What I’m watching in 2016
December 28, 2015
This time of year, every reporter worth his or her salt likes to make predictions about what to expect in the coming year. Based on stories in the Wall Street Journal over the last week or so, I expect four trends to dominate supply chain and materials handling projects in the coming year.
It’s all about shipping: Following the 2013 holiday season, when UPS and FedEx were overwhelmed with holiday orders, I wrote a column more or less stating that retailers, distributors and transportation providers were letting their mouths write checks that our rears can’t cash. My point: We were training shoppers to place holiday orders later and later in the shopping season with promises that, like Santa, the packages would come down the chimney in time to make it under the tree on Christmas morning. The problem, I pointed out, is that we simply didn’t have the infrastructure to deliver all of those packages, even if materials handling systems can get them onto the back of a truck before the order cutoff time. What’s more, I noted that you can’t fight Mother Nature. “The lesson: No matter how much UPS, FedEx or the USPS plans for the peak holiday season, planes, trucks and delivery personnel are subject to the same mechanical breakdowns and weather delays that strand the rest of us.”
Frankly, I took a lot of flack from folks who argued that better materials handling systems would solve the problem or that I simply just didn’t get it. Fast forward two years, and I’m reading headlines in the Wall Street Journal, like “FedEx Misses Some Holiday Deliveries” and “Amazon Seeks To Ease Ties With UPS.” The story is the same as it was two years ago. Despite significant investments in equipment, people and sophisticated planning systems, the parcel carriers were once again on the short end of the stick, compounded once again by severe weather. Something else is happening: Those increased volumes have been a blessing and a curse to everyone. While UPS’s top line is growing, its costs to deliver those packages is growing even more, impacting its bottom line. The Wall Street Journal reports that the average cost of handling a parcel last year was about $8, up from just $6.50 in 2000. Meanwhile, the Journal reports, shipping now accounts for 11.7% of Amazon’s revenue, up from 10.4% a year ago. Meanwhile, Amazon continues to expand what it offers to customers, forcing every other retailer to play catch up – and see their bottom lines shrink as well. That is driving Amazon to explore its options, like launching its own delivery fleets and leasing its own cargo planes.
Perhaps I still just don’t get it, but I’m not sure how any of those moves are going to lower delivery costs or beat Mother Nature at her own game. What I do know is that what we do today is not sustainable if industries like retail are going to maintain their traditional margins and meet the growing customer demand for home delivery. This could be the most significant issue facing manufacturers, distributors, retailers and their transportation providers in the years to come.
On the shelf or online: This is related to the above challenge. Now that the web is driving the growth in sales while sales in traditional stores are flat, retailers are facing a new challenge. Where do I place my inventory to meet demand and still turn a profit. The Journal just ran a story on the impact of the fast-selling Yeti travel mug on retailers like West Marine. Since the majority of its new customers are online, West Marine allocated “the majority of its Yeti cups to fill online orders,” the company’s chief executive told the Journal. The good news: The retailer sold through its inventory. The bad news: Because of free shipping it made very little money, especially when compared to the profit it makes selling in its store. Or, as a PwC analyst was quoted: “Everybody loves to sell products that are in demand. The important thing is that the products are profitable.”
In today’s retail environment, that’s easier said than done. In the coming year, I expect retailers to get more sophisticated about where inventory is placed in their networks and from where they fill orders.
Procurement’s new role: Think purchasing, and most people think of someone whose job it is to beat up a supplier over a nickel. However, as global growth stalls and companies are forced to control costs to generate profit, sourcing and procurement could take center stage. It won’t, however, be about beating up suppliers over nickels. Instead, procurement’s new role will be to forge new relationships with suppliers or look for the next China for new sources of supply.
That’s my takeaway from a Journal article on how industrial manufacturers like GE and United Technologies “are squeezing suppliers for lower costs and shifting existing factories to cheaper locales as they seek to maintain profit margins in …. A prolonged period of slow global growth.” The Journal notes that UTC plans a $1.5 billion restructuring effort through 2018 that could include closing or shifting production related to “half of the company’s 42 million square feet of manufacturing space.” “The weak link in our whole manufacturing process remains the supply chain,” UTC’s chief executive says. Meanwhile, GE is deploying strategies like purchasing small suppliers that provide critical parts or services. None of those strategies work without a strong procurement practice that is integrated with other supply chain processes.
Are you resilient: For years companies focused on supply chain risk management, or, how can we address the things that we believe could possibly go wrong in our operations. That’s a great first step, but as we all know from Murphy’s Law, no matter how well you plan, things are still going to go wrong that you didn’t anticipate. The real measure of a company is its resilience, or the ability of its supply chain to bounce back from the unexpected. One need look no further than Chipotle to see the impact a supply chain issue – in this case tainted products that led to E. coli outbreaks in numerous locations – can have on a company’s reputation. The next step is whether the Mexican food chain is resilient: Can it revamp its supply chain and regain the loyalty of its customers. I expect other companies to ask similar questions.
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