the supply chain revolution - tandlatandla.net/sites/default/files/chess - supply chain...3 supply...

THE SUPPLY CHAIN REVOLUTION

L E E A. C L AI R

O C T O B E R 7 T H , 2 0 1 5

Transportation and Logistics Advisors, LLC

1Transportation and Logistics Advisors, LLC

Agenda

Thinking About the Supply Chain Strategically

eCommerce versus Traditional Supply Chains

Complexity and Challenges


So what is a Supply Chain anyway?

3

Supply chain costs are typically over 20% of total store-based retail — multiple times retailer operating margins

Source: US Census Bureau; TandLA experience and model estimates

Est. 2014 US Store Retail Sales

Cost Buildup

Total $4.33 T 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

Est. Retail Store Supply Chain Cost

Supply Chain

21%-23%



Traditionally, supply chain management has been about how to move the products from supplier to customer

Thinking Results

• 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

• 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


But today, the supply chain is beginning to be viewed as a “supply network” and is complex with many alternatives

Manufacturers

Wholesale Distributors

Suppliers

Customer Demand

Info

GoodsContract Manufacturers

Logistics Providers

Co-Packers

Retailers

Supplier

PortalsBI-

Collaborative Analytics & Scorecards

Customer

Portals


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


Agenda




8

eCommerce is growing fast, but still only about 7% of US retail sales

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

0

100

200

300

400

500

2010 2011 2012 2013 2014 E2015 E2016 E2017

Source: US Census Bureau; eMarketer, April 2014, Factiva; US Census Bureau

US eCommerce Sales by Year ($B)



In housewares, eCommerce penetration is about 15.5% —higher than for overall retail, but differs by product

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

26%

25%20%

15%

9%5%

Kitchen Electronics Personal Care Appliances

Floor Care Appliances Cookware/Bakeware

Tabletop Kitchen/Dining Textiles

2014 US Housewares Sales

by Product Category

Source: IHA quarterly Housewares Marketwatch report; IHA 2014 State of the Industry Report; TandLA analysis

10

In eCommerce, supply chain costs are measurably higher than for store based sales — estimated 30% to 33% of eCommerce sales

Source: US Census Bureau; TandLA experience and model estimates

Est. 2014 US eCommerce Sales

Cost Buildup

Total $299 B Category % SalesSpend

($B)

• Inbound 8% $24

• Fulfillment 5% $15

• Inventory 6% $18

• Outbound 6%-9% $18-27

• Returns 4.5% $13

• TOTAL

Supply Chain

29.5% -

32.5%

$88 -

$97

Est. eCommerce Supply Chain Cost

Supply Chain

30%-33%

• Assumes a well run supply chain

• If sub-optimal, costs escalate – fast!


11

So why are eCommerce supply chain costs so high?

Supply Chain

Cost Element

Traditional

Retail

eCommerce

RetailDifference Why?????

Inbound

Freight

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% -

32.5%

5.5 to

12.5%

YES supply chain costs

go up 20 to 50% and

can go up more!



Agenda





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?


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?


Critical problem — eCommerce turns a 40,000 pound truckload to a store, into 10,000 four pounds shipments to homes

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

$0.39

$0.18 $0.11

$0.03 $-

$0.25

$0.50

$0.75

$1.00

$1.25

$1.50

$1.75

2 to 5lbs.

20 to 50lbs.

500 to600 lbs.

2000 to2500lbs.

40,000lbs.

Parcel

LTL

Truckload

Example Relative Shipping Economics Per

Pound (by shipment weight)

$1.74


How and where to fulfill? Most companies are set up to ship pallets, not hand picked items

Traditional Warehousing eCommerce Fulfillment

Outbound

Shipment

Volume

• DC to DC/store

• Low volume of large

shipments (TL or LTL)

• DC to consumer

• High volume of small shipments

(parcel)

Warehouse

Operations

• Stacked pallets, moved

with fork lifts

• Staging of multiple pallets

to move into trailers

• Limited handling or

packaging ― some

mixing, shrink wrapping

• At individual product level

• Manual picking

• Can be highly automated picking

systems with large capex

• Packaging lines

• Trailers of packages for parcel

carriers


Some customers want same day delivery – only viable with local fulfillment

Advantages Challenges

• Highest speed

to customer

• Best alternative

to physical

shopping (“need

it now”)

• 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


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 cross-company Web “front end” Various order management systems Various ERPs

Level of automation for package handling

More complex returns


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 trade-

offs

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)

Example UPS Zones – 1 DC

Example UPS Zones – 2 DCs

5

2

4

5

5

4

5

5

2

3

4

2

8

8 6

5

4

4

4

4

3

5

8

7

Sources: UPS website; TandLA expertise

24

6


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


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?

$0.84

$0.84

$0.84

$2.73

$3.32

$3.84

$3.79

$4.12

$4.51

$0 $3 $6 $9 $12

High

Medium

Low

Cost Per Unit

Inbound Storage/ Handling Delivery

$9.19

$8.28

$7.36

Ship

per

Volu

me

Estimated Sample Cost/Unit

Single Product, Single DC, DDU Delivery

Sources: UPS and USPS websites, FedEx financial filings, client fulfillment economics, Stern School, Port of LA/LB; TandLA estimates


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)$1.92

$1.92

$1.92

$2.73

$1.86

$3.45

$3.63

$6.56

$0 $3 $6 $9 $12

2 Units; 2 DCs;DDU Delivery

2 Units; 2 DCs;Grnd Delivery

2 Units; 1 DC;Grnd Delivery

1 Unit; 1 DC;Grnd Delivery

Cost Per Unit

Inbound Storage/ Handling Delivery

$10.13

$5.97

$4.38

Estimated Sample Cost/Unit

High Volume Shippers

$6.39

Sources: UPS and USPS websites, FedEx financial filings, client fulfillment economics, Stern School, Port of LA/LB; TandLA estimates


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

[email protected]

312-961-4403

mailto:[email protected]

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