Over the past few decades, the role of the supply chain has been evolving from cost center to competitive advantage. Nowadays, leading retailer supply chains have already succeeded at providing decent service at low costs.
For many, the next frontier is using the supply chain as a way to fuel top-line growth and take on a new strategic role in the business as a result. Driving top-line growth is even more important in today’s hypercompetitive environment, which is often compounded by margin pressure in a fragile economy.
But to accomplish this objective and help the business grow, supply chains must also face five challenges: increasing speed, supporting international growth, responding to a shifting sourcing landscape, enabling a new push for customization and facilitating omnichannel fulfillment.
These business, consumer and competitive imperatives are already defining the shape of the retail supply chain, and retailers’ responses will have significant impacts on their ability to compete in the years to come.
Increasing Speed and Responsiveness
There are three key segments of the supply chain that are ripe for speeding up: product development factory to DC or store, and DC to store or customer.
Product development. There’s considerable room to speed up the earliest stage of the supply chain. For example, prepositioning materials can save anywhere from five days to four weeks upfront, while staging finished goods overseas saves additional time.
And some factories are capable of taking POS data from retailers and creating forecasts for replenishment orders, which saves time and reduces supply chain WIP. For example, consider the partnership between JCPenney and TAL. JCPenney sends POS retail data directly to the factories, which enables factories to forecast demand, buy fabric just in time, and cut it to a particular SKU or sizeimmediately. Then, TAL speeds up the process even further by shipping the finished garments directly to JCPenney stores.
Factory to DC or store. The middle leg of the supply chain can also be sped up significantly. Much of this improvement can come through the effective application of simple Lean principles, like eliminating redundant activities (quality control, for example), avoiding any unnecessary handoffs or waiting times, and shifting more value-added services like price and RFID tagging to source countries.
Transportation options can also increase speed if they make sense based on the business model. For example, one multibrand specialty retailer recently focused on aligning its delivery network to meet the needs of a new operating model and speed-to-market vision. This included a redesigned transportation network, capable of accommodating unique product flow paths while still capturing cost savings and speed-to-market improvements. After reviewing global transportation flows, carriers and outbound functions, the retailer implemented network and transportation optimization efforts that resulted in a 35% reduction in annual ocean transportation spend, a 10% reduction in annual domestic outbound transportation spend and a 33% improvement in transportation speed to market.
And closer to home, more and more retailers are speeding up their domestic supply chain by cutting the number of points through which a product has to move or by reducing storage points. For example, more and more retailers are cross-docking products, eliminating time spent in storage (Walmart crossdocks about 85% of its volume).
But if the DC is unavoidable, there are plenty of ways to speed it up by automating processes. For example, one Kurt Salmon client, a $2.7 billion book wholesaler and retailer, increased picking rates by 35% by implementing an auto-pick solution.
DC or store to customer. Although this is arguably the fastest part of most retail supply chains, it is also the most visible to customers and, as a result, is facing considerable pressure to speed up. Much of this can be attributed to Amazon and other e-commerce pure plays. The number of categories in which Amazon doesn’t effectively compete is shrinking by the day. And even if a retailer is in a category that does not directly compete with Amazon, customer expectations have shifted anyway.
As it stands now, many retailers have significant room for improvement when it comes to delivery speed. A recent Kurt Salmon survey of more than a dozen U.S. retailers found that the average delivery speed of online-only retailers was 2.6 days versus five days for omnichannel retailers. This story is similar in Europe, or often even speedier, with nextday delivery common (in London, some retailers offer delivery within 60 to 90 minutes). Several major Asian cities offer a glimpse into what the future may hold: Online retailers have pushed even their offline competitors into same-day or next-day delivery.
But ultimately, being faster and more responsive is only the first piece of the puzzle. Many retailers have significant room for improvement when it comes to sales and operations planning (S&OP). Developing an organizational structure with one owner of S&OP across geographies and channels will help balance open capacity across merchandising, finance and supply chain, improving speed and responsiveness across the organization without sapping profits.
International Growth. International growth is one of the biggest potential sources of top-line growth, as retailers look beyond their saturated home markets to untapped markets beyond. But effectively supporting international growth will also force retailers to decide whether a given market should be supported from their home territory or in the target country via a 3PL or an owned facility.
Luckily, as many retailers experiment with international growth, the barriers to entry have dropped, and there are a set of well-proven models for entering many prime international markets, with countries like India being the rare exception.
As retailers’ international footprints grow, they will increasingly find themselves at a size that justifies a physical presence and the benefits that come along with it.
For example, one specialty apparel retailer was using a cross-border service provider to handle all its international e-commerce fulfillment, but found it to be high cost, slow and brand damaging in terms of the customer experience. Instead, the brand put DCs in its key Asian markets to be able to fulfill the orders itself, which made sense given its plans to add five additional countries in the next two years and eight in the next five.
Even if retailers don’t have the kind of density necessary to justify bringing their international supply chains in-house, entering Asia demands a local or regional 3PL partner at a minimum. That’s because Asia is an incredibly complex region, made up of dozens of growing, attractive markets with their own regulations. Even something as simple as a price tag varies significantly across the region, and the supply chain has to be able to cope with those differences and the added complexity they create.
This is exacerbated by the high service expectations of many Asian consumers, especially those in urban areas, where same-day or next-day delivery is now the norm. Global 3PLs are often ill-equipped to handle this myriad of regulatory and logistical challenges and, instead, retailers should take a long look at local providers.
The same push for ownership can often be true in key growth markets for European brands, like Russia and Turkey. While shipping from regional hubs may be enough for other markets, the size and complexity of these markets—including customs regulations—increasingly justifies renting or owning a DC directly to increase speed to market as service requirements grow. For example, Adidas is one of several global, Europe-based brands establishing DCs around Moscow.
Finally, supply chain leaders should be thinking about emerging markets in the southern hemisphere— including Australia and South America—and the complications they bring to the supply chain. First, for apparel retailers, these countries will have seasonal inventory requirements that are totally at odds with their northern hemisphere counterparts. Plus, especially with Australia, transportation can be an issue. Even shipping from Asia to Australia can be so costly that it often makes sense to open an in-country DC instead of fulfilling from another region. For example, Abercrombie & Fitch recently announced plans to open one of its Hollister stores in Australia and will build an in-country DC to support the store and e-commerce sales.
Sourcing Shifts. With Chinese labor costs continuing to rise, many brands have begun to look for new sourcing hubs, as illustrated in Exhibit 2.
Retailers increasingly have two choices when it comes to sourcing:
1. Go cheap. Move sourcing to regions with lower labor costs, like Southeast Asia or Africa.
2. Go local. Move production closer to the market to increase speed to market.
And, of course, these decisions carry important supply chain implications.
First, in a quest to “find the cheapest source,” many retailers have shifted from housing a vast majority of their production in China to breaking it up between several other smaller Asian countries. This fracturing can create consolidation issues. The best bet is either consolidating across suppliers (as consolidating across countries can create a customs headache) or being aware of the implications of deconsolidation on transportation costs and service levels. In the U.S., leading retailers use transloading points at the coasts to postpone final store allocation decisions to the last possible moment. In Europe, operational cost arguments still outweigh this flexibility, as allocation by country DC is already fixed before shipment from Asia. But this should change in the future, as more international companies shift to regional supply chain organizations that manage their inventory cross-country.
On the other hand, near-shoring can also be another way to increase speed and responsiveness by bringing production closer to home. Of course, using one option for some products does not prevent using another for other products. In fact, selectively using near-shoring can be the fastest way to the speed-cost sweet spot.
Brands can either produce small quantities of each style close to home, testing them in-store and online, and then sending larger orders of popular styles to China, as Nine West does. Or retailers could use near-shored facilities to produce quick reorders of popular products mid-season, as Abercrombie & Fitch does. The right path is a function of balancing four key factors, as illustrated in Exhibit 3—margin, number of styles, volume and the retailer’s degree of confidence that those styles will sell well based on analytics.
Everyone has heard of fast-fashion examples like Zara using near-shoring to excel at speed to market. But other players are also benefitting from a local approach in other ways. For example, some U.K. grocers have excelled at going virtually “stockless,” using strong analytics, effective vendor partnerships and a top-notch regional supply chain to keep only a few days of stock on hand. This helps lower costs and increase freshness, which can be a competitive differentiator in the low-margin, highly competitive grocery space.
Customization. Customers now expect to be treated as individuals and that includes access to customized products. As a result, retail supply chains will increasingly be asked to support this customization and personalization, which, of course, comes with its own host of supply chain challenges.
Customization can be difficult to execute both quickly and cost-effectively. But for retailers with enough demand, bringing customization capabilities in-house can help solve that problem and provide other benefits:
Quality. Executing customization in-house helps control quality because the brand is able to keep a close eye on everything going out the door. This was the rationale behind one $4 billion global fine jewelry retailer’s decision to execute custom engraving and etching within its own DC, consolidating production to keep costs down without sacrificing quality, which is especially important given the high price point of its products.
Speed to market. Inventory proximity and production control enable quick turnaround time, as well as increased visibility and reporting. And here, the customization capability doesn’t have to be limited to one-off designs, but can help support general market responsiveness. For example, a $15 billion global fast-fashion retailer owns 20 factories to support intensive pattern design and cutting processes that enable it to deliver new SKUs on a biweekly basis.
Cost. A customization capability can also help reduce transportation costs and operating expenses. Consider the case of a $6 billion global lifestyle retailer with 12 embroidery machines within its DC to support custom orders from its online business. Bringing these machines in-house helped cut outsourcing and fuel costs, and the retailer retains the flexibility to outsource to a 3PL when necessary.
Potential for growth. Once a retailer has built out a customization capability within its supply chain, it can leverage the investment over a wider set of products. For example, one U.S. online and catalog retailer built an in-house customization capability in its DC and ultimately grew its customized offerings to include 14 types of personalization and 3.5 million SKUs.
Omnichannel Fulfillment. The new price of admission for retailers is rapidly becoming anytime, anywhere shopping, purchasing, delivery and returns. This creates significant new demands on the retail supply chain, which is confronted with dozens of new product flows and service levels that have soared to new heights.
To win in the face of this change, omnichannel retailers need to use the biggest asset already at their disposal—their stores. Stores will help the supply chain of the future deliver top-line growth for two reasons. First, they help satisfy customer needs by reducing the likelihood of out of stocks, increasing sales and reducing the need to drastically mark down leftover merchandise at season’s end. Secondly, they cut costs in two key ways. They can help delay the need to open a new DC to relieve lack of capacity at already stressed facilities, which, at around $100 million each, is no insignificant expense. On rare occasion, shipping from stores can also help save on transportation costs, which is especially important as fuel costs remain high and show no sign of coming down.
To enable ship from store and a myriad of other omnichannel fulfillment paths, retailers also need to increase inventory visibility across channels to ensure that each product is being fulfilled from the smartest location as it relates to both customer experience and profitability. RFID will be instrumental in enabling this, and that’s why retailers from Macy’s to C&A are implementing it.
Omnichannel also has a heavy systems and data requirement that will impact supply chains, including a need for common master data across channels with product information management (PIM) systems that can add e-commerce–specific data (such as pictures or Google search keywords) and systems that can communicate across channels. Distributed order management is one potential solution to help use inventory availability to route orders based on business goals and customer preferences. To enable ship from store and a myriad of other omnichannel fulfillment paths, retailers also need to increase inventory visibility across channels to ensure that each product is being fulfilled from the smartest location.
Although DCs will not be the only part of the omnichannel supply chain, they will still have to change significantly to accommodate shifting demand and product flows. In a quest for common systems as their e-commerce businesses continue to experience explosive growth, brands will continue to insource their DC operations and build omnichannel DCs that enable retailers to take advantage of pooled inventory, which will reduce safety stock and inventory carrying costs as assortments grow and help facilitate greater inventory visibility.
Retailers need to get a handle on omnichannel immediately, as levels of cross-channel shopping and fulfillment will only continue to increase— especially in currently underutilized channels like grocery. U.K. grocers like Tesco and Sainsbury’s, who have embraced omnichannel—think Tesco’s virtual aisle in South Korean subway stations—already see about 3% to 4% of their orders coming from online or mobile channels. This will continue to grow and processes and systems have to be ready to keep up.
Asia is an entirely different animal when it comes to omnichannel, for several reasons. First, the franchisee model, which is very common there, can make it difficult for headquarters to roll out new, complex initiatives across the entire store fleet. Plus, stores are generally very small and already have difficulty finding space for their store inventory. That being said, several leading retailers are already beginning to make strides in delivering omnichannel shopping and pickup, and consumer expectations will soon follow. Already, Amazon has partnered with Family- Mart, a Chinese convenience store, to give consumers the option of picking up their packages there.
Of course, within Asia each country is at a different level of maturity when it comes to omnichannel. Very mature markets like Japan and South Korea are worlds away from less mature markets in Southeast Asia. Although omnichannel isn’t as big of a concern in these less-developed markets now, it will grow in importance in the years to come.
The message is the same across every aspect of the retail supply chain: Change is here, and it will only continue to accelerate. While that may seem like a daunting prospect, it’s actually an incredibly exciting opportunity. If supply chain leaders can deliver on five key imperatives—increasing speed, supporting customization, sourcing shifts, internationalization and omnichannel—they will be in an unprecedented position to drive top-line business growth now and for years to come.
1 July 2013