The Renaissance of Available-to-Promise Capability to Support Retail and Online Omni-Channel Fulfillment
Supply Chin Matters has featured prior commentaries exploring the supply chain impacts of Omni-channel and online customer fulfillment for retail supply chains. Such impacts are many, but one of the more important relates to the needs for efficient overall inventory management while exceeding more demanding customer fulfillment and satisfaction needs.
In B2C retail, and in online B2B, inventory investment has a major impact on margin and profitability, and Omni-channel strategies that allow customers different fulfillment options can cause havoc with the proper balance of inventory.
Consumers increasingly prefer to buy online, and at the same time, seek flexibility to either have their orders ship direct, or pick-up or return in a local retail store or outlet. This new paradigm is why so many Omni-channel retailers are seriously re-visiting inventory management strategies. Some are building dedicated online customer fulfillment centers to directly support online order volumes while allocating separate inventory to support brick and mortar retail needs. Other Omni-channel retailers have rightfully determined that the same inventory has to be efficiently managed to support fulfillment needs across all channels. This changes the role of the brick and mortar store to be an added node within the fulfillment network with the ability to support in-store pick and pack.
Within this increased retail business challenge, available-to-promise capability (ATP) has taken on a new significance as a key capability to assist in more efficient and responsive inventory management. As Supply Chain Matters sponsor JDA Software describes it, ATP is experiencing a new renaissance.
Last week, The Wall Street Journal provided further evidence of the business importance of efficient inventory management. In the article, Retailers See Gains in Serving E-Commerce Supply Chains (Paid subscription or free metered view), the WSJ reports that while retailers view online shopping as a boon to sales, it can provide a drag on profits especially in the light of parallel delivery networks. Some retailers, however, may be on the way toward figuring out the logistics and profitability potential of Omni-channel. Examples cited was that Home Depot which grew online sales 25 percent in the second quarter while improving overall logistics, including higher efficiencies in its distribution network. Target, grew online sales 30 percent and reported a small increase in margins.
Last week, Supply Chain Matters contrasted the financial results and supply chain strategies of Wal-Mart and Target. Wal-Mart’s financial results were perceived by Wall Street as disappointing. To address Omni-channel, the global retailer is currently implementing a new inventory management system. That strategy includes shifting inventory to regional and dedicated customer fulfillment centers, rather than from the retail store backrooms. That would allow the flexibility to meet both online and in-store demand from a distribution center centric inventory strategy. The downside is a de-emphasis of the retail store as a fulfillment node and a greater potential for stock-outs at retail store locations as online orders consume available inventory.
Target on the other hand, has recently demonstrated improving financial results, but at the same time has been candid to Wall Street that balancing inventory across its network and leveraging resources at store level are an integral part of strategy. Senior management candidly admitted that in-stocks within physical stores have been unacceptable so far this year, but a newly appointed role of Chief Operations Officer will have as an initial priority, beefing up the capabilities and responsiveness of the supply chain. Target’s strategy includes the retail store as a direct fulfillment node. Thus far the retailer’s is shipping online orders direct from 140 stores with plans to enable 450 ship-from locations by the end of this year. Target senior management further noted that an important enablement of ship-from-store will be will be testing and deployment of a new ATP system that provides specific online customer delivery commitments.
On JDA Software’s Supply Chain Nation blog, Kelly Thomas writes on the renaissance of: Order Promising and Demand Shaping in a Segmented, Omni-Channel World. Thomas observes that ATP married with demand shaping provides an increasing number of fulfillment options as well a means to determine profitability profiles for fulfillment channels. It provides a basis in making the most informed decision on the source of inventory for a given customer order line and the pick-up or delivery location of the online customer.
Rightfully noted is that nearly 20 years ago, elements of what is today JDA Software (i2 Technologies) pioneered and patented allocated-driven ATP functionality for discrete manufacturing and other industry supply chain environments. Today’s JDA Order Promiser application is now being applied to the evolving needs of Omni-channel retailers for facilitating more responsive online fulfillment as well as improved inventory investment and bottom-line profitability.
The technology has come a long way and has found new meaning in more efficiently managing inventory in a B2C and B2B Omni-channel world.
Disclosure: JDA Software is one of other current sponsors of the Supply Chain Matters blog.
Reflecting on the Application of Social Enabled Supply Chain Processes- Bob Ferrari Guest Commentary
In March of 2011, I had the opportunity to join two fellow supply chain management bloggers in a thought-leadership webcast focusing on the potential of the social supply chain. Four years ago, the concept of the social supply chain was relatively new, not well understood, and lacking many specific examples to cite.
Indeed after much market education and early adopter successes, leveraging social supply chain applications to enhance business processes has far more meaning and applied uses. That is especially pertinent to today’s reality of increasingly complex and fast moving globally based supply chain networks.
On the 21st Century Supply Chain blog I provide a guest posting reflecting on what has occurred in this area and how the power and potential of many is being increasingly leveraged within supply chain business processes.
Have a read and share your perspectives and views regarding what has transpired regarding this area of technology.
Bob Ferrari, Founder and Executive Editor
Yesterday, after the stock market closed, Apple announced its fiscal third quarter financial performance and Wall Street’s headline was immediately one of disappointment. This was despite reporting that profits had surged 38 percent from the year earlier period along with total revenues that grew 33 percent. Gross margin was reported as a whopping 39.7 percent which is extraordinary for the majority of today’s consumer electronics providers. Yet within minutes of the earnings report, Apple’s shares plunged 7 percent in after-hours trading and today, dropped as low as 21 points before a small rebound.
What the investment community is primarily concerned with is a perception that Apple is trending toward a one-product company, that being the iPhone, which with the latest results, accounts for 63 percent of Apple’s overall sales. That is a ten percentage point increase from a year ago, prompting concerns that other products such as the iPad are declining in sales, while new products such as the Apple Watch have yet to provide an offset. Unit sales of the iPad are believed to have declined 18 percent in the latest quarter, making a sixth consecutive quarter of year-over-year declines. Once more, the previously touted partnership among Apple and IBM, designed to provide more business applications leveraging the Apple tablet, do not appear to be stemming the declining trend.
In the fiscal third quarter, while Apple reported shipping 47.5 million iPhones, an increase of 35 percent from the year earlier quarter, that number was 23 percent lower than shipped units reported for fiscal Q2. According to a report by The Wall Street Journal, analysts noted previous quarter-on-quarter iPhone volumes fell by 19 percent and 17 percent respectively, and remain concerned for a steeper rate of decline. Apple attributed unit shortfall to the lowering overall inventory by 600,000 units during the quarter. Fiscal Q3 has traditionally been Apple’s slowest volume quarter.
In an interview with the WSJ, CEO Tim Cook indicated that he refuses to accept the thinking that Apple cannot sustain its existing growth rates. He further indicated that Apple has pried open the door to untapped markets such as China, and that the company is sensing a larger conversion rate from Android powered devices to iPhone.
Apple did not provide any breakdown of Apple Watch performance but CEO Cook indicated to analysts that the “sell-through” of the Watch was better than the iPad and iPhone at their product introduction phases. We will have to wait and observe what that means over the next two critical quarters.
From our supply chain lens, the upcoming quarters will provide Apple’s planning teams with added challenges. Earlier this month, we highlighted that Apple is now actively planning the ramp-up of the planned next release of iPhone. Reports indicate that the company is requesting suppliers to support between 85 million and 95 million iPhones for the all-important end-of-year holiday buying season that ends at the end of December, This is despite anticipated modest hardware changes.
Planners are obviously reducing existing model inventories but must be diligent to not impact Apple fiscal Q4 results. With expectations for increased sales of the Watch, as well as a newly introduced iPod Nano, additional effort will be focused on ramp-up production milestones. An added challenge has got to be focused on what to plan for inventory and fulfillment needs for the iPad, given that there may well be a product change coming.
And then there is that mega “elephant in the room”, what to do with $200 plus billion in cash.
The adage for Apple’s and indeed many other global supply chain teams is often, not what you did yesterday, but what are you going to do tomorrow, next month, and next quarter.
Does that resonate?
Last Wednesday, in a noteworthy effort to spur widespread additional interest and new subscribers within its Prime buying program, Amazon declared its inaugural Prime Day, offering its online Prime program customers Black Friday like pricing deals in the middle of July.
The date was chosen because it represented the 20th anniversary of Amazon. The significance of a compelling holiday like online buying event in July was more important. Amid a flurry of anticipation as well as competitor response, Prime Day ended up having a mixed online fulfillment response. From our Supply Chain Matters lens, in spite of large-scale marketing driven promotional efforts, the event looked to be more of an inventory clearance event than one that would add a new dimension to Christmas in July in online fulfillment.
Online consumers did respond but had mostly a mixed reaction with the #PrimeDay hashtag garnering mostly disappointment or cynical commentary regarding the lack of compelling product offerings and/or deals. Some noted slower web site response time. Bargains on high-profile items such as Amazon’s Fire TV stick or the Amazon Kindle HD sold-out rather quickly, reverting to an unspecified wait list. The hashtag of #HappyPrimeDay turned instead to #CrappyPrimeDay for some. Product selection turned out to be more generalized and included apparel, household and other every-day type items. That prompted our declaration that from our supply chain lens, the reality of Prime Day looked more to be one of a July inventory clearance event.
Online sales tracker ChannelAdvisor reported that by Noon, Amazon’s U.S. same-store sales were about 80 percent ahead of volumes the prior July 15th. During the day, Amazon’s marketing types were hyping numbers to business channel CNBC regarding one-day sales records. However, the network could not avoid overlooking the mixed reviews streaming across social media. We tested bargains and selection at around 10am Eastern and found few compelling bargains to be garnered but rather pointers to every-day selection categories and pricing.
An Amazon press release on Friday declared a headline that the online retailer sold more units on Prime Day than that of Black Friday 2014. Worldwide order growth increased 18 percent more than Black Friday of 2014. Customers reportedly ordered 34.4 million items among Prime eligible countries. Readers should recall, however, that 2014 Black Friday sales were reported by the National Retail Federation as 11 percent below that of 2013 with shoppers spending upwards of 6.4 percent less. In 2014, shoppers opted for last-minute deals.
The Amazon release notes specific item level sales to include, among others:
- 41,000 Bose Headphones, compared to 8 the previous Wednesday
- 28,000 Rubbermaid 42-Piece Easy Find Lid Food Storage Sets, compared to 428 the previous Wednesday
- 24,000 Instant Pot 7-in-1 Programmable Pressure Cookers, compared to 182 the previous Wednesday
- 14,000 iRobot Roomba 595 Pet Vacuum Cleaning Robots, compared to 1 the previous Wednesday
Various sales and operations and supply chain planning teams will appreciate the impact and pain level of such one-day order volume spikes, especially when planning is based on past online order history likely had to scramble to fulfill such demand. It is literally a huge gamble to position such inventory for any single customer, albeit Amazon and Wal-Mart.
Other teams are more likely in the midst of assessing whether Amazon’s demand needs impacted other key customer needs, or whether such spiked July demand will have a substantial impact to the forthcoming three months of B2C channel fulfillment sales.
The build-up to Prime Day definitely caught the attention of other retailers, particularly Wal-Mart, which quickly marshalled a series of product promotions designed to both offer a lower-cost membership program as well as compelling deals on Wal-Mart.com. Reports indicated that Wal-Mart.com encountered greater interruptions and slower response times as online consumers checked for matching or better deals. None the less, Wal-Mart was quick to declare its counter-attack to be an online success, as well as the largest day for same-day pickup at a retail store.
Amazon declares that Prime Day will now be an ongoing annual event.
Like any new online fulfillment program, a lot can be garnered from results of the inaugural event. While Amazon’s line-of-business and marketing teams can declare victory, it is the online consumer that has the ultimate final vote as to the attraction and success of an online event.
In April, Supply Chain Matters alerted our readers to news that supply chain design and analysis technology provider LLamasoft had acquired IBM’s LogicTools supply chain network design applications business unit, including rights to LogicNet Plus, Inventory, Product Flow Analyst and Transportation Analyst. At the time of the announcement, our initial view was that this deal was one more related to customer acquisition and opportunities to up-sell existing LogicTools customers with broader LLamasoft applications coverage. Our suspicion was that LogicTools was an orphan within IBM’s Smarter Commerce supply chain management family of applications and services without a strategic fit.
Last week, we finally had the opportunity to speak with LLamasoft management and learn more about this acquisition, explore the strategy behind this acquisition as well as progress to-date.
Our conversation with Jeff Metersky, vice president for customer success at LLamasoft confirmed that the acquisition was a “no-brainer”, and afforded the opportunity to remove a recognized stand-alone supply chain network design technology competitor from the market as well as remove a burden from IBM. Metersky acknowledged that while the LogicTools technology is dated, it is providing recognized value for its customer base. After the acquisition was announced, many customers directly praised LLamasoft management for the move and felt that their installed software would fare better in terms of being part of a broader supply chain network design expert community, ongoing support or added product migration options.
LLamasoft offered the small contingent of existing LogicTools employee’s positions and has now assumed software maintenance and support for existing customers. Once more, the provider is now actively evaluating broader product strategy options related to its flagship supply chain network design application, Supply Chain Guru, which is in the midst of a major upgrade cycle. The opportunity is to provide existing customers the best from both applications while providing continued continuity for existing LogicTools customer who either continues with maintaining their current software, or consider an upgrade path to broader functionality. LLamasoft Supply Chain Guru currently supports a broad variety of supply chain design and analysis needs that include multi-echelon inventory, product flow-path and production modeling optimization. According to Metersky, in the currently planned new release, the application will be provided with a more modernized user-friendly interface and added functionality options including the best features of existing LogicTools applications.
After our post-acquisition briefing with LLamasoft, Supply Chain Matters is of the belief that while the acquisition was indeed focused on customer acquisition, existing LogicTools users will indeed gain benefits in attention and technology upgrade options. Existing LLamasoft Supply Chain Guru customers’ may have to wait longer for the next product release but now have the opportunity to collaborate with a broader community of supply chain network design multi-industry expertise as well as gain some added supply chain analytical functionality.
However, those remaining sales and operations planning or supply chain planning teams that are merely seeking to augment their supply chain management capabilities with stand-alone supply chain network design or inventory optimization capabilities will face limited options.
The broader market implication is that LLamasoft remains on a competitive collision course with existing ERP and best-of-breed supply chain planning providers who are targeting predictive and prescriptive analytical support planning capabilities in their strategic growth plans. The more that supply chain network predictive analysis functionality is collectively sought, the more these two worlds collide.
We may well hear more news regarding this area in the week and months to come.
A firm’s supply chain exists to support and enable specific business outcomes. Such outcomes might include increased profits, broader product selection or higher levels of customer satisfaction and service. Supply chain strategy setting can often stumble when specific outcomes are not clearly defined or outcomes become conflicted. Consider the notion that a strategy driven to overall supply chain cost efficiency can sometime hinder needs for more agile response to market opportunities.
Supply Chain Matters has often praised Apple’s supply chain capabilities, not only from aspects of product and supplier innovation, but in overall agility as well as enhancing product margins. By our lens, few supply chains exhibit such a track record.
That point was driven home by today’s published report from The Wall Street Journal, Apple Gets 92 Percent of Smartphone Profit. (Paid subscription required) The report cites estimates from Canaccord Genuity concluding that in the first quarter: “Apple recoded 92 percent of the total operating income from the world’s top smartphone makers.” That was an increase of 65 percent from a year earlier. According to this report, the combination of Apple and Samsung accounted for more than 100 percent of industry profits since other makers broke even or lost money.
According to the report, what stands out even more regarding this achievement is the fact that Apple sells fewer than 20 percent of total volume, yet manages to garner the highest average prices and occupy the high end of the smartphone market.
Once more, as we have pointed out in our numerous Supply Chain Matters commentaries, Apple has the ability to practice highly agile sales and operations planning, segmented supply risk and multi-channel customer fulfillment while supporting the industry’s highest product margins.
From our lens, a lot of the success of the Apple supply chain stems from the ecosystem of responsive suppliers who can scale with Apple’s relentless requirements. And in fact, some suppliers have succumbed because they could not continue to meet Apple’s requirements while attempting to support individual financial outcomes for profitability.
Some will speculate that Apple’s advantage may eventually succumb to the track record of other high tech or consumer electronics OEM’s that eventually over-saturate their market and are attacked from more innovative producers. For now, however, Apple and its supply chain remain the ‘best of show”.