick-and-mortar retailers are entering the online sales market, resulting in strong demand for modern logistics in Tokyo, as logistics networks must be upgraded to accommodate the higher volumes of package movement. Additionally, the online trend is strong in Taiwan and South Korea, where 83% and 73% of shoppers, respectively, go online to avoid going to a physical store.”
There are many other insights and observations regarding rapidly shifting patterns of logistics which are impacting commercial real estate investment. However, what should be of concern to supply chain and Sales and Operations teams are the implications to existing distribution fulfillment networks that were formed under far different business process assumptions than today’s Omni-channel and global production strategy world.
The report itself can be accessed at this CBRE hosted web link. Please note that registration and account sign-up is required to download this complimentary report.
We provide a contextual follow-up to our ongoing Supply Chain Matters observations and insights regarding the current holiday focused surge period among retail supply chains. This week, The Wall Street Journal observed (paid subscription required) that unsold goods and added inventories are piling up on retailer’s shelves possibly making it challenging for some retailers to hit their earnings targets in this critical quarter of performance.
We have previously called attention to the implications for this year’s expected online fulfillment volumes, a recent consumer sentiment survey indicating shoppers may elect to shop earlier this season, and the important technology enabling considerations for the rapidly changing Omni-channel world.
The WSJ report cites supplier sources and industry watchers as indicating that some department stores have experienced an overhang of inventories in anticipation of the coming holiday period, and beliefs that with far lower energy prices and higher employment levels, consumers will spend more on gifts in the upcoming holidays. The publication indicates that specialty stores and apparel manufacturers are each experiencing a “build-up in inventories beyond the natural increase ahead of the holidays.”
Separate reports this week indicate specific retailers such as Macy’s and Wal-Mart specifically stepped-up inventory buying activity to offer more attractive promotions and selection for consumers. Earlier this week, Cowan and Company published a warning to investors indicating that inventory is above sales growth across the retail industry.
Amidst this collective optimism among many retailers, the WSJ observes that industry executives are beginning to question whether this year’s sales predictions have been too optimistic. While the gap is reportedly not as wide as that in 2013, it is concerning, since new inventory brought in for the holidays must compete with unsold inventory overhang, some as a result of last year’s U.S. West Coast port debacle which had holiday goods arriving after the holiday period had passed.
The implication remains that retailer’s, and their associated customer fulfillment teams will need to promote and fulfill merchandise orders earlier in the holiday period rather than later. The upcoming Thanksgiving holiday and the days leading into early December will be critical determinants of whether inventories will be sufficiently depleted among both online and physical stores, and whether sales and profits will meet business expectations.
The ability for sales and operations teams (S&OP) to quickly assess multi-channel sales volumes, remaining network-wide inventory levels associated and profitability outcomes will likely differentiate winners from losers, especially when considering that online fulfillment costs may be prove to be more than traditional sales channels. Waiting to discount merchandise later in December could be troublesome because retailers will likely be aggressively competing among themselves for limited consumer interests in categories such as apparel, footwear, jewelry and home goods vs. electronics and gadgets while risking added or peak-period shipment costs among parcel carriers.
Supply chain wide visibility, analytical and intelligent fulfillment capabilities have never been as important as they are for this holiday surge.
Last year at this time, Supply Chain Matters featured a commentary focused on China’s online fulfillment provider Alibaba. Noted was that we can sometimes get enamored with names such as Amazon and Wal-Mart but Alibaba is indeed an evolving player to reckon with in this era of online commerce and hanging retail supply chain customer fulfillment.
That point was again driven home this week with reports of probably one of the largest online fulfillment events, ever, an event that made a significant statement relative to the processing of a single day’s volumes and on promoting largescale consumer interest in an online shopping event.
China’s Singles Day is somewhat equivalent to Black Friday or Cyber Monday in terms of an online shopping event. This event was conceived by students in the 1990’s as a mock celebration for people not in relationships, with a desire to give something to oneself. It traditionally occurs on the 11th day of the 11th month or Double Eleven, since when written numerically, November 11th is represents “bare branches”, a Chinese expression for bachelors and singles. In 2009, Alibaba orchestrated an online shopping event promotion to rival that of Western nations. The event is now replete with high anticipation including a four-hour variety television shopping focused extravaganza complete with Hollywood celebrities and other guests.
According to Alibaba, this year’s Singles Day online event recorded a record 91.2 billion yuan ($14.3 billion) in one-day gross sales. Volume was reported as surpassing last year’s $9.3 billion in sales after 12 hours. For the sake of comparison, last year’s online Black Friday and Cyber Monday volumes do not come close to that of this year’s Singles Day.
A report from BBC News highlights data indicating that the event now represents 80 percent of China’s total online shopping with an estimated 120,000 orders processed each minute. Nearly 73 percent of online purchases in the first hour had reportedly originated by mobile phone. Alibaba further indicated that this year there would be 40,000 merchants and 30,000 brands from 25 countries offering merchandise across its various online platforms.
Of significance from a supply chain logistics and fulfillment perspective is that Alibaba owns its own parcel delivery logistics entity, Cainiao, along with close relationships with other logistics providers to insure that packages are delivered to expectations amid a number of residential delivery challenges across China’s high density urban and rural landscapes. The online firm estimates that 1.7 million delivery persons and over 400,000 vehicles will be deployed to deliver this week’s volume of packages. In a September commentary, we called attention to Cainiao’s efforts to forge shipping relationships with other global parcel delivery entities including the United States Postal Service.
Make no mistake, when it comes to sheer volume and scale of B2C/B2B online commerce, Alibaba is the provider to watch. This week’s Singles Day milestone provides yet more evidence of such scale and inherent online retail customer fulfillment capability.