Over the last decade or two, there has been a significant evolution in both how products are sold and in their delivery to customers. Internet retailers such as Amazon have captured increasing market share in certain product categories. Previously well-established brick-and-mortar retailers such as Sears and Kmart have lost business, either positioning them on the financial precipice or in bankruptcy.
The current social-distancing environment has accelerated this change, since it has led people to become more and more comfortable in purchasing online. The alignment of relatively short—usually a couple of days—delivery of product from an e-retailer to a customer has contributed to this transition. Even larger and more expensive products such as automobiles can now be purchased online, thus avoiding the brick-and-mortar middleman. How does this all relate to supply management? A recent survey of over 118 U.S. based retailers by Coresight Research titled A New Reality Demands a Networked Product and Supply Chain Platform had two interesting supply-chain-related findings.
- “Almost half of retailers cite supply chain agility and flexibility as the most pressing issue over the next 12 -24 months.”
- “41% percent of respondents reported that finding new suppliers and leveraging current suppliers are top business issues going forward, while 39% are focused on supply chain transparency and traceability.”
To back up the above statistics—according to Forbes—total online monthly sales reached a record of $73.2 billion in June of this year. That is more than a 76% increase year-over-year from June 2019.
Assuming these statistics reflect the overall marketplace, it is apparent that most if not all brick-and- mortar retailers of consumer products—as well as manufacturers of those products—will need to adopt new step-function strategies to survive.
What type of changes am I talking about? Many customers no longer feel the need to physically touch products prior to purchase. This means that physical marketing venues—stores and malls—are overhead and expenses that no longer represent value to these buyers. Because of this, they do not provide adequate return on investment.
In response, brick-and-mortar retailers are closing their unprofitable retail outlets. This does not address the root cause of why their physical stores are no longer financially sustainable. Actions such as closing low traffic stores are stop-gap measures to reduce short-term financial bleeding. In the end, retailers relying solely on a store-closing strategy will not survive. It is pretty evident that to effectively address the challenges of an expanding e-tail marketplace, retailers will have to effectively immerse themselves in it.
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Why had there been resistance to adopting an e-tail marketing and order fulfillment strategy? Two reasons. First, many executives probably view such a shift in strategy as a bridge too far from the current practices that have previously made their companies successful. Second, the change will likely have a negative impact on overall sales, at least in the short term. In my mind, though, sales will be lost whether an e-tail based marketing strategy is adopted or not.
Another significant financial hit is related to the loss the investment that was needed to maintain a physical presence. Executives probably don’t want to be sitting in the chair that has to make such a write-off decision. For instance, strip malls have pretty much been thing of the past. I see mega-malls following a similar path. A couple of years I drove to a mega-mall hoping to shop, and it took over 30 minutes to find a parking spot. This, in spite of there being over 25,000 parking spots. A couple of years from now similar experiences will likely be only a memory.
That begs the question, “Who will lease the buildings when major retailers opt out?”
E-tail is already having a significant impact on Original Equipment Manufacturer supply management strategies. Why? E-tailers compete not only on price but also in customer delivery times. E-tailers that cannot complete their order fulfillment in days will not survive, unless they have a totally unique product. And very few do. The only three ways I know of to assure speedy customer order fulfillment are:
1. Sourcing with a supply chain that is Lean Supply Chain Performance capable; i.e. can respond to changes in order through short “true” lead-times.
2. Shipping from pre-built inventory.
3. A combination of both of the above.
It should be pretty evident that manufacturers relying on pre-built inventory incur extra cost, ceding a financial advantage to competitors that don’t. The reality is that manufacturers that adopt a strategy of shortening their supply chains in support of short-fuse customer schedule changes will require some level of pre-built inventory. However, the leaner the supply chain, the less of this reliance.
So how is a company to address the need for order fulfillment flexibility? The answer is not further streamlining of logistics and building/maintaining more warehouses. As I’ve said before, I view these two as Band-Aid steps that need to be taken when sourcing with suppliers that can’t support market dynamics.
E-tail first gained traction selling products that could be considered commodities. And as brands become less and less distinguishable, a greater number lend themselves to fitting in that category, all the way from things such as toasters up to furniture and appliances. As cited above, even automobiles—at least in certain categories—pretty much include the same features and performance specifications.
Original Equipment Manufacturers (OEMs) may claim that their products are not commodities. But the reality is that many types of products have morphed into clone-like similarity as OEMs work to cost reduce their products to increase their profitability.
Bottom line is that e-tail will continue to emerge and become the preferred approach for customer purchasing transactions for increasing types of products. Companies that are unable to react successfully to this new environment will suffer similar fates to the retailers mentioned above. OEMs that are able to make the adjustment will also favor e-tail as it is a marketing channel with the potential to maintain—or increase sales—with less capital investment.
Again, how will e-tail affect the supply chain? I’ve already indicated e-tail’s reliance on short-fuse order fulfillment. Sourcing with suppliers that have relatively short “true” lead-times—those that don’t rely on significant waste--- will be the big differentiator between OEMs that successfully transition from brick-and-mortar to e-tail and those that don’t.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
