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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


Another Sobering Warning for Retail Industry- This Time from a Major Industry Supply Chain Influencer

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In a 2013 article, the New York Times had described Li & Fung as follows:

Li& Fung– the most important company that most American shoppers have never heard of- has long been on the forefront of globalization, chasing cheap labor to garment factories first in China, then elsewhere in Asia including Bangladesh.”

A lot has changed in four years but indeed, Supply Chain Matters has often referenced Li & Fung as the most influential player among global-based apparel supply chains and in supporting many major branded retailers in their apparel and other goods sourcing, merchandise selection and inventory procurement needs.

This week, the Asian based company reported a 47 percent decline in 2016 net profits, coupled with an 11 percent decline in annual total revenues. Further communicated was an indication that ongoing challenging conditions across the global retail industry would place additional challenges on its own business operations.

What caught our eye was these statements from the firm’s CEO as reported by Reuters:

I expect an unprecedented number of bankruptcies and store closures in the years to come. I remain cautious as (the) operating environment is deteriorating.

Li & Fung, being the largest influencer of apparel sourcing offering retailers access to tens of thousands of global suppliers in over 60 countries implies a large purview of business intelligence as to retailer buying practices, supplier payments and order volumes.

This is what makes the above Li & Fung statement so significant and rather sobering.

Our specific 2017 predictions and other research advisories specifically focused on the global retail industry continues to echo the unprecedented business challenges confronting retailers, driven from the implications of permanent consumer shifts to online shopping practices. These permanent forces will continue to present ongoing challenges, and retailers, and their respective supply chains, must adapt or suffer the consequences.

The casualties of retailers that have succumbed is building and so are the reports of bankruptcies and significant reorganizations in this year alone. Wal-Mart, one of the largest global retailers recently enacted job cuts and executive realignment directed at integrated online and physical store customer fulfillment. Last week, a sobering warning from Sears Holdings evoked added concerns and actions among retail suppliers and partners.

Now, one of the most influential players in merchandise and supply chain sourcing is communicating a similar sobering message.

The industry is already experiencing higher turnover and shorter tenures of CEO’s and C-suite executives, all trying to sort out different strategies to compete in an online and Omni-channel driven retail industry environment. The changes impacting retail continue to be described as unprecedented.

Supply chain leaders must get on board with fostering integrated online and physical store planning and customer fulfillment. Once again, the retail supply chain is not a collection of cost center activities to essentially support inventory procurement, warehousing and store replenishment. In today’s online fulfillment-driven retail model, the supply chain is a collection of capabilities directed at Omni-channel customer fulfillment and customer services capabilities. In 2017 and beyond, the alternatives are in-house, outsourced or hybrid supply chains.

Bob Ferrari

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


Additional Update on B2B Supply Chain Business Network Provider E2open Merger with Steelwedge

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This Supply Chain Matters blog posting serves as an update to our prior mid-February posting regarding supply chain B2B platform provider E2open’s announced merger with sales and operations planning (S&OP) and supply chain planning technology support provider Steelwedge.  This latest deal follows prior acquisitions of icon-scm for supply chain planning simulation technology, Terra Technology for deeper levels of business intelligence and data management, and Orchestro for product demand sensing support.

This week, we had the opportunity to view an online webcast, anchored by E2open CEO Michael Farlekis, which was directed at both customer communities to serve as an update on strategic direction.  e2open 150p Additional Update on B2B Supply Chain Business Network Provider E2open Merger with Steelwedge

Both tech providers come together to serve a combined installed base of 160 customers with some stellar nameplates sw logo e1401973532206 Additional Update on B2B Supply Chain Business Network Provider E2open Merger with Steelwedgeand diverse industry supply chain settings. The E2open side includes Cisco, Dell, HP, Kimberly Clark, Mondelez International, P&G, Unilever, Kraft-Heinz, among others. With the merger of Steelwedge, added industry vertical presence includes Nissan and Land Rover in automotive as well as some common customer among high-tech supply chains.

CEO Farlekis described the combined value proposition as universal cloud connectivity of the extended supply chain supported by a broad offering of applications. He reiterated that scale matters citing a host of numbers related to platform users, countries supported and volumes of transactions and item categories now supported.

With Steelwedge’s S&OP and baseline continuous planning support capabilities, E2open goal is for customers to be able to extend this process to include the inclusion of supply chain partners including key customers, suppliers, and trading partners.

SVP of Product Management and Strategy, Pawan Joshi, outlined the full application and user-centric capabilities of E2net platform and confirmed our prior belief that Steelwedge will provide augmented S&OP support capability, and that the existing technology will be fully integrated into E2open’s technology and platform stack over time, including the E2open Harmony Dashboard.

Plans call for integrating the Steelwedge data model and functionality into that of E2open’s, supported by the current singular platform sign-on and user interfaces. Regarding anticipated integration timelines communicated, initial data interface and user interface integration is expected to occur during 90-day release timelines this year, with full integration and rationalizing of planning functionality expected by early 2018. CEO Farlekis indicated there will be no change in existing support contracts with Steelwedge customers.

Given the above, the presenters declared that all existing Steelwedge customers will have access to the combined product portfolio and that E2open account managers will now serve Steelwedge accounts in their broader end-to-end platform support needs. We have learned that E2open plans to sell Steelwedge as a stand-alone offering until the integration process is completed, but that may present somewhat of a challenge given that prospective customers will want to understand the broader product integration.

There are subsequent individual briefings being planned with existing Steelwedge accounts and it would behoove these customers to seek more specifics regarding access to E2open’s platform capabilities, expected changes in functionality as well as the full integration timeline. Long-time pricing is another consideration, along with E2open’s ongoing efforts to improve its balance sheet.

Our prior observation that Steelwedge clearly needed an infusion of new capital and thought leadership coupled with more savvy marketing and sales execution resources was obviously reinforced by this customer update. Privately-held E2open seems to communicating the flexibility to be able to undertake this effort and hopefully, in an aggressive timeline. With its expanding B2B Business Network platform capabilities supporting procurement replenishment, continuous planning, execution, and collaboration, E2open will likely gain added market attention.

Before closing this commentary, this supply chain industry analyst would like to share an additional thought or two. We have long advocated that an S&OP process should be able to include and support the participation of key external partners in the overall process and in shared decision-making. That stated, such a capability does require some maturity in accurate master data and information management, scenario and what-if planning methods, collaborative based practices, and joint decision-making. With E2open’s platform, the opportunity exists to extend S&OP to extended supply chain partners, but change management and process readiness are important considerations to not overlook.

Supply Chain Matters will feature additional updates on E2open as developments warrant.

Bob Ferrari

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


Quantification of 2016 Holiday Related Customer Fulfillment Adds Compelling Evidence to Inescapable Trends

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The market performance numbers surrounding the holiday fulfillment period that spanned November and December of 2016 are in and the headline takeaways are twofold. The first is that U.S. retail shoppers were very optimistic in spending and very shrewd in their shopping habits. Second, the tide towards online and Omni-channel customer fulfillment is once again profound, and implications are even more impactful and inescapable for some traditional retailers. FBA sized 300x145 Quantification of 2016 Holiday Related Customer Fulfillment Adds Compelling Evidence to Inescapable Trends

A More Optimistic Retail Consumer in the Final Quarter

The National Retail Federation (NRF) released its final tally of holiday focused retail sales in the November thru December time-period, declaring a 4 percent increase over the previous period in 2015.  According to the NRF, holiday retail sales, not including autos, gasoline, and restaurants, amounted to $658.3 billion, exceeding the organization’s prior forecast of $655.8 billion reflecting a 3.6 percent increase. U.S. Commerce Department data similarly reflected an overall 4 percent increase in retail sales for the three months ending in December. And a 3.6 percent increase for all of 2016. On the plus side, online retail sales increased 12.6 percent while retail sales at health and personal care retailers increased 6.7 percent. Retail sales at department stores decreased significantly at a 7 percent rate, while sales at clothing and accessories and electronics and appliances retailers decreased 2.5 percent and 2.3 percent respectively.

Market quantitative analysis firm comScore reported final 2016 holiday sales originating from desktop computers climbed 12 percent from the year-earlier period to reach $63.1 billion. While the firm’s quantification of mobile-based online sales is still in-process, the latest update based on initial mobile data indicates that online holiday sales will likely come within comScore’s original forecast range of a 16-19 percent increase overall. Further reported was that for the seventh consecutive year, Cyber Monday (November 28), and November 29, the day after ranked as the busiest online shopping days with $2.7 billion and $2.2 billion in daily online spending. In total, there were 10 $1 billion plus shopping days in the 2016 holiday period based on desktop sales. When the mobile-based numbers are finally tallied, the numbers will be even larger.

Such activity levels are a testament to the responsiveness of B2C and B2B-to-B2C supply chain customer fulfillment teams. And then there is the elephant in the room, the continued dominance of the Amazon online buying platform. Preliminary data would indicate another stellar year of Amazon performance in many online sales and customer fulfillment dimensions.

Automobile and truck sales further contributed to holiday spending as U.S. consumers took advantage of rather attractive promotional discounts offered by automakers.

More Compelling Impacts for Brick and Mortar

As we have noted in prior Supply Chain Matters postings, the compelling impacts surrounding 2016 online shopping trends became ever more compelling for traditional department stores and brick and mortar retailers. Macy’s, Kohls, Sears, JC Penny and Target, among others, have each announced declining physical retail store revenues, with many indicating additional store closings. Regarding Target, Business Network CNBC host commentator Jim Cramer observed that while that retailer’s online sales grew a healthy 40 percent during the holiday period, it most likely cannibalized physical retail store sales which declined 3 percent in this same period.  Cramer characterizes Target’s performance as the best indicator of the existing fundamental problem of Omni-channel retail and the consequent destruction of prior retail business strategy models predicated on physical foot traffic. We concur.

Wal-Mart itself has announced further organizational restructuring and a headcount reduction involving corporate level staffing to add additional leadership focus to the global retailer’s online growth strategies. Wal-Mart’s strategy direction is now one of predominate online with physical stores serving as an adjunct supporting strategy for pickup and pay or physical shopping needs.

As noted in earlier commentary, the physical store is now the virtual store, merchandising is now about intimate knowledge of customer needs and buying tendencies, and inventory management that is anchored in more sophisticated item-level planning and pooling algorithms.

From the supply chain customer fulfillment lens, today’s online world demands analytics-driven planning, agile marketing, and multi-channel customer fulfillment capabilities, supported by advanced inventory management with flexible and adaptable logistics.

The industry implications and trends are compelling as well as inescapable.

Bob Ferrari

© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.

 


Point of View Commentary: Techies vs. Brokers in Global Transportation and What Will Likely Change

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The following is a Supply Chain Matters blog guest commentary contributed by Cory Margand, Co-Founder and CEO of SimpliShip.com, an online marketplace connecting international shippers directly with qualified, dedicated NVOCC’s and freight forwarders. We feature this point-of-view guest commentary as a sidebar to our 2017 Prediction of continued global transportation industry turbulence.

 

The title of my commentary seems to be a very hot topic in today’s transportation industry both domestic and international. I felt I needed to share my point of view (as well as SimpliShip‘s) with the global logistics and Supply Chain Matters community.

Let’s first discuss how transportation pricing actually works. Below, I’m only specifically discussing those brokers and forwarders/NVO‘s (non-vessel operating common carriers) who negotiate contracts with carriers. For the sake of simplicity, I will refer to both international and domestic as brokers.  MSC Ship 2 300x199 Point of View Commentary: Techies vs. Brokers in Global Transportation and What Will Likely Change

Each broker negotiates rates with their carriers whether it be air, domestic, parcel etc and then resells to their customers at a higher price. This is how they make money. Sure, there’s a lot more that goes into it but that’s the basic concept. The reason this takes place is that carriers get the benefit of large volume from one customer and they don’t have to worry about the small customers that they simply are not set up to do business with from both an operating and pricing stand point.

Interestingly, Maersk recently announced that they will be integrating Damco’s (their freight forwarding arm) product range into their own to sell in certain add on items like customs brokerage and cargo insurance. The question is whether this is a step towards carriers servicing the SMB’s which have largely previously been serviced by brokers. Or, is it simply to sell in Damco’s products to their current target customers. Maersk also announced that they are integrating with Alibaba. However, it’s unclear as to whether Maersk is simply making their rates available online (most likely at a premium) or they are truly going to be managing the relationship directly with the customer.

Now, to the point that really “grinds my gears”.

This topic of Techies vs Brokers is simply coming from two points of view that do not, from my view, understand each side of the business. Technology solutions aren’t always meant to disrupt- some are built to enable. In other words, we view the SaaS (Software-as-a-Service) and marketplace opportunities as a way for both the customer and the broker to create more efficient solutions.

Our team at SimpliShip is experienced at procuring freight spanning both large and small to medium size businesses. On the other side of things, we have moved freight both as a 3PL and carrier all around the world and domestically. We are now laser focused on the technology side of the industry.

Historically, carriers and brokers have a more than outdated tech infrastructure especially from the customer’s perspective with heavy reliance on static databases, EDI, or email/phone calls. This isn’t a surprise as most large carriers and brokers are putting resources into improving the user experience. This is where tech startups can really create value if they can successfully bridge the gap between tech and the industry. At this point and until carriers change the way they do business there is no threat to brokers.  A technology solution that is executed correctly will create a more efficient process for all parties involved.

As a challenge to both sides, with an understanding of the above, is to think critically about your current process and ask yourself is this the best way for my organization or business to procure rates and sell to my customers especially in a transportation marketplace that is highly volatile? If not, it’s time to look at tech solutions critically as a way to enable your business.

It really is as simple as that.

In reference to global logistics, a true SaaS platform should be completely carrier/broker neutral. These platforms will become smarter and smarter but initially will offer a simple way for shippers to make decisions based on their ability to get rates and other information faster and from a larger network.  A lot of the “techies” that are being discussed in industry publications or other outlets are not true SaaS platforms. These are in fact brokers. So, it’s misleading, at best, to say they are trying to eliminate brokers.

Technology will prevail when it’s created to solve specific challenges in the industry. It will enable both buyers and sellers of freight to work more efficiently and move towards a superior customer experience. Given that, our point of view is that there is no question the supply chain is going to be digitized. Those companies that embrace technology will survive and those that do not will not.

Have any insight, comments on feedback on this topic?

Please drop me a line, I’d love to hear from you.

Cory Margand, Co-Founder & CEO, SimpliShip


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