Supply Chain Roundtable July 2012

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Once very much at the centre of consumer activity, the high street is rapidly losing ground to online retailers. This is not the first time traditional outlets have come under threat, however, the ease and convenience of online shopping has drastically altered consumer behaviour. These changes have radically affected supply chain strategy.The reduction in stock heading to the high street has increased supply chain costs and created a difficult environment for bricks and mortar retailers. This has created a vicious cycle in which retailers are selling fewer products but having to pay higher prices for deliveries. The decline of the high street in its present iteration seems inevitable.4C Associates brought together several leading supply chain professionals to explore these issues and others, currently at the forefront of retail supply chain. Topics discussed included competitors collaborating, dead end logistics models and the apparent might of Amazon.
Collaborating out of Necessity
The decline of the high street presents numerous opportunities for innovation. Businesses which would never have considered working together in the past have now been brought together through necessity. This is particularly relevant for smaller retailers who are more affected by supply chain price hikes. London authorities have initiated projects to encourage collaboration although attendees questioned whether enough was being done.

Fixed delivery times are currently being used to force retailers to work together, however, this lack of flexibility can cause problems. As customers increasingly come to expect rapid access to goods, retailers need to be able to offer as many options as possible to retain their clientele. There is currently an immense amount of pressure on both vendors and logistics, and an inflexible system will not help either navigate through the current financial situation. The very function of the high street is also changing. More and more customers are using retailers as “show rooms” for goods. People are increasingly visiting shops to test and try on items which they then purchase via an online retailer at a lower price. This new behaviour could prove advantageous for companies able to consolidate stock.“If I were a manufacturer, I would be very uncomfortable if the only outlets left to sell to were the huge chains.”The scenario also opens the doors for collaboration between smaller retailers and manufacturers. The camera industry, for example, would not be well served by the disappearance of the more specialised shopping outlets. If these smaller shops were allowed to go out of business by companies such as Canon, the industry would be overly reliant on Tesco and Dixons.

 

An important distinction needs to be made between products which consumers are happy to buy online and those which require hands on interaction. Examples given included clothes, which need to be tried on, certain electronic products, and, more expensive items such as furniture. Certain cultural differences also need to be taken into consideration, French customers, for example, are less likely to order food online.Cut Throat Models and OpportunitiesOne of the most discussed themes was the lack of sustainability of the current business models employed by many businesses. The late cut off time for next day deliveries, currently in place at many major retailers, was singled out as unmaintainable. The issue is that as delivery prices become increasingly low, logistics companies are forced to reduce their prices further in order to remain competitive.“UK parcel deliveries are far too cheap”There was a general consensus that the industry would not remain viable in its current state. Some felt this was an indication that the retail sector was in decline whereas others saw the current environment as a great opportunity to bring about positive change. The high street model has come under threat before. 15 years ago the emergence of out-of-town shops was seen as the end of the high street, yet the model remains in place.“The industry is not in decline, it is evolving, years ago people used to complain about Tesco’s entry into the market”One of the major issues facing retailers is balancing the growth and decline of their online and bricks and mortar businesses. There is a need for companies to reconsider their approach to logistics as the current model is not able to respond to current consumer demands.  A multichannel strategy was highlighted as a potential solution.

Aurora Fashions, the parent company of brands such as Oasis, Coast and Warehouse, introduced a decentralised stock management system, “Anywhere Everywhere”, in 2011. The concept is based on using stores as “holding shops” and moving stock from one shop to another depending on demand. This innovative system, which requires excellent stock visibility and sophisticated IT systems, saw product availability increase by 28% and sales by £2.5m in six weeks.

“Customers hate being told they have to drive 15 miles at their own expense to pick up a product they expected to receive at home”

Many retailers have begun experimenting with the “store model” in a bid to avoid home deliveries. Research has demonstrated that customers are  extremely aggravated by the discovery of a note informing them they were not home at time of delivery. The home delivery model was described as fundamentally flawed and unsustainable.

Internet Shopping and the Emergence of New Models

“Some retailers want everything for nothing; providers are fools to do exactly what they ask”

One attendee expressed his frustration that Amazon, a company with no direct route to market, has been allowed to take charge of the sector. 3PLs have competed with each other in such an aggressive way that no one company has emerged as a winner. The price war, instigated by businesses such as Amazon, has forced operators to cut their costs to unsustainable levels.

The retail sector has responded to the challenge brought about by online retail by reviewing their supply chain strategy. A number of models have emerged which focus on providing flexibility and choice to the consumer. One of the most interesting is currently employed by Next. The UK based retailer offers exclusive items and discounts online, with free next day delivery to any of its 500 selected stores. After picking up the product, customers have 30 days to decide whether or not to keep the item and pay.The click and collect model allows businesses to take advantage of their retail presence and entice customers picking up items to buy other products. This model offers numerous advantages and has been taken even further in Germany with Hermes ParcelShops. The German supply chain management company has more than 14,000 ParcelShops across the country. These “receiving offices” are often local shops which have signed an agreement with the company.Discussing whether or not this system could operate in the UK, one participant explained that in his view, the process would be expensive to set up and fraught with danger. Firearms and drugs are amongst the items which could be shipped this way. This was not a universally held opinion and one person argued that the Royal Mail is currently managing exactly the same risks. Another attendee felt the issue was one of trust; “People order from Boots and want to collect from Boots because they trust the brand.”“Consumers want choice and therefore all delivery models may well end up being employed. The challenge is for supply chains to adapt.”Each of the discussed models could be used to fill a different niche. Some products are perfectly adapted for courier delivery whereas others are more suited to click and collect models. The main consideration is getting the items into the homes of consumers in the most convenient away possible.  In order to do this sustainably, it is inevitable that a variety of supply chain models will need to co-exist.A Lack of Innovation in Supply Chain?Many retailers have adopted a strategy which is in line with customer demand but not what supply chains can provide. Several attendees suggested that technology is the answer to creating sustainable supply chains. The home delivery model would see its efficiency greatly improved if combined with smart phone technology to plan drop offs.“Customers are ready for a technology driven supply chain but we are not yet optimised for it.”Despite 3PLs often being criticized for a lack of innovation, several attendees felt retail supply chains had coped very well under the circumstances. The retail sector has seen supermarkets go from huge warehouses outside of town to providing home deliveries. UK supply chains in particular have had to adapt to market changes in a short space of time.

“Supply chains aren’t perfect but if you place an order by 10pm, you can expect delivery the next day.”

Tesco in particular was singled out as leading the pack in terms of integrating technology with supply chain. Using advanced databases, the retailer is able to predict the quality of returned items based on the customer. If someone consistently returns items in shop condition, Tesco is able to count pending returns as live-stock and plan their supply chain accordingly. This type of innovative practice may provide the key to creating sustainable and flexible supply chains.

Achieving Sustainability

Offering a variety of delivery options to customers in a sustainable way, emerged as the key issue for retail supply chains. Consumers are increasingly demanding and expect retailers to provide not only a wide selection of goods but also flexible delivery options. In a climate of financial austerity, living up to these expectations has proven extremely challenging and numerous providers have gone out of business trying to undercut the competition.

All parties involved in the retail process must work together in order to design and implement cost effective and flexible solutions. Many companies such as Amazon, Tesco and Next have already begun to adapt to the ever evolving retail space. The high street in its present form is likely to disappear, however, more effective models will be created to take its place. Retail supply chains will play an essential role in determining the future of the sector and will need constant updating to deliver to expectations.

Event Details

On the evening of the 4th July 2012, 4C assembled a group of supply chain leaders from different industries at Maze by Gordon Ramsay, Mayfair. The event was chaired by Ed Ainsworth, 4C’s Managing Director.

Attendees included Dan Curran, Head of Supply Chain at World Duty Free, Phil Duckworth, Operations Development Director at DX Network Services, Michael Durig, Head of Supply Chain and Procurement at Grunenthal, Paul Flanagan, Logistics Operations at Kraft Foods, Ewan French, COO at Barloworld, Calum Lewis, Operations Director at LEGO Company Limited, Maria Mana, Logistics Manager at Marks and Spencer, Rob Riddleston, Head of Transport and Logistics at Barclays, Matthew Sweet, Director of Global Transport Sourcing at CEVA Logistics, Liam Tucker, Operations Director at Hermes, Nick Weetman, Operations Director at IAWS Foods (Delice de France) and Nick Wilkinson, Purchasing Director, Transformational Productivity at PepsiCo.

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