In March of 2012, Amazon agreed to acquire privately-held warehouse automation and robotics provider Kiva Systems in an all cash deal of $775 million. At the time, there was much speculation regarding Amazon’s strategic intent in acquiring this warehouse and distribution center robotics automation provider at such a hefty price. Speculation primarily centered on what was Amazon’s strategic intent. That speculation changed shortly thereafter when external sales of Kiva based technology was no longer offered to new external customers. In essence, Kiva was to become an in-house fulfillment center automation innovator for Amazon.
In June of this year, Supply Chain Matters highlighted reports noting that at Amazon’s annual investor meeting, founder Jeff Bezos indicated that the Internet retailer would have upwards of 10,000 Kiva based robots deployed by the end of this year.
Last week, The Wall Street Journal reported (paid subscription or free metered view) that during the current surge of holiday orders across the Internet retailer’s 80 distribution centers, Amazon will be able to now leverage its Kiva deployments. Readers further have the opportunity to view information relative to the results of some deployments.
According to the WSJ, in the first nine months of this year, Amazon’s fulfillment costs averaged 12.3 percent of net sales compared with 8.9 percent in 2009. Wall Street investors are obviously quite concerned with the size and current growth of that number. But, with full deployment of robotics, fulfillment center workers who previously recorded upwards of 100 order picks-per-hour are expected to average 300 picks-per-hour. A security equities analyst is quoted as indicating that Amazon could reap $400-$900 million in annual cost savings as a result of Kiva technology deployment. If those savings are accurate, they more than justify the original acquisition cost and would provide some buffering to the growth of Amazon’s fulfillment costs.
In our June commentary, our view was that Amazon has a broader strategy, one that allows robotics to buffer the often perplexing need to flex fulfillment center human resource requirements during seasonal peak periods. For the current 2014 holiday fulfillment surge, Amazon has brought in 80,000 temporary workers, an increase of 10,000 from the 2013 period.
In September, Supply Chain Matters called reader attention to Amazon’s efforts in testing deployments of new sortation centers to mitigate shipment delivery congestion and provide added flexibilities in the selection of last-mile delivery carriers.
Amazon’s supply chain leadership has numerous technology enablement strategies underway and we will all have the opportunity to observe the initial results of these efforts over the next few weeks.
Supply Chain Matters provides a brief contrast to our prior posted commentary regarding Wal-Mart’s efforts to spread out holiday promotions in the coming holiday surge. The Wall Street Journal reports that yesterday, which was China’s celebration of Singles’ Day, online provider Alibaba set a record for China’s largest online shopping day. The online provider’s various online properties processed a reported $9.3 billion in sales, most likely the equivalent to the Black Friday or Cyber Monday shopping holidays in the United States.
The WSJ notes that last year, Alibaba processed $5.9 billion in Singles’ Day sales. China’s premiere online provider also offered a number of pre-holiday promotions which allowed consumers to order ahead of time and complete their sales transaction on the holiday. Keep in mind that for the most part, Chinese consumers shun the use of credit cards in favor of cash or mobile based payments.
In its fiscal year ending in March, Alibaba recorded the equivalent of $275 billion in various online sales which the WSJ notes is bigger than the combined online sales of Amazon and eBay combined. Included in the information surrounding its recent initial public offering of stock the online provider noted that it is just tapping the enormous potential of its online market.
We can sometimes get enamored with names such as Amazon and Wal-Mart but Alibaba is indeed an evolving player to reckon with in the coming era of online commerce and retail supply chain customer fulfillment.
The synchronization and management of the Omni-channel customer fulfillment experience has fast become a complex problem for retail industry business management and supply chain teams. The added dimensions of taking orders online or from physical stores and fulfilling from multiple channels adds complexity and needs for smarter and more-informed decision-making. Cost to serve and determining impact to profitability become ever more a challenge.
Yesterday, in conjunction with the Focus Connect 2014 event being held in Barcelona, JDA Software and IBM made a joint announcement that Supply Chain Matters believes demonstrates the ongoing importance and continued evolution of Supply Chain Control Tower (SCCT) support capabilities in the supply chain technology market. This announcement could also portray a possible broader relationship among these two technology providers in the months to come.
The specific announcement involves a joint collaboration among JDA and IBM development teams to address the need to process and fulfill retail industry Omni-channel orders in a more efficient and more intelligent manner. The approach calls for combining the elements of JDA’s warehouse management, demand planning and workforce planning business support capabilities (JDA Intelligent Fulfillment and Labor Productivity) with IBM’s Sterling Distributed Order Management network platform capabilities. In essence, this approach marries elements of supply chain planning and execution with an end-to-end order management and fulfillment platform that connects all channel participants. The combined capability is expected to be offered in either an on premise or cloud deployment option, the latter being supported by IBM’s SoftLayer business arm. The joint development effort is currently underway and according to the announcement, is expected to be available in late spring of 2015.
This author had the opportunity to speak with IBM regarding the joint announcement. Discussions among these two technology providers began in January of this year at the National Retail Federation (NRF) conference. Both companies have a rather strong market presence among global retailers and each was hearing customers speak to the increasingly complex challenges currently manifested in Omni-channel customer fulfillment, including the dynamic aspects of having to manage the tradeoffs of inventory, appropriate fulfillment location, transportation and labor requirement needs. In May of this year, our Supply Chain Matters commentary associated with attendance at IBM’s Smarter Commerce Summit highlighted the evolving dimensions of Omni-channel and the needs to provide more predictive and prescriptive decision-making capabilities into the process.
The joint press release includes a quote from joint customer Lowe’s Home Improvement, and we were informed that both firms have identified interest from other unnamed retailers as well. Apparently, the original timetable called for announcement of joint product integrating JDA and IBM elements later in 2015, but it was obviously pushed-up to coincide with this week’s JDA customer event.
Our supply chain and B2B business community education series regarding SCCT has articulated that the concepts of control towers involve efforts to bring together supply chain planning and execution business process elements with enhanced intelligence and more predictive decision-making that can be provided in near real-time dimensions. There have been a number of strategic movements underway among multiple supply chain, enterprise and ERP technology vendors to build, broaden or position SCCT capabilities. We view this JDA-IBM joint announcement as yet another dimension of such efforts. JDA has the potential to leverage a broader more feature-rich distributed order network platform that supports more dynamic process parameters while IBM garners access to deeper retail-specific supply chain planning and execution support functionality. We have been informed that JDA is building and architectural framework that supports plug-in capabilities from other vendors, similar to what we have heard from supply chain planning providers such as Steelwedge and its connection to the Salesforce.com platform. Similarly, supply chain business network provider E2open augmented supply chain planning and product management support capabilities with the acquisition of Icon-SCM and Serus Corporation respectively.
As noted in our previous commentaries, IBM has been integrating elements of Sterling order management and B2B messaging capabilities with its IBM Emptoris sourcing and procurement business suite, and has communicated efforts to bring the predictive elements of Watson decision-making to online fulfillment and supply chain synchronization challenges. Thus, the SCCT business process support elements continue to broaden from many dimensions and are a sign of what will transpire from SCCT support technology down the road.
In the meantime, readers and joint JDA and IBM customers should watch the ongoing joint efforts among both providers for further signs of what is to come. Just like the prior announcement of the partnership among IBM and Apple, both parties provide the potential to remove the information integration burden for today’s highly complex supply chains.
Disclosure: IBM, E2open and Steelwedge have current or prior business relationships with the Ferrari Consulting and Research Group, parent of the Supply Chain Matters blog.
In last week’s commentary we echoed comments from observers that described a logistical nightmare that could undermine the best laid plans for the all-important holiday fulfillment surge period. One week later, various media and on-the-ground reports paint a picture indicating that the crisis is worsening and that retailers and manufacturers are well into contingency scenario planning. The situation has further spread to other ports including Seattle and Tacoma, with a report indicating that truck queues at Tacoma stretching several miles long. On this Friday afternoon there is no doubt that Sales and Operations and supply chain execution teams are manning the phones, terminals and supply chain business network systems to figure out their scenario options.
A report this week from business network CNBC clearly points to the confluence of forces undermining this building crisis. Shipping companies and port operators are pointing their fingers at the ILWU labor union for orchestrating work slowdowns in the shadows on ongoing labor contract talks. A spokesperson for west coast port operator, Pacific Maritime Association (PMA) is quoted as indicating that terminals that had averaged 25-35 moves per hour were experiencing less than 10. Yesterday, the PMA indicated that the union was not dispatching adequate levels of highly skilled crane operators to unload ships. Union representatives are pointing to a severe shortage of truck chassis and of truck drivers as causes. As of yesterday, a report indicates that 14 ships are now anchored off Los Angeles and Long Beach waiting for space, double the number of last week.
The National Retail Federation (NRF) is now seeking the personal intervention of President Obama citing an obvious sudden change of tone among the PMA and the ILWU and suggesting a full shutdown of every west coast port may be imminent.
Regardless of the finger-pointing, the situation has fast become the perfect storm scenario that many had feared and industry supply chains need to deal with the realities. This perfect storm has a strong potential to cascade further into the upcoming holiday fulfillment surge, dragging consumer product manufacturers into the effects. Need we painfully remind our readers that the Black Friday and Cyber Monday shopping events is a mere three weeks from today.
A published report in today’s edition of The Wall Street Journal indicates that Wal-Mart and Kohl’s had shipments arrive earlier than usual, and while caught-up in the current crisis, delays are not having a major impact on current merchandising plans. In contrast, the parent of Ann Taylor and Loft stores blamed a shortfall of sales in the recently completed quarter because of delayed shipment and the shifting of inbound goods to more expensive airfreight channels. These are all indicators of the impact of proactive risk planning on the part of retailers. However, larger retailers often have the resources to be able to cushion disruption or finance earlier pre-holiday inventory movements than smaller or cash-strapped brick and mortar or online retailers.
We therefore re-iterate that retail supply chains are now too-deep into the holiday execution window with little tolerance or patience for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, which is now not very likely, it will do little to salvage the current backlogged condition. It will take additional weeks to dig out of the current mess.
Supply chain teams need to be in full-on contingency planning mode since supply chain execution is now the bogey of the all-important holiday business goal revenue attainment. For some retailers, financial survival is at-stake.
The obvious question now turns to making good on critical holiday focused revenue expectations. From our lens, last year’s last-minute shipping snafu’s for destined holiday goods are in-jeopardy of repeating. Retailers who did not plan for the current crisis will have to figure out ways to offload products in December leading to our previously described doomsday scenario- that retailers delay their most aggressive promotions until the very last days before the Christmas holiday when inventory is hopefully in-place.
The west coast port crisis by default, now engages FedEx, UPS and other surface and air carriers as retailers turn the emphasis toward priority movements and just-in-time inventory offload promotions. Further, it will be especially interesting to observe how Amazon, Google, Wal-Mart and other large online players respond or take competitive advantage to the developing logistics perfect storm scenarios.
As for port operators, organized labor, ocean container lines and their logistics partners, best you address and solve the confluence of forces that resulted in this muddle. Yes, ongoing labor contract negotiations are a factor, but there are other industry shortcomings becoming evident that point to lack of proper surge planning.
Last year, UPS, and to some extent FedEx, were thrown under the proverbial bus by retailers for non-performance at the most critical time period. In 2014, the creditability of west coast ports and indeed the surface shipping industry is at-stake for being the Grinch’s of Christmas.
Throughout the summer months, Supply Chain Matters as well as other supply chain management focused media have been monitoring the ongoing threat of potential west coast port disruptions. The primary threat resulted from the expiration of the labor contract among the Pacific Maritime Association, representing 29 U.S. west coast ports, and the International Longshore and Warehouse Union (ILWU).
During July, a Supply Chain Matters commentary cited a published report in Logistics Management made the observation that the threat of U.S. West Coast port disruptions raised an open question as to “peak shipping season” this year. Logistics Management further conducted a reader poll of 103 buyers of freight transportation and logistics services. That survey indicated 68.1 percent of respondents expecting a more active peak shipping season this year. Some respondents were reported to be concerned about potential transportation lane disruptions in the fall. Perhaps, in retrospect, that was insightful thinking by some.
In September, there were reports of significant progress in labor talks with a tentative deal reached on the critical knotty issue of healthcare benefits. The other remaining issues involving compensation, job security and workplace safety implied that contract negotiations would continue for several additional weeks.
As we pen this latest Supply Chain Matters, reports indicate that congestion within the critical Ports ofLos Angeles and Long Beach has reached levels not seen since 2004. A report published on Friday by the Los Angeles Times (paid online subscription or free metered view) describe a logistical nightmare that could undermine the best laid plans for supporting the all-important holiday fulfillment surge. As on Friday afternoon, there were a reported seven container ships anchored and queued off the coast awaiting to be unloaded at both ports.
In a situation which one trucking firm executive describes as “a meltdown on the harbor”, and what LA’s Port Director describes as “a perfect storm”, the unloading and throughput of goods from both ports is now taking 7 to 10 days, and perhaps longer. Four of the seven container terminals in Los Angeles are reported to be currently operating above 90 percent capacity.
Concerns are raising that apparel, toys, electronics and other holiday merchandise may not arrive in time to meet holiday promotional windows. While retailers are initially optimistic that consumers will open their wallets in the coming weeks, this threat for inbound supply delays adds more challenges for retail focused sales and operations planning teams. Already, manufacturers and retailers are being forced to ship critically needed goods via alternative but far more expensive air cargo methods.
The current severe port bottlenecks are being attributed to a combination of factors. They include the increased use of mega-container ships which take longer to unload, a shortage or misbalancing of trailer chassis required for unloading and transporting loaded containers to destinations. Shipping lines have for the most part excited the ownership of trailer chassis to third-party leasing companies. While the operators of the two ports have offered the use of extended free storage time and overflow storage yards, there are little takers due to confusing work rules. Accusations of work slowdowns as a result of a lack of a signed labor contract have reportedly added to the current congestion and calls for acceleration towards a final labor agreement. It is indeed the “perfect storm” scenario that is unfolding.
Supply Chain Matters recently re-visited the port container volumes for the Port of Los Angeles for the periods of July through September, which is the traditional high volume inbound period, contrasting TEU volumes in 2013, vs those this year. For the three months, 2014 TEU inbound load volumes this year were trending up roughly 6 percent from 2013 levels, thus, some retail S&OP teams were planning for a potential disruption scenario. However, it seems now that there were other bottlenecks and choke points beyond the threat of a work stoppage or slowdown.
Retail supply chains are deep into the holiday execution window and there is now little tolerance for finger-pointing or posturing. Even if labor contract talks were to come to a hasty final agreement, the ratification and sign-off process will do little to salvage the current port condition. This is a time for creative action.
The optimistic holiday retail sales forecast scenario can well be in jeopardy or compromised by late arrival of needed holiday inventories. Need we further mention the other doomsday scenario- that retailers now delay their most aggressive promotions under the very last days before the Christmas holiday when inventory is in-place.
We will all have to wait and observe as one disruption cascades through the remainder of retail fulfillment channels.
Business media and online channels are abuzz regarding the latest rather optimistic forecast of expected retail holiday sales issued by the National Retail Federation (NRF), an industry trade group of the retail industry. However, retail supply chains need to be prepared for even more challenges and unknowns in the coming weeks leading up to the end of year.
The NRF is forecasting that upcoming retail sales in the months of November and December (excluding autos, gasoline and restaurants) will increase by 4.1 percent over 2013 levels, equating to nearly $617 billion. According to the NRF, retail sales incurred an actual 3.1 percent increase during this same time period in 2013. The current forecast marks the first time since 2011 that holiday sales would increase by more than 4 percent.
In an interview with business network CNBC, NRF’s chief economist indicated that the 4 percent increase could be on the low end, given the current downward trend in energy prices that are benefitting consumers.
Also today, Shop.org released its 2014 online holiday sales forecast, expecting sales in November and December to grow between 8 – 11 percent over last holiday season to as much as $105 billion. Holiday non-store sales in 2013 grew 8.6 percent.
In its release, the NRF wisely warns retailers that shoppers will remain extremely price sensitive and that retailers will have to overcome such challenges through differentiation in value and exclusivity. That trend was reinforced by a recent PwC study based on a poll of more than 2,200 consumers across the U.S. that spanned all demographics and income levels, and defined the holiday season as September through January. The PwC study reported that 84 percent of respondents indicated that they plan to spend the same or less than they did in 2013. That is a somewhat conflicting data point relative to spending levels and for us, is a clear indicator of continued price sensitivity among the majority of consumers. Thus, the retail winners in 2014 are those with the most attractive promotions and merchandising creativity.
Even more confusing is presumptions that termed “webrooming” (researching online and buying in physical store) the opposite of “showrooming” (research and touch in-store and buy online) will prevail this year. We refer readers to various commentaries, including our own, written at the conclusion of the 2013 holiday buying period regarding lessons learned. In early January, the Wall Street Journal produced ShopperTrak trending data related to total retail foot traffic since 2010 that clearly indicates a significant reduction in store visits, by a factor of almost a half since 2010. In our Supply Chain Matters 2013 lessons learned commentary, we addressed information data security (credit card data breaches) coupled with logistics and transportation capacity breakdowns as important lessons. Some of those learnings are now reflected in conversations among retailers and their logistics partners.
What does all of this mean for retail supply chain teams?
It essentially means that the challenges in the upcoming holiday surge are going to be even more dynamic than last year and supply chain agility, flexibility and patience will be all important factors.
Sales and Operations teams will probably have dynamic, perhaps even heated discussions with merchandising and marketing on the timing of promotions, including how late to keep the channels open for orders and guarantee holiday delivery for consumers.
Planning for inventory needs in the correct fulfillment channel will be another challenge and will require a lot of demand sensing and day-to-day collaboration with marketing and merchandising teams. There are but 11 weeks remaining of planning time. Because of the threat of a west coast dock labor stoppage, most of the inventory has arrived and is making its way to various distribution points. Similar to last year, the period between the Thanksgiving and Christmas holidays is a short 26 days and the severity of winter weather conditions will again be all important in assuring continuous logistics flow without last year’s numerous logjams.
One very important other wildcard to monitor is whether economically stressed but savvy consumers, who may have lost trust in the data and information security practices of retailer systems, trend toward shop online and pickup and pay by cash at retail stores at the very last minute. That may well be the 2014 doomsday scenario for retail supply chains that lack adequate agility in inventory re-positioning, multi-channel and logistics partner fulfillment capabilities.
Good luck, best wishes and let the planning and execution begin.