Optimizing The Supply Chain Is More Than Minimizing Costs
By Jim Tompkins
CEO of Tompkins International and MonarchFx
Tompkins International has been disrupting traditional supply chain thinking for over three decades. In a recent white paper, Achieving Revenue Gains from Distributed Logistics, we again extend the thinking of the role of supply chain and the business impact on supply chain. In addition to the white paper, we wanted to discuss several other key elements that have made a major impact on the supply chain.
Traditionally companies looked at supply chain as an opportunity for cost reduction. The reason for this is before we had the bigger picture of supply chain, the supply chain was made up of individual processes and activities that were operated independently. These independent processes were in silos and required that each of these processes be optimized. At the highest level these processes were the supply chain mega-processes of:
Before adopting the supply chain perspective, the objective was to optimize these individual processes within each company (within each link). This initial approach of viewing these processes independently resulted in optimizing the processes, but clearly sub-optimized the performance of the link. Therefore, the early focus of supply chain was to go beyond what had been done and not to optimize the individual processes, but rather to optimize the integrated company’s performance through cost reduction. This beget huge cost reductions and thus became the thrust of traditional supply chain organizations.
The savings resulting from supply chain from the year’s 2000 through 2010 were huge. Organizations extending their view from just their link to include their suppliers and their customers, then extending it again to their customer’s customers and their supplier’s suppliers, etc. All of this done to eliminate waste and reduce cost. From 2010 through today, organizations are still heads-down on taking costs out of their integrated links to optimize their total supply chain.
Starting at around 2015 a new awareness came to pass, optimizing the supply chain was more than minimizing costs. Organizations began to see that as their supply chain gave them the opportunity to provide new and better service, the supply chain was not only a tool for cost reduction, but also for revenue growth. A company’s enabled supply chain saw opportunity for higher revenue in personalization, reduction of friction in the buying process, and delivery to their customers’ doors. These enhanced supply chain capabilities resulted in the objective of supply chain evolving from cost reduction, to cost reduction/revenue enhancement, to today’s most modern view of profitable growth. Profitable growth is a result of the net of higher top line (revenue) and lower costs, resulting in higher profits.
The key to these results is the distributed, multi-client, automated ecosystem:
- Cost Reduction: The target of MonarchFx is eCommerce, although MonarchFx also has the potential to support wholesale and store replenishment.
- Transportation Costs
- Transportation costs are lower for the final delivery as the distance traveled to the consumer is less in a distributed network.
- Transportation costs are lower for the entire network as volumes are higher in a multi-client network than for any one client.
- Fulfillment Center Costs
- Fulfillment center costs are reduced as higher levels of automated robotic material handling are justifiable to multi-client fulfillment centers.
- MonarchFx requires no investment costs and companies only pay for the capacity they use, therefore they are more economically able to handle peaks.
- Overhead Costs
- Due to the multi-client nature of MonarchFx the overhead costs to each client is less.
- Due to the automation, fewer direct labor employees are needed and less overhead is needed.
- Transportation Costs
- Revenue Enhancement: As is presented in, Achieving Revenue Gains from Distributed Logistics, the estimated sales growth by locating products closer to customers will be:
- For 2018 between 6% and 10%
- For 2019 between 8% and 12%
- For 2020 between 10% and 15%
- This sales growth is a result:
- Lowering abandoned carts
- Reducing returns
- Enhancing customer experience
This revenue enhancement is huge and can be achieved through the distributed logistics ecosystem of MonarchFx. MonarchFx will absolutely provide for cost reductions, revenue enhancements, and a significant increase in profitable growth for all retailers and brands who decide to add MonarchFx to their Direct-to-Consumer (DTC) logistics ecosystem.
Faster Delivery Times
If eCommerce and Amazon had not evolved to free two-day delivery of products to the majority of the country, the topic of increased revenue resulting from quicker delivery would not be a discussion. In fact, if it were not for Amazon creating Amazon Prime in 2005, the speed of delivery would not be on the table today. Also, if Amazon had not invented Amazon Prime, we believe the history of eCommerce would be drastically different than it is today. Bezos promising people free day two-day delivery and delivering on that promise, is what got people willing to switch from going to a store and instead shopping online. Two-day and quicker delivery is what opened the flood gates for eCommerce.
Distributed Inventory Flow Forecasting (DIFF)
It is well known that as you increase the number of inventory stocking locations, you increase the amount of safety stock. This, often called the square root principle, says that as you go from one stocking location to two, you will increase the amount of safety stock by the square root of 2 or 1.414. If you increase from one stocking location to three, you will increase the amount of safety stock by the square root of 3 or 1.732, etc. If instead of increasing stocking locations you create distributed logistics by maintaining the same number of stocking locations, only increasing the number of forward picking locations, you will not increase safety stock nor the total inventory. The forward pick locations hold small amounts of inventory that is replenished frequently, increasing the flow of inventory, but not the stock. It is flow vs. stock. For example, at MonarchFx we use a tool called DIFF to increase the flow of inventory to forward pick locations, without increasing the overall quantity of inventory.
The logistics costs are less when the retailer stocks the shelf and the customer does the order picking and final delivery to their home. It is also clear that no retailer is large enough to do distributed logistics on their own. They do not have adequate volume to compete with the combination of Amazon the retailer and Fulfillment By Amazon (FBA). Well over half of FBA’s shipments are for non-Amazon retail fulfillment, therefore FBA has more than twice the volume of picking, packing, and delivering as the retailer Amazon.
To cover the country and to try to compete with Amazon, retailers and brands must either increase their logistics cost, deliver slower than Amazon, or join an organization like MonarchFx, where their volume is handled along with many other retailers to achieve high levels of economies of scale. If they handle DTC logistics through an organization like MonarchFx they can then reduce their store footprint or add features to their stores making shopping more entertaining. If they reduce their footprint this will reduce their store operating costs to make up for the higher DTC logistics costs, if they make their stores more entertaining that can increase their revenue. The discussion gets back to the basic issue of The New Retail. If you try to add the logistics cost of DTC, not changing the way you do DTC and changing the way you do store logistics, you will have a reduction in margin. The only way to fight this trend is to alter how you do DTC and store logistics.
Speed of Delivery
From 2014-2015 many of the leading retailers altered their logistics network so that they could offer two-day DTC delivery to over 90% of the U.S. This was expensive, but a valent effort to try to catch up with Amazon.
Unfortunately, while retailers were pursuing this path, Amazon was deploying a network that would give 30% of the country same-day delivery, 40% of the country next-day delivery, and the rest of the country two-day delivery. The leading retailers spent a significant amount of capital that would literally leave them “a day late and a dollar short” or in general providing logistics that were too little, too late, or more literally a day or two late after spending hundreds of millions of dollars of capital. Therefore, the faster and less costly delivery challenge is a race no single retailer is going to win. The fact is, Amazon is brilliant as they have embraced the network effect (the more who participate the better it gets) and economies of scale (the more who join the cheaper it gets) to the point that no company can duplicate the ability of the combination of Amazon the retailer and FBA. The only option is for retailers to join together into an automated, multi-client, distributed logistics ecosystem to match the power of the combined Amazon the retailer and FBA.
As we look to 2019 and beyond, we will find consumers expect free delivery and free returns in all large cities on a same-day basis, in medium sized cities on a next-day basis, and in rural areas on a two-day basis. By 2023 some of what today we call rural, will become a medium sized city and some of what we call medium sized cities will be considered large cities. The speed will not be affordable for retailers who try to build their own solution but will be very affordable for folks who join an ecosystem designed for high speed and low cost.
The Disruption Cycle
There are two differences between the disruption cycle I recently described in Creating Competitive Advantage with Innovation and Disruption and my view of DTC and eCommerce. The first is in the video I assume that innovation and disruption that will occur, will be done by different entrepreneurs continuing to improve the value proposition of a business sector. These entrepreneurs disrupting the current established firm, becoming the new status quo, and taking over the title of industry leader, then only to be disrupted by another entrepreneur. In commerce today, most of the innovation and disruption is being done by Amazon. They are disrupting themselves and thus doing the best job at profitable growth and value creation. The second difference between the disruption cycle and my view of DTC and eCommerce has to do with the scope of the discussion. The disruption cycle assumes the scope of a disruption cycle is consistent and what we are disrupting is the same business. This assumption is almost always what you find. The difference in the DTC and eCommerce space is the scope keeps changing and growing. The original scope was just eCommerce for books then it evolved and expanded into the everything store. At the same time not just expanding in the U.S. but globally. Then continued to not just expanding in products but also services. Last, not just online, also through The New Retail. The disruption cycle described is a single layer evolution of reinvention. What is now being played out is the everything, everywhere, universal, and ubiquitous layers of evolution of reinvention that is much more dangerous than the disruption bear of our latest video.