For B2C and retail supply chains, dedicated planning efforts throughout the year to prepare for the holiday surge period are about to meet the stress test. The Thanksgiving holiday is the stress test for food focused and grocery supply chains. The Black Friday shopping holiday that follows has promotional activities already underway this week, and in a matter of hours, online and in-store consumers will be seeking out the best bargains that extend through the Cyber Monday shopping holiday.
Last year, parcel carriers and logistics providers reported peak surges over the Black Friday weekend and during the first two Mondays in December. This year, parcel carriers expect a rather busy period, anticipating anywhere from 10 to 15 percent in increased parcel shipping volumes through the end of December.
As Supply Chain Matters has noted in prior commentaries, retailers once again have a lot at-stake. Last year’s activities were hampered by logjam and disruption of inbound and outbound holiday focused export inventory among U.S. West Coast ports. Approaching Black Friday this year, indications and evidence reflect that retailers are this year deep in inventory overhang, and such inventories need to be sold. Other data indicates that consumers will be unforgiving and will shop early for the upcoming holidays.
As we enter the holiday, there is a report posted on ZD Net indicating that Amazon has forced automatic individual account password resets with a number of registered users raising speculation that the online retailer may have been hacked in the area of mobile device access.
The next few days are obviously crucial for achieving revenue and profitability expectations for all stakeholders, retailers and carriers alike. If consumer promotions extend further into December, the stakes will obviously be far higher.
In the meantime, enjoy the Thanksgiving holiday with family and friends. Rest as best you can an d give thanks for family, friends and relationships.
We extend a Thanksgiving holiday wish to all of our U.S. based and other global readers for continued blessings.
Stay tuned to Supply Chain Matters for our continuing commentaries related to the 2015 holiday surge events including early insights as to supply chain performance.
Supply Chain Matters has always been of the belief that history provides valuable learning, especially when business process improvement and technology deployment are being considered. Thus, we wanted to call attention to a commentary featured on Strategy + Business, Navigating Retail’s Last Mile, that reflects on important learning related to online fulfillment. (Complimentary account sign-up required)
The authors revisit the past 16 years of last mile retail efforts of the late 1990’s and early 2000s, when most online start-ups struggled with the trade-off between speed and consumer choice. The commentary argues that early start-ups such as HomeGrocer, Kozmo and Webvan focused on speed at the expense of variety.
The premise is that many of the same challenges persist today, often with added Omni-channel complexities. In essence, the argument is:
“the fundamental economics of the last mile haven’t changed. Companies have to offer a solution with costs equal to or lower than the customer’s willingness to pay (the “cost to serve’)”
In its analysis, the authors conducted research on the “cost to serve” for an array of retail models including traditional physical store, curbside pickup, crowdsourced shoppers, white glove delivery and pure-play e-commerce. This was supported by a survey of 2000 online U.S. shoppers regarding shopping preferences.
Our readers are welcomed to explore the specific examples, which from our perspective, provide excellent examples of what’s involved in an effective “cost-to-serve” tradeoff analysis.
Supply Chain Matters advises readers to focus on the two key takeaways that were provided over the Strategy+Business two decade timeline. The first was clearly summarized: “The pursuit of speed without an understanding of cost led to the demise of many of the early last-mile players” Many of us in the industry analyst community have observed this lesson being replayed again over the last 2-3 years, as online retailers discovered the hard way, the unexpected hidden expenses of fulfilling online consumer demand where consumers ordered more frequently but with lower average order sizes. Often, this reflects the dynamic tension among sales and marketing and supply chain as dynamic online programs are deployed without accurate awareness or knowledge of the associated cost factors.
We would like to offer another supplemental important takeaway based on our observations of online fulfillment history. That would be that technology has also come a long way, particularly in the ability to analyze and predict cost-to-serve across various customer fulfillment channels. Technology providers have leveraged in-memory and other information management technologies that can span supply chain and customer management applications towards needs for more informed and contextual based decision-making. Teams should therefore be focusing technology strategy toward supporting more intelligent fulfillment capabilities that can provide various cost-to-serve decision-making contexts as was described in the article’s examples.
The final takeaway was that consumer behaviors will continue to change and evolve. Rather than constantly reacting to such changes, instead lead customers to online fulfillment that makes the most economic sense. The authors point to determining the most appropriate model for last-mile delivery of their goods and create a value-proposition that builds on inherent strengths. If you think about it, that is exactly what retailers such as Alibaba, Amazon, Best Buy, Restoration Hardware and Wal-Mart are currently deploying. Build on the inherent strengths that you have and lead consumers to attractive fulfillment options.
We provide a contextual follow-up to our ongoing Supply Chain Matters observations and insights regarding the current holiday focused surge period among retail supply chains. This week, The Wall Street Journal observed (paid subscription required) that unsold goods and added inventories are piling up on retailer’s shelves possibly making it challenging for some retailers to hit their earnings targets in this critical quarter of performance.
We have previously called attention to the implications for this year’s expected online fulfillment volumes, a recent consumer sentiment survey indicating shoppers may elect to shop earlier this season, and the important technology enabling considerations for the rapidly changing Omni-channel world.
The WSJ report cites supplier sources and industry watchers as indicating that some department stores have experienced an overhang of inventories in anticipation of the coming holiday period, and beliefs that with far lower energy prices and higher employment levels, consumers will spend more on gifts in the upcoming holidays. The publication indicates that specialty stores and apparel manufacturers are each experiencing a “build-up in inventories beyond the natural increase ahead of the holidays.”
Separate reports this week indicate specific retailers such as Macy’s and Wal-Mart specifically stepped-up inventory buying activity to offer more attractive promotions and selection for consumers. Earlier this week, Cowan and Company published a warning to investors indicating that inventory is above sales growth across the retail industry.
Amidst this collective optimism among many retailers, the WSJ observes that industry executives are beginning to question whether this year’s sales predictions have been too optimistic. While the gap is reportedly not as wide as that in 2013, it is concerning, since new inventory brought in for the holidays must compete with unsold inventory overhang, some as a result of last year’s U.S. West Coast port debacle which had holiday goods arriving after the holiday period had passed.
The implication remains that retailer’s, and their associated customer fulfillment teams will need to promote and fulfill merchandise orders earlier in the holiday period rather than later. The upcoming Thanksgiving holiday and the days leading into early December will be critical determinants of whether inventories will be sufficiently depleted among both online and physical stores, and whether sales and profits will meet business expectations.
The ability for sales and operations teams (S&OP) to quickly assess multi-channel sales volumes, remaining network-wide inventory levels associated and profitability outcomes will likely differentiate winners from losers, especially when considering that online fulfillment costs may be prove to be more than traditional sales channels. Waiting to discount merchandise later in December could be troublesome because retailers will likely be aggressively competing among themselves for limited consumer interests in categories such as apparel, footwear, jewelry and home goods vs. electronics and gadgets while risking added or peak-period shipment costs among parcel carriers.
Supply chain wide visibility, analytical and intelligent fulfillment capabilities have never been as important as they are for this holiday surge.
Last year at this time, Supply Chain Matters featured a commentary focused on China’s online fulfillment provider Alibaba. Noted was that we can sometimes get enamored with names such as Amazon and Wal-Mart but Alibaba is indeed an evolving player to reckon with in this era of online commerce and hanging retail supply chain customer fulfillment.
That point was again driven home this week with reports of probably one of the largest online fulfillment events, ever, an event that made a significant statement relative to the processing of a single day’s volumes and on promoting largescale consumer interest in an online shopping event.
China’s Singles Day is somewhat equivalent to Black Friday or Cyber Monday in terms of an online shopping event. This event was conceived by students in the 1990’s as a mock celebration for people not in relationships, with a desire to give something to oneself. It traditionally occurs on the 11th day of the 11th month or Double Eleven, since when written numerically, November 11th is represents “bare branches”, a Chinese expression for bachelors and singles. In 2009, Alibaba orchestrated an online shopping event promotion to rival that of Western nations. The event is now replete with high anticipation including a four-hour variety television shopping focused extravaganza complete with Hollywood celebrities and other guests.
According to Alibaba, this year’s Singles Day online event recorded a record 91.2 billion yuan ($14.3 billion) in one-day gross sales. Volume was reported as surpassing last year’s $9.3 billion in sales after 12 hours. For the sake of comparison, last year’s online Black Friday and Cyber Monday volumes do not come close to that of this year’s Singles Day.
A report from BBC News highlights data indicating that the event now represents 80 percent of China’s total online shopping with an estimated 120,000 orders processed each minute. Nearly 73 percent of online purchases in the first hour had reportedly originated by mobile phone. Alibaba further indicated that this year there would be 40,000 merchants and 30,000 brands from 25 countries offering merchandise across its various online platforms.
Of significance from a supply chain logistics and fulfillment perspective is that Alibaba owns its own parcel delivery logistics entity, Cainiao, along with close relationships with other logistics providers to insure that packages are delivered to expectations amid a number of residential delivery challenges across China’s high density urban and rural landscapes. The online firm estimates that 1.7 million delivery persons and over 400,000 vehicles will be deployed to deliver this week’s volume of packages. In a September commentary, we called attention to Cainiao’s efforts to forge shipping relationships with other global parcel delivery entities including the United States Postal Service.
Make no mistake, when it comes to sheer volume and scale of B2C/B2B online commerce, Alibaba is the provider to watch. This week’s Singles Day milestone provides yet more evidence of such scale and inherent online retail customer fulfillment capability.
In prior Supply Chain Matters postings, we have commented on how retailers are actively positioning online fulfillment practices for the current holiday fulfillment period and how industry watchers anticipate that shoppers will likely initiate purchases earlier in the holiday period. We further believe that technology and informed decision-making will play an important role in which retailers successfully navigate their Omni-channel strategies and achieve or exceed their profitability goals.
JDA Software recently sponsored and released a new 2015 Consumer Survey consisting of a polling of more than 1000 likely online consumers. An important finding was that 50 percent of the respondents indicate that they will be unforgiving of retailers who provide less than satisfactory online home delivery experiences. Once more, nearly one-third of these consumers reinforced that convenience is a major factor when placing an online order with nearly one in four of the survey respondents indicating a preference for “Buy Online, Pick Up in Store” as being more convenient than direct to home delivery. General news media adds to concerns by reporting on the so-called “porch thieves” who shadow parcel delivery vans and steal delivered merchandise from doorways. Other survey data from previous years generated by independent market research firms consistently reinforce that higher Free Shipping threshold policies sponsored by online retailers also have a strong influence for consumers opting for “Buy Online, Pick Up in Store.”
The latest JDA survey data is an indication that online retailers who cannot meet expectations risk losing a considerable percentage of customers to a competitive retailer that can offer a more seamless online shopping experience. According to the JDA release: “While shoppers expect convenience throughout the retail experience, most are outright not willing to pay for it, leaving retailers searching for ways to respond to consumer demand and still remain profitable.” Amazon’s Prime fulfillment program is the best example of how an online retailer can buffer consumer perceptions for having to pay for convenience by spreading such costs across an entire year..
In a JDA survey of retailers released last December, only 16 percent of retailers indicated that they can make a profit on online demand. That report concluded that: “Profitability is the biggest challenge because costs are rising faster than revenue.” The holiday surge period is the make or break quarter for many retailer’s financial performance.
As Supply Chain Matters and others in the industry have observed, in-store, local pickup and other shipping strategies will be tested once again during this upcoming holiday season. Target and Best Buy Co. have indicated they would provide Free Shipping on all online orders, while Wal-Mart has thus far opted to continue charging shipping fees on orders under $50, but is promising to make shopping easier every single day.
Online fulfillment costs are exploding and retailers can become more and more blindsided by such costs. Positioning inventory to support multiple fulfillment channels is now a necessity to insure margin goal performance, yet only 40 percent of retailers have network-wide visibility to such inventories. Logistics, transportation and service cost factors are now a critical input toward insuring overall business profitability. As noted in our previous commentaries, this is especially becoming evident with the latest round of expected parcel fuel surcharge, logistics and transportation cost increases.
Augmented technology will certainly play an enabling role in overcoming such challenges. However, technology selection teams will need to assess that such technology has the ability to span supply chain planning, network-wide inventory and Omni-channel fulfillment information streams in supporting more informed decision-making and to contrasting service segment needs with cost and overall profitability impacts. During last year’s holiday surge period, some retailers had the opportunity to test Omni-channel fulfillment processes including pick-up in store, with mixed results. Some were seamless, others experienced problems as noted in the recent survey results. The upcoming Black Friday and Cyber Monday promotional period will provide an added test not only to the ability to manage surge volumes, but in retailer’s abilities to determine expected impacts on costs and profitability.
Inventory, distribution, fulfillment center support and transportation management systems can no longer exist as stand-alone information sources. Root cause analytics that offer recommendations and simulation modeling as to the cost impact of various fulfillment scenarios are now important table-stacks in a constantly dynamic Omni-channel world.
Once again, retail teams need to insure that your organization takes a cross-functional and cross-channel perspective to the overall process, decision-making and technology support implications of Omni-channel fulfillment.
Disclosure: JDA Software is one of other sponsors of Supply Chain Matters.
We close out a very busy week with some updates relative to previous supply chain management and industry developments highlighted in prior Supply Chain Matters postings.
In our most recent Supply Chain Matters commentary stream, we questioned whether recent fuel surcharge rate hikes would have an impact on consumer online buying trends for the coming holiday period. The Black Friday to Christmas holiday period has never been more important for online retailers as well as to parcel carriers and retail supply chain teams. There remains retail inventory overhang from last year’s U.S. West Coast port debacle and we expect retailers to be aggressive in earlier merchandise promotions. We furthered wondered aloud how consumers will respond to higher shipping charges, or whether online retailers will elect to absorb increased shipping costs or seek alternative delivery models.
This week, major online and brick and mortar retailers have begun to disclose their Free Shipping policies. Target announced that it will offer free shipping for orders placed online from Nov. 1 to Dec. 25. The retailer currently requires a minimum online order of $25 to qualify for free shipping. According to reports, Free-shipping boosted Target’s digital sales 36 percent during the fourth quarter last year.
Wal-Mart, on the other hand, indicates it will keep its minimum online order size for free shipping at $50 this holiday season. Electronics retailer Best Buy has elected to waive its $35 minimum through early January. Amazon, of course, offers free delivery to members of its Prime shipping service, and this year, may well add premium or same-day shipping services for members.
Meanwhile, the same retailers are positioning their policies for Thanksgiving holiday hours among brick and mortar owned stores. Sears announced it will open its doors from 6 p.m. through 2am on that holiday, and then reopen at 5 a.m. on Black Friday. The Sears’ announcement came one day after Macy’s disclosed that it will offer shoppers within its stores Black Friday deals beginning at 6 p.m. on Thanksgiving. On the other hand, a handful of retailers including Lowe’s, TJX and Staples have indicated that they will be closed for the holiday.
Many studies continue to reinforce that convenience and Free Shipping motivate consumer buying decisions. However, retailers run the risk of not meeting or underperforming profitability goals if they do not have up-to-date information on shipping and fulfillment costs. This year, with parcel carriers adding the dimension of additional charges and capacity premiums, the challenge becomes ever more important.