Consumer expectations are becoming increasingly higher. When once consumers were happy with waiting a week to receive a package in the mail, today anything longer than two day delivery means that many consumers will forget their order by the time it arrives, and maybe decide they would rather not receive any item at all than wait.
Companies, retailers, and suppliers are now expected to comply and come up with creative ways to meet consumer demands. For example, Amazon recently announced that it was expanding its same day delivery service on its Prime Now app and EBay also tried a pilot in the US for same day delivery (EBay however canceled the pilot in 2015, because it wasn't performing as well as expected).
For consumers, same day delivery is convenient, but what they don't see is the significant planning and resources that go in to managing a supply chain that can deliver in such a short time frame. For example, same day delivery requires companies to have inventory on hand in close proximity to the consumer and to have streamlined logistics that would allow it to process, pack and ship an order almost instantaneously. With these requirements come challenges of inventory storage, forcing companies to find a balance between the minimal inventory needed to safeguard against stock outs, and the threat that inventory may expire or go out of style before it is sold.
Determining the right level of inventory is no easy task. In fact, forecasting and demand planning is the biggest challenge in supply chain management today, according to a survey conducted by Tefen and the Israeli Supply Chain Management Association. This challenge is only getting harder as the way people shop keeps changing.
The consumer's relationship with retailers is no longer that of a person in need seeking something from a giant provider. Shifting trends have given consumers more power in the relationship, causing consumer activity to change and forcing retailers to adjust accordingly.
Some of the biggest global trends affecting consumer activities are:
Changing Consumer Experience
Shopping isn't just about walking into a store and buying things anymore. Today, shopping can be done from home, from work or even from a phone. Many stores today offer shoppers the option to buy online and pick up in store. For example, Macy's, a large American department store, guarantees that online orders are ready for pick up in store in four hours, however, on average, most orders are ready in just two hours.
Another retailer, Follett, which operates university stores at more than 1,200 campuses in the US, says that 56% of its online orders are picked up in store.
This quick service level requires strict inventory management in order to avoid shortfalls. Companies need real time inventory management capabilities and need to set safety stock levels that will ensure items are available when customers order, but also won't take up too much room at retailer locations.
In the future this trend could lead to new delivery challenges, where customers may want instant delivery without visiting the store. Retailers may have to figure out how to delivery orders in real time depending on a customer's location at the time of purchase, whether that be at home, in a coffee shop or a library. Amazon has already started developing its response to this trend with Amazon Prime Air, a future service that will allow it to deliver packages of five pounds or less to customers within 30 minutes via drones. Amazon has not yet said when this service will be available, but it has been testing drones in Canada, the UK and the Netherlands. (The US has not given Amazon regulatory approval to test the drones as of yet.)
Adapting to this trend will require companies to come up with new innovations to create unique customer experiences.
The links between the physical world and the virtual world are shortening, which also renders some links in the supply chain to be less relevant than they once were.
Online sales accounted for more than half of total retail sales growth in 2015, according to data from the US Commerce Department. Ecommerce sales in 2015 totaled $341.7 billion, representing a 14.6% increase from the previous year. Total retail sales in the US grew just 1.4% in 2015, and most of the growth came from the online arena. In 2015, roughly 1.5 billion people bought something online and that number is expected to continue increasing.
Selling straight to the customer online cuts out several links in a company's supply chain. The supply chain can go straight from a warehouse to a customers without following the traditional chain through different distribution centers and retailers.
Being less reliant on retail stores also means companies need to change their sales focus to consumers instead of focusing on buyers or merchandisers from stores.
This also means changing distribution and logistics processes. Distribution channels now need to reach the end customer instead of retailers; and logistics processes must allow for smaller orders instead of industrial size orders to stores. The tradition of trucks delivering goods to stores each morning may little by little be replaced with small deliveries to people's homes.
Crowding in Urban Centers
Today, 54% of the world population lives in cities and that is expected to grow to 66% by 2050, according to the UN DESA’s Population Division's World Urbanization Prospects. In 1950, only 756 million people lived in urban centers, and today that number is close to 4 billion.
There are also more "mega cities" today than ever. The UN defines a "mega city" as an urban center with a population of at least 10 million. In 1950, there were 10 mega cities in the world. Today there are 28; 16 of which are located in Asia, four in Latin America, three in Africa, three in Europe, and two in North America. By 2030, there will be 41 mega cities, according to UN predictions.
Urban centers mean expensive real estate. Stores in big cities are small and most have no storage space other than the shelves where customers pick out their goods. This means products need to be delivered to stores ready for shelves and delivery drivers must restock shelves often.
People in urban centers also have higher expectations for convenience. Fewer people in urban centers drive cars, so shopping decisions are usually made by store location and proximity to people's apartments.
Smaller stores and a focus on convenience require retailers to have more flexible supply chains and shorter response times to inventory stocking. Low inventory levels means retailers may need deliveries of small doses more frequently, maybe even more than once a day. Delivery fleets may also need adjustments to navigate cities and carry inventory in shelf ready packaging.
Stores also need more advanced inventory management capabilities to determine when and which products are needed to ensure they have the exact amount to fill their shelves, or risk losing money on empty shelves or overcrowding space.
Supply Chain Evolution
Meeting these challenges will require companies to adapt and modify their supply chains to maintain profitability in a more complicated world. How will the supply chain change in the next ten years?
Direct Delivery Channels
As discussed, delivery channels will become more direct. This means stores will have to offer more same day delivery services, the ability to buy online and pick up at store, allow for instant shopping without a store, and skip supply chain links.
One retailer that has managed to master its direct delivery channels is Tesco, one of the largest grocery retailers in the world. Headquartered in England, the company has six distribution centers located in different neighborhoods around London. Customers can order online and choose a slot of time for the groceries to be delivered, even on the same day. Tesco also offers a service called "click + collect," meaning consumers can shop online and pick up the order packed and bagged at a convenient time at one of Tesco's 300 retail location in London.
Tesco has been able to master its delivery channels due to its distribution centers, which are not open to the public, located in densely populated locations and separate from its retail stores. Tesco also has strong inventory management and demand planning capabilities, and fast response time. Tesco estimates that its online sales to double in the next five years.
Another company that has shortened its supply chain is Cardinal Health, a Fortune 500 distributor of medical devices and pharmaceuticals. Healthcare in the US is costly and some patients may prefer to receive treatment outside of regular healthcare institutions.
For example, many patients with chronic diseases are required to visit hospitals often for treatment, even if the treatment is noninvasive and easy to delivery. Cardinal Health seized an opportunity to work directly with these patients and give them the opportunity to administer their own treatment, eliminating patients' need to spend time and money in hospitals, and eliminating two links in Cardinal Health's supply chain: distributor, and hospital/pharmacy.
This strategy not only shortened Cardinal Health's supply chain, it also helped the company enter into a new customer segment. To achieve this strategy, Cardinal Health acquired a distributor called Assuramed, a leading direct-to-home medical supplier that specializes in aging and chronically ill patients. Cardinal Health also turned to pharmacies interested in expanding in this segment so that it could reach customers with a full portfolio of products.
This strategy saves patients an estimate of about $200 billion a year, or 8% of US healthcare costs.
Today's consumers expect transparency from retailers, from how things are made to how they are delivered. With new advances in technology, such as the IoT (Internet of Things) and big data, companies are able to gain complete visibility of their entire supply chain and make dynamic decisions and optimize their resources.
By 2020, it is expected that more than 50 billion items will be connected to the internet, only 17% of those items are expected to be phones or traditional computers. Connecting other objects with sensors and software means that communication, surveillance and automated analysis of real time information will be easier than ever.
Two companies looking to get ahead on the IoT trend are DHL and Cisco, which have worked together to create a report on how the IoT can influence their operations. The report estimates that the IoT will generate more than $8 trillion in "Value at Stake," or untapped potential profits, over the next 10 years. Of that, $1.9 trillion is expected to come from supply chain and logistics. The report lists efficiency gains from better management of resources and more optimized asset utilization as some of the largest benefits from IoT.
For example, IoT sensors on delivery trucks can help logistics managers know in real time where inventory is and allow them to plan accordingly, or sensors on machines in a manufacturing facility can give mangers constant updates on production and help them see any problems almost immediately.
Other benefits from IoT are:
Companies will need to work together to optimize their supplier chains. While working alone may seem preferable, companies can save money and time if they share, whether it be space in a warehouse or truck, or in a delivery system.
The city of Berlin, for example, has created a system to reduce the number of trips to deliver items within the city. The program, called "BentoBox," is centered around a modular logistics hub where deliveries and outgoing shipments are organized by their end location. Different urban freight operators work together to organize packages and then deliver them within the city on electric bikes that can carry up to 250 kg.
More than 140 courier businesses are participating in the BentoBox program in Berlin and the city estimates that 85% of all packages in the city can be delivered by bicycles. The program is also being tested in Lyon, France and Turin, Italy.
Flexe is another platform that helps with collaboration, allowing companies to rent out any extra warehouse space to companies that need storage. Flexe is focused on short term solutions, so if a company's warehousing needs differ by season, it can rent out its extra space during the slow months.
Walmart has also made a foray into collaboration, but with its customers instead of with other retailers. The company in 2013 announced that it would crowdsource deliveries by giving discounts to in store customers who agree to delivery packages to online shoppers located near them.
Agility and Flexibility
The ability to change plans fast and react will become more and more important, as companies stuck in their ways will find it harder to maintain profits if they can't keep up with trends.
This trend is prominent in the fashion world. Traditional fashion companies, including today's high end brands, have a turnover time of 6-12 months. Clothing are designed in the company's location, and it can take two months before samples are produced. When samples are approved, manufacturing takes place in the Far East and then items are shipped to distribution centers and then to stores. The entire process, from planning until items arrive in stores can take 6-12 months.
By this time, styles could have changed, or designers could have predicted the wrong fashion, but with the lengthy development time, there is no easy fix. This problem then shows up in sales. In stores, only about 60% of merchandise is sold in season, and the remaining 40% is sold on sale at the end of the season to make room for next season's designs.
The problem with this model, is that fashion can change within the time it takes to design and manufacture products. If a new trend arises, companies may not be able to adapt and produce clothing that would allow them to take advantage of the trend before it goes out of style.
Low cost fashion brands have figured out how to become more agile and sell more products through ever changing trends. Zara, for example, is known as a leader in "fast fashion," being able to get products from design to store shelves in just 6-8 weeks.
Zara conducts its design and manufacturing near its headquarters in Spain and delivers new items to stores every two weeks. With more than 200 designers constantly working on spotting new trends and factories that are able to quickly change to new products, Zara can have samples of new designs in just two weeks. With its large capacity, and proximity of factories to stores, Zara can reduce manufacturing time significantly.
Products in Zara stores mostly sit on shelves for just days or weeks before they are sold, as opposed to high fashion stores that can shelve products for months. Because of the high turnover, only about 20% of items are sold at a discount at Zara, which is about half of the products traditional fashion houses sell at discounts.
This strategy has made Zara one of the most profitable fashion companies, with a gross margin of almost 60% annually.
Another company that has mastered agility is Eli Lilly, an American pharmaceutical company that developed a lean supply chain management system that relies on four principles:
These principles allow Eli Lilly to reduce lead times and cycle times, as well inventory at different stages in the supply chain.
“It is not about improving the accuracy of the forecast and reducing the amount of uncertainty in the future, it is about eliminating the need for certainty." –Ronald W. Bohl, Senior director of supply chain at Eli Lilly
Supply chain management is all about meeting customer demands in a way that is profitable and sustainable. As demands change, so must supply chains so that they can be managed and operated as needed.
By Yuval Barak, Partner, Tefen Israel and Aviva Gat, Consultant, Tefen Israel
Supply Chain and Operations Expert