The Renaissance of Available-to-Promise Capability to Support Retail and Online Omni-Channel Fulfillment
Supply Chin Matters has featured prior commentaries exploring the supply chain impacts of Omni-channel and online customer fulfillment for retail supply chains. Such impacts are many, but one of the more important relates to the needs for efficient overall inventory management while exceeding more demanding customer fulfillment and satisfaction needs.
In B2C retail, and in online B2B, inventory investment has a major impact on margin and profitability, and Omni-channel strategies that allow customers different fulfillment options can cause havoc with the proper balance of inventory.
Consumers increasingly prefer to buy online, and at the same time, seek flexibility to either have their orders ship direct, or pick-up or return in a local retail store or outlet. This new paradigm is why so many Omni-channel retailers are seriously re-visiting inventory management strategies. Some are building dedicated online customer fulfillment centers to directly support online order volumes while allocating separate inventory to support brick and mortar retail needs. Other Omni-channel retailers have rightfully determined that the same inventory has to be efficiently managed to support fulfillment needs across all channels. This changes the role of the brick and mortar store to be an added node within the fulfillment network with the ability to support in-store pick and pack.
Within this increased retail business challenge, available-to-promise capability (ATP) has taken on a new significance as a key capability to assist in more efficient and responsive inventory management. As Supply Chain Matters sponsor JDA Software describes it, ATP is experiencing a new renaissance.
Last week, The Wall Street Journal provided further evidence of the business importance of efficient inventory management. In the article, Retailers See Gains in Serving E-Commerce Supply Chains (Paid subscription or free metered view), the WSJ reports that while retailers view online shopping as a boon to sales, it can provide a drag on profits especially in the light of parallel delivery networks. Some retailers, however, may be on the way toward figuring out the logistics and profitability potential of Omni-channel. Examples cited was that Home Depot which grew online sales 25 percent in the second quarter while improving overall logistics, including higher efficiencies in its distribution network. Target, grew online sales 30 percent and reported a small increase in margins.
Last week, Supply Chain Matters contrasted the financial results and supply chain strategies of Wal-Mart and Target. Wal-Mart’s financial results were perceived by Wall Street as disappointing. To address Omni-channel, the global retailer is currently implementing a new inventory management system. That strategy includes shifting inventory to regional and dedicated customer fulfillment centers, rather than from the retail store backrooms. That would allow the flexibility to meet both online and in-store demand from a distribution center centric inventory strategy. The downside is a de-emphasis of the retail store as a fulfillment node and a greater potential for stock-outs at retail store locations as online orders consume available inventory.
Target on the other hand, has recently demonstrated improving financial results, but at the same time has been candid to Wall Street that balancing inventory across its network and leveraging resources at store level are an integral part of strategy. Senior management candidly admitted that in-stocks within physical stores have been unacceptable so far this year, but a newly appointed role of Chief Operations Officer will have as an initial priority, beefing up the capabilities and responsiveness of the supply chain. Target’s strategy includes the retail store as a direct fulfillment node. Thus far the retailer’s is shipping online orders direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target senior management further noted that an important enablement of ship-from-store will be will be testing and deployment of a new ATP system that provides specific online customer delivery commitments.
On JDA Software’s Supply Chain Nation blog, Kelly Thomas writes on the renaissance of: Order Promising and Demand Shaping in a Segmented, Omni-Channel World. Thomas observes that ATP married with demand shaping provides an increasing number of fulfillment options as well a means to determine profitability profiles for fulfillment channels. It provides a basis in making the most informed decision on the source of inventory for a given customer order line and the pick-up or delivery location of the online customer.
Rightfully noted is that nearly 20 years ago, elements of what is today JDA Software (i2 Technologies) pioneered and patented allocated-driven ATP functionality for discrete manufacturing and other industry supply chain environments. Today’s JDA Order Promiser application is now being applied to the evolving needs of Omni-channel retailers for facilitating more responsive online fulfillment as well as improved inventory investment and bottom-line profitability.
The technology has come a long way and has found new meaning in more efficiently managing inventory in a B2C and B2B Omni-channel world.
Disclosure: JDA Software is one of other current sponsors of the Supply Chain Matters blog.
This week, two major U.S. based retailers, Target and Wal-Mart, each reported financial results 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 point 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. The approaches, however, are different.
Wal-Mart’s second quarter net income declined 15 percent as a result of increased competition and added costs. The retailer has been forced to add staffing and has increased wages to improve customer service and overall merchandising. The retailer further pointed to currency fluctuations, lower than expected reimbursements for its pharmacy business and an increase in goods stolen or lost as weighing on profit performance. The latter related to “shrink” of inventory has to be especially troubling. The retailer is currently implementing a new inventory management system.
If our readers have had the opportunity to visit a U.S. based Wal-Mart store over the past 3-6 months, you would have witnessed the results of prior cutbacks in staffing and an ill-planned merchandizing strategy. Stores appeared messy, shelves were not stocked adequately and store and checkout clerks seemed to be in short supply.
On a positive note, Wal-Mart has finally been able to stem the lack of sales growth among its U.S. stores. Same stores sales across the U.S. actually increased 1.5 percent within the latest quarter, the fourth quarterly increase after rather long multi-quarter declines. Online sales rose 16 percent in the second quarter.
Wal-Mart has been heavily investing in its online and Omni-channel customer fulfillment capabilities which have obviously impacted profits in the short-term. In this week’s financial performance announcements, the retailer actually lowered its profitability targets for the current quarter and the remainder of its current fiscal year. The notion of Wal-Mart has been one of supply chain scale in distribution, warehousing and dedicated fulfillment.
In prior commentaries, Supply Chain Matters has highlighted reports indicating that Wal-Mart again focused on its suppliers for sharing the burden of needed higher margins. In April a front page published article by The Wall Street Journal reported on Wal-Mart’s increased pressures on North America based suppliers to squeeze costs. The retailer informed suppliers involved in a wide range of purchased categories to forgo any additional investments in joint marketing and focus the savings on lower prices to Wal-Mart. In July, Reuters reported efforts to impose added fees affecting upwards of 10,000 U.S. suppliers. Contract renegotiation letters were mailed to respective suppliers that included amended contract terms along with added fees to warehouse products at Wal-Mart DC’s. A Wal-Mart spokesperson indicated to Reuters that these fees were a means for sharing costs of growth and keeping consumer prices low.
In its reporting of Wal-Mart’s results, the WSJ noted Wal-Mart’s CEO Doug McMillon acknowledgement that the company was in a period of change. He further cited a 1996 magazine article hanging on the wall in his office titled: “Can Wal-Mart Get Back the Magic”, while quipping that the retailer has rebounded before.
In contrast, we reflect on Target.
For its second quarter, the retailer reported a 2.4 percent increase in same-store sales and elected to raise its outlook for the second time. A concerted strategy on improved in-store and online merchandising has caught the positive attention of Wall Street, especially in light of the prior 2013 massive credit-card breach that significantly impacted sales growth.
Sales of termed signature merchandise categories were reported as growing at 7 percent, three times faster. Online sales increased 30 percent contributing .6 percentage points to comparable sales growth while more than 80 percent of online sales growth was driven by Home and Apparel categories. Overall net income nearly doubled in the second quarter.
In its earnings briefing, Target CEO Brain Cornell specifically addressed five strategic priorities, many of which have supply chain connotations. The first is to become a leader in digital, including direct from store capabilities. Thus far the retailer’s is shipping direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target’s current online fulfillment is supported by six dedicated fulfillment centers, regional distribution centers and direct ship from store.
Most important from this author’s lens, was Cornell’s acknowledgement that balancing inventory across the network and leveraging resources at store level are an integral part of strategy. Target will be testing a new available-to-promise system that provides specific customer delivery commitments, later this year.
There was also refreshing candor. CEO Cornell indicated:
“Retail is changing rapidly today than any time in my career and we need to ensure that core operations keep pace with the new ways we’re serving our guests. Over time, Target has developed an incredibly complex supply chain, built to serve an outdated linear model in which product flows from vendors through distribution centers to stores. To serve guests today, we are becoming much more flexible in the way we fulfill demand for products and services. And this is stretching our supply chain well beyond its core capabilities.”
To add more credence to candor, Cornell acknowledged to Wall Street analysts that in-stocks within physical stores have been unacceptable so far this year. He has tasked a newly appointed Chief Operations Officer, John Mulligan, to have as his initial priority the improvement of overall supply chain capabilities.
As readers may be aware, Target recently had to make a very painful decision to close all of its Canada retail outlets. A part of that problem related to merchandising and significant challenges in maintaining in-stock inventories.
From our lens, such articulation from senior management, reflecting the importance of integrating both merchandising and end-to-end supply chain capabilities is a very important and noteworthy change in retail. Later in follow-on Q&A with analysts, Cornell articulated the value of collaborative efforts among various suppliers to bring more innovative products to market.
Wal-Mart and Target provide different contrasts but yet reflect the common challenges impacting retail industry. Retail supply chains are undergoing significant and groundbreaking change, far different than the last decade. Online and in-store marketing, merchandising, supply chain customer fulfillment and supplier management are all interrelated and must be addressed in a singular umbrella strategy and supporting action plans. Emphasizing one as the expense of the other often leads to sub-optimal business results.
Every year at just about this time, ocean container shipments inbound from China and other Asian ports begin to surge as retailers ramp-up inventory levels in anticipation of the Thanksgiving and Christmas holiday buying period. Ever year at this time, Supply Chain Matters features commentaries noting how the ramp-up is progressing.
Last year, we raised early concerns about potential labor disruptions occurring along U.S. West Coast ports. We all know how that turned out. Multiple industry supply chains encountered long delays and inventory disruption, some at considerable cost.
This year shows signs of different industry dynamics that could once again lead to some disruption, or at the least, the need for very careful and methodical supply chain planning and synchronization.
The Wall Street Journal reports that a combination of tepid growth and a continued sluggish Eurozone economy has now motivated ocean container carriers to significantly cut back on scheduling. According to the report, the G6 Alliance, consisting of carriers APL, Hyundai Merchant Marine, Mitsui OSK, NYK, Hapag Lloyd and OOCL announced this week the cutback of 12 round-trip sailings from Asia to Europe starting in September. This equates to a one-sixth reduction in capacity for that route. This follows an earlier announcement from the 2M Alliance consisting of Maersk Line and MSC indicating it with withdraw 10 percent of capacity from the Asia to Europe route until further notice.
The timing of these cutbacks, while advantageous to container carriers, is not advantageous to industry supply chains. The open question is whether the removal of this much container capacity heading toward Europe will have any later impacts as we move closer to the holiday season.
It is further another indication of the significant gross overcapacity situation of ocean container fleets. According to the WSJ, freight rates between Shanghai and Rotterdam barely cover carrier operating costs, hence the announced cutbacks. The carriers are significantly reducing capacity to insure higher freight rates, in spite of dramatically reduced fuel costs.
In a related development, industry leader A.P. Moeller Maersk, in reporting its latest financial results, gave strong indications that it will defend and even expand its industry market share position. That raises the likelihood of additional industry cost or capacity cutting moves. The question is timing.
Maersk Lines additionally revised its estimates of global container volume down to a range of 2-4 percent from the previous 3-5 percent growth estimate which is a further acknowledgement of reduced global shipment volumes.
For industry supply chains, especially those that are B2C and retail focused, the timing of these ocean industry cutbacks is troublesome, coming at the time of peak seasonal movement. On the one hand, such cutbacks in scheduling may provide added flexibilities for alliances moving surge container volumes from Asia to North America. One of the newer mega-container ships can carry lots of last-minute cargo. On the other hand, the reduction in capacity places added pressures on various procurement and supply chain planning teams to carefully plan remaining inbound movements and required safety-stock levels. The challenges of container chassis availability and the ability of certain ports to be able to efficiently unload and reload the newest mega-container ships remains an open concern.
If any major U.S. or European port were to encounter a disruption or significant backup over the next three months, carriers will likely be reluctant to have ships sitting idle and generating additional operating costs. The open question is how many supply chain teams elected to balance inbound movements among U.S. West and East coast ports, and now, European ports.
Once again, it is going to be a challenging holiday surge period where careful planning will prove to be a key difference. Sales and Operations planning teams need to have a keen eye on supply chain planning and execution along with early-warning mechanisms. The lessons of from 2014 have hopefully translated into enhanced planning and risk mitigation since the turmoil of global transportation continues to play out.
Whether you reside in a large or smaller, up and coming business, accurate product planning is always essential to insure timely and responsive supply chain customer fulfillment, especially when new products are introduced to the market. For consumer electronics, the first few months of customer demand are the most critical. That includes the demand expected among different model variants of a product.
A reminder of such importance is reflected in this week’s business headlines concerning Samsung Electronics, and its recent release of the Galaxy S6 smartphone family. The company alerted its investors this week that second-quarter earnings would be disappointing because of laggard sales of its new Galaxy S6 model. According to a published report by The Wall Street Journal, Samsung may have misjudged demand.
The WSJ cites informed sources as indicating that when the Galaxy S6 family was launched April, the established supply and manufacturing plan called for demand for the Galaxy S6 to be four times more than that of the Galaxy S6 Edge, curve screen variant. It turned out that consumer demand was evenly split between both devices which led to a surplus of unsold S6 devices and an eventual shortage of the higher priced Edge model. Samsung’s supply chain teams then had to scramble to boost component supply and contract manufacturing levels of the Edge model.
As to how much the planning snafu contributed to a sales or revenue shortfall will come when formal quarterly results are reported. Final quarterly results are due later this month. However, the WSJ observed that the company’s stock has fallen 17 percent since the April launch of the Galaxy S6.
Certainly, Samsung is but one visible example of the importance of more dynamic and agile supply chain planning. Other manufacturers and retailers have experienced similar lessons, some public, others not as public but equally challenging.
The report serves as another timely reminder of insuring that adequate resources and more agile planning methods that sense product demand are continually incorporated in your supply chain planning.
Survey of Retail and CPG CEO’s Reflects Today’s Realities of Higher Costs Associated With Online Customer Fulfillment
A new joint study of senior retail and CPG industry CEO’s conducted by PwC under the sponsorship of JDA Software confirms what many in our supply chain community have believed; the increasing profitability challenges being brought about by the higher costs associated to today’s online customer fulfillment demands.
This study, The Omni Channel Fulfillment Imperative, reinforces that an enormous amount of money, energy and time is being spent by retailers and consumer goods manufacturers to improve their Omni-channel fulfillment capabilities. While this may not be surprising given the current business environment, the report reveals an unexpected and disturbing fact: only 16 percent of companies openly indicate that they can fulfill Omni-channel demand profitably.
The survey itself included a reported 410 retail and consumer goods companies from eight different countries. The authors included some CPG company’s views in order to gain perspectives from both ends of the customer fulfillment supply chain, along with the reality that may CPG firms have increased their direct online fulfillment presence. Nearly 51 percent of responses were reportedly weighted toward the classification of top 250-1000 retailers, while 22 percent represented the top 250 retailers.
Supply Chain Matters had the opportunity to speak with Wayne Usie, Senior Vice President of Retail Industry at JDA Software about this study and its messages. Usie aptly pointed out that most retailers remain optimistic for top line revenue growth, they are acknowledging that their firms originally designed their supply chains around the bulk movement of goods from suppliers, through distribution centers and eventually to stores and consumers. Today’s business demands of Omni-channel and online customer fulfillment require a far different set of capabilities. The other important insight is that in their original design that emphasized distribution center centric flows, retail supply chains can often mask the true source of customer channel demand. That has a significant influence on how to plan and efficiently position inventory associated with today’s Omni-channel dynamics.
From our lens, other important perspectives brought forward by this study was the indication by 71 percent of CEO’s polled that Omni-channel fulfillment was a top priority for retail business. Keep in mind that merchandising and sales strategies have often been top priorities for retail businesses. This different perspective, we believe, is the new reality of online and Omni-channel reflecting that the fulfillment supply chain has become an important focus.
Other profound findings were the indication that 67 percent of CEO’s believe that the cost to fulfill orders across channels is increasing, and that 88 percent (a near total consensus) cited transportation and logistics as a fulfillment capability that needs the most attention. Supply Chain Matters believes that this is a reflection of the continued high costs trending of free or same-day shipping that is impacting retail supply chains, especially those with lower product margins. Much of the survey data reflects the threats brought about by global online retailers such as Amazon, Wal-Mart. The major global package carrier’s increase in rates and the shift to dimensional-based freight pricing this year has not helped and probably added even more concerns and needs for alternative methods.
Question 9 of this survey queered on likely internal challenges likely to occur over the next 12 months. Indications were remarkably equally balanced and also from our lens, point to many supply chain related implications including inventory management, effectively integrating physical stores with online business models and failing to consistently meet customer expectations across all channels. Reflecting on such a listing, we believe that the data is yet another revealing indication that not all customers can have the same fulfillment service-level dimensions, hence the need for more discernable supply chain segmentation strategies, aligned to expected customer service and business profitability needs.
The complete PwC Survey as well as a summary infographic can be accessed at this web link. (some registration information required). A further perspective of the survey can be garnered in a posting authored by Wayne Usie on JDA’s Supply Chain Nation blog.
Supply Chain Matters will reflect more on the effects of Omni-channel retail in our live coverage of the upcoming JDA FOCUS 2015 conference occurring later this month.
Disclosure: JDA Software is a Lead sponsor of the Supply Chain Matters blog and a client of its parent, The Ferrari Consulting and Research Group LLC.
It was nearly 10 years ago when the initial hype of item-level tracking enabled by RFID began to emerge across retail and other consumer and industrial focused supply chains. The vision for the ability to connect the physical and digital aspects of the supply chain was within grasp and the hype cycle was extensive. Our readers might recall Wal-Mart’s highly visible corporate initiative for mandating RFID-enabled tracking across its supply chain as well as the U.S. Department of Defense efforts to do the same. But something happened, namely learning that seems to be rather consistent with advanced technology initiatives.
In the early days of RFID, there were challenges involved with the economic cost of individual RFID tags. Recall the threshold number of tags eventually costing less than 5 cents each. The IT infrastructure of required mobile and fixed readers, antennae, and database systems was more expensive than vendors were communicating. Industry-wide consistent information transfer standards development was elusive because either technology vendors continued to advocate for certain proprietary standards, hoping to cash in on the new technology wave, or specific industry groups themselves favored certain standards.
It is therefore very noteworthy to reflect on results of a recent survey conducted by GS1’s US Apparel and General Merchandise Initiative. For those unfamiliar, GS1 is a global information standards based organization that fosters trading-partner collaboration through adoption of global-wide consistent item numbering and identification electronic information exchange. Keep in-mind that apparel and merchandise supply chains operate on narrowest of product margins, with cost, inventory and shrinkage being prime challenges. Apparel and general merchandise was one of the prime targets of the early RFID mandates.
Last week the organization released the results of a 2014 survey providing indicators for how apparel and general merchandise manufacturers and retailers are utilizing item level Electronic Product Code (EPC) enabled RFID tracking. That survey indicates that nearly half of the manufacturers surveyed now indicating that they are currently implementing RFID, with a further 21 percent planning to implement within the next 12 months.
Of the retailers surveyed by GS1, more than half reported current implementation efforts underway with another 19 percent planning to implement in the next 12 months. Retail respondents indicated that on average, 47 percent of items received in their supply chains have RFID tags. In the news release, an Auburn University researcher indicates that retailers are garnering greater than 95 percent inventory accuracy, decreased out-of-stocks, increased margins and expedited returns. That phrase should sound familiar since it was the original declared benefits of the prior mandate efforts.
In the current clock-speed cadence of business where results are measured and expected in weeks and short months, 10 years is a lifetime. Yet, that it what was required for the technology maturity and economics of RFID item-tracking to reach what appears to be the dawn of mainstream adoption. This GS1 survey announcement should be viewed in that light.
For RFID enabled item-tracking, the early innovators have paved the way of learning and economics, as well as what worked and what did not. We at Supply Chain Matters have already brought to light the next wave of item-level tracking, sensor tags that can monitor the composition, state and movement of products across the global supply chain utilizing today’s mobile technologies and near-field communications (NFC). These tags will eventually provide for use cases in supply chain settings requiring higher levels of monitoring and detailed visibility such as fresh foods, pharmaceuticals, aerospace and others.
What is ever more important is that as a community, we learn from previous technology adoption curves where elements of business process adoption, standards and cost-effective technology all interplay. One obvious conclusion is that supplier mandates for technology implementation will not work if these elements have not been realistically evaluated.
Beyond all the hype are the inherent realities. Advanced technology does provide meaningful business benefits when applied to well-understood business process needs, challenges and cost factors. Technology adoption is not driven by vendor product marketing but by business education, process maturity, people and process realities.
© 2015 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog. All rights reserved.