L E E A. C L A I R O C T O B E R 7 TH, Transportation and Logistics Advisors, LLC

Transcription

1 THE SUPPLY CHAIN R EVOLUTION L E E A. C L A I R O C T O B E R 7 TH,

2 Agenda Thinking About the Supply Chain Strategically ecommerce versus Traditional Supply Chains Complexity and Challenges 1

3 So what is a Supply Chain anyway? 2

4 Supply chain costs are typically over 20% of total store-based retail multiple times retailer operating margins Est US Store Retail Sales Cost Buildup Total $4.33 T Supply Chain 21%-23% Est. Retail Store Supply Chain Cost Category % Sales Spend ($B) Inbound Fgt. 7% $304 Fulfillment 4% $173 Inventory 5% $217 Outbound 3%-5% $130- $217 Returns 2% $87 TOTAL Supply Chain 21%- 23% $911 - $998 Source: US Census Bureau; TandLA experience and model estimates 3

5 Traditionally, supply chain management has been about how to move the products from supplier to customer Thinking Supply chain is how you move the product after the key decisions have been made Primarily driven by cost, not service Undervalues flexibility and risk management Results Disconnected material flows Demand/supply variance Long lead times problems Sourcing from Asia Volume commitment problems Low cost shipping Large shipment sizes Slow, low cost transport Larger inventory Make to stock Take inventory risk 4

6 But today, the supply chain is beginning to be viewed as a supply network and is complex with many alternatives Retailers Wholesale Distributors Manufacturers Suppliers Customer Demand Customer Portals BI- Collaborative Analytics & Scorecards Supplier Portals Info Goods Logistics Providers Co-Packers Contract Manufacturers 5

7 Going forward, product sourcing must be part of the supply chain, and together they need to be integral to the corporate strategy Assess how one component impacts other components Consider trade-offs Low cost production versus higher inventory and longer lead times Customer responsive versus low cost Answers will differ based on timing and position in the market High fashion versus predictable low margin Seasonal or promotional versus stable staple Life cycle stage Perishability High volume versus low volume Supply Chain Drivers Products to sell Number of SKUs Manufacturers and locations Production cost spreads Product value Lot sizes Inventory levels Inventory locations Inbound transportation cost Outbound transportation cost Speed to market Reliability 6

8 Agenda Thinking About the Supply Chain Strategically ecommerce versus Traditional Supply Chains Complexity and Challenges 7

9 ecommerce is growing fast, but still only about 7% of US retail sales US ecommerce Sales by Year ($B) E2015 E2016 E2017 Estimated 2014 ecommerce sales of $300 B 2010 to 2013 Sales CAGRs ecommerce: 16.3% Total Retail: 5.6% ecommerce sales forecasted to grow by 13.1% per year 2014 to 2017 ecommerce sales account for approximately 7.0% of total retail sales (Q1, 2015) Traditional retailing is still the vast majority of the market Source: US Census Bureau; emarketer, April 2014, Factiva; US Census Bureau 8

10 In housewares, ecommerce penetration is about 15.5% higher than for overall retail, but differs by product 2014 US Housewares Sales by Product Category 15% 9% 20% 5% 26% 25% Direct to consumer housewares sales was 15.5% in 2013 Up from 13.1% in 2011 Housewares products have widely varying online sales share 25% - flatware 20% - small appliances 17% - cookware 15% - table linen 7% - kitchen linen Kitchen Electronics Floor Care Appliances Tabletop Personal Care Appliances Cookware/Bakeware Kitchen/Dining Textiles Source: IHA quarterly Housewares Marketwatch report; IHA 2014 State of the Industry Report; TandLA analysis 9

11 In ecommerce, supply chain costs are measurably higher than for store based sales estimated 30% to 33% of ecommerce sales Est US ecommerce Sales Cost Buildup Total $299 B Category % Sales Supply Chain 30%-33% Est. ecommerce Supply Chain Cost Inbound 8% $24 Fulfillment 5% $15 Inventory 6% $18 Spend ($B) Outbound 6%-9% $18-27 Returns 4.5% $13 TOTAL Supply Chain 29.5% % $88 - $97 Source: US Census Bureau; TandLA experience and model estimates Assumes a well run supply chain If sub-optimal, costs escalate fast! 10

12 So why are ecommerce supply chain costs so high? Supply Chain Cost Element Inbound Freight Traditional Retail ecommerce Retail Difference Why????? 7% 8% 1% Lower volumes Shuttle moves from DC More destinations Fulfillment 4% 5% 1% Eaches versus Pallets Inventory 5% 6% 1% Lower volumes More locations Outbound Freight 3%-5% 6%-9% 3 to 6% Parcel versus truckload Returns 2% 4.5% 2.5% try it on! what color? TOTAL Supply Chain 21%-23% 29.5% % 5.5 to 12.5% YES supply chain costs go up 20 to 50% and can go up more! 11

13 Agenda Thinking About the Supply Chain Strategically ecommerce versus Traditional Supply Chains Complexity and Challenges 12

14 ecommerce is still in a state of flux making it difficult to plan and manage Category Key Questions and Issues Sales models Sell through traditional retailers? Sell through Amazon and other etailers? Sell direct through brand website? Channel conflicts? Shipping models Slow and cheap or fast and expensive? Free shipping expectations? What will consumers demand and pay for? How to manage DIMed versus heavy products? Fulfillment models Growth of direct brand/manufacturer fulfillment Pallet and eaches out of same facility? Need to be close to consumers versus centralized? Level of automation Returns Free shipping of returns? Consumer mentality buy 3, return 2 Where and how to process returns? 13

15 ecommerce requires a new set of capabilities and assessment of various trade-offs Transportation ecommerce Challenges Transportation Outbound Express, Ground, Parcel Select, mail, same day? Inbound LTL versus truckload? Need to breakdown containers into LTL versus through container? Need for shuttles from DC? Service/speed versus cost? Impact of DIM, surcharges, rate changes Fulfillment Pick and pack at eaches level, not pallets Level of automation Can it be run out of same facility? Additional smaller facilities? Inventory Inventory level versus number of stocking locations Inventory and facility cost versus delivery cost Returns How to handle larger quantity of returns? How to process returns and get inventory back into system without creating mistakes on outbound shipments? 14

16 Critical problem ecommerce turns a 40,000 pound truckload to a store, into 10,000 four pounds shipments to homes Example Relative Shipping Economics Per Pound (by shipment weight) $1.75 $1.50 $1.25 $1.00 $0.75 $0.50 $0.25 $- $ to 5 lbs. $ to 50 lbs. $ to 600 lbs. Parcel LTL Truckload $ to 2500 lbs. $ ,000 lbs. Outbound transportation cost Up significantly in ecommerce environment Parcel cost/pound can be 10x the cost of LTL and TL to store Dimensional pricing further increases costs for light products 15

17 How and where to fulfill? Most companies are set up to ship pallets, not hand picked items Outbound Shipment Volume Warehouse Operations Traditional Warehousing DC to DC/store Low volume of large shipments (TL or LTL) Stacked pallets, moved with fork lifts Staging of multiple pallets to move into trailers Limited handling or packaging some mixing, shrink wrapping ecommerce Fulfillment DC to consumer High volume of small shipments (parcel) At individual product level Manual picking Can be highly automated picking systems with large capex Packaging lines Trailers of packages for parcel carriers 16

18 Some customers want same day delivery only viable with local fulfillment Advantages Highest speed to customer Best alternative to physical shopping ( need it now ) Challenges High inventory cost (multi locations) High cost DC s (small) High delivery costs Amazon Prime Same Day Free Shipping Cities Sources: Amazon.com website; TandLA expertise Few retailers can do same day effectively today 17

19 Technology to support single pick is very different and requires additional capabilities Inventory management at various levels Pallet Case Each Order picking Premium on real-time information in both directions What is in-stock Applying orders immediately to inventory Shipping cost Integration with various systems, often crosscompany Web front end Various order management systems Various ERPs Level of automation for package handling More complex returns 18

20 Single point or multi-point fulfilling? Multiple DCs increases inventory costs, but lowers outbound delivery cost Multiple DCs can lower transportation costs and improve service Asian imports Shorter parcel zones Faster ground shipments However, there are some tradeoffs Need volumes to support to DCs Increase inventory And when adding a second DC the location of the first also needs to move (in this case into the northeast) Sources: UPS website; TandLA expertise Example UPS Zones 1 DC Example UPS Zones 2 DCs

21 How to handle returns? Get ready for a lot more of them! Many store based retails have returns in the 1 to 2%% range Discount and in-store liquidation But with ecommerce, five to ten time higher returns is the norm How will it look on me? What size? Process to re-sell versus send to liquidation or trash? Process in fulfillment center or separately? keep the inventory where you can restock? Keep returns processing out of the way of the pick/pack and ship operation? How not to have transport costs for returns eat you alive? Small one-off shipments are high cost Sources: TandLA experience 20

22 Shipper Volume Designing an ecommerce supply chain is complex, the costs will change as volume grows Largest cost categories are outbound shipping and product handling and storage cost At low volumes even inbound cost jump up Increasing volume can lower supply chain costs by about 20% At what point should additional DC s be added? Estimated Sample Cost/Unit Single Product, Single DC, DDU Delivery Low Medium $0.84 $0.84 $3.84 $3.32 High $0.84 $2.73 $4.12 $3.79 $4.51 $9.19 $8.28 $7.36 $0 $3 $6 $9 $12 Cost Per Unit Inbound Storage/ Handling Delivery Sources: UPS and USPS websites, FedEx financial filings, client fulfillment economics, Stern School, Port of LA/LB; TandLA estimates 21

23 The supply chain design will be driven by more than cost service levels and speed of delivery are critical Low volume and rapid delivery is extremely expensive any way you do it One DC and Express Two DC s and mix of next day Ground and Express Small items can benefit from Parcel Select products Package density is also critical (DIM impact) 1 Unit; 1 DC; Grnd Delivery 2 Units; 1 DC; Grnd Delivery 2 Units; 2 DCs; Grnd Delivery 2 Units; 2 DCs; DDU Delivery Estimated Sample Cost/Unit High Volume Shippers $2.73 $1.92 $1.92 $3.63 $3.45 $1.92 $1.86 $4.38 $6.56 $6.39 $5.97 $10.13 $0 $3 $6 $9 $12 Cost Per Unit Inbound Storage/ Handling Delivery Sources: UPS and USPS websites, FedEx financial filings, client fulfillment economics, Stern School, Port of LA/LB; TandLA estimates 22

24 So how can you make supply chain a central part of your corporate strategy? Is your product portfolio optimal or have you averaged supply chain cost and hidden loser SKU s? Can we use supply chain speed and consistency as a competitive advantage? In ecommerce, the supply chain and the web site are the only customer interfaces, and the supply chain is the last impression is your supply chain delivering the customer experience you want? Can you afford to add an ecommerce channel? Can you afford not to? What is the best way to do so without it eating you alive? Lee A. Clair lclair@tandla.net