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The Supply Chain Matters Blog Returns

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We want to alert our readers that Supply Chain Matters has returned from two weeks of summer holiday.  Supply Chain Matters Blog 350 100 J The Supply Chain Matters Blog Returns

Industry supply chains take little pause in ongoing developments and events, and that has certainly been the case during our brief hiatus. Catching up on events, we noted:

Costco Shipping’s Controlling Interest in OOCL

Another consolidation effort in ocean container shipping with the July 8th announcement by China’s Cosco Shipping Holdings intent to acquire a reported $6.3 billion controlling interest in Hong-Kong based Orient Overseas International (OOCL). The deal, if consummated and approved by global maritime regulators, would result in Cosco being recognized as the third largest container shipping firm in terms of capacity, behind industry leader Maersk and Mediterranean Shipping Co. (MSC). Also with the approval of Costco’s move, the top six ocean container shipping lines would in-essence, control three-quarters of all ocean transportation. That has implications for global shippers and industry supply chains.

More Apple Supply Chain Rumors

Continued rumors abounding as to what is no-doubt, the globe’s most visible supply chain. Various reports indicate that Apple’s planned introduction and shipment of its new line of smartphones, including the hyped 10th Anniversary edition, is reportedly behind schedule due to various production start-up or other delays. Such rumors and speculation are nothing new, and some argue are orchestrated to create a frenzy of demand among Apple’s loyal customer base eager to get hands on the latest model. As to what really is occurring is a matter of time and continual observation, especially considering the financial stakes among Apple’s supplier ecosystem.

Sears Teams-up with Amazon on Kitchen Appliance Offerings

The retail industry is buzzing over the announcement of an agreement among Sears Holdings and Amazon indicating that Sears will sell its Kenmore line of refrigerators and kitchen appliances on the Fulfilled by Amazon online fulfillment platform. The move thrusts Amazon much deeper into hard-goods retailing and distribution, a segment yet to be penetrated. From our lens, the more interesting twist to this development is a large retailer, on literal financial life-support, taking a gamble with one of the most-savvy online retailers. There may well be more to this new partnership in the coming months.

On the similar theme of Amazon, business news network CNBC reports that to boost its online catalog of offered merchandise, the online retailer has introduced a new program offering retailers the opportunity to have Amazon buy inventory at full price from third-party merchants while offering to sell such goods on the Fulfilled by Amazon portal. According to this report, in some cases, Amazon has approached third-party merchants after specific end-item manufacturers have specific contract clauses prohibiting the distribution of that manufacturer’s products on the Amazon platform.  This has the potential to place certain merchants in contract violation with a specific manufacturer or goods producer.

Wal-Mart Gears-Up for OTIF Hipping Enforcement

Beginning in August, Wal-Mart will operationalize its “On-Time, In-Full” program, holding suppliers accountable for shipments to be delivered exactly to schedule. The program applies to full-truckload shipments of fast-moving items to the global retailer’s vast network of store distribution and customer fulfillment centers. According to Wal-Mart, goods must be delivered as ordered 100 percent in full, and must arrive on the firm delivery date 75 percent of the time. Items that are late or missing during a one-month period will incur a fine of 3 percent of the goods value. Thus, suppliers will be held to stricter delivery scheduling and stand to be penalized for nay shipments arriving later or even earlier that the planned delivery date. According to a report by Bloomberg, OTIF is one of the hottest discussion topics in retail as suppliers prepare for supporting this new program. Wal-Mart is reportedly playing hardball as well, indicating that if a supplier is determined to be at-fault for not delivering goods on the specified day, the delivery fine will be enforced and is according to the retailer, non-negotiable. From our lens, this will provide rather interesting dynamics among suppliers and their third-party logistics providers contracted to deliver to Wall-Mart.  Who pares the burden of the fine when the 3PL is deemed at-fault?

 

Another Chipotle Mexican Grill Illness Incident

There was another reported norovirus incident involving a Chipotle Mexican Grill restaurant, this one being an outlet located in that state of Virginia, where upwards of 100 patrons were sickened. Preliminary indications are that the contamination did not originate from the food supply chain, but none the less, the incident casts yet another shadow of scrutiny for the restaurant chain’s food safety practices. Wall Street is now awakening to the realization that more consumers will shun the Chipotle brand and that the chain’s aggressive efforts to convince consumers that its food safety mitigation efforts had been addressed.

 

June Cyberattack Impacts FedEx

Weeks after the late June Petya cyberattack that impacted numerous businesses across Europe, FedEx’s TNT Express unit reportedly is still experiencing the aftereffects. Some recent securities filing by the company indicates that TNT shipping hubs and facilities remain operational but are being operated with manual processes. FedEx indicates it cannot estimate at this time when full computerized operations will be restored and that the cyberattack will likely have a financial impact on its operations for the quarter. Further disclosed was that FedEx does not have business insurance to compensate for the effects of a cyberattack.

 

Indeed, the supply chain universe continues to overcome business challenges and Supply Chain Matters will continue to provide our readers the essential insights as to what to expect and how to prepare.

Stay tuned for continued multi-industry coverage and insights.

 

Bob Ferrari

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

 


The State of Logistics in 2016- Accelerating Into Uncertainty

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The Council of Supply Chain Management Professionals (CSCMP) with the collaboration of A.T. Kearney and Penske Logistics, published the 28th Annual State of Logistics Report©. As has been our annual custom, Supply Chain Matters provides our initial impressions and some takeaways relative to the report reporting on 2016 logistics industry activity.

The latest report headline reflects a U.S. and North America logistics industry “buffeted by crosswinds as the pace of change accelerates” as the authors term: “Accelerating into Uncertainty.” That contrasts with last year’s report theme- An Industry in Transition. Looking ahead, the report indicates that 2017 could be a pivotal year for the industry with the ongoing impacts of online altering industry economics, large-scale shifts in distribution flows and various other uncertainties pointing to “anything is possible.”   Container Term 300x200 The State of Logistics in 2016  Accelerating Into Uncertainty

That stated, the report indicates that U.S. logistics costs were somewhat down in 2016, to a value of 7.5 percent of GDP, compared to 7.8 percent reported for 2015. The was the first drop reported since 2009, but we should note that there has been a revision of how the data is compiled. The authors have included a redo of numbers previously reported from the last ten years with the revised calculation with the result being roughly a half-a-percentage point on average adjustment in the numbers.

In the important area of transportation costs, which represents the largest component of overall logistics cost calculation, that category fell by 0.7 percent in absolute. At the surface, that would be good news, with water, rail, full and LTL truckload costs all declining. Of course, it is important to keep in-mind the lower costs of diesel, LNG and other fuels that occurred last year, and continue at historically low rates.

One concerning aspect however was parcel transportation which was reported as a 10 percent increase in 2016, reflecting a five-year compounded annual growth rate of 6.4 percent, which far exceeds GDP growth. Parcel obviously relates to the ongoing explosive growth of online and Omni-channel commerce. Indications are very likely that this transportation area will continue to rise with the recent announcement from UPS on higher holiday parcel surge rates.

Another obviously important area is the category of inventory carrying costs, which were reported as declining by an overall 3.2 percent in 2016. Two important cost components are the financial costs (weighted average cost of capital multiplied by total business inventories) and overall warehouse and storage costs. Both categories are subject to increases this year, possibly significant.

As we noted last year, the average cost of capital has been influenced by the unprecedented low average cost of capital and consequent interest rates these past few years. With the U.S. Federal Reserve now gradually hiking interest rates, the financial costs of inventory are likely to rise. The second, and by our lens, far more concerning component is the cost of warehouse and storage space.  With the certain reality of increasingly retail sales stemming from online commerce, a structural cost burden shifts from the cost of operating physical stores, to an era that requires ever more expensive pick, pack, and parcel transportation costs. A recent CNBC Business Network report reflects the reality that the U.S. has too many shopping malls and not near enough warehouse space.  The investment firm Jeffries reports that Amazon’s needs for warehouse space has been growing at a 35 percent CAGR rate, and that is just one online retailer. Accordingly, Jeffries opines that if Internet retailers were to double their online sales, it would create the need for 600 million square feet of incremental warehouse space needs. With warehouse leasing or outfitting rates already reflecting double-digit cost growth increases, it is likely that the U.S. will experience certain increases in warehouse costs. We can well envision vacant shopping malls being converted to online distribution and fulfillment centers. Factor Amazon’s announced acquisition of Whole Foods, and the likelihood of physical grocery stores having annexed online customer fulfillment to assure one-hour or same-day delivery is very real.

A third area to comment on is the category of Other Costs (Carrier support and other administrative), which was reported down by 2 percent. Here again, there is the question of whether transportation providers and logistics services providers are investing adequately in new technologies to support industry supply chain needs for increased supply chain wide visibility and digitization of customer support processes. Last week, the Business Performance Innovation Network, a peer-driven thought leadership and professional networking organization, released a study indicating that the global maritime shipping industry still needs better data sharing, and that most respondents cite improved supply chain visibility as a requirement.  This report indicates that:

industry resistance to change, coupled with the industry’s aging and inflexible IT systems, are key impediments to improving visibility and collaboration. Some 54 percent of respondents said the industry being “slow to change” was one the biggest roadblocks to improving collaboration, while 49 percent cited the cost and complexity of legacy systems.”

We view the above as an indication that while the logistics industry has performed in keeping a lid on support costs, customers and shippers are growing restless in the reluctance to change and invest among various stakeholders. This has implications for pending change.

The report authors point to four potential scenarios for logistics in the coming years;

Plain sailing”

“Choppy waters”

“Stemming the tide”

“Industry doldrums

By our lens, the latter three are all pertinent. Business-as-usual or plain sailing, from a customer and industry disruption perspective, does not appear to be a reality given the faster-pace of continuing multi-industry changes.

Once again, Supply Chain Matters applauds CSCMP and A.T. Kearney for their increasing efforts in making the Annual State of Logistics Report more meaningful in presenting a balance for both logistics industry and customer perspectives related to U.S. logistics.

Our takeaway for readers is once again, is similar.  A current high level of economic uncertainties coupled with ongoing logistics industry challenges imply that last year’s optimistic viewpoints may not necessarily apply to a rapidly changing global and U.S. logistics landscape.

Bob Ferrari

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


Breaking: Amazon to Acquire Whole Foods- An Obvious Industry Inflection Point

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In the history of any industry, along with its associated supporting supply chains, there comes a seminal series of events that ultimately point to a major inflection point, one that clearly indicates that business-as-usual is no longer an option. For the food and grocery industry, and all of its supply chain stakeholders, the year 2017, in the second week of June, two thunderbolt events ignited a seminal industry change.

As we pen this Supply Chain Matters posting, business and general media are broadcasting the headline announcement that Amazon intends to acquire Whole Foods Market for $42 per share, or more than $13 billion, a clear and obvious effort to directly penetrate the retail grocery landscape. This is Amazon’s largest acquisition to-date, and no doubt, there were likely multiple choices. In the press release announcing the acquisition, Amazon CEO Jeff Bezos indicated that the attraction to Whole Foods was the wide offering of natural organic foods.   FBA sized Breaking: Amazon to Acquire Whole Foods  An Obvious Industry Inflection Point

By our lens, healthy margins, a loyal brand, and future methods to leverage online and in-store shopping were an obvious consideration, Whole Foods has also been under intense pressure from private-equity firm Jana Partners. Whole Foods CEO John Mackey has been quoted as characterizing Jana as greedy. (Actually, he utilized a more direct term)

According to the release, Whole Foods will continue to operate under its current branding, and CEO Jim Mackey will stay-on as CEO.

News and social media reports further indicate that if the grocer receives a better acquisition offer, Whole Foods would be obligated to pay a $400 million termination fee to Amazon.

The other industry shockwave this week came from Kroger Company, one of the largest retail supermarket chains in the U.S., who issued unexpected lowered earnings forecast for the year. The aftermath of this news caused the chain’s stock to drop by 19 percent, the steepest one-day drop for the company’s stock in more than 17 years.

Kroger CEO Rodney McMullen is noted as sting the following in an interview:

The change right now in what the customer wants has never been faster.”

Business and general media reports are citing Nielsen and other retail sales data all indicating that consumers are both more price conscious in their food shopping, continue to seek out healthier food and beverage choices, and are increasingly turning to online channels for food and grocery needs. Nielsen data indicates that online grocery orders have risen 6.8 percent while visits to deep-discount chains are up 2.9 percent.

Other grocery retail chains are also feeling the effects of quickly changing  grocery shopping trends and the words, industry consolidation, are now coming to the forefront.

At the same time, discount grocery chains Aldi and Lidl are making a major expansion within the U.S. to take advantage of the current shopping trends, which will add to increased industry competition at the retail level.

What is now occurring in the retail channel will continue to cascade across consumer product goods, food and beverage supply chains in the form of tougher price negotiations and demands for increased product innovation addressing healthier food choices. The industry has already experienced the pressures from both Amazon and Wal-Mart as to which will receive the most attractive supply pricing deals.

As noted in our Supply Chain Matters industry commentary published in May, the industry winners are supply chain leaders who educate senior management on the differences of supply chain as a cost center vs. a business innovation enabler. They will also be those that can keep a laser focus on the end-goal, meeting and accommodating far different consumer preferences with changed thinking and distribution methods. By our lens, industry supply chains that invest in talent that can bring forward new creativity, collaboration and thinking for a supply chain model that leverages both online and in-store buying needs will likely benefit.

CPG suppliers are also subject to the influences of private equity, specifically 3G Capital, and no doubt, there will likely continue to be influences for additional M&A among major suppliers and food producers.

Consumer packed foods and associated industry supply chain teams need to pay very close attention to industry developments and associated implications. The notions of single-channel product demand forecasting or other business-as-usual supply chain planning and distribution methods no longer apply during now permanent industry shift. Agility, resilience, and a predictive understanding of consumer needs in food and food buying preferences are table stakes.

Be it noted that in June 2017, two industry shockwave developments became the catalyst for structural packaged and fresh food industry change.

Supply Chain Matters will continue to monitor industry supply chain developments and share insights. We predicted significant industry changes at the start of the year, and the clock speed has accelerated.

Bob Ferrari

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

 


Exploding Demand for Warehouse Space- Thorough Analysis is Wise

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Some concerning news crossed our Supply Chain Matters news desk that compelled a blog commentary. That news is that warehouse space acquisition across the United States has reached its highest level in over 16 years.

This data comes from CBRE, one of the largest global commercial real estate services and investment firms. CBRE reports that almost half of the 167 million square feet of new U.S. warehouse space currently under construction, the equivalent of over 70 million square feet is already pre-committed to new tenants. The tenants are described as primarily E-commerce, third-party logistics and retail industry users, no doubt responding to exploding needs for online fulfillment capabilities.  Warehouse 300x200 Exploding Demand for Warehouse Space  Thorough Analysis is Wise

Further noted is that current ratio of space under construction that is pre-leased stands at 43 percent, which exceeds the 17-year average of 38 percent. Obviously, the ratio signifies a healthy momentum and zeal on the part of online logistics and customer fulfillment teams for warehouse and fulfillment space acquisition.

We are of the view that such space trending and building momentum should be viewed with a cautionary lens. Here is why.

As a long-time industry supply chain analyst, my view of warehouse space has been admittedly as a skeptic. Warehouses, particularly very large ones, are monuments and reflections of inefficient supply chain inventory and customer fulfillment management. However, the boom in online B2C and B2B fulfillment has added a newer dimension for warehouse space, namely a tradeoff of overall physical retail space for that of warehouse space. A further market influencer is no doubt Amazon, which continues to consume new warehouse and distribution space. Adding to the challenge for some brick-and-mortar retailers is the need to simultaneously support both traditional store inventory replenishment and growing online fulfillment needs.

For the most part, prior warehousing and distribution strategies were predicated on supporting physical store or distributor inventory replenishment needs. Warehouses were maximized for vertical height vs. square footage, reflecting maximum inventory storage in a concentrated dimension.  Replenishment orders, for the most part, called for pallet-loads of inventory and merchandise shipped to individual retail stores or wholesale distributors. Inventory could thus be stacked higher in warehouse racks, with automated material handling cranes and equipment providing the bulk of warehouse pick automation.

Online fulfillment centers support a different strategy, namely far higher numbers of individual online orders that feature single cartons or packages. Thus, today’s specialized online customer fulfillment centers are now highly automated examples of end-to-end inventory flow-through, where bulk inventory is received and stored in building flow-through configuration, and where pickers or robots, perform pick and pack needs, while highly automated conveyors flow individual shipments to the other end of the building for actual shipment to online customers.

Online fulfillment is a trade-off of required real-estate square footage with the assumption that the customer fulfillment center assumes the real-estate burden of physical stores or distributors. Thus, the need for fewer overall physical stores, but new investments in customer fulfillment logistics and lower-density warehousing that focusses more on order volume productivity. The one continually changing variable will always be assumptions for inventory needs.

Where this tradeoff is tricky is in the cost and footprint of overall physical space, as well as the cost of such space.  Real estate market supply and demand dynamics can often inflate real-estate and subsequent leasing costs, especially when retailers like Amazon and Wal-Mart are leading the charge. As we all know, today, the cost of capital continues to be rather low. What if that changes over time, particularly in the costs of large footprint warehouse space vs. that of traditional shopping mall or retail space. The other looming challenge is the increasing costs included in online fulfillment, including added inventory, transportation, and logistics costs.

Such trends are complex and the takeaway for supply chain and online customer coordination and fulfillment professionals is that major decisions on real estate cannot be made in isolation.  They are not the context of a supply chain functional decision alone. Rather, thorough, rigorous business-wide analysis and review as to longer-term strategic business implications is very important. By our lens, the firm’s CFO and the head of supply chain are key stakeholders as well as stewards for such decisions.

The last thing that retailers need or desire is to tradeoff cheaper fixed or variable physical store real-estate and store operating costs for even more expensive online fulfillment costs. Likewise, supporting traditional stores and online needs with different or redundant footprints is no longer efficient nor cost affordable. Compounding the strategy are decisions to entirely outsource online customer fulfillment to an experienced 3PL, but here again, logistics providers are subject to the same market supply and demand dynamics.

At face value, exploding demand for warehouse space is not surprising. Such dynamics are the elation of warehouse design, construction, automated systems and real-estate providers.

Thorough analysis of the cost and service tradeoffs for implementing a widescale online customer fulfillment model is a business-wide joint responsibility involving multiple stakeholder inputs.

 

Bob Ferrari


Wal-Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

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Global retailer Wal-Mart held its annual meeting of stockholders last week and declared that the world’s largest retailer has  “started to invent the future of shopping again.” CEO Doug McMillon declared: “we are going to make shopping with us faster, easier and more enjoyable.”  Wal Mart 300x199 Wal Mart Conducts an Optimistic Annual Meeting but Industry Realities Remain

We would quickly add that this is a tall and expensive order in today’s turbulent retail industry environment.

In prior commentaries, Supply Chain Matters has praised Wal-Mart’s emphasis on leveraging the retailer’s vast brick and mortar presence as a more effective extension of an overall omni—channel business strategy. What seems clear from the strategy that continues to unfold is that Wal-Mart will indeed leverage its significant physical presence as an extension of an online shopping experience. In that vein, the retailer is currently testing the deployment of automated online order pickup stations in stores, actual pick-up stations in select store parking lots, and what the retailer’s terms as “Jet Fresh” delivery, which provides deliveries of household groceries one 1-2 days. Regarding the latter, company management indicated that the service is currently available to about half of U.S. households.

Stockholders were updated on the retailer’s continued commitment to source $250 billion in products within the United States along with meeting a goal to source $20 billion of products from women-owned businesses. Further mentioned were initiatives to source more local and sustainable products and to reduce greenhouse gas emissions across the supply chain by 1 giga ton by 2030.

CEO McMillon boldly declared: “We will compete with technology, but win with people”, adding that workers should not fear increasing automation that will change the work involved in retail.  He added: “We will be people-led and tech-empowered” indicating: “I don’t think we should be afraid of changes.  Instead, I think we should recognize that we’ll be able to learn, grow and change together.”  He went on to state that associates need to be lifelong learners and: “The secret of our success will always be our people.”

Uplifting and motivating statements indeed, but from our Supply Chain Matters lens, there are still brute realities to the current Wal-Mart strategies.

The first and obvious was a realization that prior attempts to build a competitive online presence met with very mixed results. That ultimately led to the bombshell acquisition of Jet.com for a sum of over $3 billion. Since that time, Jet.com founder Marc Lore has been given total license to revamp and improve the retailer’s online presence and associated capabilities. That includes more widespread utilization of Jet.com’s price optimization algorithms, as well as lower prices for merchandise that is ordered online and picked-up at a local Wal-mart store.

As many retailers are now fully aware, investing in online fulfillment capabilities is not a cheap proposition, and many of the touted online initiatives already deployed and talked about are examples of these efforts.

And then there are realities of a changed, people and technology-driven business model that CEO McMillon touched upon. He acknowledged the needs to create new jobs in data science, machine-learning, systems engineering and mobile app development. At the store Associates level, being tech-driven brings new realities as well in terms of added training and personal skills development to be able to be an extension of an extensive omni-channel customer fulfillment environment.

Other open questions come to mind.

The first is a building compensation gap from top to bottom. Business media has disclosed that online czar Marc Lore was compensated in $237 million last year, nearly ten times more than CEO McMillon’s $22 million in compensation. Thus the compensation gap from CEO to store associate grows significantly wider and profound.

It remains widely believed that Wal-Mart has staffed its retail stores with a predominance of part-time vs. full-time staffing.  While starting salaries were recently boosted to a minimum of $10 per hour for retail associates, that level does not provide the financial means to invest in more individual technical skills.  Those possessing such skills will likely be able to find jobs that provide far higher compensation levels. Part-timers need to find other jobs to financially make ends meet, again leaving little time for personal skills development.

Another reality is that the online world remains highly competitive, especially when it comes to Amazon. We have previously highlighted that Amazon and Wal-Mart have been in head-to-head negotiations with major suppliers for lowest priced supply of inventory.

On the very week of Wal-Mart Annual Meeting, Amazon announced a lower Prime membership fee for low-income shoppers which are Wal-Mart core customer group. Lowest income shoppers, those currently obtaining government assistance will likely be eligible for $5.99 monthly Prime membership that includes free shipping. Likewise, Amazon announced an Amazon Cash program earlier this year that allows customers to add cash to their account balances at more than 10,000 locations across the U.S. The online giant continues to step-up its merchandise offerings in lower-cost apparel and in a wider variety of household groceries and local food and grocery outlets.

 

The good news is that at least one large retailer, Wal-Mart, can portray an optimistic strategy of future omni-channel capabilities. On the other hand, there remains an ongoing learning that former methods, practices, and corporate culture are all subject to change in the new world of retail and in retail supply chains.

 

Bob Ferrari

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


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