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.
Concerns are growing regarding the current holiday surge period after recent reports regarding inbound and outbound transportation movements. Once more, there are concerning questions whether there is too much inventory overhang.
Earlier in the week, data compiled by The Wall Street Journal and trade research group Zepol Corp. indicates that for the first time in over ten years, imports recorded among the three busiest U.S. seaports, Los Angeles, Long Beach and New York harbor, fell by over 10 percent between August and September. As our readers are aware, this is traditionally the busiest shipping period by volume as holiday focused inventories make their way to wholesalers and retailers. However, imports among the nation’s busiest ports for the first 10 months of this year is reported as being up 4 percent from last year. Railroads and trucking companies that normally scale-up for this peak period report concerning reductions in volume.
Similarly, in Europe, container throughput volumes are down. Container volume for the first nine months of this year at the Port of Rotterdam increased just one percent over 2014 levels. Volume numbers for the Port of Hamburg are down 9.2 percent from levels of a year ago. Decreases at both ports are attributed to lower Chinese exports, slowing growth among emerging markets and the deterioration within the economy in Russia.
In its reporting, The Wall Street Journal concludes by these numbers that more businesses have been stocking up throughout the year and holding on to inventories far longer. Two further questions are posed: does this trend represent the start of a sustained period of weakness driven by concerns by businesses of a weak economic outlook, or is the slump a side effect of a massive inventory buildup that occurred earlier in the year? The WSJ cites U.S. Census Bureau data as indicating that the inventory-to-sales ratio in September stood at 1.38, up from 1.31 in the year earlier period.
Supply Chain Matters is of the view that the current situation stems from both of these described trends. Retailers and manufacturers were burned badly from last year’s disruption and dysfunction among U.S. West Coast ports. The digging out from the backlog of unloaded container vessels extended into February and March, leaving retailers with unsold holiday goods. Similarly, exporters missed their holiday selling period because goods could not be shipped in time, in some cases, losing out to domestic competitors. Another factor is that with far lower fuel and energy prices, retailers are assuming a robust holiday selling period, and wanted to bulk up on certain in-demand products to insure a successful season. Rather than risk last year’s transportation and logistics snafu’s, retailers more than likely exercised buying activity that spread out inbound activity and balanced receipts among both U.S. east and west coast ports as a risk hedge.
As noted in our recent Q3 quarterly newsletter, global supply chain activity thus far this has been trending downward, edging closer to contraction. The J.P. Morgan Composite Global Manufacturing PMI averaged 50.9 in Q3 with forward indicators such as New Orders, Export Orders and Inventories indicating further contraction.
Thus, the current holiday fulfillment period will be crucial for industry and global supply chains. How much inventory gets sold and how global retailers and wholesalers fare from a financial perspective will provide key indicators for 2016 and beyond. Network-wide inventory management correlated with sales has once again, taken on an important dimension.
We want to hear from readers- how do you view current trends? Are global supply chains inching toward overall contraction in 2016 and beyond?
Supply Chain Matters will provide further observations and insights as we publish our 2016 predictions in the December time period.
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.
In prior Supply Chain Matters postings, we have commented on how retailers are actively positioning online fulfillment practices for the current holiday fulfillment period and how industry watchers anticipate that shoppers will likely initiate purchases earlier in the holiday period. We further believe that technology and informed decision-making will play an important role in which retailers successfully navigate their Omni-channel strategies and achieve or exceed their profitability goals.
JDA Software recently sponsored and released a new 2015 Consumer Survey consisting of a polling of more than 1000 likely online consumers. An important finding was that 50 percent of the respondents indicate that they will be unforgiving of retailers who provide less than satisfactory online home delivery experiences. Once more, nearly one-third of these consumers reinforced that convenience is a major factor when placing an online order with nearly one in four of the survey respondents indicating a preference for “Buy Online, Pick Up in Store” as being more convenient than direct to home delivery. General news media adds to concerns by reporting on the so-called “porch thieves” who shadow parcel delivery vans and steal delivered merchandise from doorways. Other survey data from previous years generated by independent market research firms consistently reinforce that higher Free Shipping threshold policies sponsored by online retailers also have a strong influence for consumers opting for “Buy Online, Pick Up in Store.”
The latest JDA survey data is an indication that online retailers who cannot meet expectations risk losing a considerable percentage of customers to a competitive retailer that can offer a more seamless online shopping experience. According to the JDA release: “While shoppers expect convenience throughout the retail experience, most are outright not willing to pay for it, leaving retailers searching for ways to respond to consumer demand and still remain profitable.” Amazon’s Prime fulfillment program is the best example of how an online retailer can buffer consumer perceptions for having to pay for convenience by spreading such costs across an entire year..
In a JDA survey of retailers released last December, only 16 percent of retailers indicated that they can make a profit on online demand. That report concluded that: “Profitability is the biggest challenge because costs are rising faster than revenue.” The holiday surge period is the make or break quarter for many retailer’s financial performance.
As Supply Chain Matters and others in the industry have observed, in-store, local pickup and other shipping strategies will be tested once again during this upcoming holiday season. Target and Best Buy Co. have indicated they would provide Free Shipping on all online orders, while Wal-Mart has thus far opted to continue charging shipping fees on orders under $50, but is promising to make shopping easier every single day.
Online fulfillment costs are exploding and retailers can become more and more blindsided by such costs. Positioning inventory to support multiple fulfillment channels is now a necessity to insure margin goal performance, yet only 40 percent of retailers have network-wide visibility to such inventories. Logistics, transportation and service cost factors are now a critical input toward insuring overall business profitability. As noted in our previous commentaries, this is especially becoming evident with the latest round of expected parcel fuel surcharge, logistics and transportation cost increases.
Augmented technology will certainly play an enabling role in overcoming such challenges. However, technology selection teams will need to assess that such technology has the ability to span supply chain planning, network-wide inventory and Omni-channel fulfillment information streams in supporting more informed decision-making and to contrasting service segment needs with cost and overall profitability impacts. During last year’s holiday surge period, some retailers had the opportunity to test Omni-channel fulfillment processes including pick-up in store, with mixed results. Some were seamless, others experienced problems as noted in the recent survey results. The upcoming Black Friday and Cyber Monday promotional period will provide an added test not only to the ability to manage surge volumes, but in retailer’s abilities to determine expected impacts on costs and profitability.
Inventory, distribution, fulfillment center support and transportation management systems can no longer exist as stand-alone information sources. Root cause analytics that offer recommendations and simulation modeling as to the cost impact of various fulfillment scenarios are now important table-stacks in a constantly dynamic Omni-channel world.
Once again, retail teams need to insure that your organization takes a cross-functional and cross-channel perspective to the overall process, decision-making and technology support implications of Omni-channel fulfillment.
Disclosure: JDA Software is one of other sponsors of Supply Chain Matters.
In a previous Supply Chain Matters commentary we questioned whether newly announced surcharge and standard rate hikes among the major parcel carriers would impact their business models that have so much reliance on the continued growth of B2B/B2C online commerce. As we enter the full blown kickoff of the 2015 holiday surge fulfillment period, both Fedex and UPS have provided further important data regarding expected volumes and perhaps why rates were hiked as aggressively as they were.
In conjunction with its financial earnings report today, UPS third quarter results reportedly missed Wall Street estimates as a result of a reported decline in overall ground shipments. According to business media reports, revenues were further impacted by lower fuel surcharges and the negative effects of foreign currency. Of more concern, UPS executives pointed to a slowing industrial production as now impacting overall B2B shipment volumes.
In our Supply Chain Matters Newsletter released this weekend, we also pointed to a disturbing decline in overall global supply chain activity which is rapidly approaching contraction. This morning, noted CNBC stock analyst Jim Cramer went so far as to declare that recession has occurred in the manufacturing sector.
Reflecting on the upcoming holiday surge, UPS forecasted an incremental 10 percent increase in package volumes over that experienced in last year’s holiday period. Waiting further on UPS is that its pilots have authorized a work stoppage vote at an undetermined time, no doubt timed for maximum pressure and uncertainty for the coming surge. UPS executives have downplayed the threat citing ongoing negotiations and reminding investors that a work stoppage is subject to the Railroad Security Act.
Earlier this week, FedEx forecasted an incremental 12.4 percent increase in package volumes in the period between the Black Friday and Christmas holidays. The carrier further indicated that it is planning for three spikes in volume, coming on Cyber Monday, and the first two Mondays in December.
The picture is now getting clearer as to why the major parcel carriers elected to again boost fuel surcharges in time for the holiday surge and to increase rates in 2016. They had little choice since economic forces are impacting network infrastructure business models.
All the chips are on growth in B2C online fulfillment both this year and in the future. That is significant.
Despite a muted first-half of retail sales, the National Retail Federation (NRF) has predicted that retail sales in the November-December period will increase 3.7 percent to $630.5 billion. Online sales are forecasted to increase 6-8 percent to $105 billion, yet the NRF points to trends of a more prudent consumer. NRF’s recent Consumer Shopping survey found nearly half (46.1 percent) of holiday shopping will be conducted online, up from 44.4 percent last year and the highest recorded since NRF first surveyed holiday shopping intent in 2006. For the 14th year in a row, NRF’s holiday spending survey found that approximately 40 percent of holiday shoppers say they begin their holiday shopping before Halloween, while 41.5 percent say they begin their holiday shopping in November, and 18.7 will begin sometime in December. That trend was reflected in 2014 when a majority of online shopping had completed by mid-December. Thus, retailers will be concentrating online promotional efforts now and through November and parcel carriers will experience network surges in November.
The Black Friday period has never been more important for online retailers as well as to parcel carriers and retail supply chain teams. There remains retail inventory overhang from last year’s U.S. West Coast port debacle not to mention financially distressed China suppliers who have offered more attractive pricing of holiday-focused goods.
Yet, we wonder aloud how consumers will respond to higher shipping charges, or whether online retailers will elect to absorb increased shipping costs or seek alternative delivery models. The Free Shipping option and Amazon’s Prime program will be important factors in whether online retailers meet their margin and profitability goals, and indeed whether major parcel carriers meet their profitability goals.
The takeaway for B2C focused supply chain teams will be a requirement for robust, proactive inventory management and very strong ties with online marketing and merchandising teams, as well as parcel carriers. Similar to last year, online retailers will need to accurately forecast expected daily shipment volumes or risk being locked-out bt parcel carriers whose networks might reach peak capacity.
As we further pointed out in our previous commentary, the rising costs of logistics and transportation are now important factors in insuring required business profitability. All forms of predictive or prescriptive trending of expected online shipment volume will be important determinants to assessing whether online fulfillment activity is tracking to plan and whether margin and profitability goals will be met.
Supply Chain Matters provides an update to our previous commentary: Are Parcel Carriers Pushing Too Far in Dampening Online Fulfillment. Our commentary reflected on whether both FedEx and UPS were inching closer toward upsetting the “golden goose” of their current growth strategies, that being their participation in the boom in online B2B/B2C fulfillment. We primarily reflected on FedEx and its announcement of implementing added surcharges to parcel rates as a response to heavier packages and a rise in residential deliveries. Further, how such a move could be rationalized with the average fuel costs reportedly down 35 percent from year earlier periods.
This week, as everyone on the planet expected, UPS joined-in, and somewhat upped the ante. The parcel carrier just about matched FedEx for ground based parcel transportation but outreached FedEx’s fuel surcharge, while implementing 2016 rates a week earlier than FedEx.
UPS announced that effective November 2, 2015, for Over Maximum Packages and the tables for Ground, Air and International fuel surcharges will be updated. For Ground, the fuel surcharge will increase from the existing 4.75 percent to 5.25 percent. For Air and International, the surcharge will increase from 3 percent to 4.5 percent. The Over Maximum Limits fee will increase $52.50.
Effective December 28, 2015, UPS Ground rates and accessorial charges will increase by an average net 4.9 percent. UPS Air and International services and accessorial, including UPS Air Freight rates within and between the U.S., Canada and Puerto Rico, will increase an average net 5.2 percent. UPS Freight® rates will increase an average net of 4.9 percent, effective October 26, 2015.
Included in area surcharges are increased surcharges that will be applied to commercial business addresses. Similarly, the Residential Surcharge for UPS Ground Services, UPS Air Services and On-Call Pickups will increase $0.15. The Residential Surcharge for UPS Hundredweight Service shipments will increase $1.30, and the Residential Surcharge for UPS Worldwide Express Freight® shipments will increase $5.00.
The Large Package Surcharge will increase $10.00.
Newly announced was that beginning January 4, 2016, UPS will institute a Third-Party Billing Service of 2.5 percent applicable to the total charges on all packages that are billed to third parties. This has an important implication to Omni-channel online commerce where third-party logistics or manufacturers drop-ship directly to customers and bill freight charges to the online provider. A 2.5 percent surcharge of the total invoice could be significant, especially when other charges noted above are added, to include package dimensional surcharges.
According to UPS, these rate and surcharge changes are to address the impact of increased costs, changing demand for select UPS products and other market factors. Essentially, as was the case with FedEx, this broad wording perhaps defies the realities that both carriers seek to boost their margins and profitability while riding the presumed increased B2B/B2C commerce wave. It would behoove both to actually provide customers with hard data indicating what actual volume trends of larger packages really are.
These pricing scenarios threaten Free Shipping options for online consumers and open the door for new industry disruptors, either larger online retailers, or other transportation and parcel services providers to serve as an alternative parcel delivery mechanism in 2016 and beyond. We believe they will move online consumers to opt more for the free pickup in-store option but retailers will have to find increased methods to leverage localized inventory.
For supply chain teams supporting dominant online fulfillment channels, best that you crank-in these new rate structures into your supply chain network models as soon as possible. You may well find impacts related to online fulfillment center locales.
A final note: Yes, there are realities that nationwide parcel delivery networks require large asset investments, but disruptors such as Amazon, Google, Lyft and Uber strive to challenge any status-quo. From this author’s view: The door is now open for alternatives