5 Tips: Curtailing the Supply Chain Bullwhip Effect

A phenomenon that quickly turns otherwise accurate forecasts into far-reaching supply chain inefficiencies, the bullwhip effect refers to the increasing swings in inventory — in response to shifts in customer demand — as one moves further up the supply chain

Accustomed to seeing ample supplies of diapers, toilet paper, and cleaning products on store shelves, consumers were in for a shock when COVID-19 began to take its toll on the world’s supply chains in early 2020. Although the barest of shelves began to rejuvenate by midyear, there are still some lingering effects (plus the potential for more shortages later in the year and into 2021). 

Blame the bullwhip effect for creating a lot of this chaos and uncertainty. 

“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

Here’s what companies should be doing now to avoid supply chain disruption in the future. 

5 Supply Chain Takeaways for 2021

Under “normal” circumstances, companies invest in extra capacity, inventory, labor and work shifts to minimize the bullwhip effect or to avoid it altogether. The problem this time around is that otherwise routine approaches didn’t work. Demand sensing, forecasting and other forward-looking predictions were equally as ineffective, and mainly due to the unprecedented nature of the global pandemic. 

Here’s the good news: shippers now have boots-on-the-ground experience with a fairly extreme case of the bullwhip effect. Using their 2020 experience as their guide, companies can now prepare for the next potential disruption with a better understanding of the hefty impacts that it could have on their global supply chains. 

Here are five lessons that all companies should apply toward their future supply chain management: 

  1. Communication, data sharing, and visibility trump all when it comes to minimizing the bullwhip effect. One large national retailer, considered to be a leader in supply chain strategy, opened the lines of communication by allowing suppliers to access their inventory data. The result: increased customer satisfaction, a decrease in inventory and warehousing costs, and more stable supply lines.
  2. Third-party logistics experts have proven their worth. Well equipped to handle the logistics, transportation and technology that go into a well-oiled supply chain, experts like Transportation Insight know both sides of the business (i.e., shipper and carrier), and we can demonstrate and articulate how each node in the supply chain will benefit from a specific decision. 
  1. Scenario planning and simulations actually work. Think of them as the “war games” of your own supply chain, use them to run simulations on historical data across different hypothetical scenarios (e.g., if we can’t get raw materials from country A, how will it impact the rest of the supply chain?). Getting the answers to these questions before a disruption occurs will help you be more prepared in the event of a disruption.
  1. Use dashboards and control towers to get big-picture views in real-time. The days when a warehouse manager had to wait until the end of the month for a printed performance report are long gone. Thanks to advancements in technology, the same manager can get that information in real-time and then use it for good decision-making. Being able to drill down into order profits, for instance, will help you better understand what you should actually be charging for shipping. This, in turn, helps support good margin management in any business conditions.
    
  2. Alternate sources of supply are a good thing to have. In surveying 150 senior manufacturing executives, law firm Foley & Lardner found that most expect to make “fairly drastic” changes to their supply chains post-pandemic, including a shift away from just-in-time manufacturing (JIT) and sourcing in China. In Global Supply Chain Disruption and Future Strategies Survey Report, the law firm says that of those companies that were operating in China pre-pandemic, 59% have either already withdrawn operations, are in the process of doing so, or are considering it. Many of those organizations are looking to reshore their operations closer to home in the U.S., Canada, or Mexico.

Depending on how you approach it, transportation can play a major role in avoiding the bullwhip effect in your supply chain. Through good communication and data-sharing across all supply chain partners, you’ll gain an understanding of both real-time and historical information as it relates to all points in the supply chain. The better decisions you can make, the better the odds of avoiding the bullwhip effect.    

Tame the Bullwhip: Manage the Demand Waves

We examine the steps you can take to build a responsive supply chain management system in our latest Supply Chain Masters Series digital event. 

Watch the webinar to learn best practices for collecting, retaining and analyzing supply chain data. We also highlight the business intelligence solutions that drive continuous improvement and proactive strategy adjustment. 

Click the link below to learn supply chain strategies that minimize risk and protect your profitability today and tomorrow.

The Bullwhip Effect: Managing Swings in Demand

The “Bullwhip Effect” is a term often used to describe a phenomenon that quickly turns otherwise accurate forecasts into outdated information, amplifying misinformation along the supply chain. The dust was brushed off this broad concept, and it returned to the shelves not long after COVID-19 began disrupting global supply chains.

“Supply chains allow companies to focus on their specific processes to maintain maximum probability,” Osmond Vitez writes in The Bullwhip Effect in Supply Chain. “Unfortunately, supply chains may stumble when market conditions change and consumer demand shifts.”

That’s exactly what happened when an abrupt change in customer demand plus factory shutdowns put companies in the tight spot of having to forecast demand in the middle of an unprecedented, worldwide pandemic.

With demand for certain items amplified, the tiniest crack of the bullwhip’s handle caused an uncontrolled, snapping motion at the tip of that whip.

Balancing Demand Effects and Available Inventory

“When major swings in inventory occur from panic buying and hoarding, the impact of this sudden demand is magnified as it moves upstream in the supply chain (similar to the way a bullwhip’s thong amplifies in a wave as it moves away from the handle),” Jenny Reese explains in “Preparing for COVID-19 and the bullwhip effect: What happens to the supply chain when you buy 100 rolls of toilet paper?” The customer feels the anxiety of empty aisles, the retailer loses sales, and customer service suffers. “Distributors are left scrambling to determine who should get how much of a given product in a shortage,” Reese continues, “and manufacturers are overwhelmed with sudden, unanticipated spikes in demand.”

With little or no visibility into demand patterns to lean on, many companies wind up flying blind and hoping for the best.

How Does the Bullwhip Effect Work?

Without accurate, accessible, and strong communication across the various partners in the supply chain, the bullwhip effect can occur in any business environment. In a supply chain made up of a factory, a distributor/wholesaler, retailer, and end customer, for example, the retailer and customer tend to be closely aligned. For instance, a customer places an order and a retailer reacts accordingly.

Continue further up that supply chain, however, and that alignment begins to diminish.

Manufacturers don’t always align their forecasts with retailers’ own projections and distributors are, frequently, caught in the middle of two entities that have zero communication with one another.

These gaps widen during events like COVID-19, with even a small variance creating a Bullwhip Effect. In fact, Jay Forrester, who first conceptualized the Bullwhip Effect in these terms, says that even a 10 percent change at either end of the supply chain can result in a 40 percent fluctuation in the middle. That’s when the wheels fall off the cart; all players in the supply chain make quick adjustments to compensate for the problem.

Why Should You Care?

Virtually every organization must address or, at least be aware of, the Bullwhip Effect. Without up-to-date and wide supply chain communication, companies risk having it adversely impact their operations and their customers. Since no organization is an island, even the most vertically-integrated companies should know the signs of the Bullwhip Effect and how to deal with it effectively.

It’s easy to recognize the Bullwhip Effect in retrospect, as customers are cancelling or returning orders that they were clamoring to buy because they bought too much, overestimating their need. In order to meet perceived demands, erratic production, excessive inventory and depletion of resources highlight this effect. During COVID 19, suppliers most at-risk from the Bullwhip Effect included makers and distributors of PPE, hand sanitizer, toilet paper, and other hard-to-find items.

As a Supply chain professional you’ve been exposed to the Bullwhip Effect. The costly consequences materialize quickly and immediately erode your profitability.

Are you able to make informed decisions based on real time data?

Transportation Insight allows your business to make evidence-based decisions. We amass data about your supply chain to give you a comprehensive understanding of your logistics network. Our expertise and tools enable contingency planning through “what if scenarios” that address the Bullwhip Effect before it impacts your bottom line. Transportation Insight monitors multiple key performance indicators that measure your business activity and reveal threats and opportunities to drive continuous optimization of your supply chain.

Tame the Bullwhip: Manage the Demand Waves

We offer more context around the Bullwhip Effect in our Supply Chain Masters Digital Event. Watch the webinar today and learn how you can manage demand fluctuations with a responsive supply chain management system:

  • Best practices for collecting, retaining and analyzing supply chain data.
  • Processes that encourage scalability and readinesss for decline, recovery and even growth.

Learn the supply chain strategies that minimize risk and protect your profitability today and tomorrow.

Buy Online Pickup In Store: Retail in Evolution

Yet, the store remains a core focus of the buying experience. That’s how it should be. The in-store customer is typically more loyal and tends to buy more than the online shopper.

A robust strategy for “Buy Online, Pick Up In Store,” or BOPIS, can offer the best of both worlds. BOPIS expands a retailer’s online exposure while preserving and deepening the in-store experience. In fact, retailers find that is common for shoppers to buy more product once they arrive at the store to retrieve their online orders. 

A well-designed BOPIS retail program also helps reduce delivery costs because the customer is going to the product, not vice-versa. Consumers prize the ease and convenience of the transaction, especially when the COVID-19 pandemic has made contactless interactions more of the rule than the exception.

Responding to a New Retail Landscape

For retailers with limited resources and insufficient time spent mastering alternate fulfillment methods, the real world suddenly became a very different place in 2020. Many have been challenged to adjust to an unfamiliar “fractured fulfillment” model where products are ordered, fulfilled, and distributed from anywhere to anywhere. It is difficult for retailers to strike the right balance of inventory levels that satisfy in-store shoppers and ensure product availability to support online channel growth.

Retailers often over-order store inventory to avoid the risk of stock-outs. This raises carrying costs, and shrinks inventory  available to allocate to online channels. 

Moving ahead with an ill-vetted BOPIS strategy can make things worse. Customers assured of a product’s in-stock status on a retailer’s website will be displeased if they take time to visit the store only to find the item isn’t available. This could damage a brand’s reputation, especially if word spreads quickly on social media.

Visibility is the pain point. Many retailers lack proper visibility into the inventory flow from their partners to effectively plan and execute an error-proof BOPIS strategy. Without visibility, retailers will continue to prioritize avoidance in-store stock-out scenarios, and will continue to absorb excess and costly inventory.

A strong 3PL provider arms retailers with superior, actionable data that improves inventory visibility without forcing them to increase levels of safety stock. The endgame is to manage appropriate safety stock thresholds for both in-store and BOPIS experiences so the customer is satisfied in either scenario. 

Personalized Solutions Require Visibility

Each retailer is unique, and each shipper-retailer partnership is unique. Working with good data, an experienced 3PL partner creates customized plans to achieve optimal results. Progress and outcomes are constantly measured and refined so fill rates achieve acceptable thresholds. Changes to the plan can be implemented quickly should circumstances change – and they often do. 

For example, a plan could require the partners to issue electronic order acknowledgements indicating changes to item quantities and arrival dates within a specified time of receiving an order. It could call for transmission of advance ship notices within two hours of a shipment’s departure so visibility is optimized. Fully leveraging distribution center connections to stores optimizes shipping flexibility to react quickly to customer behavior. 

It is still most profitable for stores when customers pick up their orders in-store, but the busy holiday season could make it difficult for consumers to get to the store. Data generated by zip codes can identify areas of strong online ordering and in-store activity. This offers retailers insight into how to best position inventory for timely and accurate distribution.

For example, a retailer wants to offer one- to two-day deliveries but its transportation providers are challenged to consistently hit those targets. It may be more feasible to ship that order out from a store versus a fulfillment center. This could require shippers to invest in a drop-shipping strategy to support an e-commerce strategy where goods are brought directly to the store level. All this strategy is grounded in visibility.

This holiday season will be like no other. In-store buying will still be prevalent. However, more consumers have adopted online ordering after being required to do so in the early days of the pandemic. BOPIS utilization will be strong this holiday, but it will continue long after peak season and even after the virus passes. Consumers want options. It is critical for retailers to comply, but to do so efficiently.

Master Your BOPIS Revolution

The last mile is the most complex part of e-commerce fulfillment. It is also the most important. The last mile makes or breaks everything that came before it. That final delivery is the moment your customer will remember your brand most. How well do you finish?

A BOPIS strategy is just one of several last-mile offerings that shippers and retailers are expected to deliver. Done right, it reaps brand loyalty, lower costs and profitable opportunities for new market share. However, it requires a specialized level of resources and knowledge. It also requires skills and vigilance to ensure flawless execution.

We created The BOPIS Revolution: Navigating the New Never Normal to highlight some of the things you need to keep in mind when approaching – or modifying – your BOPIS strategy. Watch our SME Roundtable for a deeper dive into the ways we drive top line revenue results through personalized solutions driven by technology and expertise.

To continue the conversation, reach out to one of our supply chain experts. Let’s talk about how we can help you evolve solutions that support final delivery strategies to control cost and consistently wow your customers.

E-commerce Supply Chain 2020: Digital Deck the Halls

The challenges this year will be as long a family’s shopping list:

  • The traditional holiday peak converges with elevated online demand due to the COVID-19 pandemic. E-commerce sales will match or surpass brick-and-mortar. Consumers have multiple ordering channels to tap. E-commerce supply chain fulfillment and delivery operations need to respond to this decentralized − and unprecedented − demand-pull.
  • Many supply chains remain out of kilter, one of the pandemic’s many legacies. U.S. inventories are at their lowest levels in five years, according to several analysts. Stock-outs have been common throughout most of 2020. U.S. imports are spiking. However, those goods may not reach store shelves or distribution centers in time to satisfy peak consumption needs.

  • Parcel networks have been overwhelmed by demand since March. This has led to inconsistent delivery performance across the board. National and regional parcel carriers have maxed out their fulfillment and distribution infrastructures. Late deliveries mean that consumers will be forced to accept holiday service levels that are beneath their expectations. If there is good news, it’s that e-commerce consumers are aware of the problems and will be more tolerant of slower delivery. What they demand, and should expect, is access to real-time information about any service issues.
  • Consumers may order goods earlier than usual, allowing the supply chain to spread out delivery timetables to create a “load-leveling” effect. That would be positive news, but it should not automatically be counted upon. Amazon’s shift of its “Prime Day” program from July to mid-October could pull forward a fair amount of holiday activity.

  • Warehouse space is severely constrained. Amazon said several months ago it will need 50 percent more space to keep up with its projected holiday demand. Retailers with brick-and-mortar exposure need to position stores as “forward fulfillment” nodes. This allows orders to be pulled from store inventory and delivered over relatively short distances. Store networks will also support what is expected to be major demand spikes for in-store and curbside pickups of online orders. Pure-play e-tailers without store networks will need to get creative.
  • FedEx and UPS are levying meaningful peak surcharges on volumes from their largest customers. The U.S. Postal Service imposed the first peak surcharge in its history. Carriers say the fees are needed to offset their higher costs to serve. That is true, up to a point. Demands on delivery networks will be unprecedented, and carriers are pricing their services accordingly. Companies will have to consider this in their free shipping strategies to maintain profitability.

THE CLOCK IS TICKING

Is it too late for shippers and retailers to get their holiday house in order?

Not necessarily, but it will take fast action and deep planning. The challenges, as we’ve laid out, are immense. One key is to get ahead of the “demand curve.” When shippers gain visibility into end demand, they can prepare and execute a plan that enhances customer satisfaction and does so profitably. After all, meeting customer demands while losing money in the process is the hollowest of victories.

Managing the upstream channel is just as critical. Calibrating inventory flows with replenishment needs is a year-round challenge, and especially so during peak. The challenge is magnified this year with the headwind of COVID-19. Retailers need a clear line of sight into supplier production so they can forecast their inventory replenishment. In normal times, lack of visibility can lead to costly over-ordering to ensure adequate buffer stock. This season, however, over-ordering may be an adequate response, given how and where the inventory is positioned. 

During CSCMP’s EDGE 2020 Virtual Conference, Target Executive Vice President and Chief Supply Chain and Logistics Officer Arthur Valdez advised to “not be afraid to overreact.” That may sound counter-intuitive, but it can be an appropriate step during this peak. Target will be investing heavily in transportation services with a focus on improving delivery timing, Valdez said. Again, that appears to run against the grain as transport is considered a cost center. Yet it will be less costly than failing to execute deliveries because capacity is not available. A seasoned logistics partner can map out a strategy to leverage a customer’s existing assets, as well as to bring in outside capabilities that profitably meets customer demands.

This is especially important as shippers encounter an increasingly complex surcharge environment constructed by FedEx, UPS and, to a smaller degree, USPS and regional carriers.  High-volume FedEx and UPS customers could be looking at surcharges as high as $4 to $5 per piece. These are by far the most expensive surcharges we have ever seen. They can spell the difference between peak season success and failure, even if everything else breaks right. Any shipper expecting to tender significant traffic to either or both must be able to navigate those surcharges all within the framework of their logistics execution.

Amid the coming storm, it may be hard for folks to get a good fix on demand profiles beyond the holidays. But it pays to do so. For example, we may see another e-commerce surge early next year as fears of a combined COVID-seasonal flu cycle keep more consumers homebound. Already, we are seeing 2021 budget plans being adjusted to account for the lingering effect of COVID-19. We also expect similar peak season patterns for the next 3-5 years even after a coronavirus vaccine is approved and distributed. A strong logistics partner not only can help you get through 2020. It can prepare you for 2021, 2022, and beyond.

Lean Supply Chain Perspective Required for New Normal

Meanwhile, the pressure is on lean-focused supply chain experts expected to examine internal processes and accommodate supply chain shortfalls. Their perspective is integral not just to the continuous improvement of in-house activities, but, importantly, to the network adjustments that come with the re-shoring of supply production.

Unfortunately, just as COVID-19 disrupted manufacturing networks, it also created new challenges for keeping lean supply chain teams engaged. Workforce reductions and remote operating environments create hurdles for maintaining the close awareness required to identify wasteful activity and efficiency improvement opportunities.

As manufacturers focus on a new normal, a lean perspective supports supply chain corrections, and the timeline for turnaround does not need to be limited by social distancing and remote environments. An expert partner can help you identify and execute the most effective supply network strategy, so you can keep focus on advancing your business.

New Manufacturing Normal Begins to Emerge

Midway through a year of disruption, we are hearing common refrains among manufacturers across diverse industries. It seems that, regardless of the supply chain network, the comments are very similar:

  • Manufacturing is moving toward reshoring to reduce supply chain disruption and distance.
  • Constant supply chain focus is needed to eliminate current and future supply chain disruptions.
  • Supply chain failure is the No. 1 reason a company is having issues in start-up or restart activities.
  • Adjusting product mix and production set-up is a struggle.
  • Lean training and learning is difficult outside the facility “Gemba”

Focused on cost, some companies furloughed or laid off their lean teams. This leads to significant impact across the organization, often requiring executive attention to resolve emerging network problems. Losing the process visibility provided by these experts can lead to costly misalignment across your existing network and in any future supply chain adjustments.

Problem Solving for Inventory Management, Network Changes 

Looking deeper at these trends, some of the specific emerging problems can be resolved through the total supply network awareness your lean expert maintains. 

Inventory management drives the biggest questions manufacturers encounter as they reset to serve a new normal. Common inventory problems in our assessments of  manufacturers include:

  • Too much of it, not balanced or not accurate.
  • Too much of the wrong inventory for the manufacturing product family mix.
  • Not enough of the correct inventory to manufacture replacement parts and service clients.
  • Never adjusted parts inventories for major equipment repairs.
  • Single sourcing from Asia, Europe, etc.

Losing the visibility of your supply chain expert can quickly impact your transportation cost, especially in a volatile environment following a significant disruption.

Organizations that scaled back their lean team during COVID-19 experienced common outcomes:

  • Quickly lost awareness to inbound ocean transportation and ensuing TL freight moves
  • Unprepared for spike in air freight costs for productions and parts inventory
  • Increased costs such as detention fees resulting from misaligned lead times and production planning
  • Reduced capacity for problem solving 

In the “old” normal environment, while your lean resources maintained process awareness required to exert continuous improvement, ongoing training also offered perspective for global practices that are applicable within your organization. Losing access to those resources – usually provided on-site – impedes your ability to evolve your processes.

Leverage a Master Partner to Evolve Processes

There is no doubt that a loss of process monitoring inside the operational environment leads to reduced visibility. Lean operators need to be in the Gemba to be most effective.

In a quarantine or remote environment, it is not always possible to have that consistent on-site presence – but, you don’t always need it. Some organizations have achieved success with lean supply chain teams of two that maintain social distance and COVID-19 protocols. While this has slowed Kaizen work, there has been success, it just takes longer than planned. As a positive outcome, lean leaders have executed administrative items for each Kaizen, a process that can be carried forward.

A problem solver’s mentality supports these types of in-the-trenches adjustments, and they are vital not only to your disruption response, but to the ongoing evolution of your supply chain. We offer our clients access to that mentality on an ongoing basis, using supply chain data analysis to provide awareness of emerging improvement opportunities.

At the same time, we offer organizations the ability to develop their own internal lean expertise. While protocols of a contact-conscious environment can limit on-site activity, the power of modern technology not only supports classroom-like digital learning, it also grants virtual visibility on par with physical presence.

For more information about invigorating your organization’s supply chain capabilities to support reshoring or other new practices for a new normal, schedule your lean supply chain consultation today. Whether you want to bolster the expertise of your internal resources or plan and design a supply chain network suitable for serving your customers tomorrow, we apply our mastery to help you establish efficient processes that control cost and improve service.

Post-Pandemic Tactics for E-Commerce Logistics Advantage

Before COVID-19, businesses looking to build an e-commerce presence were hamstrung by the lack of speed in developing their current labor pool with the skills required for e-commerce, as well as fulfillment automation capability. Others dabbled in a web storefront strategy. These companies typically lacked the sophisticated technology, generally a good Warehouse Management System (WMS), needed to pick multiple orders to a cart and then have them quickly and accurately auto-sorted through a RF or mobile device. The result was unsustainable inefficiencies. We saw that e-fulfillment costs in some cases exceeded 25 percent of sales.

In the meantime, Amazon.com, which controlled about half of all U.S. e-commerce going into the crisis, kicked into high gear during it. At one point during the crisis Amazon customers spent as much as $11,000 a second on its products and services. By contrast, nearly 1 million traditional retail workers were furloughed in one week, and more than 250,000 stores had shut down. Many stores may never reopen, or may look very different going forward. The same goes for fulfillment centers. Many have and will continue to be physically modified to ensure worker safety. The flow of operations may need to be modified as well.

For many e-tailers, the “new normal” of e-commerce will be challenging and may seem insurmountable, but getting to the other side is doable. 

E-Commerce Logistics Strategy for the New Normal

Understand what current state looks like in the new normal − starting with your cost per-order. 

Are your costs segmented by freight, management and supervision, labor, facilities and shipping supplies?

Then understand what and how these costs can be managed, optimized and reduced. Typically, freight costs exceed the sum of the other components. Reducing freight dollars spent per revenue dollars created should be an immediate focus. 

The questions to ask from this point are critical to the next step. 

  • Is your network aligned to best serve the customer? 
  • Are your shipping lanes optimized? 
  • Are you using the best shipping partners to meet your strategic goals? 

Stay on top of your rates. Evaluate them frequently, and renegotiate them when appropriate. 

This is where collaborating with a seasoned logistics expert adds enormous value to you e-commerce platform. Our long and deep relationships with carriers, our data analytics and information mining expertise and our proprietary audit technology platform give you end-to-end visibility to answer those key questions.

Align Your Operations and Your Network

Once your network is optimized, it is time to consider how your operations play into that. What questions can quickly be addressed?

By asking these questions and making some quick, deployable solutions, you can improve your profitability profile in short order.  

Benchmark your service-level performance with best-in-class metrics. How does your fulfillment center operation compare with leaders in the field? 

Focus strongly on the efficiency of your picking and packing operations, which can account for more than half the cost of your order outside of outbound shipping. A thorough analysis of your fulfillment center process will yield changes to improve operations and reduce costs.

Apply technologies where it makes financial sense and where it fits your growth plans. Many legacy WMS applications were designed to manage fulfillment orders in pre-determined waves. They were not optimized to manage the unpredictable flows of e-commerce traffic. Today’s technology is built to allow orders to be picked for store and e-commerce simultaneously. This enables businesses to leverage inventory buys to achieve economies of scale.

Also, consider a multi-fulfillment center strategy, including BOPIS strategies. These can expedite orders to consumers quicker and reduce shipping costs. Facilities expansion can carry with it significant operating expense. An expert partner with a robust portfolio of data, expertise and carrier relationships can support your decision-making on this critical issue. 

Improvement Focus Drives Customer Experience

Above all, be consistent with ongoing process improvements. Don’t consider e-commerce logistics just a project, it is a process that has to be constantly improving. Companies that dedicate full-time employees to process improvements are those that make the biggest strides. 

Analyze your facility space requirements, and how labor is being utilized. Be open to suggestions on how to improve productivity and boost customer satisfaction. Make it a part of your corporate culture.

According to a recent study, millennial consumers who account for about $1.2 trillion in U.S. retail sales say they value the “experience” that accompanies an online order as much as the product itself. The “Generation Z” group coming up behind the Millennials shares those sentiments. 

At the core of that experience is fast, timely delivery supported by in-transit visibility across multiple digital platforms. Succeed in executing on that final step, and you will achieve favorable word of mouth that can help build a brand. Fail, and that brand may not get a second bite.

Those attitudes were in place well before Covid-19. And they are unlikely to diminish. It is both an enormous opportunity, and daunting challenge. Is your e-commerce strategy ready?

Master Logistics, Power Competitive Advantage

You invest a lot of money in your logistics network. But are you maximizing its value? Do you feel like your logistics operation is more of a cost center than a tool of competitive advantage?

It doesn’t have to be. In fact, with the right strategy and execution, logistics can drive the success of your enterprise. Companies like Amazon, Walmart, Target and Dell made logistics a priority, with spectacular results. There is no reason you can’t do the same!

To master your logistics strategy, read “Moving to the Front of the Line: Making Logistics a Competitive Advantage.”

Use Logistics to Compress Cash-to-Cash Cycles

Logistics is the lifeblood of any organization. It connects suppliers, manufacturers, intermediaries, carriers and end customers with actionable data based on historical transaction patterns. Yet too often corporate leaders view logistics as a cost center instead of a competitive advantage. We find the best way to overcome that perception is to connect the dots between our deep skill set and the positive financial outcomes we can deliver for our clients.

When Transportation Insight talks about logistics as a competitive advantage, we refer to the speed to serve as much as the cost to serve. Time is money.  Companies implementing strong logistics strategies typically turn their inventory faster. They need to rely less on safety stock throughout every level of the supply chain, which is itself a cash burn. They keep goods in motion so they reach consumption points faster, and turn capital quicker.

Reduce Cash-to-Cash Cycle, Free Up Operating Capital

For definition, cash-to-cash cycle time examines the number of days of working capital an organization has tied up in managing its supply chain. The faster the cash-to-cash cycle, the fewer days an organization’s cash is unavailable for other investment. According to American Productivity and Quality Center (APQC) research, the top performers have 60-day cycle times. The bottom performers clock in at about 120 days+.

Reducing cash-to-cash cycle time involves eliminating factors (such as inventory) that tie up operating capital. Effective organizations optimize inventory to free up capital while maintaining enough stock to satisfy customer orders. This can be accomplished through a well-designed demand forecasting, comprehensive company-wide inventory optimization strategy, supported by logistics that aligns roles and responsibilities in the supply chain, and identifies processes that can be streamlined.

Streamlining order-to-cash processes can also reduce cash-to-cash cycle time because faster invoice processing and receipt of customer payment decreases the amount of time that an organization’s capital is unavailable.

Make no mistake, there are some logistics people who love inventory because it covers some of the “stumps in the water,” as we like to say. But safety stock exists because businesses struggle to match their inventory needs with final demand. Safety stock is also an impediment to optimal cash flows.

But in a lean world, there is no such thing as “safety stock.” Everything turns in its own time, and on its own velocity. Thus, it is critical to identify and root out supply chain inefficiencies at the front end. Are you optimizing inbound shipping lanes, whether domestic or international? Does your inventory strategy balance your costs with meeting customer delivery expectations? Do you have the technology and expertise to effectively manage your product velocity and shrink the cash cycle?

Companies have multiple customer channels. You may have a traditional B2B channel, an e-commerce channel, or a hybrid. Each channel may have its own dedicated inventory. They also have their own cash-to-cash cycles. They are certainly going to have their own logistical challenges. A capable logistics partner like Transportation Insight can support the unique needs of each channel to achieve the most financially desirable outcomes.

Mastering Logistics to Meet Consumer Demand

There are companies that have succeeded in re-inventing the wheel. Then there are others that prospered by improving on legacy processes. Walmart wasn’t better than any other retailer. It offered the same brand of toothpaste and laundry detergent as others did. Sam Walton’s genius lied in focusing on logistics to get goods to the shelves, and in customer’s hands, faster and cheaper than anyone else.

By putting the right product, in the right place and price, when and where the consumer wanted, Walmart accelerated cash returns for manufacturers and for itself. It also turned out to be a lethal combination-for other retailers.

Mastering the competing dynamics of transportation and inventory requirements can be a complex undertaking. You need to weigh the importance of improved working capital with ensuring that goods are always available when and where your customers need them. This is our forte.

Each day, we bring our data platforms, deep understanding of carrier networks, rate negotiating and auditing expertise, and decades of accumulated industry experience to bear to solve these problems. We are quite candid with customer feedback, and what we hear most from our clients is that we take challenges like these off their hands, provide them with rich analysis, and enable effective decision-making.

For more information, read “Move to the Front” today.

Cost Changes Hide in Shift to Online Fulfillment

By expediting moves toward ship-from-store, buy-online-pickup-in-store (BOPIS) and other alternative fulfillment options, those retailers seized a growth opportunity in a slow economy. At the same time, they continued to move inventory, employ associates, and effectively utilize brick-and-mortar assets all while delighting customers.

However, in the rush to make those changes and meet consumer demand, it is not enough to have resources capable of adapting and executing your supply chain network strategy. It is essential that those resources provide a clear understanding of how alternative services affect costs across your transportation network.

While offering service alternatives to a demanding consumer base can drive revenue growth, profit margins can quickly disappear without awareness to how those new delivery options can affect freight cost, time-in-transit and carrier utilization, among other key transportation performance metrics.

We help our retail clients recognize the financial implications of their service changes with a transportation alignment study that helps them quickly redesign their network strategy, execute on transportation procurement and access the evidence required for decision-making that protects profitable performance.

Evolving Fulfillment Strategy to Meet Online Demand

When the pandemic began affecting U.S. retailers, many of our clients with distribution centers faced the risk of closure due to “Stay at Home, Work Safe” guidelines issued by federal and local agencies. At the same time, revenue was stagnant for retailers with brick-and-mortar storefronts that were required to close due to social distancing expectations.

With online sales booming, some of our retail clients took brave action to convert darkened stores into mini-fulfillment centers. Deploying staff from distribution centers and stores to complete fulfillment activity at the retail locations, these clients are not only able to keep staff gainfully employed, they are also utilizing store inventory that might have otherwise gone unsold.

Making this type of move with your fulfillment strategy can happen quickly – scenarios within 10 days have been reported for some retailers. Adding BOPIS with curbside capabilities can happen in 60 days. These types of changes have become a necessity for retailers across the country, but by changing fulfillment models, these organizations also completely changed their supply chain and distribution network. Unfortunately, because this adaptation occurred so quickly and with such a need to continue business, it is not always supported by the essential transportation study and analysis that determines the cost implications of the network changes.

Do you have the systems in place to determine how these changes affect freight cost, profit margin and customer experience?

Leveraging Data, Analysis to Manage Cost of Online Fulfillment

As our retail clients are rapidly responding to the changes the pandemic is driving in consumer behaviors, we use technology tools and industry expertise to support network alignment studies that clarify cost implications of service changes.

Using historical shipping data, analysis and multi-modal expertise, we help clients manage cost/identify opportunity by providing greater visibility to:

  • Impact of network changes to overall transportation cost
  • Time in transit through predictive modeling based on carrier zone information
  • Freight expense as percentage of cost to serve
  • Margin impact by product level
  • Consumer geography and accessorial changes
  • Overlapping shipment details
  • Store-level profitability
  • Split-order percentage trends
  • “True” customer experience metrics
  • Consumer behavior analysis

With the results of our network alignment/margin management study, we help our retail clients make changes to their carrier contracts, their carrier utilization or their market response. In doing so, we’re able to help make sure they are fulfilling orders in a profitable way, while protecting customer experience.

Master Online Fulfillment

Organizations that create a supply chain personalized to the expectations and behaviors of their customers can achieve greater brand loyalty and improve customer retention. At the same time, the shippers that establish a nimble network can rapidly respond to fluctuations in supply and demand and capitalize on opportunities for growth.

If your business is pursuing rapid deployment of alternative fulfillment practices, make sure you understand fulfillment costs at the retail store location. Retailers that can manage network costs associated with a strategy adjustment in order fulfillment can realize competitive advantage. That’s especially meaningful in a tumultuous environment where rapid supply chain pivots are required to capitalize on changes in consumer behavior.

As a supply chain master, we’ve worked with hundreds of organizations mapping thousands of supply chains. Applying expertise across diverse retail categories and industry segments, multi-modal transportation management capabilities and technology-enabled data management and analysis, we help clients align their transportation practices with their business goals.

To master your online order fulfillment and deploy a variety of final delivery options talk to one of our experts today.

Omnichannel: 3 Ways Service Merchandise Got it Right

In its heyday, Service Merchandise was a retail force. With 413 stores and $4 billion in revenues at its peak, the company singlehandedly turned the “catalog showroom” shopping experience into one that consumers flocked to for fine jewelry, electronics, toys, and other merchandise. 

Hindsight being 20/20, modern-day concerns like high inventory carrying costs, the escalating cost of expansive retail space, and the labor-intensive nature of its decidedly non-DIY showroom should have all been red flags for Service Merchandise. Despite these oversights, the company definitely had a few things nailed when it comes to omnichannel. Let’s look at three areas where Service Merchandise excelled.

Lesson 1: Sales in the Front, Fulfillment in the Back

Service Merchandise stored inventory in the backroom versus in the front of the house and basically understood the value of the omnichannel model as far back as the 1980s.

Stores aren’t meant to be fulfillment centers. Employees don’t know how to pack boxes efficiently. They rely on their own judgment about how much packing material and product to load into a box for a ship-to-home customer. That can get expensive when dimensional minimums come into play. For example: If a box is too large relative to the weight going into the box, the shipper is going to overpay. 

Service Merchandise escaped these challenges.

  • All inventory was maintained at the store level, in the back of the house, where customers couldn’t touch it until they ordered it, initially using a clipboard and written order and later using the “Silent Sam” ordering system.
  • Employees were trained on efficient fulfillment techniques: The goods were either sent by conveyor to the customers or shipped to their homes. 

“The average price of an item sold in the store was $30. The average transaction was $55, so we were selling less than two items per transaction,” says Service Merchandise CEO Ray Zimmerman. “Because they were $30 items, it was less expensive for us to handle it on a pick and conveyor basis than it was to stack it out and let the customer pick it up.”

Obstacles emerge when fulfillment creeps into a retailer’s sales floor customer-facing roles:

  • Store employees picking orders instead of taking care of customers. 
  • Aisles congested with big carts and harried fulfillment individuals trying to fill orders quickly. 
  • Online shipments packed inefficiently by store employees untrained in the fine points of fulfillment. 
  • Unnecessary touches: product is received, unpacked, put on store shelves, retrieved, repacked and shipped back out. 
  • Multiple touches create a high volume of dunnage and corrugate waste.

Just think about how far a store employee has to walk to collect all of the items from an online order, versus someone who was working in a warehouse with very high pick densities. Warehouses also incorporate technology (i.e., pick-to-light and voice options) that makes picking and packing more efficient.

Lesson 2: Technology is Integral to Omni-Channel Success.

Retail has come a long way since the 1980s, but it’s clear that Service Merchandise’s leaders had a knack for understanding their customer base and serving it well. They also weren’t afraid to invest in technology long before terms like omnichannel, automation, robotics, and Amazon were common vernacular for retailers. 

“We had a great group of IT people – and that was unique for most companies at the time,” Zimmerman says. “At the time, there was no point-of-sale system that had an alpha numeric. They were programming in BASIC language, it was very simple, but that’s how we developed all these systems.”

Those systems monitored inventory, too.

“We had to keep inventory tight and we spent a lot of time monitoring to make sure that stores were making inventory adjustments,” Zimmerman says. “If they didn’t have any adjustments, the store wasn’t doing its job verifying inventory count; if there were too many, the store was having a shrinkage problem.”

If afforded today’s technology advances, omnichannel data management and its innovative mindset, here’s what a profitable “Service Merchandise 2020” might look like.

  • An early adopter of warehouse automation, it deploys advanced technologies like robotics.
  • Warehouse pickers are equipped with wearable technology that enables them to do their jobs faster in a hands-free environment. 
  • Integrating automated co-bots, conveyors and cranes into its stockrooms, it effectively leverages technology to shorten fulfillment times and hit two-day and one-day shipping windows.
  • Leverage artificial intelligence (AI) and machine learning to optimally determine placement and levels inventory based on predicted customer demand. 

Lesson 3: Give Customers an Experience

Customers like going into stores to look at and touch products. 

Service Merchandise knew that its customers really wanted to experience a product before buying it, which meant stores didn’t really need to have all of their inventory visible and stacked to the ceiling when those customers walked in the door. 

With its part-catalog/part-showroom approach, Service Merchandise was meeting customers where they were in the ‘80s.

“The catalog was not for people to order from. It was an advertising tool – people could pick what they want and come into the store,” Zimmerman says. “If that customer drove 3 blocks to come into our store, they expected to get it. We had to be in stock every day, on every item.”

Many people still remember fondly a key aspect of the Service Merchandise experience, even if the retailer’s dominant presence has faded.

“When the company liquidated, I bought the name to keep it in the family. I put up a website – it didn’t sell much merchandise, but it got a tremendous amount of comments,” Zimmerman says. “Many wanted to tell me how much they loved watching the merchandise coming down the conveyor belt.”

Putting it all Together

Retailers are still trying to figure out the right recipe for omnichannel success. A multichannel approach to sales focused on providing customers with a seamless shopping experience — be it online, on a desktop, via a mobile device, by telephone, or in a brick-and-mortar store — omnichannel is pushing companies into new terrain when it comes to fulfillment, transportation, and delivery.

To help retailers understand how to improve omnichannel performance, we created “Prime Before Its Time: The Service Merchandise Experience.”

Download the guide to learn how the retail innovations of yesterday can help you deliver a prime performance today.

The Service Merchandise Experience: Omnichannel in the ‘80s

Standalone brick-and-mortar structures with expansive parking lots — most of which were packed with cars during business hours — Service Merchandise stores were where people went, catalog in hand, to look at product displays and check off their selections on order forms – or in a computer terminal. A few minutes later, their goods appeared on a conveyor straight out of the onsite stockroom.

Let’s explore Service Merchandise’s roots, dig into its retail strategy, and see how its strategies for customer experience can apply in today’s omnichannel retail environment. 

Customer Experience Innovator

Headquartered in Brentwood, TN, Service Merchandise was built on an innovative business. The company broke new ground in a handful of retail landscapes. In fact, many of its competitive moves were well ahead of their time, leading us to believe that Service Merchandise may have actually mastered “omnichannel retail” decades before the term was even coined.  model. Initially a variety store opened in 1934, it went from being a chain of dime stores to a catalog business. Operating from warehouses in Tennessee, that business eventually morphed into the showroom concept that made Service Merchandise famous. 

  • 1980 – Allowed customers to place orders via specially equipped TV sets.
  • 1981 – Developed a computer program that used demographics and a specific location’s characteristics to predict the market.
  • 1982 – Installed a cash register that allowed customers to check on product availability and order merchandise right on the sales floor. 

Three years later, it implemented a computerized inventory replenishment system that helped it reduce inventory carrying costs while also reducing its out-of-stocks. In 1986 it opened an automated, 752,000-square-foot warehouse in New York.

Convenient Fulfillment Options

For retailers, having the right inventory at the right place and at the right time has become table stakes. Service Merchandise served multiple channels efficiently from its brick-and-mortar locations. It had walk-in business, for example, and it also had a successful catalog component. Really, the latter is no different than today’s online environment, where “order online-pickup in store” is the newest dynamic that retailers are trying to harness. 

“The catalog was not for people to order from,” says Raymond Zimmerman, CEO of Service Merchandise. “It was an advertising tool – people could pick what they want and come into the store. If that customer drove three blocks to come into our store, they expected to get it. We had to be in stock every day, on every item.”

Service Merchandise also leveraged brick and mortar locations to meet retail customers where they were. Inspired by UK-based retailer Argos’ fulfillment model that allowed freight deliveries to a secured inventory room without store access, Service Merchandise tested a warehouse-only model. 

In Metro Atlanta, a handful of 13,000 square-foot suburban stores opened with the catalog as the main attraction along with a few display items. Customers could access Service Merchandise inventory in the warehouse and have it shipped to the catalog store for next-day pick-up.

Everything was in stock, but very little was on display. 

“All the online guys are opening brick-and-stores or they are creating places where you can pick up merchandise in the existing stores,” Zimmerman says. “That’s where we were going – to have all those 10-15,000-square foot stores, so we could open hundreds of them close to the customer. … In the ‘80s and ‘90s, we were where everybody is trying to get to now. It was the implementation that was our failure.”

The retailer developed inventory management systems that, if one location was out of stock, store staff could identify the five closest stores with the item on site. The customer could pick it up there or have it shipped to their home by UPS. 

“We took that system and expanded it so that you could go to a store in Columbus, Ohio, pay for something and send it down the conveyor belt in the Tuscaloosa, Alabama store,” Zimmernan says. “At the time, customers couldn’t go online and order and then pick up in the store.”

Customers Want to Experience their Purchases

Service Merchandise knew that its customers really wanted to experience a product before buying it. They like to go into the stores to look at and touch products. Stores didn’t really need to have all of their inventory visible and stacked to the ceiling when those customers walked in the door. 

But they did need to make sure items promoted in the catalog were available in local store inventory.

“The hottest item that wasn’t in the catalog was less important than the worst item in that catalog,” Zimmerman says. “The customer that comes in has pre-shopped and they knew what they want.” 

So the question becomes, is there really a need for high levels of inventory on the retail floor, if all customers want to do is experience the product versus walk out the door with it? 

Ultimately, customer experience was enhanced by the Service Merchandise strategy of separating the sales floor from order fulfillment in the warehouse.

Many retailers trying to fulfill multiple channels from physical stores often threaten their in-store success. Likely earmarked for in-store or curbside pick-up, those orders consume labor and get in the way of a pleasant shipping experience for customers. The sales floor isn’t very welcoming when aisles are congested with big carts and harried fulfillment individuals trying to quickly fill carts.

Omnichannel Fulfillment Jeopardizes Performance

We’re in an era where higher fulfillment costs continue to erode retail margins. It’s time for stores to think harder about how to fulfill orders across all channels while also factoring in parcel transportation costs and how to package in a way that minimizes dimensional charges.

Knowing the struggles that retailers face as they navigate the complexities of omnichannel fulfillment, reflecting on how Service Merchandise approached the customer experience could give companies a clear advantage in the marketplace. 

To help retailers understand how to protect customer experience while balancing the cost of service, we created “Prime Before Its Time: The Service Merchandise Experience.”

Download the guide to learn how the retail innovations of yesterday can help you deliver a prime performance today.