D3 | Dynamic Distribution Disruption Report

How retailers are tackling the challenge of aligning inventory perfectly with fluctuating demand.

By Shisam Bhattacharyya, Sr. Manager – R&D (SAFEXPRESS Group)

Introduction

The rate of change today in retail supply chains is great. Marketplaces,

eCommerce, cross boarder commerce, mobile, social, customer

expectations and Omni channel are all having major impacts on retail

supply chains. Tompkins International is pleased to have partnered

with EFT on this survey, and in quantifying the rate of industry

responses to this rate of change in retail supply chain requirements.

This survey however, not only gets the retailers view, but also the view about

retail from 3PL, manufacturers who do and don’t do retail themselves,

technology companies and non-technology service providers to the retail

industry. So, with over 450 responses this survey presents a wide perspective

on retailers responding to today’s dynamic supply chain requirements.

This report presents meaningful information on the following retail topics:

Demand planning

Aligning inventory supply with customer demand (being demand-

driven) the criticality of supply chain visibility, Omni channel and

supply chain technology

The important impacts on supply chains of final delivery,

eCommerce, reverse logistics and predictive analytics

The opportunities of combining distribution and fulfilment and of

utilizing stores as a part of the eCommerce supply chain.

What is your company’s annual revenue? What best describes your business type?

$0–5 m $5–50 m $50–250 m $250–1 b $1 b +

24.4% 17.8% 14.2% 13.4% 30.1%

What region are you based in?

Europe Asia Pacific USA/Canada 35.2%

32.3% 20.4% Middle East

2.3%

Africa

South America 4.2%

5.7%

Count: 471

23.4% 30.6% 8.7% Retailer or Logistics and Pure-play

manufacturer warehousing manufacturer

that retails service provider

16.3% 21.0%

Technology Non-technology

solution solution provider provider (consultant, lawyer,

banker, etc.)

In total, 144 logistics and warehouse service providers (LSPs) shared their

thoughts on dynamic distribution and inventory management for retailers. This

section includes only their responses to these questions. 84.6% of LSP

respon-dents classified ‘dynamic distribution’ (The ability to align inventory

perfectly with shifting demand) as very important or of critical strategic

importance for their retailer customers. Globally speaking, LSPs are getting

significant demand from their retailer customers on problem-solving,

innovating and driving ROI in the area of inventory dynamics.

However, everything isn’t equal across the globe. In the US and Canada,

some 27% of respondents reported dynamic distribution as being somewhat

import-ant or moderately important whereas in Asia and Europe, these figures

were at 15% and 11% respectfully. As Jim Tompkins outlines in the

introduction, it isthe forces of marketplaces, eCommerce, Omni channel etc.

driving retail supply chains at the moment. Many analysts, including eft, would

tend to rank each of the above regions in terms of maturity that reflects the

results to this question:

1. Europe – only 11% would classify dynamic distribution as anything

less than Very Important

2. Asia/Pacific – only 15% would classify dynamic distribution as

anything less than Very Important

3. United States/Canada – almost 1/3 of respondents would classify

dynamic distribution as less than very important

Look for this trend to shift as we see the biggest Black Friday on record, and

the eCommerce bug start to take the US by storm.

The biggest challenges LSPs face in achieving dynamic distribution for customers

50%

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It’s the fundamental process that underpins how businesses work together across the supply chain. It was also the dominant chal lenge LSPs identified in terms

of achieving dynamic distribution for customers. In addition, processes that play into visibility were also highly-ranked with lack of customer collaboration, not

enough inventory information and inability to plug technology into customers’ systems filling out the top 4 challenges LSPs face. If we define visibility as a

process that requires both technology and collaborative relationship building, respondents are being challenged by the entirety of the process. “In addition,

technology clearly plays a major role in how LSPs interact with their customers. It is short fallings in this area that also underpins the bulk of the challenges faced

by LSPs. New technology platforms are emerging to transform how the industry communicates and makes dynamic decisions,” says Tommy Barnes, president

of Chicago-based Technology Company, project 44. “It’s essential that LSPs and shippers use the data made available through emerging logistics technology to

increase end-to-end visibility, improve operational effectiveness, and drive additional revenue. In essence, the data revolution is hitting the logistics industry

hard, and one of the primary drivers of this has been the retail revolution. The velocity of supply chain has increased as consumers are more and more

empowered to get what they want where they want when they want it. A combi-nation of shrinking margins, stagnant innovation and complacency has meant that many

logistics providers have been caught unprepared. We can expect to see IT budgets rise and leadership and workforce changes as collaboration and technology prove

themselves as key drivers of success for LSPs working with retailers.

The LSP service offering – adequate?

60%

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21.15% of respondents felt that ‘Lacking in service offering’ was challenging their ability to serve retailer customers. As such, we wanted to know which areas LSPs were

looking to expand their service offerings. Reverse logistics was one of the most prominent areas this came about. In his analysis ‘The Titans: Alibaba, Amazon and

Walmart’, Jim Tompkins lays bare the fact that free delivery and free returns are expected by the consumer in this day and age. Logistics

Providers hoping to serve the retailer community – especially the online portion of the industry are going to have to address reverse logistics as part of their offering to

compete.

eCommerce dominates the service offering expansion areas of LSPs. After reverse logistics, online real-time inventory for consumers, online eCommerce portal management,

eCommerce fulfilment, last-mile and same-day delivery all round out the top choices. Having explored visibility in previous questions, we see that this is increasingly necessary

not only for customers but for consumers. The ‘full-stack’ LSP has been growing in popularity along-side the growth of eCommerce. The service offerings selected by LSPs in this

aspect of the report certainly emphasizes a desire to follow this trend as eCommerce portal management and online real-time inventory for consumers rank highly. Asset-heavy

vs. asset-light, tech heavy vs. people business, customer centric vs. consumer centric – are the types of dilemmas facing logistics companies as they structure their

offering strategies moving forward.

Key Takeaways Consumers are increasingly driving LSP expectations LSP strategies tend to focus on: Assset-heavy vs. asset-light, tech heavy vs. people business, customer centric vs. consumer centric The flat nature of the graph indicates a shift towards the ‘full-stack’ LSP

The next 18 months in eCommerce logistics services

70%

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The next 18 months in eCommerce closely fits with conclusions drawn in the

previous graph. End-to-end, full-stack LSPs: ‘from web to door’ are going to

be the future. Respondents overwhelmingly selected this as the directionality

LSPs are going to be taking over the next 18 months. We’re seeing this with

XPO’s inorganic growth alongside many of the other strategic purchases by

Geodis, FedEx and UPS and we continue to see business like Amazon and

Walmart establishing distribution networks akin to logistics ones capable of

achieving certain levels of end-to-end eCommerce.

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Reducing friction in eCommerce logistics was a common theme amongst the

choices outside of ‘full-stack’ logistics providers. These included using the

store as a DC. As an extension, there would presumably be interest in

transforming the store into an FC as well – and even a returns and repair

centre in some sectors. Also included were innovation in urban delivery and

fully-dynamic re-routing of deliveries giving the consumer more power over

where and when they receive their packages.

What is preventing LSPs from gaining a more active involvement in their customer’s inventory?

50%

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While technology can underpin and facilitate many of these innovations, there are plenty that are leveraging existing infrastructure in combination with evolving strategies

and processes to reduce friction. Collaboration and innovation with supply chain partners is critical for LSPs, especially those who need to innovate within the constraints

of a tight IT budget. That being said, this is easier said than done as we’ll see later in the report.

Key Takeaways Full-service LSPs ‘from click to door’ are gaining popularity Non-traditional companies are increasingly wading into providing end-to-end logistics services

These non-traditional players are often doing a really good job at this, underpinning the consumer-centric nature of this service

Technology is not the only factor driving these changes - innovative strategy and rethinking business models are proving valuable

So far, we’ve seen that technology and the building of collaborative relationships have been critical for the successful delivery of logistics services by providers to

retailers. With technology being a budgetary black hole, many LSPs look towards collaboration for helping bridge any visibility shortfalls, drive innovation and maintain

margins. 44.23% of LSP respondents to the survey, however, listed a lack of collaborative relationships/trust as the biggest barrier preventing them from having a more

active involvement in their customers’ inventory. In addition; contract length was cited as another barrier. One of the challenges of a short contract is the inability to

properly establish a relationship in a 12-18 month period. LSPs have to rapidly understand their customers business, objectives and challenges to effectively deliver

services. A tall task, especially in the eCommerce world where there are distinct seasonal demands that an LSP will only get one chance at delivering. As the logistics

industry evolves, we can imagine a world where LSPs not only blend with technology providers but also consultancies so that they can arrive at helping their customers

with ready insight into their business.

The eCommerce solution menu – what services are LSPs providing?

60%

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40% of LSPs are providing Same-day delivery, DC Management, courier services,

last mile delivery and fulfilment/picking and packing. Repairs and urban ware-

housing ranked lowest in terms of solutions offered. This fits with what we’ve seen

in previous analysis as the industry looks more and more to urban areas for

expansion. It also fits in with the notion that reverse logistics was one of the

primary areas LSPs are looking to open services in. Repairs would be a natural

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Progression of this service, especially in such industries as hi-tech retail. In

fact consumer returns management was the third lowest ranking service. In

the coming years, with the push towards full-service logistics providers,

we’re likely to see the numbers in the above chart increase across the

board with new areas such as eCommerce portal management, dynamic

re-routing etc. as the more nascent technologies on the scale.

What’s going to revolutionize retail next?

60%

50%

40%

30%

20%

10%

0%

The further mobilisation Predictive analytics The re-imagination of the 1-2 hour delivery iBeacons and other

of shopping and delivery retail store as part sensors changing the

of goods warehouse retail experience

There was a relatively balanced response in terms of what’s going to

revolutionize retail over the next 18 months. While the top choice was the

further mobilisation of the shopping and delivery experience, the second

lowest choice – 1-2 hour delivery – still had 35% of respondents selecting

it.

Ultimately, the retail revolution has only begun and it is inconclusive yet which

of the many areas of change is making the biggest impact.

Mobilization of payments, shopping, marketing, engagement, delivery

information

Personalization of marketing, shopping and delivery

experience Descriptive, predictive, prescriptive analytics,

IoT, iBeacons etc. for marketing, data collection and automation

Logistics innovation – urban delivery, crowd-sourced delivery models etc.

As we’ve seen earlier, real change is a combination of innovation and

technology alongside changes in process and strategy as driven by the

people within an organization. As such, the impact of the above really only

tells half the story as retailers including the likes of Wal-mart, Macy’s, Warby

Parker have made waves through strategy as much as they have through 0s

and 1s.

Distribution network, visibility, technology, agility, retail store – how do retailers rank themselves on maturity in each area?

1: Entry level 2: Scaling 3: Advanced 4: Mature

Retail store - how active are your retail stores in helping

you manage your inventory. (entry level being just as pure

retail, mature as a forward fulfilment and repairs center)

Agility - how agile is your inventory

in response to fluctuating demand

Technology - what is the state of the technology

you currently have in place to manage your inventory

Visibility - how much visibility

do you have over your inventory

Distribution network - how advanced is

your distribution network for delivering

the level of service consumers demand

0 0.5 1

Distribution networks: Retailers felt they had the highest level of maturity when it came to distribution

networks with a weighted average of 2.52 on the back of 35.38% of

respondents indicating that they had advanced competency in this area. A

further 16.92% felt they had total competency or full maturity in the area as

well. That being said, 47% of respondents felt they were still scaling their

distribution network or were still at an entry level point.

1.5 2 2.5 3 3.5 4

Visibility: We’ve discussed visibility a lot in this report, and retailers appropriately rated

themselves a weighted average of 2.45 – ‘scaling’ – in terms of their maturity in

the area. As we’ve seen, visibility has existed for years and remains area

retailers are looking to invest in as we saw earlier, as well as an area that

continues to change as new information becomes available and as complexity

increases. Visibility sits at 2.45 – on the cusp of being categorized as

advanced – in comparisons across subsequent years it will be interesting to

see how this number evolves, as it’s not unlikely that it might remain stagnant

given a combination of increasing complex-ities and difficulties organizations

are facing collaborating and sharing data.

Technology: Technology was also classified as ‘scaling’ with a weighted average of 2.23.

Technology advancement shows no sign of slowing down. Given the

accuracy of Moore’s law for decades, we can expect to see new tech

innovation for the next decade, as such, don’t expect to see a major shift in

this number in 2016 and beyond.

Agility: Agility was classified on the low end of ‘scaling’. As we’ve seen throughout this

report, there have been some significant challenges for retailers to respond quickly

to fluctuations in demand. Logistics providers have also been seeing this in their

customer bases. Effectively, how can you store your inventory in a ‘cloud’ that can

be accessed when and where necessary? It’s a massive challenge, and one that retailers are only getting a handle on as a number of other forces

continue to affect where and when they need this inventory. We would expect

to see agility in the ‘scaling phase’ of most retailers for another several years

until LSPs are able to seamlessly integrate with retailers and provide

affordable inven-tory management (From click to door).

Retail store: For years, we’ve seen the desertion of the mall and the high street. We’ve

seen big company names, once common in every line of shops disappear, and

new household names pop-up that are web-only. Is the retail store dead? Far

from it, it’s just being reinvented. Consequently respondents to D3 gave the

‘retail store’ a weighted score of 1.95 giving it a rating of ‘entry level’. The

potential behind the retail store is exploding with a newly defined role ranging

from urban warehouse to urban fulfilment centre to showroom to urban return

and repair centre. This is a really exciting space and an area we’re likely to

see a lot more traction in the coming weeks and months. Amazon just opened

its first store and Warby Parker is well into bricks and mortar after a pure-play

eCommerce history.

Conclusion

Retail is undergoing its biggest transformation since the eCommerce boom

– and bust: Pets.com, Kozmo.com, Boo.com etc. - of 1997- 2000.

Unsurprisingly the future of retail isn’t either online or offline – it’s a

combination of channels, seamlessly integrated and enabled by a supply

chain capable of keeping pace. In fact, at the crux of this newfound

transformation is inven-tory, which is perhaps the single most critical

component of the supply chain that can make or break the seamless retail

experience for consumers.

The path towards an inventory that perfectly aligns with fluctuations in demand

getting consumers products where, when and how they want it isn’t simply a

question of technology investment and technology innovation. The process of

achieving truly dynamic distribution is an equal parts combination of

technology, people, process and partnerships underpinned by information.

Data is increasingly playing a role in allowing retailers and their supply chain

partners to create what we could term ‘cloud inventory’. However, it is the

usage of predictive analytics and machine learning that are truly going to

underpin this transformation.

15 years after the dot-com bubble, retail has finally found its way.

Want to learn more?

The D3 (Dynamic Distribution Disruption) Summit is the most elite gathering of

C-level Supply-Chain and Omni-channel decision-makers in the Retail

industry.

The unique nature of the summit, bringing together CSCOs and SVPs of

Supply-Chain and Omni-channel in Retail alongside strategic 3PL and

Technology partners, allows the industry’s most prominent leaders from both

the customer and provider side, to debate their concerns and thoughts on the

industry’s future.