From time-to-time as developments warrant throughout the year, we publish various succinct research advisories to clients and blog readers focused on specific industry, line-of-business, functional or technology trending that warrant specific attention for both management teams and supply chain management professionals. Normally our advisories are included within regular blog posts, but when significance warrants, and content length dictates that we provide deeper insights, we will now provide these advisories in our Research Center as complimentary downloads.
There have been several phases related to the ongoing explosion of online commerce and its impact on retail and B2C focused industry supply chains. Take note that 2016 marks the beginning of the newest phase, namely impacting the long-term presence of brick and mortar retail.
The watershed events have been recent Q2 financial performance results from various retailers, and more specifically, last week’s public acknowledgement by broad based merchandise retailer Macy’s that declining foot traffic makes the cost or value of real estate and physical store operations a new determinant of long-term strategy. The initial shockwave came in January with Wal-Mart’s announcement that it would close 260 stores globally, including 154 across the United States as part of comprehensive strategic alignment of strategy. By June, there is additional discernable evidence of this new phase.
In our Ferrari Consulting and Research Group Research Advisory– The Beginning of a New Phase of Online and Omni-Channel Fulfillment for B2C and Retail Supply Chains, we address background, the iteration of phases and including the tenets of this new phase, along with actions to consider.
Our only requirement for this complimentary research advisory report is that readers fill-out an electronic download form that requires some basic information. To download the report, access our Research Center from the top menu, double-click on the words Research Advisory- August 2016 on the right-hand side and complete the form.
This week, the United States Postal Service (USPS) reported its financial performance for the latest quarter, and from our lens, there are distinct indications that the agency has reached a critical juncture in its ability to be a sustaining competitor and service provider to the world of online fulfillment. As the agency handles more and more package volumes, its transportation and operating costs have risen significantly. Readers, those residing in small and medium as well as large businesses, need to continue to be aware of the implications of this trend.
In September of 2014, Supply Chain Matters declared that the USPS had suddenly changed the industry dynamics of parcel shipping, online commerce and customer fulfillment. The agency established a whole different dynamic for B2C/B2B online commerce by aggressively reducing parcel shipping rates and by declaring to online retailers and businesses that the USPS intended to be a parcel transportation and last-mile delivery partner in the ongoing explosion of online. Suddenly, e-retailers who wanted to maintain attractive free shipping options discovered a potential new alternative to control costs of such programs, and entities such as Amazon were quick to make leverage. Both FedEx and UPS were not all that pleased with the pricing move and began logging protests claiming foul, even though both relied on the agency for completing more costly last-mile delivery needs. However, both were forced to deal with a different competitive landscape in terms of rates and customer alternatives.
Then we viewed the evidence of the results from the all-important 2015 holiday fulfillment quarter, as the agency actually surpassed UPS in total delivered packages. USPS letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. UPS reportedly delivered 612 million packages as compared to its initial forecast of 630 million. The postal agency offered the equivalent of as many as 25,000 Sunday delivery routes, up from a normal 4000 pattern. In essence, the USPS became the de-facto go-to carrier for Amazon’s needs for Sunday deliveries. Financially, the agency recorded its first quarterly profit since 2011, earning $307 million, a significant milestone.
In the latest June ending quarter, while total revenues increased 7 percent, the agency reported a controllable loss of $552 million compared with a year-earlier controllable loss of $197 million. Overall volumes were down slightly while package volumes increased 14 percent, an indication of offsetting declining volume in standard mail. The agency reports that it is now delivering to one million additional addresses across the U.S..
In the latest quarter, operating expenses increased 12 percent. The agency’s CFO indicated that transportation and compensation costs continue to rise despite strict cost controls, and according to The Wall Street Journal, the majority of compensation cost increases were related to the growth in package volumes. Further noted was that transportation costs rose in part due to added air freight expenses to meet customer expectations. According to a statement from the Postmaster General, while a recent package rate increase helped to boost revenues in that segment, it was not enough to offset rising costs. By the way, the principle air freight services provider to the agency is FedEx, who obviously benefitted from increased USPS package volumes.
From our lens, the USPS cannot continue to sustain its growth in package deliveries related to current and more expanded online commerce package volumes without investments in newer equipment, systems, and more flexible people resources. Most current delivery vans are over 20 years old and added package volumes are obviously taking a toll on these trucks. The agency is close to awarding contracts in evaluating new delivery van prototypes with larger cargo capacities while consuming less fuel, but the timetable obviously needs to accelerate. Most of the agencies inter-city and cross-country surface delivery needs are established with external transportation firms or independent trucking contractors. As noted, air freight resources are contracted as well.
Scalability of this model does not equate to added efficiencies and cost control. As a government agency, beholden to the U.S. Congress, there are obvious political constraints. Some in Congress want to be rid of direct government ownership yet many current and retired postal workers as well as associated contractors are voters who expect their interests to be considered. Add to this a heightened and highly partisan Presidential campaign environment and readers can get the picture.
The agency and its associated postal workforce have proven viability as an option in package delivery and last-mile fulfillment. The latest TV commercials depicting USPS vans branded with virtual retail branding has purposeful meaning for online consumers. But, the crossroads has been reached in terms of added scalability without losing additional monies.
It is time for the U.S. Congress to act. Either allow the agency to manage, invest and compete as an alternative e-commerce delivery provider or take action on other options.
The analogy is perhaps a teenager that proves to his or her parents that they have finally grown-up and matured, and desire to launch on a chosen career, and seek the support to do so. So is the situation with the USPS and the Congress. The crossroads is at-hand.
In the meantime, businesses need to stay aware to the implications of these trends especially in the light of continual evidence indicating that supporting online customer fulfillment has become more expensive with every passing campaign.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved
August marks the traditional start of the peak transportation period leading up the October thru December peak holiday fulfillment period involving both traditional and online retail channels. The following two Supply Chain Matters commentaries address two important trends that will make the forthcoming period far different and perhaps far more challenging for industry supply chain teams.
Since last December, Supply Chain Matters has been alerting our readers to the changing dynamics related to parcel logistics and transportation, specifically Amazon’s ongoing efforts to build out and directly manage its own logistics, transportation and last-mile fulfillment capabilities during high peak periods such as the holiday fulfillment period. We have urged teams to stay informed.
During this period, Amazon had been rather coy in not commenting on each of the developments that had come to light across business, industry and supply chain social media such as this blog. Ongoing developments included two separate direct agreements involving the leasing of former used air cargo aircraft. Subsequently two leasing deals were established that including the leasing of 20 Boeing 767 air freighters from Air Transport Services Group (ATSG), and an additional 20 cargo jets from Atlas Air. ATSG is reportedly further contracted to provide loading and unloading support for Amazon’s entire air freighter fleet. Further disclosed was the leasing of 4000 semi-trailers to move parcels among various Amazon distribution and logistics sortation centers.
In a media event held late last week, Amazon unveiled one of the cargo planes now painted in the Prime Air logo design shown here. Keep in mind that because Amazon has leased these aircraft from a third-party charter carrier and does not directly own the aircraft, there are limitations to directly affixing a corporate logo to the aircraft.
The accompanying Amazon press release portrays a more direct admission of the ongoing supplementary capabilities including a direct quote from Dave Clark, Amazon’s senior vice-president of worldwide operations. This newly painted aircraft, similar to the painted leased semi-trailers, establishes the branding of dedicated logistics and transportation services to the Amazon Prime program which customers pay a premium for in order to obtain free and more responsive shipping. Readers may have already noticed Amazon Prime logo delivery vans navigating urban and suburban streets across select areas of the U.S.
Noted in the press release is that in approaching the upcoming 2016 holiday fulfillment period, the global online retailer has a network of 125 fulfillment centers and over 29 logistics sortation centers to increase delivery speeds for customers. Directly confirmed is the leasing of the 40 air freighters through leasing partners ATSG and Atlas Air and that there are currently 11 dedicated aircraft now flying with all 40 expected to be operationally deployed within the next two years.
A separate published report from the Seattle Times notes the significance of the unveiling of the newly painted plane being held with a Boeing hanger in Seattle. The newspaper cites two informed sources with knowledge indicating that Amazon is further talking with Boeing about the possibility of buying brand-new 767’s for its dedicated Amazon Prime air cargo fleet. However, Mr. Clark insisted in a direct interview that this option is not one that the online retailer is pursuing at this time, but added: “I’d never say never… Who knows what the future holds?” Another hint is an indication by an Atlas Air executive indicating that the leasing firm has plans to hire 400 to 500 pilots just to support its Amazon dedicated aircraft needs.
Once again, Amazon has all strategic options covered while being careful to not disrupt current service agreements with existing parcel transportation partners FedEx and UPS. In essence, Amazon is indeed taking more direct control of both its transportation and logistics capabilities as well as its cost structures along with the potential opportunity to share such capabilities with other manufacturers and online fulfillment partners.
In the coming months, we will all get to observe Amazon’s dedicated logistics, transportation and last-mile fulfillment capabilities and the implications to other carriers and to retail and consumer goods industry supply chains will continue to reverberate.
In the meantime, you can watch the dedicated You Tube video depicting the branding of the first Amazon Prime Air cargo aircraft, a milestone with lots of ongoing multi-industry significance including the upcoming holiday fulfillment period.
In the spirit of passing along career tips to our millennial generation readers, we call attention to a recent report of recruiting trends in the fashion retail industry.
The Philadelphia Inquirer recently reported on current retail industry recruiting trends which reflect much of what our consultancy has advocated for some time, namely those efforts to manage brick and mortar stores and online business processes are coming together and that foundational supply chain management knowledge is becoming a necessity, along with other in-demand skills.
Specifically, the report notes that “e-commerce is driving the bus” across retail channels with a growing need for online merchandising managers, the online counterpart to a similar position in store divisions. Noted is that the website has to drive traffic to the store and the store has to similarly drive added traffic to the website. Requirements for online merchandising talent are described as a candidate’s market right now, with compensation levels currently ranging from $90,000-$100,000.
Qualified candidates are described as having to know search-engine optimization techniques and must further understand logistics and supply chain management. Career progression is noted as positions of either director of e-commerce where the recruiter describes a current environment of more jobs than candidates. At the director level, knowledge of supply chain management practices becomes even more essential and is described as: “everything it takes from the customer pushing the click button to buy something to delivering the package.”
We would add that this requirement is now manifested itself into the ongoing poaching of senior e-commerce and supply chain management talent from online providers such as Amazon, which recently occurred at Target as well as other retailers.
People and change management skills are also manifested as a current in-demand requirement:
“Companies are looking for people who are entrepreneurial. ”Influential continues to be a key word for my clients,” she said. “They want people to have opinions, make a case, and present their ideas clearly.”
Thus, if you are considering a career in retail management, it would be wise to acquire foundational knowledge in logistics and supply chain management and specific knowledge and experience in search-engine optimization (SEO) techniques.
The South China Morning Post reports that Alibaba founder Jack Ma has identified his vision calling for a universal global online platform that would serve to eliminate global trade barriers. The report indicated that Ma was hoping that global enterprises, including Amazon, would work together to create this new universal global platform.
The report indicates that Alibaba was establishing a team to study what rules should apply to such an online platform including those related to tariffs and global logistics. Ma noted that Alibaba does not necessarily have to operate this platform, but wants to participate in building such an online global marketplace.
The Chinese online commerce provider hopes to reportedly “test the waters” with one or two countries following the G20 summit meeting planned for September. Unlike the World Trade Organization (WTO), the envisioned platform would reportedly be organized by businesses with the support of governments. Founder Ma further acknowledged the immense challenges and difficulties of such an effort and is reportedly prepared to spend decades to turn his vision into reality.
We suppose that latter statement is rather pertinent since judging from the current global climate related to eliminating trade barriers, as well as the ongoing fierce competition among existing global online fulfillment platforms, it may well take decades. With online retail sales in China now expected to exceed 40 percent of the total population by 2018 according to Jefferies Group, , and with only two dominant online fulfillment platforms in that country, chances are that activity within China alone will tax existing processes and systems, let alone a global platform. Add to that the challenge for monitoring and controlling fraudulent goods and the notion of decades seems pertinent.
Note: Alibaba is the principal owner of the South China Morning Post