subscribe: Posts | Comments | Email

UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

1 comment

The small parcel transportation and delivery industry, under the lead of United Parcel Service (UPS), once again elected to add yet another business challenge to online retailers. Only this time, Supply Chain Matters anticipates structural shifts in online business practices likely to occur because of this move. UPS Natural Gas Van 300x177 UPS Holiday Delivery Surcharge Announcement Will Lead to Industry Structural Shifts

This week UPS announced a series of delivery surcharges timed to the busiest online fulfillment period in the United States, that being the period between the Black Friday shopping and Christmas holiday period of 2017. UPS plans to impose a 27-cent per package surcharge on all ground packages destined to U.S. residential addresses between the period of November 19 and December 2, a period that includes the Black Friday and Cyber Monday online and in-store shopping holidays. Likewise, surcharges will be imposed for the period that includes December 17 through December 23, the traditional last-minute holiday shopping surge period. For this period, the surcharge amounts to an extra 27-cents for each ground shipment, 81 cents for each next-day air, and 97 cents for two or three-day delivery. Again, these surcharges only apply to package deliveries to residential addresses, as opposed to business.

UPS further announced added dimensional package surcharges of an additional $24 to the existing surcharge of $70 for packages weighing more than 150 pounds or exceeding certain large package dimensions. Further included is a peak surcharge of $249 per package for “overmax” packages.

The motivation for the new UPS pricing actions is obvious, to protect or boost the carrier’s own profit margins by compensating the carrier for needs to add surge personnel and logistics capacity. More than likely, rival FedEx will also initiate similar pricing actions. The effect for online retailers is yet another assault on their business margins, already stressed by the increased cost factors for online fulfillment needs. While dominant online retailers such as Amazon and Wal-Mart have the financial and market power to buffer such increases with sheer market influence, that may not be the case for all other online retailers.

An obvious behavior continually reinforced by online consumers is their reluctance to pay for shipping, and thus Free Shipping remains the ultimate determinant for online shopping cart execution. We therefore anticipate that the effects of this week’s UPS pricing actions will be added motivations by many online retailers to either permanently change online buying behaviors or explore added parcel delivery alternatives. That most likely will include planning holiday related online merchandise promotions even earlier than Black Friday. Online retailers with brick and mortar presence will follow Wal-Mart’s lead in incenting online customers with free shipping or added discounts to pick-up online purchases at local retail outlets or receiving lockers. The U.S. Postal Service will likely see added package volumes during the busiest holiday periods, with the added risk that the service will not be equipped to handle such a surge or be able to recover added costs. Third-party logistics services firms, who are already marshaling resources and services to handle the need to support online purchases of larger-sized goods such as appliances, furniture and like will also benefit with increased holiday volumes, as well as opportunities to negotiate added services to online retailers. Like China, we could well observe the formation of independent parcel delivery entrepreneurs similar to an Uber or Lyft type of on-demand transportation, supported by advanced routing and dispatching technology.

In other words, if the intent of small parcel carriers was to somehow permanently change online buying trends, they will indeed get their wish.  However, as what occurred last year when Amazon demonstrated the prowess to implement its own parcel transportation and last-mile fulfillment capabilities, online retailers will have little choice but to explore other more cost-effective options to protect their margins. That will open the door to new industry disruptors.

From our Supply Chain Matters lens, the takeaway from this latest industry development is the continuing industry dynamics as to which business entity, or which supply chain or customer fulfillment partner stands to gain higher margins and profits from the ongoing explosion of online commerce. It involves the realities that consumers have become patterned to shop for the best online deals offering free or reduced shipping, regardless of time-period. Same or next day delivery is becoming part of this expectation.

At the same time, there is the reality that online fulfillment shifts the cost burdens from that of operating physical stores, where consumers take-home their purchased merchandise, to an online era that requires ever more expensive pick, pack, and parcel transportation costs. The forces related to financial gain ultimately lead to added structural changes and to new winners and losers in the weeks and months to come.

Bob Ferrari

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


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

0 comments

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.


GrandCanals Announces Launch of Fulfillment Intelligence Cloud

1 comment

There is little question that the growth of online B2C or B2B2C commerce provides a magnitude of different challenges for retailers, wholesalers, and logistics providers. In the age of Amazon, customer demands for timely fulfillment across multiple channels coupled with affordable shipping adds a far different dimension of required capabilities, not the least of which are the notions of more intelligent, analytically-driven fulfillment processes. Just this week, business media has reported that Amazon is making a new strategic thrust into bulky household furniture fulfillment.

Product producers are increasingly faced with online merchandising and selling decisions to either place products within the Fulfilled by Amazon program, or go direct to consumers via an individual online presence. In today’s online universe, going direct requires much higher levels of knowledge and intelligence relative to fulfillment costs for individual orders coupled with anticipated product demand.

This analyst recently had the opportunity to speak with the senior management team of technology start-up Grand Canals. This Silicon Valley based provider has developed what is described as a purpose-built direct-to-consumer fulfillment support application that has been designed to support needs to drive the most informed customer fulfillment decisions that can satisfy both customer and line-of-business needs. The management and development team includes a lot of acquired experience in online fulfillment, data science, analytics, and supply chain technology capabilities in companies such as Apple, Target, Flex, E2open and others. What is different about GrandCanals is its direct application of customer analytics to customer fulfillment decisions. The technology itself has been designed to also allow online merchandisers the ability to collect better data and improve on fulfillment costs.

Today, GrandCanals launched Fulfillment Intelligence Cloud 3.0 in conjunction with closing a $4.6 million Series A financing round led by Cloud Apps Capital Partners and AllMobile Fund. While in its pre-development stage, this provider has supported a number of consumer brands such as Holler, Krave Jerky, LaTavola, Specialized Bicycles and others. Several third-party logistics providers (3PL’s) are also users of the technology.

Proceeds of this Series A funding will allow GrandCanals to further its go-to-market and development needs.

More intelligent, Cloud-based analytics-driven customer fulfillment is a growing need, with vendors such as GrandCanals now addressing such needs.  We anticipate there will be other players in this area as-well.

 

Bob Ferrari

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


A Commentary on Proposed Surge Pricing for Online Retailers

0 comments

Earlier this month, United Parcel Service announced a new variation in surge pricing.  The global parcel carrier wants to charge the top retail shippers for inaccurate forecasting of shipments during peak holiday periods. In other words, if a retailer either floods the system with unplanned shipments, or does not produce expected planned shipments, there will be a surge financial penalty.

According to reports, the charges will apply to the typical peak holiday shopping periods such as the pre-Thanksgiving, Black Friday, Cyber Monday holidays extending thru the Christmas. It could also apply to other peak shipment holidays such as Valentine’s Day or Mother’s Day.

UPS CEO David Abney told reporters that this new surcharge is not meant to be punitive, but part of a broader negotiation with retailers over pricing during peak times. The carrier has cautioned that conversations with retailers have just begun and yet to be finalized. They are an obvious understatement since many competing carriers such as FedEx have not weighed-in on such an approach.

As a supply chain management social media voice, we felt compelled to weigh-in.

We suppose it could be stated that a carrier having the benefit to be compensated for both upside and downside risks is the best of all worlds.

It presents a very slippery slope from several dimensions.

We all get it in that adding augmented capacity and people during peak periods is expensive, but then again, UPS has been aggressive in added prior rate hikes and dimensional package surcharges to boost revenues, especially during peak periods. The carrier has dipped many times into the rate hike well in this new era of online and Omni-channel shopping.

It’s no secret that the traditional hub and spoke networks configured by both UPS and FedEx have been stress tested during the past peak holiday periods, to the extent that changes had to be made to offset obvious choke points.

There is also the presence of the new logistics industry disruptor, which is Amazon, and the new reality of being a logistics and transportation provider as well as a retailer.

The online shopping provider has implemented logistics and customer order fulfillment capabilities that have also exposed the weaknesses of traditional hub and spoke networks. Amazon often delays bulk air shipments of goods to various regional customer fulfilment centers until way after midnight, sometimes flying half-full aircraft if needed, to maintain overall logistics scheduling. Yes, Amazon’s peak volumes currently do not match those of UPS, but the online retailer has found creative ways to address bottlenecks, including fulfilling same-day or hourly delivery even during the height of peak shopping periods. Yes, Amazon partially funds its significant transportation and network costs via individual customer subscriptions to Amazon Prime. Customers however get in-return, many more services than Free or Guaranteed Shipping during the year, including access to other content services and benefits.

Amazon consistently demonstrates that customer agreements imply mutual win-win benefits for both parties. If UPS wants additional compensation for inaccurate planning by retailers, then the parcel carrier should be willing to step-up and commit to insuring its own performance, regardless of volume.

For example, UPS extends some of its stated expected delivery times to customer addresses during peak periods such as the holiday fulfillment quarter.  Coast to coast shipments are extended an extra day or two in customer expected delivery tracking to overcome network bottlenecks. While the customer might believe that the shipment is on-time, it is a longer transit interval than normal periods, and retailers must factor that delivery time in securing the customer’s order.  Likewise, if UPS fails to deliver at the guaranteed time, then retailers should have the ability to have an automatic credit applied to the entire shipment. UPS shields its exposure to guaranteed delivery by dynamically adjusting expected delivery times. If this new surge pricing proposal were to be adopted, UPS would be willing to commit to guaranteed delivery 7 days a week.

Retailers are now more than ever, acutely aware of the increased costs associated with online and Omni-channel online fulfillment.  The notion of a new twist on peak surge pricing adds more cost exposure, and plays right into the hands of ongoing industry disruptors such as Amazon and Alibaba. We do not profess to dictate to large volume retailers such as Wal-Mart, Target, or others, on how to negotiate with the likes of UPS. But something tells us that these negotiations are likely to be tense.

Either way, retailers will have to invest in more accurate surge planning, deeper levels of customer intelligence, augmented third-party logistics and last-mile transportation services including postal delivery.

Brown may be the gorilla in logistics but if one growls too much, one could get smarted by counteracting forces.

Bob Ferrari

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


Two Interrelated Events: United Airlines and Jeff Bezos Tenet’s of Business

Comments Off on Two Interrelated Events: United Airlines and Jeff Bezos Tenet’s of Business

This week, general media headlines and social media commentary was totally dominated by the images of the United Airlines incident of a passenger being forcibly removed from an aircraft because of an overbooking situation. The experience had to be frightening for all involved and the video is very painful to watch.

Also, this week, business and social media has been echoing the latest Amazon shareholder letter authored by Jeff Bezos.

Whether by design or by chance, the two events are very much linked and serve as timely reminders, but in different degrees.

Most all of us are quite familiar with Amazon, both as online shoppers and as a collective supply chain community.  As customers, it seems that almost all of this online retailer’s persona centers on finding ways to constantly delight customers in the most hassle-free way, whether in searching products, ordering, or returning products, or consistently making good of any screw-ups, regardless of fault.  Loyal Amazon customers consistently return because of these demonstrated business traits.

This week, social media has been echoing the latest Amazon shareholder letter authored by Jeff Bezos. In that letter, Bezos states that making quick decisions and obsessing on customer outcomes are key to avoiding stasis within companies. If the term “stasis” is unfamiliar, do not be alarmed. Our Cortona inquiry indicates the term was derived from modern Latin and Greek meaning “to stand” a state of inactivity or equilibrium.

Bezos goes on to describe “Day 1” companies that are at the beginning of their potential with that of what he describes as “Day 2” companies, which he essentially describes as stasis, followed by irrelevance, followed by excruciating painful decline.

It is an insightful commentary from a noted visionary business leader who from the beginnings of Amazon, set a direction and focus for long-term growth and market penetration over short-term financial rewards for investors. Amazon suffered much initial abuse from Wall Street regarding its longer-term view and its obsessions for investment in the customer experience.

In the context of a business mission, Bezos observes that mission and focus can be competitor, product or technology focused. His charge for Amazon has always been an obsessive customer focus.

The above statement alone is a very important takeaway for supply chain leaders and practitioners and could have been the entire focus on this Supply Chain Matters blog commentary.

Instead, let’s dwell on today’s airline industry.

Many of us who fly frequently, which likely includes many of our blog readers under the broad supply chain umbrella have witnessed first-hand, the deterioration of customer service. It is fairly clear that the business focus changed from a customer focus to a bottom-line focus. Business decisions are now driven by relentless needs to improve profits, either by charging all forms of supplemental fees to driving all forms of efficiencies that could be garnered by either employees, operating equipment, or technology. Today as airline travelers, we are forced to endure the byproducts of strategies that have taken-on too much dominance. We pay extra fees for services that were once included as a given in airline travel to a point where most of the industry is now obsessed with charging added fees. There have been frequent incidents of airline IT systems failures, driven perhaps by too many changes applied to aged technology or developers rushed for time to make needed software fixes. We could go on to mention aircraft that is over-scheduled, not allowing proper response times for unplanned weather or other schedule disruptions, let alone required preventative maintenance.

The latest absurdity are so-termed basic fares that do not include the privilege of either a carry-on bag, checked luggage, and absent any reserved seat. Just show-up, pay, and will try to figure it out.

However, this week’s United Airlines incident was a far starker reminder of a business and industry environment that has now completely lost its customer focus.

In his letter, Bezos describes a state of customer obsession:

There are many advantages to a customer-centric approach, but here’s the big one: customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and your desire to delight customers will drive you to invent on their behalf.

He then observes the tendencies for Day 2 companies to fall back on managing proxies, particularly those related to the process:

Good process serves you so you can serve customers. But if you’re not watchful, the process can become the thing. This can happen very easily in large organizations. The process becomes the proxy for the result you want. You stop looking at outcomes and just make sure you’re doing the process right. Gulp. It’s not that rare to hear a junior leader defend a bad outcome with something like, “Well, we followed the process.

That, by our lens, is the depiction of this week’s incident- United employees following the process without the context of the outcome, which was incurring needless physical harm to a paying customer and a public relation beating that will do damage to an already battered brand.

The initial response from United Airlines when the video went viral was that the airline followed the process for bumped passengers, after all, it’s all written in our customer contract.  It was not the second response from the CEO, which was do anything to make the situation right.

Not all airlines have deteriorated to such a state. But for the many that have, the context is no way that of Day 1, perhaps not that of Day 2, but very much akin to excruciating painful decline, at least for airline passengers.

And yes, there is a broader takeaway for the supply chain community.

Do not let your organization lose its focus on decisions that achieve positive customer or partner outcomes. As this blog has noted in prior commentaries, activist investors focused on near-term vs. longer-term financial results tend to force a changed context, one that is financial outcome driven. Much of that context eventually impacts supply chain resources and capabilities, including process and decision-making.

Keep a copy of the Jeff Bezos 2017 letter to shareholders prominently displayed and electronically accessible as a continual reminder of the differences in what customer ethos and stasis really mean.

Bob Ferrari

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


« Previous Entries