Supply Chain Commentary: Grocery Retailers Need to Embrace Digitization Now

The grocery industry is entering a new stage in its evolution – a transformative stage that may cause some of the major players to lose competitive ground or, worse, impact their very existence.

There is no secret here. Everyone can see what is about to happen to grocery retailers, because it already happened to other retail segments.

The apparel and footwear, electronics, appliances, and recreational goods segments have already experienced major disruptions due to two key factors: (1) the emergence of e-commerce, boosted by the success of Amazon, and (2) the expectations of hyper-connected consumers who want nothing less than seamless, personalized, and consistent experiences across their omni-channel touchpoints.

As a result, major retail brands have shut down most or all of their brick-and-mortar operations, and some have even disappeared completely. While these factors have hit grocery retail at a slower pace, their impact is accelerating – as demonstrated by Amazon’s acquisition of Whole Foods.

Keeping Pace with Amazon

Grocery retailers need to completely rethink their business model. Simply stated, their current mode of incremental innovation is not going to succeed against the disruptive innovations led by Amazon.

The big difference between Amazon and traditional grocers is that Amazon can fund their disruptive innovations from their other business segments – a luxury the traditional grocers don’t have.

To reinvent their business at the same pace as Amazon, they will need to find the resources within their own grocery business. Digitizing their stores and enabling their omni-channel business will be expensive. Where will they find the funds to transform their own business while running on a 1- to 5-percent operating margin?

The answer is obvious: On average, 76 percent of the revenue of a grocery retailer comes from its cost of goods sold (COGS). The first and most critical cost component grocers need to optimize is their product and distribution costs, including the inventory costs required to optimize their on-shelf availability performance.

Obviously, grocery retailers and their supply partners have a very long history of working together to deliver the right product to the right store at the right time. The problem is that they have been leveraging disjointed enterprise-centric processes, batch systems, and information silos, and connecting them together across their B2B network by way of point-to-point electronic data interchange (EDI) connections, emails, and spreadsheets.

This convoluted way of doing business across all parties creates delays, frictions, and inefficiencies. As a result, on-shelf availability is still a major area of improvement for the industry, even though, on average, grocery retailers and food manufacturers maintain respectively 35 and 62 days of inventory.

Let’s face it. Grocery retailers cannot compete on their own against a vertically integrated and fully digitized Amazon. They need to integrate and digitize their supply network, and optimize their multi-party processes, from demand forecasting all the way to store deliveries. Structurally, that is just not possible by leveraging batch enterprise-centric processes and systems, and connecting them point-to-point, many times over.

The only way to get this done is for grocery retailers and their B2B supply network to embrace newer options such as a consumer-driven supply network in order to share a single version of consumer demand, propagate that demand signal through their entire network, synchronize demand and supply at every node in the network, and respond to the demand signal in real time.

A consumer-driven supply network allows grocery retailers to digitize and integrate their supply network, in order to increase their on-shelf availability, help their suppliers improve their service levels and inbound logistics, reduce their landed costs to the shelf, and slash inventories throughout.

Optimizing Supply Networks

This concept of “real-time sense and respond” is not new.

The industry has been talking about it for the past 20 years, but has not yet been able to achieve it. So what will it take to finally get the grocers to fully optimize their supply network?

  1. Employ new options such as a consumer-driven supply network solution.
  2. Leverage store-level consumption data to generate order forecasts that can be back propagated across the network to optimize demand and supply at every node on the network.
  3. Merge planning and execution in real time by leveraging machine learning agents to optimize every transaction in real time.

Grocers will have to transform aggressively and adapt swiftly if they want to avoid the fate of retailers in other segments. They will need to digitize their stores and consumer experiences, which will require additional funding.

That funding will come from the digitization of their supply chain. These consumer-driven supply networks will enable them to reduce their COGS, operating costs, and inventory levels, and will give them the leverage they need to compete effectively against Amazon. Relying only on existing enterprise-centric systems and processes will not get the job done. After all, if history tells us anything, a grocer’s survival may depend on it.

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