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Another Example of SKU Proliferation Leading to Cost Complexity

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Yesterday in one of our news feeds, we came across a report on FoodBusinessNews regarding snacks producer Snyder-Lance, and it efforts to address an ongoing challenge to increase profitability. We view this report as a typical current day example of how the C-Suite turns to the supply chain as a prime barometer and facilitator of needed cost savings.

The report outlines a “comprehensive and aggressive performance improvement plan” that a result of recent first-quarter financial results falling behind management expectations., according to the interim CEO. A number of factors were attributed to the sub-standard performance that were described as category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses. Some or most of these phrases should be familiar to our readers in consumer packaged goods, food, and beverage companies since most of the industry has been whiplashed by many of these same forces.

What is rather interesting and noteworthy are statements that overall business complexity drive increases in costs. Snyder-Lance has identified five priorities to attack the complexity problem which include manufacturing and supply chain streamlining efforts. That includes a realization that a proliferation of SKU’s (stock-keeping units), half of which only contribute a reported 5 percent of revenues, the other-half, the majority of revenues.

SKU proliferation is a familiar challenge in supply chain business planning, one that dates back quite a few years in CPG and consumer brand-oriented product areas.

There are many causes.

Companies that undergo periods of active merger and acquisition cycles will often inherit both added distribution channels as well as associated SKU’s. Likewise, companies with inherit multiple channels of distribution are often subjected to such risks.

The snack food area is particularly vulnerable because snacks are often subject to impulse buying within multiple outlets including neighborhood convenience stores, dispensing machines, convenience restaurants, food purveyors catering to service firms such as airlines, passenger trains, ferries and the like, and the typical member warehouse and retail grocery chains. A new market twist is that of online grocery basket shopping which online providers such as Amazon, Wal-Mart, Target, and other online retailers have introduced.

In fact, this analyst is of the belief that SKU proliferation is again becoming a more widespread problem because of the new realities of online retail. Retailers themselves are finding themselves bloated with SKU’s to address different sales channels, be that physical store where snacks are purchased in bulk or online on an induvial basis.

Another challenge that Sales and Operations (S&OP) teams are quite familiar with is the relationship dynamics of sales and marketing, who advocate for creating separate SKU’s for what they believe will be new and upcoming customers. After all, a separate SKU allows the new customer to gain personalized product and at the same time, more definitive tracking of a channel’s sales volume.

There is little doubt that SKU Proliferation indeed can drive complexity and supply chain inventory and distribution costs. Advanced inventory management or inventory optimization tools help in identifying and addressing problem areas. The resolution, however, involves a lot of internal supply chain cross-functional and external sales and marketing collaboration. It is also a condition and a watch out that should be factored in the analysis of the increased costs related to supporting today’s more focused online business models.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


A Commentary on Proposed Surge Pricing for Online Retailers

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Earlier this month, United Parcel Service announced a new variation in surge pricing.  The global parcel carrier wants to charge the top retail shippers for inaccurate forecasting of shipments during peak holiday periods. In other words, if a retailer either floods the system with unplanned shipments, or does not produce expected planned shipments, there will be a surge financial penalty.

According to reports, the charges will apply to the typical peak holiday shopping periods such as the pre-Thanksgiving, Black Friday, Cyber Monday holidays extending thru the Christmas. It could also apply to other peak shipment holidays such as Valentine’s Day or Mother’s Day.

UPS CEO David Abney told reporters that this new surcharge is not meant to be punitive, but part of a broader negotiation with retailers over pricing during peak times. The carrier has cautioned that conversations with retailers have just begun and yet to be finalized. They are an obvious understatement since many competing carriers such as FedEx have not weighed-in on such an approach.

As a supply chain management social media voice, we felt compelled to weigh-in.

We suppose it could be stated that a carrier having the benefit to be compensated for both upside and downside risks is the best of all worlds.

It presents a very slippery slope from several dimensions.

We all get it in that adding augmented capacity and people during peak periods is expensive, but then again, UPS has been aggressive in added prior rate hikes and dimensional package surcharges to boost revenues, especially during peak periods. The carrier has dipped many times into the rate hike well in this new era of online and Omni-channel shopping.

It’s no secret that the traditional hub and spoke networks configured by both UPS and FedEx have been stress tested during the past peak holiday periods, to the extent that changes had to be made to offset obvious choke points.

There is also the presence of the new logistics industry disruptor, which is Amazon, and the new reality of being a logistics and transportation provider as well as a retailer.

The online shopping provider has implemented logistics and customer order fulfillment capabilities that have also exposed the weaknesses of traditional hub and spoke networks. Amazon often delays bulk air shipments of goods to various regional customer fulfilment centers until way after midnight, sometimes flying half-full aircraft if needed, to maintain overall logistics scheduling. Yes, Amazon’s peak volumes currently do not match those of UPS, but the online retailer has found creative ways to address bottlenecks, including fulfilling same-day or hourly delivery even during the height of peak shopping periods. Yes, Amazon partially funds its significant transportation and network costs via individual customer subscriptions to Amazon Prime. Customers however get in-return, many more services than Free or Guaranteed Shipping during the year, including access to other content services and benefits.

Amazon consistently demonstrates that customer agreements imply mutual win-win benefits for both parties. If UPS wants additional compensation for inaccurate planning by retailers, then the parcel carrier should be willing to step-up and commit to insuring its own performance, regardless of volume.

For example, UPS extends some of its stated expected delivery times to customer addresses during peak periods such as the holiday fulfillment quarter.  Coast to coast shipments are extended an extra day or two in customer expected delivery tracking to overcome network bottlenecks. While the customer might believe that the shipment is on-time, it is a longer transit interval than normal periods, and retailers must factor that delivery time in securing the customer’s order.  Likewise, if UPS fails to deliver at the guaranteed time, then retailers should have the ability to have an automatic credit applied to the entire shipment. UPS shields its exposure to guaranteed delivery by dynamically adjusting expected delivery times. If this new surge pricing proposal were to be adopted, UPS would be willing to commit to guaranteed delivery 7 days a week.

Retailers are now more than ever, acutely aware of the increased costs associated with online and Omni-channel online fulfillment.  The notion of a new twist on peak surge pricing adds more cost exposure, and plays right into the hands of ongoing industry disruptors such as Amazon and Alibaba. We do not profess to dictate to large volume retailers such as Wal-Mart, Target, or others, on how to negotiate with the likes of UPS. But something tells us that these negotiations are likely to be tense.

Either way, retailers will have to invest in more accurate surge planning, deeper levels of customer intelligence, augmented third-party logistics and last-mile transportation services including postal delivery.

Brown may be the gorilla in logistics but if one growls too much, one could get smarted by counteracting forces.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


The Demise of Brick and Mortar Stores and of Traditional Retail Distribution

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For the past three years, Supply Chain Matters has been predicting a radically changed business environment across retail channels because of permanent shifts by consumers to favor online buying.

Last year, and updated for this year, our research report: The New phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains (Available for Complimentary Downloading in our Research Center) called for retail line-of-business and supply chain teams to unify organizational leadership and supply chain alignment among traditional store and online logistics and distribution strategies.

Last week. The Wall Street Journal provided more updated and quick frankly, sobering data indicating that:  Brick and Mortar Retail Stores as Shuttering at a Record Pace. (Paid subscription required)   Reported was that so far, this year, at least 10 retailers have filed for bankruptcy protection, which compares to 9 retailers that declared bankruptcy with a t least $50 million in liabilities, for all of 2016.

What we found to be more sobering was a cited prediction from Credit Suisse that retailers could close more than 8600 locations this year, which would eclipse the number of store closings that occurred during the 2008 recession.

The noted causes of the current wave of store closings are cited as decades of shopping center and retail store overbuilding along with the permanent shifts towards online shopping. Another cited cause was noted as the excessive debt burdens that retailers took on through leveraged buyouts or efforts to fund expensive share buybacks. The WSJ cites Moody’s Investor Service as indicating that the amount of debt coming due for 19 distressed retailers is set to more than double over the next two years.

There are obviously significant supply chain implications implied from this trending which we wanted to echo for our Supply Chain Matters readers, implications that may seem obvious, but need to be stated.

Traditional retail distribution strategies were predicated on purchasing high volume merchandise from lowest-cost and highest value suppliers, moving that merchandise into large owned or leased warehouses, and pushing that merchandise into individual stores based on selling forecasts, merchandise promotional plans, or store replenishment needs. The operations of the warehouses and the distribution to physical retail stores was for the most part, straight-forward.

Now, with so many brick and mortar stores subject to closing, coupled with the permanent moves toward online and Omni-channel merchandising and selling, the logistics and distribution model is significantly changed, and as retailers have now come to understand, can be far more expensive if not planned and executed properly.

Warehouses are now customer fulfillment centers that store inventory in volume and move that inventory to contiguous pick and pack operations within the same building, all responding to individual online orders.  Fulfillment center locations are now more predicated on a combination of population density and access to major transportation and logistics hubs, as Amazon and other online providers have artfully demonstrated. Inventory management requires far more sophistication and requires far more detail related to item-level demand across selling and customer pick-up channels. Overall management of transportation costs becomes more essential, since online consumers are now patterned to shop where free shipping is offered.

Remaining physical stores will increasingly serve as extension of the online business model, meaning stores can serve as customer pickup, merchandise return, or merchandise demonstration centers. In-store labor has shifted to customer fulfillment center labor, and in-essence, the fulfillment center becomes a key presence and capability of the retail brand in the minds of online consumers.

The closing of so many physical stores comes about because of the needs or existing retailers to dramatically reduce their cost structures to deliver required profitability goals. However, we again need to reiterate that the traditional notions of viewing transportation, warehousing and logistics as purely cost center, or outsourced expenses that can be adjusted at-will is not necessarily a wise decision when considering the changed distribution and logistics considerations of today’s online world.

Retail and B2C and B2B2C supply chain capabilities must be far more agile in the ability to support an integrated Omni-channel strategy. We caution that this is not solely investments in further distribution and fulfillment center automation, since that may well be one-dimensional.  Instead, it should include more sophisticated supply chain planning and inventory optimization supported by advanced analytics related to being more predictive and responsive to constantly changing online customer fulfillment needs manifested by multiple customer touch points.

The takeaway is that slashing distribution, logistics and customer fulfillment operations budgets without a context to an integrated online business model could prove to be short-sighted.

 

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Supply Chain Matters Shares Our Top Ten Blog Postings in 2016

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An annual tradition for the Supply Chain Matters blog has been to look back to the prior year’s readership uptake and share with our readers the top ten blog postings of the prior year.

Admittedly, we are a bit late in compilating all of our 2016 readership data but we did want to publish this for readers, clients and sponsors.

The list provides a sense of what particular topics were of the most interest in our over 300 blog postings published in 2016.  SCM 250 76 Supply Chain Matters Shares Our Top Ten Blog Postings in 2016

In the Dave Letterman style, we start with number ten and work our way down to the number one topic of readership uptake.

Number 10:

Observations on the Rankings for Supply Chain Planning Technology (February 5, 2016)

After industry analyst firm Gartner published its Magic Quadrant Rankings for Supply Chain Planning System of Record applications in mid-January, this commentary shared observations regarding the rankings of vendors. Our takeaway was that the current landscape of supply chain planning, sales and operations planning (SO&P) and B2B supply chain network planning technology was far more influenced by line-of-business and supply chain leadership input needs and requirements. Hence many other sources of information support the buying decision beyond industry analyst rankings.

Number 9:

The Value Proposition for Cloud Computing is Broader in Scope and in Business Implications (January 22, 2016)

This Supply Chain Matters commentary explored the implications of a full Cloud-based technology suite in supporting broad supply chain business process needs after industry analyst Bob Ferrari completed nearly two days of briefings and conference presentations related to Oracle’s Cloud based technology offerings. One takeaway provided was to view Cloud from the perspective of a broader focus on an engineered suite of pre-integrated software applications that are continually updated to reflect changing business needs. Why settle for business application innovation every 1-2 years when every 6 months is an option, and with lower capital and overhead costs.

Number 8:

Sports Authority- A Disturbing Twist to Consignment Inventory Management Practices (March 17, 2016)

Characterized as one of the largest sporting-goods retailers, Sports Authority was weighted down with debt from a prior leveraged buyout a decade ago. We called attention to a disturbing development in the ongoing bankruptcy process, as the retail chain filed lawsuits with more than 160 suppliers challenging supplier claims to consigned inventories. We opined that this development had significant ramifications for supplier collaboration practices within retail as well as other consumer goods focused supply chains.

Number 7:

A Disruptor is About to Enter the Heavy Truck Equipment Market (June 20, 2016)

Supply Chain Matters has continuously provided our readers visibility to emerging industry disruptors who are leveraging advanced technology and platforms directed at supply chain related business process and asset needs.  Such visibility included the entry of Uber and Lyft and their potential to move beyond people transportation. In this posting we provided visibility to start-up Nikola Motor Company and its ongoing development of a Class 8, 2000 horsepower electric powered semi-tractor truck that will be named the Nicola One.  The actual unveiling occurred in early December.

Number 6:

Chipotle’s Consumer Trust Crisis Enters a New Critical Phase (February 9, 2016)

One of our early blogs in a series of ongoing commentaries we outlined from a supply chain lens regarding the business, brand and supply chain crisis that impacted Chipotle Mexican Grill after hundreds of consumers were sickened by a series of varying incidents ranging from E-coli outbreaks to norovirus that date back to the summer of 2015. We opined that too much attention was being applied to corporate marketing vs. supply chain and restaurant risk mitigation efforts. It is now April 2017 and the challenges to restore brand trust remain.

Number 5:

Look to the Cloud to Support the Modern B2B Network (September 1, 2016)

This blog commentary addressed an organization’s journey toward mature B2B information integration and how this is made possible by today’s advanced cloud-based platforms, applications and infrastructure. We opined that there is no question that analytics and broader, more predictive business insight capabilities are opportunities to transform B2B business and supply chain business networks. The opportunity — and indeed the necessity — is to leverage an end-to-end business network to synchronize planning, execution, customer fulfillment and more predictive decision-making needs.

Number 4:

Gartner 2016 Top 25 Supply Chain Rankings- Supply Chain Matters Initial Impressions (May 19, 2016)

Our annual commentary related to analyst firm Gartner’s Top 25 Supply Chain Rankings.  Our annual commentaries reflect our beliefs that ranking criteria can be misconstrued, especially when it tends to favor supply chains that avoid major ownership of assets and inventory, or tend to weight other criteria lower, such as sustainability and social responsibility practices.

Number 3:

A Tour of Healthcare Supply Chain Innovation in Action (February 4, 2016)

Executive Editor Bob Ferrari shared impressions and insights regarding a November 2015 visit to the Cardinal Health Healthcare Supply Chain Innovation Lab located in Concord Massachusetts.  The lab served as a hub to explore innovative technology approaches such as smart sensors and near-field communications (NFC) in addressing healthcare supply chain product demand and supply inefficiencies.

Number 2:

What are Specific Skill Needs and Gaps in Supply Chain Management? (February 26, 2016)

Supply Chain Matters highlights results and an infographic from a supply chain skills survey conducted by Canadian based Argentus Supply Chain Recruiting outlining what specific hard and soft skills are organizations looking for in their hiring and recruiting efforts. Supply chain skills and talent development content has consistently drawn reader interest.

 

And now, a drum-roll for our most read 2016 blog:

 

Airbus and Boeing Continue to Experience Supply Chain Scale-Up Challenges (May 2, 2016)

After announcing Q1 financial and operational performance results, both Airbus and Boeing addressed ongoing challenges related to their supply chains and expected performance for 2016 total aircraft delivery commitments. We shared candid comments from Airbus’s CEO as to the global producer’s most critical new product introductions and clear signs of concerns related to various supply chain challenges. We also called attention to comments from United Technologies regarding the new Pratt and Whitney geared turbofan engine, which turned out to be the weakest link in the Airbus supply chain. Finally we concluded that for the two dominant manufacturers of commercial aircraft, supply chain challenges have once again come back as concerns amid an environment of robust order backlogs. Each has different manifestations and supplier challenges, and each reflects on internal operational scale-up as well. We opined our belief that challenging product design among the most critical supply components, including aircraft engines would continue to be the linchpin towards achieving required production scale-up milestones.

 

Thanks again to all globally located Supply Chain Matters readers for your continued readership and frequent visits.

Thanks as well to our sponsors, clients, and network contacts for their continued support. We will no doubt, have yet another set of different topics of reader interest throughout 2017.

A final thought, why not consider having your company’s brand appearing as a designated sponsor or advertiser on this blog. Send us an email at info <at> supply-chain-matters <dot> com and we will respond with all of the information.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.


Amazon Makes a Strategic Investment in Fuel Cell Technology

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Last week, Amazon.com announced that it had made a major investment in fuel cell provider Plug Power, Inc. contingent on the company making major milestones.

The deal reportedly concerns the development of a new generation of hydrogen powered electric forklifts and other equipment services, and is valued at upwards of $600 million. The CEO of Pure Power indicated to media sources that his company plans to work more closely with the online giant in collaboration of the application of fuel cell technology, including faster charge times of powered industrial trucks in Amazon’s customer fulfillment centers. Both companies have been working together for a year now in installing the technology. amazon e1429905152262 Amazon Makes a Strategic Investment in Fuel Cell Technology

Pure Power reportedly had nearly $85 million in total revenues in 21016, and with this agreement, Amazon plans to invest $70 million in equipment purchases this year. With the agreement, Amazon has been granted warrants which will vest when certain spending is met, and if fully vested, Amazon would gain a 19 percent stake in Pure Power.

In the case of material handling equipment, charging of conventional lead acid batteries can take considerable hours of electrical power draw, along with dedicated chargers. Fuel cell technology can fuel equipment in a matter of minutes, saving on energy costs and they do not require dedicated chargers.

In its reporting of the Amazon move, The Wall Street Journal indicated that Wal-Mart has invested heavily in Plug Power’s technology.  In 2016, the global retailer was the only customer contributing more than 10 percent to Plug Power’s top-line revenue. It will be interesting to observe how the Wal-Mart relationships fares now that Amazon has invested in the company.

This deal has parallels to that of 2012, when Amazon acquired warehouse robotics technology provider Kiva Systems for $775 million.  At the time, there was considerable speculation as to why Amazon would pay so much for such technology. Since that time, Kiva robots now proliferate Amazon distribution centers in assisting with picking operations and fulfillment center space optimization. Kiva became an in-house fulfillment center automation innovator for Amazon. The Kiva technology was essentially removed from the market and solely dedicated to Amazon’s internal operational deployment needs. In 2014, a security equities analyst estimated that Amazon was reaping $400-$900 million in annual cost savings as a result of Kiva technology deployment, more than compensating for the investment.

Last year when Amazon began leasing air freighters for dedicated operational support, it also took equity investment positions in the air transport carrier firms providing and operating the air freighters. This is consistent with an Amazon policy for having equity interests in strategic partners. As technologies and services become more mainstream to Amazon’s operational plans, it can leverage its equity investments to secure additional leverage in negotiations.

Bob Ferrari

© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


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