April 2014 | News | Trends

Trends—April 2014

Tags: Ocean, Retail, Supply Chain Management, Last Mile Delivery

Retail trends including social commerce, multi-channel efficiency, marketing

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The National Retail Federation (NRF) drew a record 30,000-plus attendees to its January 2014 BIG Apple Conference to "touch and feel" the latest hot trends and innovations in the retail industry. For some attendees, like Mark Ledbetter, global vice president for SAP Retail, the reality is even more compelling.

Ledbetter, who has been a regular at NRF's event for the past decade, offered Inbound Logistics a man-on-the-ground perspective of some key takeaways from this year's show.

Retail is big business. Everything about the retail business continues to expand. "Sellers and consumers face infinitely more options—technology and SKUs chief among them—which only raises the bar as industry takes analytics and innovation to new levels," Ledbetter says.

Death of the channel. "Whether it's multi-channel or omni-channel, retailers are moving away from the whole concept of managing channels via brute force," he says. "The focus now is on eliminating multi-channel inefficiencies."

In effect, more companies see inventory in an agnostic way. Distribution networks, supply chain processes, technology, and materials handling systems are falling into place accordingly. Amazon, Walmart, and others are forcing the issue for many retailers as they come to grips with their own channel strategies.

"Retailers that typically have managed multi-channel fulfillment by brute force didn't have commingled inventory or processes to support a unified brand experience," Ledbetter adds. "But now they realize that, from an efficiency perspective, it is too expensive to do multi-channel fulfillment the same way they have in the past."

Strategic urgency emerges. For a long time, retailers were experimenting with how to approach the e-commerce market. "In the late 1990s, for example, retailers roped off a part of the warehouse and called it Store 9999," says Ledbetter. Then, suddenly, e-commerce exploded.

"Strategic urgency stems from retailers recognizing they can't fulfill orders efficiently enough to compete where segments are largely driven by price," he adds. "They have to fulfill from all the stores, the DCs—any place where inventory is."

Marketing breaks out. "Retail was always marketing at its core," Ledbetter notes. "But now we talk about what chief marketing officers are doing. The whole concept of marketing owning customer engagement, and merchants owning the merchandise, is evolving with the emergence of marketers driving decision-making in retail," says Ledbetter.

Social commerce is the norm. "Retailers recognize that social networking is a great marketing tool, but not a selling tool," he explains. "It's better for advertising and crowdsourcing demand."

The perfect storm is looming. "Efficiency issues are surfacing, and marketers are trying to drive a brand experience as opposed to a channel base," says Ledbetter. "The brand experience is pushing for these channel silos to come down.

"Senior leadership who recognize the challenges know if they're not the first ones to address and solve some of these multi-channel fulfillment problems, they might be the first ones to go away," Ledbetter cautions.

Are Local Couriers the Future Of Last-Mile Logistics?

Customer expectations for speedier delivery times and later cutoffs force retailers and their logistics partners to live on the edge. Shipping guarantees, whatever the cost, get consumer buy-in. But as e-commerce continues to expand, and expedited services become the norm, are retailers promising too much? Can supply chains deliver to the last mile at the last minute?

Inbound Logistics recently met with Rob Howard, CEO of GrandJunction, a San Francisco-based technology platform that serves the local delivery industry, to talk about 2013's holiday hijinks, and what it means for the industry moving forward.

UPS and FedEx's failure to deliver millions of packages in the lead-up to Christmas 2013 delivered a shock to the industry. What happened? Is there a last-mile lesson to be learned?

Both companies were dealing with a double shift: a growth in both residential and e-commerce volume. It's the new normal and will not change. Amazon anticipated this growth, and started working with local delivery companies directly—a safety valve against UPS and FedEx spikes.

The question becomes: Is the local delivery market a viable alternative? The industry has historically been so fragmented it has been difficult to work with. But that's changing.

Retailers have to address the same issue. If UPS and FedEx aren't going to invest in assets or infrastructure, it's up to retailers to find alternative delivery means.

What advantages can shippers gain by partnering with local courier companies?

Mom-and-pop-driven local delivery companies vary wildly across the country. In the past, a local delivery option with consistent, professional, technology-enabled customer support didn't exist. Now it does. The local delivery industry is improving to the point where it is becoming viable.

Couriers excel in some aspects of customer service. For example, the local delivery industry offers more flexible cut-off times. UPS says it needs a package by 4 p.m. or it won't be delivered the next day. A local courier may accept shipments up to midnight. More flexibility equates to better customer service for shippers.

In addition, the cost of using local delivery is equivalent to, or better than, express carriers in many cases because it's a non-unionized industry with fewer marketing costs.

What are the constraints on using local couriers?

Shippers that have local inventory benefit from using couriers—whether it's to serve retail storefronts or multiple DCs. This is why Amazon is pushing all its distribution centers out to multiple markets. Companies that are centralized, with one or two DCs, will have limited access to the local delivery industry because they don't have inventory there.

Shippers can get around that by building a truckload, shipping it into a market, and tapping a local carrier at the crossdock—but they need significant volume to make it worthwhile.

How does a local delivery strategy enable same-day delivery?

Local delivery is service level-driven. It's about the retail storefront becoming a DC. Retailers can offer same-day delivery—order in the morning, deliver in the afternoon—at reasonable pricing on a national scale if they have that type of local delivery partnership.

I don't expect the emergence of same-day to be a service consumers ask for; rather it's a service the competitive environment forces retailers into. eBay and Google offer same-day delivery programs. Amazon now has 64 DCs located close to cities for that reason. The moment competitors offer that delivery option, others have to as well.

Retailers also started talking about one-hour delivery because they can do it. The reason Amazon can't is because its DCs are in suburban outlying areas. One-hour delivery is still an expensive option, equivalent to a taxi ride—pick up an item at the store and deliver it directly to the customer. It's a premium service where retailers can win.

We've heard speculation about some retailers looking to crowdsource delivery. Is this realistic?

Crowdsourcing delivery is a matter of identifying how to dispatch jobs directly to drivers. It has to be a curated experience, with quality standards and background checks. You have to collect information about the quality of the experience and rate the driver.

All independent contractors are capable of picking up from a retail store and delivering direct to the consumer as long as they are enabled with the technology to make it happen.

Retailers going directly to a driver is even cheaper than working through a courier. That model, as it evolves, will be highly disruptive to the local delivery market.

Ocean Carrier Industry Awash in Risk

The ocean freight industry has been anchored by excess capacity and challenged by shifting demand over the past few years. Steamship lines are jockeying assets and expanding alliances to create more stability. But it may not be enough.

The container shipping industry's financial distress has hit its highest level since 2010, suggests a recent report by consulting firm AlixPartners.

The study, which analyzes the world's 15 publicly traded carriers, documents several concerns, including a drive to build, fill, and route mega-ships.

While the industry's global fleet capacity has risen steadily in the past decade to 16.9 million TEUs for the 12-month period ending September 2013—up from 16.3 million TEUs in 2012 and 10.9 million TEUs in 2007—that capacity is a long way from being optimized, leading in part to more industry alliances. This, in turn, is creating an environment of haves and have-nots, where smaller carriers, in particular, may face some hard choices moving forward.

AlixPartners also contends that changing trade routes in some parts of the world, cost trumping transit time, and a newfound pressure on the part of some of the stronger lines to squeeze, or even totally bypass, NVOCCs are creating further imbalances in the worldwide fleet.

To hedge against these risks, the study urges shippers to:

  • Monitor carriers' financial health.
  • Avoid "over-consolidating" so they don't have alternatives.
  • Consider index-linked contract options.
  • Benchmark rates and service levels via objective third-party resources.

Retailers Make Labor Day Plans

Although container truck drivers servicing Port Metro Vancouver recently reached a deal to end a prolonged strike, that labor impasse was a wakeup call for U.S. importers—not that they needed another reminder. The 2002 West Coast port strike, and more recent stoppages nationwide in 2012 and 2013, serve as cautionary cues.

But as the June 30, 2014, expiration date for the International Longshore and Warehouse Union's (ILWU) six-year labor contract with the Pacific Maritime Association nears, shippers are on high alert.

Labor strikes are a recurring concern for logisticians who manage supply lines pulled taut to demand. And it was a focal point of the March 2014 Georgia Logistics Summit. While panelists at an import session voiced cautious optimism that a resolution would be quickly reached after posturing from both sides, they also hedged against the alternative.

For instance, Brentwood, Tenn.-based farm and ranch retail chain Tractor Supply Company (TSC) shared how it opened a hybrid regional DC and import center in Macon, Ga., in 2013. The facility is purposed to restock both stores and other warehouses. It can accommodate bulk buys and full pallet loads coming through Savannah when local demand elsewhere in its network is more nuanced.

Creating additional inventory latitude and bandwidth in the event of an exception was one factor that drove the Macon deployment. "We can replenish inventory to other DCs out of our import center with minimal disruption, unless the problem is long term," says Kyle Fletcher, general manager of the Macon center.

Another panelist, big-box juggernaut Target, is also proactively working to circumvent potential bottlenecks come July. "We made plans to divert some critical products if we need to," says Steve Carter, Target's director of global logistics planning and strategy.

For Target, it's less a matter of increasing inventory and more about preemptively routing shipments elsewhere. The company has built resiliency and responsiveness into its supply chain by design.

Target directly imports about 30 percent of its product. It also sources indirect imports through domestic vendors—Mattel is one example. Most shipments originate in Shanghai and Shenzhen in China, then come through Long Beach and Seattle on the West Coast, and Norfolk and Savannah on the East Coast. It's a 65 percent/35 percent balance west to east.

Following the Sept. 11, 2001, terrorist attacks, Target decided to become more proactive in sourcing offshore. As a charter member of the Customs-Trade Partnership Against Terrorism (C-TPAT), it began taking control of inbound transport from the point of origin. With its overseas suppliers, especially in China, all freight is shipped Free Carrier (FCA), which means "we pick up product at the factory in China or Vietnam," says Carter.

In addition to facilitating security and compliance, taking ownership of the product and process farther upstream makes good business sense. "When you take control of the supply chain, you find all kinds of hidden costs," Carter adds, referencing the labyrinth of customs zones, container freight stations, and middlemen shippers have to navigate in China.

Target is leveraging these intermediaries to help gain more control. It developed an in-house overseas transportation management system, then deployed people on the ground in Shanghai and Shenzhen to work directly with local truckers.

"In China, the average trucking company fleet is three to five trucks; it's very fragmented," Carter adds. "By taking control, we injected money into several carriers. Now they operate hundreds of brand new, all standard trucks."

One challenge Target and other companies face as they try to make inroads in areas such as China, Vietnam, and India is the lack of infrastructure. Absent adequate resources, visibility is also limited. That's why control upstream is important—especially when the potential for disruptions is imminent.

Other shippers have fewer options and less leverage as they look to mediate exceptions. For example, Floor & Decor, an Atlanta-based flooring retailer with 39 stores primarily in the U.S. Southeast, Southwest, and Midwest, is the epitome of demand-driven. "Flooring is a fashion item, and we want to make sure we're in sync with what the market wants," says Becky Bowling, director of international logistics.

The company empowers local store managers—referred to as chief executive merchants—to own the assortment of products they sell. So, in effect, no two stores are alike. Each reflects the unique market it serves.

Floor & Decor relies heavily on imported product from China, Europe, the Mediterranean, South America, and Mexico. It operates four DCs in Los Angeles, Houston, Savannah, and Miami. Floor surfaces and tiles are heavy, so containers often max out on weight rather than cube. Because transport cost is often upward of 70 percent of total expense, the company depends on a port-centric network of hubs to reduce dray distances.

Invariably, the company is sensitive to port disruptions. "It's hard to create a contingency plan without losing the entire margin on a product because the top is so thin to begin with," says Bowling.

To offset potential labor problems, the company will likely carry more inventory for higher demand items, use air freight if necessary, and re-route shipments.

RFID Identifies Robust Market Growth

The hype surrounding radio frequency identification (RFID) may finally be living up to expectations. The global RFID industry is primed for significant growth over the next decade, according to new research conducted by Boston-based market intelligence firm IDTechEx. The market—which includes tags, readers, software, and services for passive and active RFID—will grow from $7.88 billion in 2013 to $9.2 billion in 2014, and surpass $30 billion by 2024.

In the near term, passive UHF tags will see rapid sales growth, from a total of more than three billion tags in 2013 to 3.9 billion tags in 2014. Fewer passive HF tags will be sold in 2014 (2.5 billion), but they come with a higher average sales price, so the money spent will be almost 10 times more. The highest volume sector for passive UHF systems is retail apparel, which still has some way to go, with RFID penetrating only about seven percent of the total addressable market in 2014.

RFID chart

Source: IDTechEx