Supply Chain Matters provides added insights to recent financial and operational performance reports from major companies. We begin with United Parcel Service (UPS) which recently reported results for the December-ending holiday quarter which generally disappointed Wall Street.
The headlines included a 5.5 percent increase in top-line revenues yet falling profit margins for the global parcel delivery firm. While revenues grew 5.5 percent, the transportation firm reported a loss of $239 million compared to $1.33 billion in profitability in the year-prior quarter. Total operating profit climbed more than 13 percent to over $700 million but during the quarter, UPS recorded a non-cash after-tax mark-to-market pension charge of $1.7 billion.
During Q4, UPS delivered more than 712 million packages globally, a 16 percent increase over the same period last year. The record volume was reportedly driven by strong and steady e-commerce demand throughout the period. B2C shipments grew at 11.5 percent in the quarter. Despite completing nearly 200 facility projects and announcing 7 million square feet of new capacity during the year, volume levels obviously taxed the overall network. Average delivery stops reportedly increased 4.6 percent and average daily volume was up 5 percent. The carrier’s ORION delivery management system managed to hold daily package miles to only a 0.3 percent increase, a testament to technology’s contribution to the bottom line.
Management indicated that the expansion of e-commerce is expected to continue, with another year of double-digit growth.
Since UPS and FedEx are often viewed as the bellwether of the economy as well as the trending of logistics and transportation it is important to dwell on management’s observations regarding the latest holiday fulfillment quarter.
In the case of UPS, the takeaway from our lens, are twofold. First, as noted in our 2017 predictions, the tide for more consumers to opt toward online buying continues but the implications for increased parcel volumes and logistics costs continue evident as well. UPS indicated that 55 percent of shipments handled in Q4 involved deliveries to residential addresses. That number peaked to 63 percent in December, a month that included its usual share of winter weather disruptions. As a result, the global parcel carrier has now announced plans to invest another $4 billion, a 33 percent increase from 2016, in increased automation. UPS CEO David Abney indicated to analysts: “If this quarter taught us anything, we’ve got to quicken the pace.”
The other takeaway reflects on top-line revenue growth. Despite significant rate increases in both 2015 and 2016, UPS’s cost structure continued to increase. Having one of the more automated and technology savvy transportation providers experience such cost pressures is a further indication, from our lens, for the potential for increased rates and surcharges for large or smaller volumes shippers in the months to come. Such increases will likely also target peak shipment periods that adds to network stress. A hint to that possibility was a further statement from Abney: “We have put more emphasis on making sure that we pass on to our customers the increase in costs that e-commerce deliveries can bring.” Further added was a comment that actions from larger shippers relative to rate increases have not reflected the usual pushback garnered in any year of rate negotiations. We imply the latter to indicate that online consumers paying for shipping charges are likely to be the biggest target of rate increases in the coming months, especially during peak customer fulfillment periods.
With every passing quarter, the implications of online and Omni-channel commerce from operational and cost perspectives continue to become more visible, and so are the realities for supply chain team efforts at responding to such needs.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Thus far, we have posted deep-dives on the first nine of our 2017 Predictions for Industry and Global Supply Chains. The one prediction remaining is our final Prediction Ten, which for each year, dives into what we foresee as unique industry-specific supply chain challenges or environments for the coming year.
This year’s industry-specific challenges were especially challenging in that we contemplated adding a lot of industries, more so than prior years. In the end, we will hone in on those industries that merit additional monitoring and updates in the coming months.
As Editor, I have also decided for the purposes of brevity and reader interest, to present each industry in a separate Supply Chain Matters blog posting. We will be also posting these industry-specific predictions in a faster cadence.
Our prior Prediction Ten posting, we dived into Automotive Supply Chain Residing Across North America .
B2C, B2B-to-C and Traditional Retail Focused Supply Chains
In August of 2016, The Ferrari Consulting and Research Group, published a research advisory titled: The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains. (Available for complimentary downloading in our Research Center) The prime takeaways from that advisory was that 2016 marked the beginning of the newest phase of B2C online retail fulfillment, namely the consequences of permanent changes in consumer shopping habits beginning to impact the long-term presence of brick and mortar retail and their supporting supply chain strategy frameworks. Consumer preferences and desires have permanently changed in retail, and online platforms and consumer loyalty programs such as that of Amazon are rapidly garnering consumer loyalty and dependence. Amazon itself continues to pose a serious threat to traditional retailers as well other consumer-facing businesses, but the increasing cost challenges of online fulfillment and transportation also present an ongoing challenge for the industry as-well.
In early 2017, with the bulk of results of the industry all-important 2016 holiday fulfillment quarter now reported, the implications of permanent reductions in physical foot traffic among traditional retailers have become ever more profound. While retail sales grew an overall 4 percent during the holiday period, online sales will likely have increased in a range of 16-20 percent. Traditional retailers such as Kohls, Macys, Sears and Target reported declining sales involving physical stores. Additional store closings are planned for 2017 as our efforts to invest more in online capabilities. Wal-Mart announced two rounds of headcount reductions in 2016, one involving retail store support positions and one involving a trimming of corporate staff including some initial online commerce executives an IT support staffers.
Amazon’s juggernaut as a dominant online retail platform notched more consumer market-share with one estimate indicating the online retailer captured nearly 40 percent of total online holiday focused sales. The online retailer further demonstrated the first clear signs of integrated logistics, transportation and last-mile fulfillment that has been deployed since late 2015. Traditional retailers have now learned that competing head-to-head with Amazon is a daunting and rather expensive effort, with a likely better strategy being that of a differentiated strategy that emphasizes customer fulfillment capabilities that Amazon cannot. Retailer Best Buy has been the best example among specialty retailers while Dollar Shave Club served as a great example in the online services segment. There are opportunities and they will more than likely be focused segments that emphasize the brand and the experience.
As predicted in 2016, and now again in 2017, the retail industry will continue to come to grips with the notions that the physical store is now the virtual online store, and that the physical store may be one advantage over Amazon. In this new online dominant environment, merchandising is now about analytics-driven knowledge of customer needs and inventory management is anchored in more sophisticated item level planning that involves the end-to-end supply chain supporting all retail fulfillment channels, both online and physical.
The physical store now serves as an extension of online, and supply chain strategy and business process must accommodate or influence this changed thinking. The supply chain is not a cost center to essentially support inventory warehousing and store replenishment, but rather a collection of collective capabilities directed as supporting an Omni-channel customer fulfillment capability. In 2017 and beyond, the alternatives are in-house, outsourced, or hybrid capabilities.
The same principles apply to outsourced logistics, transportation and customer fulfillment partners. In addition to customer-facing capabilities, it is now clear that what Amazon has been building is a well thought out, customized online retail logistics, transportation and last-mile fulfillment capability to support multiple merchants in addition to Amazon. Third-party logistics and transportation providers seeking continued partnerships with retailers need to think more innovatively as well.
We predict that retail industry supply chains will begin to improve capabilities at supporting analytics-driven, demand-driven planning, multi-channel and more intelligence based customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics. The concepts of supply chain segmentation strategy will continue to take hold among traditional retailers supporting both online and physical stores.
The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-Suite executives. Supply chain leaders will either get on board with integrated capabilities or suffer the same consequences.
The industry implications and trends are compelling as well as inescapable in 2017 and the retail industry and its associated supply chains must adapt or suffer the consequences. It’s tough messages, but then again, this an industry dealing with unprecedented forces of change.
This concludes our 2017 prediction related specifically to retail industry supply chains. We are still in the process of finalizing data and inputs for other industry specific supply chain sectors and expect additional postings next week.
Readers are reminded to review all our prior 2017 predictions postings. And a final reminder, all ten of our 2017 predictions will be available in a full research report which we expect to be available for downloading in our Research Center by February 10th.
© Copyright 2017. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Quantification of 2016 Holiday Related Customer Fulfillment Adds Compelling Evidence to Inescapable Trends
The market performance numbers surrounding the holiday fulfillment period that spanned November and December of 2016 are in and the headline takeaways are twofold. The first is that U.S. retail shoppers were very optimistic in spending and very shrewd in their shopping habits. Second, the tide towards online and Omni-channel customer fulfillment is once again profound, and implications are even more impactful and inescapable for some traditional retailers.
A More Optimistic Retail Consumer in the Final Quarter
The National Retail Federation (NRF) released its final tally of holiday focused retail sales in the November thru December time-period, declaring a 4 percent increase over the previous period in 2015. According to the NRF, holiday retail sales, not including autos, gasoline, and restaurants, amounted to $658.3 billion, exceeding the organization’s prior forecast of $655.8 billion reflecting a 3.6 percent increase. U.S. Commerce Department data similarly reflected an overall 4 percent increase in retail sales for the three months ending in December. And a 3.6 percent increase for all of 2016. On the plus side, online retail sales increased 12.6 percent while retail sales at health and personal care retailers increased 6.7 percent. Retail sales at department stores decreased significantly at a 7 percent rate, while sales at clothing and accessories and electronics and appliances retailers decreased 2.5 percent and 2.3 percent respectively.
Market quantitative analysis firm comScore reported final 2016 holiday sales originating from desktop computers climbed 12 percent from the year-earlier period to reach $63.1 billion. While the firm’s quantification of mobile-based online sales is still in-process, the latest update based on initial mobile data indicates that online holiday sales will likely come within comScore’s original forecast range of a 16-19 percent increase overall. Further reported was that for the seventh consecutive year, Cyber Monday (November 28), and November 29, the day after ranked as the busiest online shopping days with $2.7 billion and $2.2 billion in daily online spending. In total, there were 10 $1 billion plus shopping days in the 2016 holiday period based on desktop sales. When the mobile-based numbers are finally tallied, the numbers will be even larger.
Such activity levels are a testament to the responsiveness of B2C and B2B-to-B2C supply chain customer fulfillment teams. And then there is the elephant in the room, the continued dominance of the Amazon online buying platform. Preliminary data would indicate another stellar year of Amazon performance in many online sales and customer fulfillment dimensions.
Automobile and truck sales further contributed to holiday spending as U.S. consumers took advantage of rather attractive promotional discounts offered by automakers.
More Compelling Impacts for Brick and Mortar
As we have noted in prior Supply Chain Matters postings, the compelling impacts surrounding 2016 online shopping trends became ever more compelling for traditional department stores and brick and mortar retailers. Macy’s, Kohls, Sears, JC Penny and Target, among others, have each announced declining physical retail store revenues, with many indicating additional store closings. Regarding Target, Business Network CNBC host commentator Jim Cramer observed that while that retailer’s online sales grew a healthy 40 percent during the holiday period, it most likely cannibalized physical retail store sales which declined 3 percent in this same period. Cramer characterizes Target’s performance as the best indicator of the existing fundamental problem of Omni-channel retail and the consequent destruction of prior retail business strategy models predicated on physical foot traffic. We concur.
Wal-Mart itself has announced further organizational restructuring and a headcount reduction involving corporate level staffing to add additional leadership focus to the global retailer’s online growth strategies. Wal-Mart’s strategy direction is now one of predominate online with physical stores serving as an adjunct supporting strategy for pickup and pay or physical shopping needs.
As noted in earlier commentary, the physical store is now the virtual store, merchandising is now about intimate knowledge of customer needs and buying tendencies, and inventory management that is anchored in more sophisticated item-level planning and pooling algorithms.
From the supply chain customer fulfillment lens, today’s online world demands analytics-driven planning, agile marketing, and multi-channel customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics.
The industry implications and trends are compelling as well as inescapable.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
A New Round of Reported Job Cuts at Wal-Mart- Part of a Singular Leadership Model Directed at Integrated Online and Store Customer Fulfillment
Last week, word began to leak out that global retailer Wal-Mart was planning to cut nearly 1,000 corporate jobs before the end of this month, the close of the retailer’s fiscal year. These cuts are in addition to previous job cuts announced in 2016. Part of this effort is to continue to streamline and centralize leadership and goal-setting across Wal-Mart’s online and physical store strategies. The latest move is being headlined as the largest round of corporate level headcount cutbacks in some time.
Several published reports by The Wall Street Journal citing Wal-Mart internal communications indicate many believed executive changes underway. They include existing CIO Karenann Terrell departing the retailer in mid-February. SAP technology focused readers might recall that SAP’s 2015 Sapphire customer conference featured Ms. Terrell in an on-stage keynote delivered by SAP’s CTO and senior board executive Bernd Leukert. Ms. Terrell provided a humorous moment as she quipped to Leukert that she hoped that Wal-Mart could complete its SAP S4 HANA implementation sometime in her lifetime at the retailer.
Other reported executive moves include existing Chief Marketing Officer Tony Rogers assuming leadership of both online and digital marketing initiatives to include Jet.com marketing. Existing head of Wal-Mart Labs engineering Jeremy King, will reportedly be promoted to U.S. Chief Technology Officer, directly reporting to both the chief of U.S. stores and the chief of U.S. online. Scott Hilton, existing Chief Revenue Officer for Jet.com will reportedly assume the role of Chief Revenue Officer for all E-commerce operations.
The WSJ further indicates that Michael Bender, existing COO for E-Commerce will likely leave the company. A separate Wal-Mart securities filing indicates that Rosalind Brewer, current Executive Vice President, and CEO of the Sam’s Club business segment plans to retire effective February 1st. John Furner, current Chief Merchandising Officer for Sam’s Club will assume Ms. Brewer’s leadership role. Other reported headcount reductions include human resource staff and other support staff.
These latest organizational and headcount reduction moves follow a pattern for providing singular leadership in Wal-Mart’s effort to take on Amazon by initiating an online capability supported and complimented by physical store presence. In September, 7000 store focused back office jobs were eliminated and in November, because of the prior announced acquisition of Jet.com, founder Marc Lore was appointed to lead all U.S. online operations, causing several existing online executives to depart the retailer. In January of 2016, existing corporate IT and @WalMart Labs Silicon Valley development groups were merged together into one singular group to focus on singular technology deployment strategies.
Wal-Mart has invested a reported $10.5 billion in new information technology to enhance its online web presence and fulfillment capabilities. The retailer is planning to invest an additional $2 billion over the next two years to further springboard its online fulfillment channel, not to mention the $3 billion acquisition of the Jet.com online platform. That implies a commitment and an accountability to get it right.
These latest moves come in the shadow of the latest restructuring and headcount reduction announcements from multiple other retailers, all a result of the more apparent implications of online Omni-channel forces continuing to impact the retail industry.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
At the start of the New Year, our parent, the Ferrari Consulting and Research Group along with our Supply Chain Matters blog as a broadcast medium, traditionally provide a series of predictions for the coming year. These predictions are provided in the spirit of assisting industry specific and global supply chain cross-functional teams in helping to set management objectives for the year ahead. Our further goal is helping our readers and clients to prepare supply chain management and line-of-business teams in establishing impactful programs, initiatives, and educational agendas.
The context for these predictions includes a broad cross-functional umbrella of supply chain strategy, planning, execution, product lifecycle management, procurement, manufacturing, transportation, logistics and customer service management.
We are admittedly and purposefully late in our usual unveiling of these 2017 predictions. We made a conscious decision in mid-November to delay after the sudden and widely unexpected results of the 2016 U.S. Presidential election coupled with the similarly unanticipated results of the Brexit referendum across the United Kingdom.
To reiterate once again, our predictions process includes a re-look at all that occurred in the current year, a reflection of future implications, and soliciting input from clients and other various industry supply chain participants and observers. Unlike others, we incorporate a lot of thought and perspective into our annual predictions and take the time to scorecard our annual predictions at the end of the year.
Readers are welcomed to review our scorecard series of our 2016 predictions that occurred in November. We are further planning to make available the scoring evaluation of all of our prior 2016 predictions in a report to be made available in our Research Center later this month.
In this initial blog, we will unveil our complete listing of our ten predictions for the coming year along with some introductory takeaways. In subsequent postings spanning the month of January we will dive further into each of our predictions.
In late- January or early February, we anticipate publishing the complete Ferrari Consulting and Research Group research report, 2017 Predictions for Industry and Global Supply Chains that will incorporate all our predictions along with even more details and supporting data related to each prediction. This report will be made available to all our consulting clients and blog sponsors and will additionally be made available for no-cost complimentary downloading in the Research Center of Supply Chain Matters, also in February.
Let’s therefore begin the process with the unveiling of our ten 2017 predictions.
2017 Prediction One- A Subdued World Economic Outlook and Heightened Political Uncertainty Will Test Industry Supply Chain Agility
There is little doubt that the year 2017 will present even more uncertainty and increased volatility for many industry supply chains. Organizations will once again need to be prepared.
2017 Prediction Two- A Challenging Year in Procurement with Renewed Emphasis on Strategic and Technical Skill Needs
Unlike 2016, what is becoming near certain is that in 2017, multi-industry supply chains will be managing a period of rising inbound component and service costs. The role of the CPO will further have to evolve in 2017 to one of strategic business advisor along with a continuing agenda of tactical procurement challenges, most notable a potential global volatile global sourcing environment peppered by continuous anti global trade forces. One of the most significant challenges in the coming year will be in skills development and filling-in skills and talent gaps.
2017 Prediction Three- A Supply Chain Talent Perfect Storm
For all functions that make up the umbrella of today’s supply chain management capabilities, we predict a supply chain talent perfect storm, one that is sure to occupy more of the management attention of supply chain and business senior leadership. The perfect storm is increased skills demand meeting limited available skilled talent supply. As Bloomberg BusinessWeek declared in late December 2016: “Right now the problem isn’t too many workers who can’t find jobs. It’s too many jobs that can’t find workers.” The coming year may well provide a period where lack of skills and talent will take on a discernable and visible impact on required competences.
2017 Prediction Four- Increased Anti-Trade Geopolitical Forces Will Provide Added Sourcing Challenges for Industry Supply Chains
Major developments surrounding global trade policies will occupy the attention of many industry supply chain organizations during the year, but now from an opposite perspective. With heightened global tensions now turning toward more anti-trade and possibly more protectionist rhetoric among developed nations, industry supply chains must now be prepared to deal with potential near and longer term implications that such policies will bring about. We anticipate that industry supply chain network models will undergo continuous analysis and scrutiny in the coming year as individual supply chain teams assess various changing landed cost factors among product management models. Global trade issues will once again percolate in the coming year and they will likely be complex and confusing to sort out in terms of which will ultimately come to fruition.
2017 Prediction Five- Continued Global Transportation Industry Turbulence
For the past three years, we have predicted industry turbulence among global and certain domestic transportation networks. Our predictions turned out to be fairly accurate but then again, the industry signs were obvious. In 2017, firms should plan for further industry turbulence and change occurring on many modal fronts. As the Washington Post, has recently observed: “industry change is indeed sweeping from all directions.”
2017 Prediction Six- A Renewed Renaissance in Business and Technology Investment
As industry supply chains enter 2017, there are distinct signs of a renewed renaissance in business and technology investment that will surely include the need for supporting augmented supply chain related business process and decision-making needs. An initial pro-business environment fostered by the election of Donald Trump and a Republican Party dominated U.S. Congress looks to lead to lower corporation business taxes and repatriation of overseas profits. There are now signs that after multiple years of plowing excess cash into stock buybacks or increased stockholder dividends, businesses may be ready to shore-up needed investments in critical areas such as increased productivity, manufacturing, and broader supply chain automation along with needs for more informed, analytical-driven decision making anchored in predictive decision-making methods. At the same time, a renaissance in multi-industry business process and technology investment activity will surely lead to further merger and acquisition activity involving either the enterprise software, supply chain, IoT, and management decision support technology vendor community.
2017 Prediction Seven- Enhanced Decision Support Capabilities Among B2B Network and Managed Services Providers Will Pay Added Dividends for Customers
There will exist increased industry specific needs for deeper and wider levels of customer, product, physical object, and supply network focused information visibility, capture and analysis. This need is coupled to building multi-industry supply chain requirements for more predictive, analytics data-driven decision making competencies that involve outside-in insights. The objective is a literal 360-degree view of supply chain wide data and information, horizontally spanning the end-to-end supply and vertically coupling high level enterprise to shop-floor decision-support needs. A means to achieve such a capability are analytics and business intelligence engines that are now being embedded across supply chain focused B2B network platforms, edge systems and production shop floor transactional and information transfer flows. B2B business networks and edge platforms are today the prime opportunity for digitizing the horizontal and vertical flow of information and analytics across end-to-end supply chains.
2017 Prediction Eight- Amazon and Alibaba Position for Global Online Platform Dominance
Similar to 2016, Amazon and Alibaba will continue to position for being the dominant global online retail platform. This competition has been civil with each respecting the other entities capabilities and strengths. Each has certain weaknesses or vulnerabilities. The head-to-head competitive battle ground in 2017 will likely be India, the next big online retail market opportunity that will test both provider’s capabilities to adapt to local requirements.
2017 Prediction Nine- Business Self-Interest Will Fuel Continued Efforts in Supply Chain Sustainability Actions and Initiatives
Despite the declarations by U.S. President Donald Trump that climate change is a hoax, business and supply chain self-interest needs, requirements and benefits to date will fuel continued sustainability initiatives and momentum. The goal is beyond supply chain sustainability, and remains sustainability of the business itself.
2017 Prediction Ten- Unique Industry-Specific Supply Chain Challenges in 2017
Each year we call out industry-specific supply chain challenges that are unique and dominant challenges. In 2017, we are including the following industry sectors for mention:
Automotive Supply Chains Existing Across North America
B2C and Online Retail
Consumer Packaged Food and Beverage
Global Based Pharmaceutical Supply Chains
Keep your browser pointed to Supply Chain Matters as we dive into each of the above 2016 predictions in more detail. Our next Predictions posting will provide added detail for our first two predictions. Subsequent posting will dive into the remaining eight predictions.
Our series will also feature some invited guest commentaries reflecting more on the topic area.
If readers or clients require further clarity, or wish to contribute additional thoughts related to what to anticipate in the coming year, you can contact us via email: feedback <at> supply-chain-matters <dot> com. Our final blog commentary of the series will include a summation of additional contributed thoughts for what to expect.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved. Content appearing on Supply Chain Matters® may not be used by any third party without written permission of the author and our parent, The Ferrari Consulting and Research Group.