More Amazon Effect For Omnichannel And The Future—Systemic Inventory Rich vs. Inventory Velocity
Inventory rich is a condition enjoyed by many retailers, manufacturers, and wholesalers. Much of this is due to systemic inventory. And the condition is becoming more significant as firms deal with the differing demands of omnichannel and with the accelerating requirements of lean for supply chain stakeholders.
The challenge is compounded for companies that source and/or manufacture globally with their large supply chains.
Many firms are focused on supply chain finance, just—in-time, vendor managed inventory, buy-sell, optimization, and other programs. These supply chains are based on the end positioning for inventory; they are not based on how fast inventory moves. Turns and days on hand--and liquidity--are not good.
Numerous current operations do not have inventory velocity which creates financial and customer benefits. Systemic versus velocity is a choice derived from using the old supply chain versus designing and implementing the new supply chain.
There is inventory throughout the supply chain—multi-echelon distribution, in-transit, raw, work in progress—everywhere. The situation is a factor of the way, for multiple reasons, that present supply chains are designed and managed in a somewhat piecemeal fashion, instead of in supply chain totality.
Omnichannel did not cause the condition; it has compounded it. Additional channels have increased uncertainties with demands and how to meet and allocate products to satisfy the customer buying options. Some have taken this to mean carrying more inventories to handle channel demand ambiguities. This is especially interesting in that companies can have too much inventory; yet these firms may also be out of stock of items.
Unsold and unnecessary inventory can negatively impact profits from intense promotions and steep markdowns to sell it. Reactions to these situations can, in turn, cause purchase cutbacks in future quarters that limit inventories, resulting in lost sales.
Supply Chain Reality. These points lay the foundation for many excess inventory problems that run through supply chains, regardless of industry or market.
- Complex international inbound supply chain.Whether the parts and products are coming from suppliers or company factories, if they are located outside the home country, the global supply chain is the most multifaceted and demanding. The distance and flows among different countries set the stage for what happens throughout supply chains.
Add in that there can be 15 (or more) parties involved with an international order and shipment. Each party, to varying degrees, operates within its own practices; there is limited real integration from a supply chain perspective. Even more, one of the key parties--container lines-- brings vagaries to the supply chain execution with schedule times and reliability.
The complexity is increasing. Additions and changes to suppliers, origins, products, production and factory trade-offs—and more—make understanding and managing the supply chain challenging.
- Supply chains within supply chains. Every firm has a supply chain—and more. The idea of a single company supply chain is an illusion. In actuality, there are supply chains within supply chains.
Think of the Mississippi River in the US. It is very long and runs from Minnesota down through Louisiana and ends in the Gulf of Mexico--the Mighty Mississippi. But the river is not a single entity. It is fed by 7000 streams, water basins, and rivers to form one river that actually is part of 31 states and 2 Canadian provinces. That is how supply chains are—many branches of inventories—and how they have evolved.
Supply chains, as a result, are more complex than is often presented. Not recognizing that actuality means that supply chains can be under-designed and under-managed.
- Emphasis on the downstream. Much supply chain discussion involves some part of the domestic supply chain—distribution centers, transportation and such. The exception may be international transport. This is similar to lean supply chain management which focuses much within the four walls of warehouses and factories. With the emphasis, companies can be operating in a fulfillment mode and looking at the last mile and other topics that do not address inventory excesses. By the time inventories reach warehouses, they are often at excessive levels.
These shortcomings may create a myopic interpretation of supply chain management design, operations, and performance. With all the focus on the downstream, the excess inventories issues exist. These could have been mitigated with a comprehensive view of the supply chain.
- Uncertainty. Inventory is a buffer against uncertainty. There are issues with demand ambiguity, network design, and inventory positioning. But there is another driver of inventory uncertainty—time—the amount of time it takes to replenish items. International sourcing has long lead times that also have variability. The additional time and inconsistency increase inventory requirements and compound uncertainty--and the amount of inventory that is carried.
Omnichannel with e-commerce is retail duality. There are two very different ways to reach customers. One is the traditional store approach which requires customers to go to the store to purchase products from stocked shelves. The other has retailers delivering many individual orders to many individual customers.
It is customers going to retail stores; and it is also retailers going to customers via e-commerce. The change is expanding from mass merchandising to tailored direct selling. Retailing is transforming from being about stores to being about a delivered service.
Retailers struggle with omnichannel. For example, they are dealing with slowing store sales and are closing stores. Yet, some use a click-and-collect delivery practice to get customers into stores while, at the same time, shutting them. This presents a contradictory message and can raise questions as to the customer experience that underlines the new retailing.
Omnichannel and e-commerce have changed demands, expectations, and requirements. Order Immediacy—delivering e-commerce orders within 48 hours or less—is the customer experience. Traditional retail supply chains were built to stock stores, not perform order immediacy.
Original supply chains for e-commerce were built to ship parcel orders, not deliver quickly. E-tailers and omnichannel retailers may transition to Tier 1, 2, and 3 based on how they respond to the new retail reality. Customer expectations are delivery of their orders within 2 days—or less—of when they placed it. Retailers and e-tailers that are not able to deliver orders quickly may be looking at their futures in rear view mirrors.
Amazon started the order immediacy customer expectation. And they are not stopping. It is not fulfillment exercise of shipping quickly from distribution centers. It is about the supply chain and how to move products through it—not just ship from warehouses. Order immediacy is driven by supply chain management—the new supply chain management.
They started the idea of drones for order deliveries. Around the world, they pushed same-day deliveries, developed dash buttons, have leased airplanes, started a freight forwarder in China, may be buying container ships, and are looking at using 3D printing delivery trucks; —all for easy ordering and to speed movement within their supply chain and to customers. Faster and faster everywhere. It is not just about last mile delivery.
New Supply Chain.
Retail duality requires and is driven by supply chain duality--to deal with stores and moving cases and pallets of products and to deal with many, individual customers and meeting their satisfaction expectations. The new retailing is about supply chain management. And that new selling requires a new supply chain to drive and create the customer experience. Trying to force standard retail supply chains do more than they were designed for is not agility; it is a failing attempt to change and grow. A one-size-fits-all supply chain does not meet the differing requirements of omnichannel.
Standard supply chains cannot respond to the new retailing. It requires the new supply chain. Otherwise retailers will be buried in inventory along the supply chain, while not meeting providing the customer experience.
The New Supply Chain drives new performance requirements and moves products quickly through the entire supply chain. There are key, interrelated elements that address systemic excess inventory and satisfying customer requirements. The New Supply Chain directs and manages structured complexity to deliver the Customer Experience.
In turn, to respond to order immediacy by retailers and e-tailers, manufacturers must accelerate production and supply chain capabilities. They also need the new supply chain with its embedded lean capabilities.
Elements of New Supply Chain. It extends upstream, compresses, advances integration, and speeds the movement of inventory/products. The result is reduced inventory and improved performance.
« Inventory Velocity. Much inventory sits—in storage of warehouses and other places. No value is added. Products are supposed to flow. From a lean view, this is waste. Moving inventory more quickly through the supply chain is critical to the omnichannel supply chain, to lean, and to good liquidity practice. Velocity is important to mastering demand ambiguity. With the new supply chain, inventory velocity is escalated to inventory velocity squared.
Velocity means that companies can move inventory faster and runs counter to what some firms do by adding to their already high stock levels—and low turns that add to liquidity and inventory problems. Companies face being left behind by order immediacy that will be required across borders, industries, and markets.
Not every product requires velocity. Selection of products/SKUs is needed. The targeting can be based on analytics, segmentation, or other methods. Inventory velocity mitigates the tendency toward carrying more inventory, while increasing service.
« Time Compression.Removing excess time is important to the new supply chain for inventory velocity. Unnecessary time exists throughout the supply chain. With so many parties involved in the supply chain, it is caused by internal and external actions.
Compressing time means being able to react more quickly to sales vagaries—and, in turn, realizing inventory yield maximization. Identifying areas of extra time is needed in to compact it. Value stream mapping of the supply chain is an excellent tool to find time compression opportunities and reliability improvement. This is especially true for the upstream sector where much of the total time occurs.
It may also impact outsourcing. There should be a shift from outsourcing with logistics providers to instead using supply chain providers. This means a new breed of outsourcing firms who can compress time—and positively impact inventory velocity. This is a new outsourcing performance metric—contribution within the supply chain, not for a logistics activity.
« Extend Supply Chain Upstream. Upstream is where the supply chain begins. Extending the supply chain is a logical result of recognizing the supply chains within supply chains and managing its complexity.
Supply chain management pulls, not pushes, inventory. Extending the supply chain is a natural action to doing this. It does not expand the definition of end-to-end supply chain management, it actually performs it. In fact, end-to-end recognizes that suppliers are not an end. Suppliers have supply chain complexity and supply chains within supply chains.
The omnichannel supply chain can have a pushback to suppliers for more and faster deliveries. This means more than implementing procedures for supplier compliance. Upstream extension implements the New Supply Chain with key suppliers. It is designing and managing the entire supply chain, not sectors of it, not logistics functions of it. The extension is into the supply chains of suppliers. Identifying key suppliers can be accomplished using segmentation or supply chain risk analysis.
This upstream move redefines supplier relationships and identifies the previously unknown, hidden supply chains—the supply chains of suppliers. It is the secret sauce of inventory velocity and is a de facto vertical integration of supply chains. The result is that extending the supply chain shortens it by removing unspecified parts, compresses time, and drives inventory velocity to inventory velocity2.
« Advanced Process and Technology Integration.The supply chain process flows horizontally across the internal organization and externally to suppliers and customers. The horizontal direction contrasts with organizational pyramids with its vertical emphasis and implicit silos. Also factor in all the stakeholders and participants involved with supply chains.
Supply chain complexity and breadth has gaps in the process; it has gaps in technology. These gaps—black holes--mean a loss of visibility and of compressing time and building velocity. Total process and technology integration is integral with extending the supply chain upstream.
Much technology reflects sections of the supply chain. WMS, TMS, and other technologies address pieces. They are somewhat standalone pieces of select activities and do not provide visibility and control of the entire supply chain. Integration is about visibility; but visibility is not enough. Expanding digitization for the total supply chain is needed to drive and manage it and to support the process.
The world is in the early stages of a global supply chain revolution. The Amazon Effect. The Internet of Things. Platform Businesses. The new supply chain will grow beyond omnichannel. It will cross into other industries and markets and will incorporate supply chains of products, information, and finance.
All the elements of the New Supply Chain tie together. They are not separate steps. They are not to be selectively chosen or excluded. These are inter-related. The New Supply Chain brings performance excellence.
Similarly for manufacturers and others, moving to the New Supply Chain provides structure for the advanced lean requirements that come with the new operating reality.
Think about what will happen when virtual reality becomes virtual retailing and what that will requires supply chain management with larger order sizes and greater product mixes. Or, as retailers struggle, what will happen if and when brand-name manufacturers enter e-commerce markets? Retailing is being continuously redefined.
Moving to the New Supply Chain is required for the new global reality of doing business. It is not a choice.