Walmart local fulfillment centers are compact, modular warehouses built within, or added to, stores – Photo: Walmart
Are retailers prepared to respond to increasing supply chain complexity?
Since the start of the pandemic, consumers have been mainly buying essentials, with a corresponding and dramatic decrease in purchases from categories like cosmetics, business clothing and sunscreen. Retail spending in the UK was down 1.9 percent last year and the U.S. saw similar trends in non-essential verticals.
Retailers have had to closely monitor what they order and stock as lockdowns have come and gone. They’ve also needed to update their channels and delivery methods to try to make up for at least some revenue lost to store closures and/or reduced in-store traffic.
Walmart is an excellent example of a retailer that has successfully taken new and unique steps to future-proof its business including adding local fulfillment centers and automated pickup points. Large grocers like Kroger and Albertsons are making similar updates.
As these new channels are implemented, however, the supply chain becomes more complex. Retailers must ensure that they’ve established a foundation of technology to handle this complexity — and even simplify it. It’s no longer enough to focus on the links between supplier and warehouse or distribution center and store. There are more delivery options to manage, demand points to forecast, inventory fluctuations to attend to and spending peaks and valleys on the horizon.
Last year, retailers needed to find ways to meet demand as quickly as possible to protect their margins, with little time to plan. This year, with the updated channels in place, it’s time to start thinking ahead and preparing for a potential spending surge due to pent-up demand.
Rather than continuing to use outdated or manual supply chain management processes, retailers must move to automated, data-based solutions. Improved forecasts help avoid the out-of-stocks that caught many off guard in 2020 while also eliminating incorrect assumptions about increased demand that lead to overstocks and stale inventory. They also help retailers react quickly and make the best decisions when stock is left over and careful markdown management is critical.
An investment in an automated supply chain system improves the flow of goods and gives customers better access to what they want to purchase across all channels and delivery methods. Adding updated tech now will speed the return to profitability while laying the groundwork for managing future demand shifts.
Discussion Questions
DISCUSSION QUESTIONS: What are the critical supply chain technologies required to enhance customer service levels and profitably transition out of pandemic mode? Which retailers are best positioned to meet this challenge and why?
Poll
BrainTrust
David Naumann
Marketing Strategy Lead - Retail, Travel & Distribution, Verizon
Natalie Walkley
Sr. Director, Marketing @ Optoro
Supply chain agility is more critical than ever, as shifts in consumer demand and supply chain disruptions are a fact of life. Real-time access to enterprise-wide sales and accurate inventory levels is now a retail imperative. Advanced analytics and artificial intelligence tools can dramatically improve the accuracy of forecasted demand and define appropriate inventory down to the store level. The retailers with the most data and insights will be the winners.
There is no doubt that operational complexity has increased at most retailers. For those serving customers through multiple, often interconnected channels, one of the most essential changes is to have a real-time, single view of stock. This drives availability levels shown on websites, allows for the most effective fulfillment options to be chosen, powers collect from store services, and helps ensure stock is properly distributed across stores relative to demand.
David Naumann has got it. Real-time access to product location at all steps of the supply chain, accurate inventory in all locations (think RFID), diversified manufacturing sources (don’t put all your eggs in one basket), predictive analysis of demand (good luck with that that one), efficient distribution and fulfillment centers (think robotics and lights-out operations), supplier collaboration, and automated supply decision-making are various factors that weigh on the optimal formula for a well-running supply chain.
Being able to turn on a dime is of the utmost importance – in fact some retailers were late to the game and are just now catching up to Walmart, Target and Amazon. There are a lot more points in the supply chain that need to be reviewed so no gaps exist in taking care of customers and profitability will need to be addressed sooner rather than later.
The single most critical component of a retail supply chain is a robust plan to anticipate and react to volatility in demand signals. The lesson from the year was that years of stable, predictable sales in core basics allowed the industry a false sense of security in supply. The result was extended supply chains and an over reliance on “just in time” inventory planning. It was profitable but, as we saw, any changes in consumer buying patterns caused a serious disruption at retail.
Now retailers are implementing new strategies that diversify their sourcing and reallocate products closer to customer without committing to specific stores to maintain flexibility. This is happening through mini-fulfillment centers, unified inventory systems and the digital twinning of supply chain assets to quickly assess the health of supply chains and inventory and see issues early on to facilitate their mitigation.
These are all concepts that were being experimented with before the pandemic. Now with a high sense of urgency, fueled by experience in a pandemic, retailers are executing these strategies.
Gary, I think you have it right on the nose: over-optimization for one element to try to drive out cost in times of stability creates vulnerabilities throughout the chain in times of stress, and only results in an overall increase in costs.
More than any system of technology or flavor-of-the-year acronym, to keep a business healthy, it takes people who can see the chain as a whole and understand that some degree of flexibility and yes, over-investment, is necessary because situations never remain stable for long and we never know where the next disruption is coming from.
Building resiliency ahead of time is the most critical element in a crisis, and it takes seasoned logistics-minded thinkers who can stand up with facts to finance and senior management to keep a company functioning when things get weird.
As my logistics professors used to say, “you’re going to pay one way or another – do you want to do it in a planful way or do you want to do it in a panic?”
I believe the time has come for the RFID enabled supply chain. With real-time retail becoming table stakes in the battle against Amazon, the price of these tags coming way down and the cost of people going up this technology is a must. RFID to know your up-to-the-second inventory, where it is, how much you own, and its proximity to the end customer are all possible and required to make the transition to post COVID-19 retail.
The data for a slick supply chain is available. The challenge is how to use the data effectively. Today there is so much data, it is impossible for a human analyst to comprehend all the implications of the data.
Therefore, the most critical aspect of having an efficient supply chain is to have the technology that can take the enormous amount of data and express it in a usable form. And further, that can actually make the supply chain decisions without a human being involved. Many manufacturers use this type of implementation. Certainly it is harder for retailers, but the payoff should be much bigger.
More than ever, retailers have learned they need reliable, real-time data on their inventory and tracking of merchandise every step throughout their supply chain. The more data they must work with, the better they can manage forecasts and advanced planning for future disturbances. Of course, that creates a new challenge for retailers, and that is having the right talent on staff to work with this data and more importantly understand the insights any system they use delivers based on that data. While AI and ML systems can help with this, the output still requires intelligent interpretation to take the right actions. Retailers need to think about the skillsets these new data science-based positions require and hire accordingly, keeping in mind such talent will be in high demand outside of the retail industry so competition will be strong! For now, the largest retailers, which can boast deeper pockets, are better positioned to afford these workers, but small to midsize retailers can look to the solution provider community to partner with them and help solve these challenges.
Coming out of the pandemic, at least in the next two years, we are going to be living in a hyper-VUCA (Volatile, Uncertain, Complex, Ambiguous) world where the supply chain will take center stage. As retailers and CPG companies redesign their supply chain for responsiveness, they will pay disproportionate attention to managing demand volatility and uncertainties and fulfillment network complexity in a profitable manner. In terms of the technology investments to navigate the VUCA world, my bet would be on 1.) supply chain control towers, 2.) supply risk mitigation tools, 3.) short-term horizon planning (demand sensing), and 4.) a single view of inventory across fulfillment channels.
Tough question. Although some have certainly jumped out ahead to streamline their supply chain and improve visibility, flexibility, and forecasting (albeit strange given the demand generated during the pandemic), I do not believe that supply chain complexity is ever resolved. The goal posts keep moving and organizations must be able to adapt new technologies, new data, and new approaches. And as the Biden administration takes further steps toward examining the overall supply chain across certain industries, additional challenges will emerge and require more change. As I’ve often said, “Every time you think you have the key, somebody changes the lock.”
Given the shift to direct-to-consumer strategies, many retailers are investing in comprehensive order management systems (OMS) to help facilitate (and automate!) the critical stages of the supply chain for fulfillment: 1) Omnichannel inventory visibility — to optimize availability and shift around to meet cross-channel consumer demand. 2) Smart order orchestration based on business logic and logistics efficiencies (proximity to the consumer, warehouse capacity, ship from store, etc.). 3) Robust return management processes— given consumers’ hesitancy or inability to “try on” certain things, reverse logistics is busier than ever, so leveraging technology to let consumers initiate returns, and automate communications throughout is paramount to faster inventory recovery and restocking.
Any supply chain technologies that are focused on helping retailers automate time-consuming “links” in the process are gaining traction and success.
One way retailers can reduce out-of-stocks is by leveraging inventory across all of their fulfillment nodes, including warehouses, stores, drop-shippers and 3PLs. The way forward would be to leverage the distributed order management functionality of their OMS and build order routing rules that cost-effectively routes inventory to the customer. While not a silver bullet in terms of effectively forecasting demand, it could help as a stop gap solution by routing inventory where it’s needed most. Retailers that have built in store fulfillment, micro-fulfillment and distributed order management into their omnichannel offering are best positioned to deal with the inventory uncertainty that re-opening will bring.
Visibility is still the number one factor year after year. The ability to know what is on your shelves in the warehouse and the store is key to flexible supply chain and adopt to any changing shopping behavior. You can’t change course if you don’t know what you are.
Retailers that focus on updating their omnichannel distribution systems and micro-fulfillment centers will create a strong customer service experience, ultimately increasing profitability. Building customer trust early in the buying process is crucial – supply chain technologies must prioritize inventory tracking capabilities that help customers know they can rely on the e-commerce platform to accurately represent the items available and when they could expect to receive them. If digital products fail consumers at this stage, chances are that customers will choose another brand in the future.