Looking back at the 2015 holiday fulfillment period, there were two significant supply chain and Omni-channel fulfillment trends that made their presence. These trends will continue to unfold in 2016 and beyond with significant implications for industry supply chains.
The first was Amazon, and from a number of dimensions. As noted in our Supply Chain Matters commentary earlier this month reflecting on the online retailer’s latest financial performance, Amazon will increasingly play an industry disruptor role in 2016 and beyond. Certain sectors of B2C / B2B online fulfillment, parcel logistics and transportation are ripe for process innovation facilitated by more innovative Cloud-based technology. We believe that Amazon is showing all of the tendencies to be that disruptor and existing industry players should be prepared. Just like Amazon Web Services (AWS) provided a new model for utility based information technology services, Fulfilled by Amazon will continue to be the next disruption. Yesterday, a report published by Bloomberg reinforced this disruptor trend in its headline: Amazon Building Global Delivery Business to Take On Alibaba. The article discloses a far bolder plan originally conceived in 2013 that outlines an aggressive global expansion of Fulfillment By Amazon services that includes a global delivery network capability that controls the flow of goods from factories in China and India to customer doorsteps throughout the world. A profound statement included in the report was: “The ambitious strategy promises to turn FedEx and UPS into Amazon rivals, but also pit the Seattle giant against Chinese counterpart Alibaba Group Holding Ltd.” The report goes on to describe a strategy that places Amazon at the center of a logistics capability that today controls legions of middlemen who handle transnational world trade, and is ripe for a new model. Through its control of large amounts of online volumes, the online retailer can acquire transportation and logistics capability at lower wholesale rates while transforming Fulfilled by Amazon into a virtual online fulfillment and delivery services platform.
The second compelling trend reinforces the first in some respects. This week, the United States Postal Service (USPS) reported its financial performance for the holiday quarter and recorded its first quarterly profit since 2011, earning $307 million Included in this reporting was a compelling statistic. During the 2015 holiday period, the USPS surpassed UPS in total delivered packages. Letter carriers delivered about 660 million packages, up from an initial anticipated volume of 600 million packages. In contrast, 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 a go-to carrier for Amazon’s needs for Sunday deliveries.
Just before the start of the 2015 holiday fulfillment period, Supply Chain Matters railed on both FedEx and UPS regarding their announced added rate hikes for both 2015 and 2016. Our commentary reflected on whether both global parcel logistics and delivery carriers were inching closer toward upsetting the “golden goose” of their current growth strategies, that being their participation in the boom in online B2B/B2C fulfillment. We opined that these pricing scenarios threatened Free Shipping options for online consumers and opened the door for new industry disruptors, either larger online retailers, or other transportation and parcel services providers to serve as an alternative parcel delivery mechanism in 2016 and beyond. Our belief was that retailers would have to find alternative methods to leverage localized inventory. If readers had not guessed at the time, we had Fulfilled by Amazon in-mind.
Earlier this month, UPS reported its financial performance and the Wall Street headline was a near tripling of reported profits. Deliveries to consumers accounted for roughly 60 percent of all U.S. deliveries, up from 45 percent in the prior quarter. Why, because 35 percent of Sure Post packages were transferred back into the UPS network. UPS executives set upbeat expectations for 2016 including a potential 5 to 9 percent increase in earnings per share.
As B2B customers and B2C consumers are now aware, during the 2015 holiday quarter it was a lot more expensive to ship parcels via the traditional parcel carriers, and ground delivery times were extended to compensate for lower overall amounts of temporary workers. Fuel surcharges remained in-effect despite unprecedented reductions in the current cost of gasoline, diesel and jet fuel. The USPS in-essence became the go-to carrier for shipping options while UPS and, to some extent, FedEx networks struggled to manage peak volumes.
We now believe that both outlined trends are indeed the prelude to pending disruption. Established parcel delivery firms have elected a strategy that will preserve profitability. Amazon is moving aggressively forward with its far reaching Fulfilled (and Shipped) by Amazon strategic plan. Alibaba will not sit idle and indeed is working on broader elements of global logistics and fulfillment capabilities that stretch beyond China. The third-party logistics sector is already undergoing merger and acquisition activity and, as Amazon’s plans continue to unfold, international freight and small package brokerage will be under attack.
Online fulfillment events are changing rapidly and there are definitive signs of pending industry disruption.
Industry supply chain teams need to pay closer attention to these evolving trends, especially those residing in small or up and coming businesses or in organizations that ship a large amount of packages. If your business has a growing online presence, you know how compelling a Free Shipping option is to online consumer’s motivation to buy.
Up to now, it was more attractive from an overall cost and resources perspective to outsource customer fulfillment to an established logistics provider. There is now a cost vice underway that is setting the stage for change and it is important to understand the short and longer-term implications and be able to inform and navigate the business through pending changes.
Now, more than ever, industry supply chain teams need to have the tools and capabilities to be able to quantify and model total customer fulfillment costs under various channel options. It is no longer an option to assume that an online presence is the sole key to growth. Rather, online is a compelling opportunity that comes with its own set of unique profitability challenges. Supply chain teams must be prepared to avoid being the scapegoat for not educating lines of business on cost vulnerabilities or cost saving opportunities.
For our part, Supply Chain Matters will continue with our market education and advisory efforts since there are, by our lens, few independent and objective voices concerning logistics and transportation.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
Last week, customer online fulfillment provider Amazon reported its best-ever financial performance that included a headline of the largest quarterly profit in the firm’s history. Within these results are more indications of evolving business strategy that includes moving further into transportation and last-mile fulfillment.
For 4th Quarter financial performance, Amazon reported a 22 percent increase in net revenues to $35.7 billion while operating income increased 88 percent to $1.1 billion. Net income was reported as $482 million almost twice as that of a year ago. In its reporting for the full year 2015, Amazon recoded $107 billion in revenues. Full year operating income was $2.2 billion compared with $178 million in 2014. The Wall Street Journal observed that it took Walmart nearly 35 years to reach $100 billion in sales volume while Amazon has reached that mark in twenty years.
Indicators of Amazon’s evolving Omni-channel fulfillment business models were evident within the details of financial performance. For instance, in 2015, the Fulfillment by Amazon program that allows sellers to utilize the Amazon fulfillment processes reportedly shipped over one billion units on behalf of sellers.
An online fulfillment focused research firm had previously estimated that upwards of 40 percent of all online transactions during the 2015 holiday fulfillment period originated on the Amazon platform. In essence, Amazon has become a dominant force for online fulfillment, either by Amazon directly or its network of hosted sellers. In the B2B dimension, after only eight months after launch, Amazon Business serves more than 200,000 businesses ranging from small to Fortune 500.
The scale of Amazon’s fulfillment reach comes with its own set of logistics and transportation challenges. Shipping costs during the holiday fulfillment quarter rose a significant 37 percent to $4.2 billion, compared to 10.9 percent in the year earlier period. Shipping costs as a percentage of net sales averaged 11.5 percent in all of 2015. Absorb the magnitude of that number- over $4 billion in transportation and logistics costs in a single quarter. That ladies and gentlemen, amounts to buyer power, influence and motivation towards a more innovative approach.
Amazon’s overall inventories have grown approximately $1 billion this year as more sellers and more merchandise become part of the Amazon fulfillment network. These combined expenses provide ample motivation for greater efficiencies and more innovative parcel delivery network approaches, especially since so many Amazon customers elect to enroll in the Amazon Prime program with its free shipping benefit. There are limits to how frequently the price of Amazon Prime can be raised over a certain annual period.
Some equity analysts question whether Amazon has been forced to resort to less efficient and more costly transportation and logistics services providers, hence the steady stream of evidence that indicates that Amazon is assuming more control of logistics and moving closer to last-mile fulfillment. In the recent earnings briefing with equity analysts, Amazon’s CFO validated that the online provider’s existing parcel delivery providers could not handle Amazon’s required delivery service commitments during the critical holiday fulfillment period.
In mid-January, Supply Chain Matters called attention to a Seattle Times report indicating the same and that within a few weeks, Amazon.com will begin competing directly with longtime partners United Parcel Service, FedEx and DHL in Europe, with pieces falling into place to make such competition a potential in the U.S. as well in time. As the strategy continues to evolve, Amazon’s transportation and logistics capabilities will likely be shared for use by other service providers or Fulfilled by Amazon partners.
Supply Chain Matters continues to predict that Amazon will playout an industry disruptor role in 2016 and beyond. Certain sectors of B2C / B2B online fulfillment, parcel logistics and transportation are ripe for process innovation facilitated by more innovative Cloud-based technology. We believe that Amazon is showing all of the tendencies to be that disruptor and existing industry players should be prepared.
Just like Amazon Web Services (AWS) provided a new model for utility based information technology services, Fulfilled and Delivered by Amazon will likely be the next disruption.
© 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
In prior Supply Chain Matters commentary as well as 2016 predictions, we have raised awareness relative to the impact of increased parcel transportation rates on B2B and B2C online commerce. At the beginning of 2016, major parcel carriers FedEx and UPS initiated new 2016 rates and added surcharges, and the United States Postal Service (USPS) has now initiated its own 2016 rate hikes averaging 10 percent.
While our commentaries have focused on multi-industry impacts, there is certainly a small and medium business impact, one perhaps more acute relative to business impact.
Thus, we highlight perhaps one of growing representative evidence of such impacts. A published article originating from Maine’s Portland Press Herald, brings forward such impacts. (Metered free view). The article profiles two small but up and coming Maine based businesses, Dresden based Maine Medicinals and Winslow based Johnny’s Selected Seeds. The latter business is one that this author has been a fan of for many years.
Both businesses bring forward the realities of today’s online world, that consumers and customers incorporate shipping charges in their buying decisions. In the case of B2C online fulfillment, Free Shipping has become the norm as a result of the track record of Amazon Prime. Yet, more and more, retail executives have come to understand the new realities of increased costs associated with online fulfillment. Thus, as indicated by executives in the featured online businesses of the Press Herald report, the costs of shipping must now be adsorbed or offset by other cost efficiencies.
The other reality brought forward in the report is how the USPS was looked upon as the contingency strategy to avoid the higher transportation costs of the large parcel providers. Now, that option is off the table since the USPS needs to deal with its own needs for agency profitability on costs. More succinctly, the message brought forward is that in many cases, increased transportation costs stand to now directly impact the bottom line of many SMB businesses anchored in online commerce. Shipping fees can no longer cover the full cost of transportation and handling, and something has to give.
We suspect that among many SMB businesses, there is a hope that other viable, less costly transportation and handling options will become available. Within these building needs, online giants such as Alibaba, Amazon, Ebay and perhaps Walmart remain continued disruptors, offering hosted fulfillment services.
Unless and until more disruptors come forward, the market swath and influence of a few online commerce dominants may well continue and SMB’s will be among those most impacted.
In our Supply Chain Matters commentaries focused on Retail industry and B2C commerce, we have for the past two years consistently urged industry players to view the needs of physical brick and mortar store retail and online customer fulfillment as a singular strategy focus. That included the management of merchandising, inventory and logistics fulfillment. The recent announcement that Walmart is now merging all of its existing corporate IT and Silicon Valley online commerce IT groups together is yet another sobering reminder of the need for singular strategy, focus and execution.
Too often, senior retail management leaders allowed or tolerated separate organizational teams to manage both physical and online business and fulfillment needs. This led to obvious internal competition and conflict for resources and investment budget. Both spheres of influence often had different vision and tactics and the challenge was often organizational energy and precious time focused too much on alignment vs. execution.
Last week’s announcement from Walmart indicating that its information systems division at corporate headquarters will combine with the @WalmartLabs Silicon Valley group to form Walmart Technology is, by our lens, the latest acknowledgement that retailers must view Omni-channel fulfillment under a singular umbrella of leadership and direction. Walmart’s existing corporate CIO and Chief Technology Officer of Walmart Labs will now report directly to the head of the retailer’s E-Commerce division. Also reported by The Wall Street Journal’s CIO blog is that the customer insights and analytics group as well as the global business process teams will be folded under the CTO of Walmart Labs.
In its reporting, Reuters quotes the head of Walmart’s E-Commerce division as indicating that customers do not think of interactions as different physical or online experiences, but as one experience. A Walmart company spokesperson indicated to The Wall Street Journal that the consolidation of IT groups will help to more quickly identify ways to build technology that combines the needs of both online and physical shopping. Consumers expect retailers to know about each and every customer’s needs and require a seamless experience.
This latest organizational realignment comes on the heels of Walmart’s restructuring of its retail store strategies that will place more emphasis on Superstore and Neighborhood physical stores and result in over two hundred store closings of perceived unprofitable stores on a global basis. The retailer is now planning to invest $2 billion over the next two years to grow its online fulfillment channel.
Walmart’s motivations come as results of the 2015 holiday fulfillment quarter now reinforce the sheer power and influence that Amazon has garnered among online consumers. One estimate has Amazon accounting for as much as 40 percent of all online purchases.
We anticipate that other similar retailer realignments will follow in the coming months. There is but one holistic online fulfillment, merchandising and supporting supply chain strategy, facilitated by one cohesive technology support strategy that brings together planning, execution and more predictive market insights.
Thus is the new reality of retail focused industry.
Copyright 2016. The Supply Chain Matters® blog and The Ferrari Consulting and Research Group.
This past April, this Editor attended JDA Software’s annual Focus customer conference. Among the notable impressions we walked away with was the announcement of a new partnership with Google and the Google Cloud Platform as a cloud services platform to leverage technology innovation.
Today, as a prelude to next week’s National Retail Federation (NRF) annual conference, JDA announced another step in its relationship and collaboration with Google, one that should capture the interest of retailers.
My takeaway from Focus 2015 held in April was that JDA was investing heavily in “true cloud” technology, something one could not report from previous Focus events. I walked away with a distinct impression that the Google partnership had the potential to lead to exciting new applications of information discovery and leveraged use of more predictive analytics across the end-to-end supply chain.
Google’s strengths are in the indexing of large volumes of data and information, in large scale parallel processing and in infinite scale computing. One could consider Google to be a late entrant to the cloud platform environment with the likes of Amazon Web Services (AWS), IBM, Microsoft and Oracle already having a market presence. But then again, late entrants have the benefit of learning from others and have the zeal to want to make a market statement, which Google has never shied away from. To this author’s knowledge, this is also Google’s first presence in retail and supply chain business process needs.
Today’s announcement is that JDA’s retail planning application “Retail me” will be the first application jointly developed by JDA Labs and Google. Initial functionality is focused in retail assortment planning across all selling channels. JDA’s describes the data design principle as more focused on product and customer as contrasted with a traditional planning focus on individual stores.
Retail assortment planning has often been anchored in the principle that the retailer plans and decides on the specific merchandise that consumers will buy, while merchandising and supply chain teams insure that inventory is populated at the right stores. Omni-channel fulfillment changes this planning approach dramatically since the consumer interacts with a retailer from multiple channels and in multiple ways, and the primary information is online.
Leveraging Google’s data algorithms has the potential to analyze significant volumes of point-of-sale (POS) transactional data as well as product search query data to determine specific customer profile and buying patterns. Leveraging data on where and when the customer interacts with the retailer coupled with customer profile data adds more meaningful customer-centric predictive intelligence. The leveraging of JDA’s application knowledge and experience accumulated across its various Retail and supply chain management applications adds the other dimension to this new approach.
Later this year, more applications functionality is planned for Retail.me in areas of merchandise financial planning, promotion management, inventory placement and other forms of distribution and supply chain planning.
It is an interesting approach that brings together strengths in data analysis and predictive technologies with expertise in retail and supply chain management, surely one that retailers should pay attention to over the coming weeks.
Disclosure: JDA Software is one of other sponsors of the Supply Chain Matters blog.