I have been paying attention to a couple of trends in how consumers’ (me included) purchase different items through different channels i.e. traditional go to the store versus online. The other trend that I have seen is how the traditional retailers like Wal-Mart have responded to the online opportunities, but have been a little slow in finding ways to match the dominate online retailer Amazon.com. With the state of the economy in the last several years retailers have been under tremendous pressure to lower operating costs, increase same store sales, and expand their revenue streams beyond general hard-lines and grocery. While a few years ago some retailers were focusing on SKU rationalization, which is basically reducing the variety of items that are offered in a particular category in order to optimize sale through and operating costs. The tide has turned and retailers have not only increased their SKU count to offer customers more variety, but many big-box retailers such as Wal-Mart, Sam’s Club, Costco and Target have expanded their offerings to the consumers through their online marketing channels. A person can buy appliances like washers and dryers, mattresses, furniture, electronics and much more through the .Com channel of these traditional retailers. The online retail space is projected to be a $250 Billion industry by 2014, and traditional retailers must learn to be leaders in the online channel as they have been in the traditional store channel, and the winner in this space by far is Amazon.com, not Wal-Mart or Target.
Retailers like Wal-Mart, Sam’s Club, Costco and Target have become powerful brands, and in many cases the Retailer’s brand is stronger than the product being sold. To give an example, I just bought a mattress for my son through Sam’s Club.com. The mattress was a brand that I have never heard of, but I have been a customer of Sam’s Club for years, and I trust their ability to source quality products at excellent prices, secondly, I know that if I am not satisfied with the product I can simply return it to Sam’s Club without any problem, so while I know nothing about the maker of the mattress I trust Sam’s Club, that’s brand power. This brings me to my point, which is traditional retailers have an obligation and a huge opportunity to become major players in the online space. The big box retailers have several things going for them; they have a traditional store footprint, they have tremendous scale and operational efficiencies, and they have powerful brand names. The one thing that retailers have not done well in my opinion is to make the make the online buying experience as easy and seamless what I would expect online. I think that the reason for this is because traditional retailers are very good at getting a lot of product to hundreds of stores; this expertise does not automatically translate to being good at getting one product to one customer’s home. Until recently the traditional retailers have used their regular supply chain channel to support their online channel. Sam’s Club has made major improvements in the past year; I can say this as a consumer who has been using samsclub.com for a while now. The retailers will have to learn how to develop another supply chain network to support their online channel because there is now way the economics in store replenishment are anywhere near the same as fulfilling one order to one customer.
Let’s take a look at Amazon.com, who by the way has been the reigning champion as an Online Mass Merchant for several years running. Amazon.com has been very successful in making online shopping very easy and cost effect for the customer, and think about this Amazon.com does 13.1% of the sales that Wal-Mart does in the U.S, but they don’t have a single store in the country. Amazon has done this by completing online channel for the customer. Amazon.com provides a very good and intuitive virtual shopping environment and then provides the customer with seamless delivery of the product to the customer’s home. We have to admit that buying online is a bit different than the traditional buying method that has been employed since the beginning of trade in human civilization. Consumers are giving-up the ability to touch and feel the item that they are about to purchase, so there could be less of a connection between the consumer and the product depending on their familiarity with the product, so when you sell an item online, you need to complete that connection between the customer and the product as quickly as possible. What Amazon.com has done well that other traditional Mass Merchants have not; is to get the product to the customer’s home as quickly and efficiently as possible. The traditional retailers have relied heavily on their store locations and DC to store supply chains to fulfill online orders, while this makes sense initially, long term this is not a good strategy for the big retailers for several reasons. First of all retailers’ don’t have those big back rooms anymore, and when you consider that Amazon did $34BB in sales in 2010, which is about 13.15% of Wal-Mart’s U.S sales of $258BB, then it becomes very clear that as retailers increase the strength of their .com channels they run the risk of increasing their inventories, increasing operating costs, and lowering customer service because the stores are just not set-up for or staffed to pick an pull customers’ online orders.
The opportunity as I see it is for the traditional retailers to apply their know-how and leverage their brand to complete the online buying experience all the way into to the customer’s home. If retailers like Wal-Mart can execute an online channel that allows customers to choose service levels such as home delivery, inside delivery, or even some light assembly at the customer’s home, then the traditional retailers will soon become as dominate in the online space as they have been in the traditional Brick & Mortar space.
Monday, December 19, 2011
Thursday, December 15, 2011
Supply Chain, How to win whatever the market conditions.
Summer 2012 might be a good time to look at any commodity input that you have. According to the World Bank's projections on the Asian markets China's growth rate has declined since 2010 and is expected to lower then level out in 2012. Some analysts think that the price for crude, copper, and iron ore, commodities that China consumes in large quantities will have downward pressure in 2012. I believe that these analysts are most likely on target.
When considering metal commodities, we must realize that China has experienced sustained growth over the last decade, and with that growth comes demand for commodities. Mining operations take a long time to put in place due to political lines, capital expense, and infrastructure; so with the strong growth in China over the past years capacity in the metals markets is higher now than it was in 15 years ago. While there are other emerging markets that will increase the demand for metals and minerals supply and demand in metals will be rationalized and metals will most likely go down in price. Also keep in mind that U.S. consumption is still very low, many experts believe that it will take a few more years for real estate and construction to fully heal, and at the same time construction is slowing in China as well, so the decreased global demand for copper, iron, zinc etc. will put downward pressure on the commodities prices.
The price of Oil, the mother of all commodities, is expected to decrease the summer of 2012 while this means that many inputs that we depend on such as plastics will eventually go down in price it does not necessarily mean that the price of Gasoline and Diesel will go down in price. This year the U.S. has exported around 655K barrels of refined fuels, and this is the first year in a long time that the U.S. has exported more refined oil than it has imported. So while domestic demand for gasoline and diesel has decreased substantially, the price at the pump does not reflect the lowered demand. The reason for this is that refined oil is a global market, and even though the world U.S consumption of fuel has decreased, there is still plenty of demand in the world markets. I also believe that the oil companies and refineries feel that a new higher equilibrium price for gasoline and diesel has been established, so I personally think that the $3-$4 per gallon at the pump is here to stay for a while.
So, what does this mean for Supply Chain Managers? Well part of supply chain management is setting optimal inventory, purchasing, ordering and logistics policies that create the most value for a company’s Value Stream. If we have reason to believe that there is going to be a dramatic change in input prices from our suppliers and service providers, then we will need to change our purchasing strategies, and this will lead to changes in our optimal inventories, ordering and logistics strategies as well. Any time one component changes of the Supply Chain changes all other value points will also need to be re-optimized. When major input prices are low then the tendency is to stock up on that item, but there are downsides to reacting to price changes without considering all of the components of your supply chain, and a knee-jerk reaction without computational validation is a sure way to destroy value for your company.
As a supply chain managers we are the links between all of the functional area in our companies i.e. Marketing, Purchasing, Finance, Production etc. so when input prices change in a major way our Buyers are going to behave differently because their main focus is getting the best price. It is the job of the supply chain manager to tie these functions together and provide them with the tools to make the optimal decision whatever the market conditions may be. To give a good example that we all have encountered and understand very well: Marketing decides to run an AD campaign for a product, but that information is not passed along to Production or Purchasing and the Supply Chain Manager was not included in the Marketing decision. Once demand increases many functions in the value chains must then react to the increased demand. Production starts adding shifts and diverting production from other items to the high volume item. Purchasing also reacts by increasing their orders for inputs; this may force the purchaser to go to a secondary supplier that most likely charges higher prices. Customer service will be hit with higher call volume. Sales begins to here from their major customers about lack of PO fulfillment. The logistics department then must react by buying more capacity from the carriers, and typically at a higher cost. Finance needs to cash flow all of this activity, so they must tap the credit facility this may trigger a higher cost of capital through debt financing. The Marketing campaign eventually ends demand then returns to normal, but now you have a surplus of that product and all of the inputs for that product were much more expensive than normal. Now if the product is like most it will soon become obsolete which means that you will have to discount the remaining inventory at some point, so now you selling a very high cost item at a very low price. This is why Supply Chain is becoming major differentiator between the companies that get it and the ones that don’t. The Supply Chain function when treated as strategic part of any business will allow a company to dominate in their space regardless of market conditions on the supply side or market conditions on the demand side. Supply Chain is not just trucking, it is the management of optimizing all of the links in a companies value chain so as to maximize value creation among all of the functional areas in a company. Simply put Supply Chain Management is the difference between Wal-Mart and KMart(no offense KMart).
When considering metal commodities, we must realize that China has experienced sustained growth over the last decade, and with that growth comes demand for commodities. Mining operations take a long time to put in place due to political lines, capital expense, and infrastructure; so with the strong growth in China over the past years capacity in the metals markets is higher now than it was in 15 years ago. While there are other emerging markets that will increase the demand for metals and minerals supply and demand in metals will be rationalized and metals will most likely go down in price. Also keep in mind that U.S. consumption is still very low, many experts believe that it will take a few more years for real estate and construction to fully heal, and at the same time construction is slowing in China as well, so the decreased global demand for copper, iron, zinc etc. will put downward pressure on the commodities prices.
The price of Oil, the mother of all commodities, is expected to decrease the summer of 2012 while this means that many inputs that we depend on such as plastics will eventually go down in price it does not necessarily mean that the price of Gasoline and Diesel will go down in price. This year the U.S. has exported around 655K barrels of refined fuels, and this is the first year in a long time that the U.S. has exported more refined oil than it has imported. So while domestic demand for gasoline and diesel has decreased substantially, the price at the pump does not reflect the lowered demand. The reason for this is that refined oil is a global market, and even though the world U.S consumption of fuel has decreased, there is still plenty of demand in the world markets. I also believe that the oil companies and refineries feel that a new higher equilibrium price for gasoline and diesel has been established, so I personally think that the $3-$4 per gallon at the pump is here to stay for a while.
So, what does this mean for Supply Chain Managers? Well part of supply chain management is setting optimal inventory, purchasing, ordering and logistics policies that create the most value for a company’s Value Stream. If we have reason to believe that there is going to be a dramatic change in input prices from our suppliers and service providers, then we will need to change our purchasing strategies, and this will lead to changes in our optimal inventories, ordering and logistics strategies as well. Any time one component changes of the Supply Chain changes all other value points will also need to be re-optimized. When major input prices are low then the tendency is to stock up on that item, but there are downsides to reacting to price changes without considering all of the components of your supply chain, and a knee-jerk reaction without computational validation is a sure way to destroy value for your company.
As a supply chain managers we are the links between all of the functional area in our companies i.e. Marketing, Purchasing, Finance, Production etc. so when input prices change in a major way our Buyers are going to behave differently because their main focus is getting the best price. It is the job of the supply chain manager to tie these functions together and provide them with the tools to make the optimal decision whatever the market conditions may be. To give a good example that we all have encountered and understand very well: Marketing decides to run an AD campaign for a product, but that information is not passed along to Production or Purchasing and the Supply Chain Manager was not included in the Marketing decision. Once demand increases many functions in the value chains must then react to the increased demand. Production starts adding shifts and diverting production from other items to the high volume item. Purchasing also reacts by increasing their orders for inputs; this may force the purchaser to go to a secondary supplier that most likely charges higher prices. Customer service will be hit with higher call volume. Sales begins to here from their major customers about lack of PO fulfillment. The logistics department then must react by buying more capacity from the carriers, and typically at a higher cost. Finance needs to cash flow all of this activity, so they must tap the credit facility this may trigger a higher cost of capital through debt financing. The Marketing campaign eventually ends demand then returns to normal, but now you have a surplus of that product and all of the inputs for that product were much more expensive than normal. Now if the product is like most it will soon become obsolete which means that you will have to discount the remaining inventory at some point, so now you selling a very high cost item at a very low price. This is why Supply Chain is becoming major differentiator between the companies that get it and the ones that don’t. The Supply Chain function when treated as strategic part of any business will allow a company to dominate in their space regardless of market conditions on the supply side or market conditions on the demand side. Supply Chain is not just trucking, it is the management of optimizing all of the links in a companies value chain so as to maximize value creation among all of the functional areas in a company. Simply put Supply Chain Management is the difference between Wal-Mart and KMart(no offense KMart).
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