There is No "Fast Following" in Today's Technology

There have been a lot of supply chain learnings as a result of the COVID-19 environment and there is nothing more important than the lesson of technology.  Technology has separated the haves and have nots in just about every industry.  Those companies which have been able to adapt are thriving even in this stressful time.  Those who did not have the core technology available, or have been unwilling to invest in the technology, have suffered and many have filed bankruptcy. 

As if to prove this case, look at a 4  industries and you will see they have come down to duopolies or maybe three to 5 companies which own the industry.  Think of this:

1. Home Improvement - Two huge players in Home Depot and Lowes
2. General Store Retail - Target and Walmart
3. E-Commerce - Amazon and Wayfair
4. Pure Technology - Apple, Google (Alphabet), Facebook (Advertising). 

You can go on with this but the point I am making is the companies which invested in technology early have thrived and are so far ahead of most of their competitors it is very likely those competitors cannot catch up.  Technology does a few things for these companies:

1. It makes them infinitely scalable.  Meaning they can scale to huge sizes and add little to no cost to the company.  Their cost per unit decreases dramatically as they grow.  
2. It allows them to be incredibly flexible and resilient.  Think of Walmart and their now infamous scale with pick up grocery business.  Walmart e-commerce business is up 97% YoY.  This would not even be possible without the underlying technology already in place. There are very few companies in the world which could handle a 97% increase YoY and have any reasonable chance of still functioning.  
3. It makes the customer experience far better because the technology allows you to customize the experience to the person.  You don't need to "group" people but rather, through the technology, you can customize the experience.  Someone wants to come into the store, you have a solution for that.  Someone wants curbside pickup, you have a solution for that. Someone wants it brought to their home, you have a solution for that.  Someone wants the products delivered to the trunk of their car (specific models allow Amazon to open the trunk of your car and put product in it), you have a solution for that.  
4. Because the technology is cloud based and built on the cloud it allows for the ability to grow dramatically very quickly.  Think about this:  In December of 2019, Zoom hosted 10 million daily meeting calls.  By April, they were up to 300 million per day.  

Virtually all of this are supply chain solutions which have made these companies leaders in their industry.  So, what lessons have we learned?

1. Technology allows companies to become dominant in their industry. 
2. Technology allows scale
3. Technology allows companies to be resilient in the face of adversity;  It actually allows those companies to thrive. 

And finally, there is no "fast following".  Walmart, because of its resources, has been able to catch up to Amazon but this is a rare example - in fact it may be the only example.  Those who get behind, will be behind forever and, ultimately, will be left behind.

The Final 3 Feet Have Become The Most Important in The Supply Chain

We have talked about "the final 3 feet" before which is defined as the leg of the supply chain where product is brought from the back room to the shelves.  However, in this COVID-19 world, the final 3 feet have really become the final 5 feet as there is a building expectation that the store will bring the product to the car and put it in the trunk for your.  People do not necessarily want to go in the store.  My thesis is the stores which do this really well will win and they will beat Amazon.

So, I have done some of my own research as I have not been in a store for at least 1 month yet I have bought many things.  I have used either Amazon or I have used the buy on-line / curbside pick-up process and I can emphatically say that when the latter is done right, it is by far the best experience. The inverse is true however.  When it is done wrong it is such a pain and so frustrating I just will never go back.  Here are the elements of a great curbside pick-up process (This is NOT buy on line, pick up in store - BOPIS as I do not go into the store.  This is Buy On-Line, Deliver to my Car).  

1. A seamless web presence which allows me to buy what is in inventory at the local store.  Take payment so there is a complete touchless process when I arrive at the store. 
2. An alert process which tells me when the order is ready. 
3. A tracking method, using my cell phone, which tells you when I am at the store and in the parking spot. 
4. A well established location to park - good signage - easy to find. 
5. A numbering system on the parking location to make it easy to find me. 
6. A "through the window" confirmation process (Show ID, Scan email etc.)
7. Associates put in the trunk. 
8. Associates need to be the best customer service people and need to be in full PPE (Mask and gloves).  

While many stores have done a good job at this, I have yet to be in one which does it all extremely well.  Even the big box home stores have yet to tie all the inventory into the order system (if the store buys locally it is not in the web site) meaning I have to order some on line and some I call in. 

They almost all fail at the last two which is great customer service at the car.  Many stores (including the big ones) have sent people to my car without any PPE and they have leaned over to ask me a question.  The entire purpose of this drill is lost when that happens. 

Surprisingly, the most sophisticated has been Shell gas station.  Here, of course, the issue is not going into a store but it is the extensive interaction you have to have with a dirty pump and they have eliminated virtually all of it.  Using the Shell app on my phone I follow the process below. 

1. Open the Shell app and it knows I am at the station.  It asks me what pump number I am at. 
2. It then asks me how much gas I want (From a fixed dollar amount to a "fill up). 
3. I use Apple Pay on my phone to pay (Completely eliminates the "skimming" threat which is where a lot of credit card fraud occurs).
4. The app activates the pump and all I have to do is put the nozzle in the car and select gas type.  

They have solved a lot of issues by doing this and one at least (the skimming) was a pre-COVID 19 issue. 

The lesson here is for all retailers:

1. Invest heavily in the final 3-5 feet of your supply / value chain.  The rule used to be your mission was to get people through the threshold of the store.  But now a huge amount of customers will not want to cross the threshold no matter what.
   
   
2. Technology is your friend - Use it aggressively and substitute in-store upgrades with technology upgrades. 
   
   
3. Always think seamless.  If there is a spot the consumer is interrupted in this process fix it with technology. 
   
   
4. Train your associates to forget their political views.  Give the customers what they want and they want to feel safe.  Masks, gloves and touchless processes do this. 
   
   
5. Take mobile payments.  It is almost silly in this day and age that we, as a society,  are not close to 100% pay by smart phone / mobile payment.  Everything should be paid this way.  

Technology is the "great equalizer" for the locally owned and operated stores.  If they embrace it and invest in it, the will beat Amazon.  Remember, Amazon can replicate just about everything except the things I described above.  GO AFTER WHAT THEY CANNOT DO!

Have Clicks and Bricks Won The Game over Pure E-Commerce

First, I will give you my hypothesis answer which is "Yes" it has.  Of course, I have been wrong before and will be wrong again but this would be my position going into the discussion.  Because of COVID19 we have learned the proper mix of "I need go to the store" with "I can wait to get it delivered". So, yes, my answer is an resounding "Yes".

I see this for three main reasons and in this posting I am going use Amazon as the proxy for e-commerce since it is so dominant in that space.  A little background on how this idea started developing.  I tweeted the following:

"A casualty of #Covid19 in the Supply chain is going to be #Amazon. With elongated delivery times, missed deliveries and massive counterfeiting, @amazon has become useless. #Bricksandclicks with in-store pick up, curbside car loading and local delivery has won the day.

— 10xLogisticsExperts (@Logisticsexpert) April 11, 2020"

The next morning I opened the Wall Street Journal to an article (Posted at midnight and my tweet was at 10:40pm) titled  "Will We Forgive Amazon When This is Over"  by Christopher Mims (@Mims, Christopher.mims@wsj.com) (May be Paywall).  The theme is the same:  At precisely the moment we needed Amazon the most, the model failed and it failed big.  There are a couple of key areas where it failed and only one could really have been an "unknown unknown":

1. Merchandising and Inventory:  This is the big "unknown unknown" and we cannot hold Amazon or anyone fully responsible for this as no one could have seen the massive whipsaw / bullwhip which occurred with certain products.  We essentially had a "run on the bank" and ran out.
   
   However, the "bricks" portion was able to respond much faster through limiting amount someone can buy, "senior hours" and other tactics (Not the least of which is just public shame if you are walking out with cases of toilet paper).  Amazon just could not get ahead of this and still to this day are not ahead.  They essentially have shut down all other "non essential" product lines yet I can still get all that stuff through either BOPIS (Buy on line pick up in store) or just in store at the bricks.
   
2. No Customer Loyalty:  The big question for the e-commerce providers such as Amazon will be whether they invest a lot into their networks to support a crisis like this or do they chalk it up to a "once in a lifetime" crisis and assume everything goes back to normal.  I think it will not go back to normal and the pure e-commerce players will lose customers and not gain them. 
   
   Take the Amazon Prime program for example.  Many hundreds of thousands have paid for years into that program.  Yes, you get free delivery but it also is somewhat of a loyalty program as well.  As soon as the crisis hit, prime customers were thrown to the curb.  By doing that, many prime customers are asking themselves "What am I paying for" and now that they have had the experience of "bricks and clicks", these customers may never come back.  I would imagine Amazon will see a decrease in both Prime customers and customers overall.
   
3. The Technology Just Did Not Work:  This led to a massively poor customer experience that did not have to be.  In fact, prior to COVID19 most discussions I have been in have always started with, "If Amazon can do... (Kind of like, "If they can put a man on the moon why can't....)".  This will no longer be the case.  No one will want to replicate this.  I think most give them a pass on the inventory issues but why is their website so screwed up?  Why do I have to click 4 times before I find out either the product is out of stock, it is reserved for first responders or the delivery will be two months from now (Why would they even allow it to be displayed)?
   
   The purchase experience has been awful.  The great technology has gone haywire and their "hands off the steering wheel" AI systems failed at precisely the time they were needed.  I found websites of other "off line" stores to be far more helpful, far more accurate and far more useful.  Amazon is going to have reevaluate this entire problem.  Their technology just does not appear to be much better.
   
4. Counterfeiting:  One item the "bricks" stores have is brand reputation.  Nothing makes it into a Home Depot, Lowes, Target, or Wal-Mart store without it being properly vetted to safety, service and functionality.  The item has to perform as specified.  Yes, there will be some warranty claims but not complete failure.  The "E-Commerce" world, led by Amazon, has had this "endless aisle" approach and they purposefully do very little vetting.  They claim they are a "platform" not a store (Although I think this is mostly "lawyer speak" so they can defend in lawsuits).  This has led to massive counterfeits, items which are displayed but never fulfilled, , items which say they will be fulfilled but it may be 2 months from now etc. 
   
   What is worse is the e-commerce players want the "wisdom of the crowd" to sort through it all, figure it out with "star ratings" (Which are easily manipulated by the very people doing the counterfeiting) and then report them.  The e-commerce people want the buyer to be their merchandiser as well and not pay us.  Bad form.  

For all these reasons, I believe pure e-commerce will lose business and it will take them a long time to get it back.  The "old guard" businesses with store fronts, reputations and really good technology have won this round and a big round it was (and still is)!

Long term readers of mine will not be surprised by this as I wrote two posts a while ago about how the bricks and mortar should win because they can do everything Amazon can do and Amazon cannot do everything they do.  I welcomed WalMart up from their long slumber (June 26, 2017) when they finally committed heavily to e-commerce.  I then wrote a post on June 3, 2018 titled: Convinced Even More That Wal-Mart Should Be The Winner Against Amazon.  

Capitalism without Capital and Why Amazon Was Able to Get To Scale

I am currently reading a fantastic book titled Capitalism without Capital:  The Rise of The Intangible Economy by Jonathan Haskel and Stian Westlake.  The essential message of the book is how the "new" economy allows companies to get to hyperscale size because they are built on intangibles (software and ideas).  These are infinitely scalable and have allowed the growth of FAANG (Facebook, Apple, Amazon, Netflix, Google ) to incredible levels.  Because this is a supply chain blog, I will focus on what this means for everyone else relative to Amazon. 

People constantly ask the question: How can Amazon keep growing if they do not make money?  There are two answers:  First, Amazon has proved that if they want to scale back investment they can make a lot of money almost at will.   Just in Q2 of this year they made over $2bl in profit in one quarter.  Not bad for a company that "does not make any money".  Second, and this is the most important point, they have built this profit machine on the value of intangibles.

Most companies value themselves based on what can physically be put on the balance sheet.  Something is an "asset" if it is physical in nature and can be valued in the marketplace, mostly by figuring out its resale value.  Further, accounting rules actually favor this as when you put this "asset" on the books you do not have to expense it all at once but rather depreciate it over time.  This makes a physical good more valuable than an intangible good. 

However in the intangible economy where it is intangibles which truly drive value this is a real problem.  Think of it this way:  What makes Amazon's supply chain so great?  It certainly is not the buildings, racks, trucks or even the Kiva robots.  All of those are easily replicable.  Rather, it is the intangible assets which make it great and where they have invested a lot.  It is the algorithms, the engineering solutions, the supply chain processes (inventory, order management and advanced delivery routing) which add all of the distinctive value of Amazon.  So now we can answer the question:  Why doesn't everyone just replicate Amazon?

Because their rigid and outdating accounting systems won't let them.

While others are looking to physical assets which can be depreciated and can easily be valued for ROI purposes Amazon looks to the intangibles.  By doing this Amazon has built a cash machine which now allows them to put up physical assets with ease. 

The basic tenet of the book is companies which value their intangible assets have infinite scale.  Once they get to this point it is tough for anyone to catch up. 

Convinced Even More That Wal-Mart Should Be The Winner v. Amazon

I have written many times about the idea of Walmart v. Amazon in the battle of retailing and e-commerce.  My basic thesis has always been this:  Walmart can do everything Amazon can do but Amazon CANNOT do everything Walmart can do.  And, yes, it revolves around the stores.  

One of my first posts on this topic was back in March of 2013 when I posted "The Battle for Retail Sales is Really the Battle of Supply Chains".  In that article I concluded:

"In the end I believe Walmart and the other big retailers can and should be able to beat Amazon.  Just like Dell could have and should have beaten Asus and just like Sears could have and should have beaten Walmart."

I concluded because of the huge logistics and retail head start Walmart had they could beat Amazon at their own game.  I also, however, posited the problem Walmart would have - the ability to innovate and brand.  Here I said:

"The problem for companies like Wal-Mart and other retailers is they are losing the "branding" war.  The name "Amazon" is becoming synonymous with on line shopping.  People I talk to really do not "shop" on line they just go to Amazon to buy what they want.  It is becoming what Marissa Mayer (New CEO of Yahoo) calls a "daily habit".  As a consumer, you decide whether you are going to go to a store or buy on line.  If you decide to buy on line you go directly to Amazon.  I am sure Wal-Mart has all sorts of statistics that try to pat themselves on their backs but reality is Amazon is building a brand which equates to on line shopping - The Amazon brand is to on line shopping what the term "Xerox" is to copiers.  If this hole gets too deep, Wal-Mart may not be able to dig out. "

Then, it appeared Walmart "awakened" and I wrote a post titled: "Welcome Back Wal-Mart:  We Missed You Over The Last 5 Years".  In this article I discussed how I went to a Walmart and also used their on-line e-commerce system.  Both experiences were extraordinary and this posting was written about 1 year ago.

Today, I have seen the future and it is, in fact, in Walmart.  I am more convinced then ever they will win this as long as they stay hungry, scrappy and focused on the customer.  In my local Walmart they recently added the giant "Pick up Tower" which essentially is an automated way for you to buy products, have them brought to the store and have a very seamless and frictionless way of getting them.   A picture of this is to the left.  Because just about everyone in America goes past a Walmart just about every day, ordering on line and picking up in the store is essentially a no-brainer.  Can Amazon do that?  Sure in the few Whole Foods stores, maybe, but not at the scale a Walmart can do it in. 

So, think of this scenario.  You "shop" on line at night after work and in front of your T.V.  You set to pick it up tomorrow at the local Walmart.  On your way home from work you swing past, you pick it up and voila.. it is at home.  So, why is this so intriguing to me?  Well, it is because there are a few external events occurring in the retail / e-commerce space which are converging and making the pure e-commerce play more difficult.   They are:

1. Rising Cost of Transportation:  Who does not know about this topic?  The way to mitigate high costs of transportation is to keep trucks "fullest the furthest" and don't break them down until you absolutely have to.  This allows for far more efficiencies when delivering to stores than to people's homes.

2. The Rise of "Porch Pirates":  This is a very interesting phenomena where people just go around to houses and steal delivered goods.  If you live in an apartment complex, it is like the wild wild west.  Between people stealing and boxes being left at wrong buildings and doors, it is a true mess.  Many companies are trying to solve this with "lockers", ability to go into your home, delivery to trunks etc. but net net, it all adds cost and complexity to the delivery system. The simple solution already exists - deliver it to a store.

3. Infrastructure Costs: Without a store network, the cost of building out a really good e-commerce infrastructure are astronomical.  The Home Depot, which already has one of the best supply chains in retail and has 2200 stores is about to spend over $1bl to build out what they believe they need for same day / next day service.  Imagine if you are starting from scratch?

4. Inability of Small Package Carriers to Deal With "Surge" Periods:  Finally, we hear this every Christmas season - one of the two major players will have "guessed" wrong and either they lose their shirt in terms of cost or they have not nearly the capacity needed to service the boxes. 

In the end, this is Walmart's game to lose and it appears they have no intention of losing.  I personally use both and am a "Prime Member" however when that comes up for renewal I think I will be rethinking that automatic sign up.  From a supply chain perspective, I believe Walmart is better situated than any other retailer in the business for the following reasons:

1. A very mature small box, big box and cold chain distribution network already in place.  They have a huge head start.

2. The ability to service an "endless aisle".  With this mechanism you could buy anything from them even if they never stock in the store.

3. Prime real estate for retail.  Any chance you do not drive past one?

4. Walmart Pay:  I have not mentioned this but the ease of paying using Wal-Mart pay is truly incredible. Also, it does not use NFC but rather QR codes which means all phones essentially can use it (Google Pay and Apple Pay require NFC which is in higher end phones). 

The battle continues but right now, due to the maturity of the supply chain, I am leaning to Walmart.

 

Thoughts on Retailers Buying XPO Logistics and What The Right Strategy Should Be

I generally do not like to comment on something so speculative however Friday ended with a huge bang in the supply chain industry with Amazon and a major retailer apparently thinking of buying XPO logistics.  I was asked by many what I thought of this so let me give you some pre-holiday thoughts:

First, this is a very normal activity as companies go upstream and downstream in the value chain to try to capture as much as they can in that chain.  Remember your business classes:  The value chain starts essentially at the extraction of raw materials and ends with the consumer (some say it goes through post consumption disposal and return of unconsumed raw materials to Mother Earth.  I agree with that however let's leave that alone for now.).  In between extraction and consumer you have activities such as transport of raw materials, conversion of raw materials to something of value, transportation to distribution, merchandising (either on line or in store) and final mile delivery (whether completed by the consumer or completed by the seller) to the point of use (the home).

Three things you will notice in that scenario:

1. Conversion is very specific to a good.  Meaning, it is not fungible and if you wanted to capture that portion of the value chain you would have to buy a lot of companies.  You may want to vertically integrate a very high margin company but not all of it.
2. Transportation is pervasive across the value chain all the way back to the raw materials movements to the final mile.
3. Delivery Final mile (v. customer pick up) is growing rapidly and it touches the consumer.  This makes Final Mile transportation part of the merchandising and consumer touch point process - and this is why retailers want to vertically integrate. The impact of final mile on the consumer experience and consumer loyalty is huge.  

There is one other dynamic happening right now and that is the current capacity crunch.  Rather than get into an "arms race" of ever increasing rates, the retailer may decide to just buy their own capacity and this is another reason to get the "Elephant Gun" out and look for carriers to buy.  

If the retailer is thinking they want to capture the final mile and protect themselves against the capacity crunch, they could do a number of things:

1. Buy technology to facilitate the final mile but not buy the assets.  Think Target's acquisition of Grand Junction.  Or their more recent acquisition of Shipt for grocery shipping.  Even Wal-Mart's acquisition of Jet.com would be part of facilitating this process.  (The biggest issue with the Wal-Mart acquisition was one of culture - Wal-Mart eliminated Jet's long standing practicing of having drinks and happy hours in the office.  That since has been reinstated).
2. Buy transportation assets and make them "in house" assets.  This is where the discussion of buying XPO comes in.
3. Build the transportation assets yourself - i.e., Amazon's acquisition of planes and doing "power only" where Amazon owns the trailers, are examples of this.  Many retailers follow this power only model.  The benefit of this is you can swap carriers pretty quickly and you can leverage small carriers since the retailer owns the trailer.  The problem with this strategy is the "crunch" is with the power not with the trailer.
4. Develop "Vested" relationships which give the specific retailer "most favored nation" status with one or more asset providers.  While this idea is championed by Kate Vitasek at University of Tennessee (read about this concept at The Vested Way) it really was "founded" in the logistics industry by the infamous J.B. Hunt agreement with the BNSF.  This gave J.B. Hunt a preferred status with BNSF which, to this day, makes it impossible for other carriers to really compete with JBH.  For the most part, the rest of the industry fights over what JBH does not want.  If JBH wants it, they win. 
5. Work within financial risk mitigation constructs. An interesting new development is to protect capacity (does not really help with final mile) by participating in the new futures exchange developed by Craig Fuller called TransRisk.  This will definitely assist with the stabilization of rates and capacity however it is at least one year away from implementation  and, while I absolutely think it will work, it is unproven.  

There are hybrids of all of these however these are the major actions a retailer could take to capture more of the value in the value chain and mitigate capacity risk.  Number 2 above, Buy Assets, has garnished all the excitement going into Christmas weekend.  My quick thoughts:

1. No one is buying XPO and if they did the Government would stop it.  XPO, as it currently is constructed, is too big and would have too big of an impact on industry assets to allow one retailer or on-line provider to buy it.
2. They could split XPO up and buy pieces of it.  While this would probably make it easier to get through government regulators, I believe this action would be value destroying not value creating.  For example, the final mile portion of XPO was created by XPO acquiring a company called 3PD.  3PD are executives who came out of retail and therefore just "putting it back" could be possible.  Combine 3PD with the final mile technology of Optima (which is a final mile technology company XPO purchased back in 2013) and you may have a platform for a good final mile service.
   
   However, don't forget, neither XPO, 3PD or Optima own the transportation assets. They merely find, qualify and route.  The "work" is still outsourced to smaller delivery companies and therefore this would be more of an example of buy technology  (along with getting very good people) versus buying transportation assets.
   
   The big question this would leave is what happens to the rest of XPO?  Is it just a carcass laying out there to be pecked at by private equity investors? Does Brad Jacobs still run it?  Are the pieces as valuable as the whole?  I think not.  I think the value of each piece of XPO diminishes significantly as other pieces get sold off. This is why I believe splitting XPO up would be value destroying not value creating (unless, of course, the buyer of a piece is willing to either pay a huge premium for the portion they buy or be willing to immediately divest of certain portions of the "carcass")

I think the logical action for retailers is to concentrate heavily on #1 (Buy Technology) along with #4

 (Develop Vested Relationships).  I would also heavily participate in #5 (Work within financial risk mitigation constructs) once it becomes available. 

Interestingly, and somewhat off the radar, this is what Target appears to be doing (after hiring Preston Mosier and Arthur Valdez from Amazon).  Perhaps everyone, including Amazon, should be focused more on what is happening in Minnesota.

Have a very happy holiday season!

Amazon Final Mile - It is All About The Brand

I keep being asked why in the world would Amazon start their own home delivery / final mile service (See Amazon Logistics)?  Everyone questions this as a stretch and even Fed-Ex could not help themselves when they stated Amazon (they did not specifically say Amazon but we all knew who they meant)  does not understand what it takes to have a dense delivery network like Fed-Ex or UPS. 

UPS chose to be in denial by having the CEO say:

"We don't believe that Amazon's strategy is to do it themselves and the reason we believe that is we have this huge infrastructure, we're investing in technology, we have a great mutual relationship with them," 

I think most of the analysis, and the response from Fed-Ex and UPS miss three critical points:

1. Branding
2. Capacity
3. Drop Ship
   

Branding:  When a final mile company delivers to the consumer's home the consumer sees it as an extension of the company the item is purchased from, the product and the purchase experience.   The consumer does not see "Fed-Ex", "UPS", "JB Hunt Final Mile" or "XPO" and certainly they do not separate the delivery from the entire purchase experience.  If the product is late, damaged, delivered in a truck that looks like a get away vehicle from a crime, is handed to you by a person who is a felon, etc. etc. the consumer will be very disappointed and will always relate this experience to the store (whether on line or physical).  If Amazon is to protect their brand they need to own more and more of the fulfillment chain  This allows them to do that. 

Capacity:  UPS and Fed-Ex have disappointed at the crunch seasons more than once and I believe Amazon is just sick of it.  At some point you have to take destiny into your own hands and take control of it.  Part of this is what stage the companies are at in their development.  UPS and Fed-Ex are in the "protection of business" stage and Amazon is still in the "Grow.. grow.. grow " phase.  What does this mean?  It means UPS and Fed-Ex are big companies who only invest when they know 100% it is a "sure thing". 

Amazon, on the other hand, is investing like mad.  Therefore, UPS and Fed-Ex cannot keep up with the explosive growth and maintain all their other businesses.  This shows itself in a lack of capacity at crunch times and so Amazon, as they always do, have taken their destiny into their own hands. 

Drop Ship: In Amazon's statements what is also clear is they want to control the drop ship experience from vendor's warehouses.  In this case the consumer orders from Amazon, the order is passed to a vendor, the vendor maintains the inventory and warehouses it but a Amazon truck picks it up and delivers to the customer.  Think about this as the touch points the customer is directly involved in are:

• Order experience
• Delivery experience
• Payment experience

In the case I outlined above, Amazon owns all three and the burden of back room logistics (versus front room logistics - I feel like I should trademark those two terms) is kept by the vendor.  This is brilliant and well outlined in this short article in Industrial Distribution Magazine.  

As logisticians and supply chain people we always look to the operational aspects of a strategic move.  In this case, it goes far beyond logistics operations.  

Read all my postings about Amazon as I have tracked this development for years:  Amazon Coverage on 10xLogistics

Interesting Supply Chain Events from Week of August 21, 2017

The week is over and some very interesting reads and developments.  Let me get right to them:

1. The war between Amazon and Walmart heats up with the use of Google Home:  In Kevin O'Marah's great piece in Forbes (Google/Walmart: The Brutal Future of Retail Supply Chains)   he discusses the impact of voice assisted purchasing.  While some thought Amazon had this locked up, Walmart joins forces with Google and given Google's penetration into the virtual personal assistance market this may give Walmart an edge over Amazon.  Other implications of this:
   
• Data flows directly from consumer to the manufacturer and could be the device that moves power back to the manufacturer and away from the retailer. 
• Price discovery by the consumer will be faster and will result in a brutal retail environment. 
• As Kevin states, if you are on a calendar based S&OP process, you may be too slow to adjust for what will be a rapidly changing consumer.
  
  This war shows retailing is really a war over efficient supply chains.
    
2. Lean is almost always in the news however when I see my good friend Robert Martichenko launching a new lean blog I jump up and notice.  It is called "Lessons in Lean: Lessons in Leadership" and I will not repeat everything he is writing here.  Suffice to say, everything Robert reads is worth reading, this blog is no exception and I encourage you to read it directly. Specifically, the post titled: Is Reflection a Lost Art was very impactful for me and I have taken actions in my own personal journey reflecting some of Robert's thoughts.  It is a must read.
   
3. More data supporting my previous post about leadership and being on the floor to lead and understand what is truly happening.  In "What CEO's can Learn From Their Frontline Workers", Mark Dohnalek does a nice job outlining why being on the floor and listening is an important trait of CEOS and all leaders.  It still is amazing to me how many CEOs spend more time in meetings than out in their facilities.
   
4. CASS reported continued upward pressure on rates for a YoY basis and a MoM basis although the pace is slowing.  I will write more about this however I will say we are still far below 2012 - 2015 and I personally think we are starting to get to a precarious position.  A lot of investments and purchases are being made in anticipation of macro economic activity by the Feds (i.e., tax cuts which they call tax reform).  If this does not happen (which I give about a 50/50 chance) we will find people have gone far in front of their skis.  CCJ reports tonnage leveling out and conditions deteriorating.
   
   
   

   

   CCJ Report on July Truck Tonnage

   Looking at the Net Income and EPS of the large publicly held carriers and you see that it has, so far, been a "ho hum" year as their income is struggling to keep up with expenses.  Landstar, once again is the outlier and doing a fantastic job.  (See transcript from conference call here: Landstar (LSTR) Q2 Conference Call.
   
5. The race for fast delivery of big box products is heating up with rumors of Overstock wanting to take advantage of XPO's incredible final mile delivery network.  While Overstock declined any agreement has been reached, I am just not sure how you execute fast delivery of things such as appliances and furniture without engaging XPO.  Bradley Jacobs, XPO CEO plans on being within 120 miles of 90% of the US population by the end of 2018.  Tough to find another competitor who can do that.
   
6. The Inventory to Sales Ratio in the economy was updated last week and while we had been enjoying some good news, you can see it has turned and started to rise again.  This could be due to the holiday inventory stock up, which is being reported as being very robust and then again, it may not be.  More to come on this.  

   

   Inventory to Sales Raio - Updated August 15, 2017

Well, that ends a pretty exciting week and hope it was profitable and engaging for all.

If Your Supply Chain is Not Customer Centric - You Are Dead

My previous post discussed why Amazon is killing the retail market.  My thesis is simple and it has nothing to do with Amazon being a financial juggernaut.  It was not always that way so we have to ask ourselves how they arrived where they are today.  The reason: Customer Centricity.  Amazon bills themselves as ..."The Earth's Most Customer Centric Company".  They are passionate about the customer.  So, what are the supply chain implications:

1. Stop Talking About Cutting Costs and Start Talking About Increasing Revenue: The stereotypical supply chain manager prides themselves on cutting costs.  They talk about taking inventory out, moving to cheaper modes of transportation, consolidating warehouses or, God forbid, outsourcing to get cheaper labor.
   
   What they don't talk about is "How can I make the supply chain better to get products to the customer faster so we can drive sales".  Yet, this is the question they should be asking and this is the question the Amazon supply chain managers think about every day.  If you want to know what a "cost centric" supply chain looks like, look no further than Sears.  They are cutting costs right out of business.
   
2. Get Supply Chain Managers Closer to The Sales Force:  If your supply chain managers are not on the road with sales people periodically, meeting with customers and listening to the nuances of what they want, you are not a customer centric supply chain.  I have met a lot of supply chain leaders who say they are customer centric and then I ask them to name (by name, not company) 5 customers who are in a position to buy their product (not the logistics people of the customer company but the actual customer) and they almost never can do it.
   
   Also, if you are selling to an intermediary (i.e., MFG selling to retailer) don't forget the ultimate customer is the consumer not the intermediary.  The intermediary is only going to buy your product if the consumer is pulling it through the channel.  Because of this, you have to understand the real needs of the consumer.
   
3. Velocity is a Weapon:  Customers and consumers want speed.  When supply chain managers cut costs that is generally a euphemism for cutting speed.  It generally means, buffering inventory, slower transportation modes, conducting mode shifts by "trapping freight" and building truckloads etc.  Make no mistake, these are all revenue and sales killers.  Speed wins!
   
4. Look to the Future:  Don't build your supply chain for today!  Look to the future.  What will customers and consumers want in the future and ensure your supply chain can flex to the future.  This is one of Amazon's super secret sauces.  10 years ago who would have believed people would pay $100 per year to get access to 2 day or next day delivery?  The only company that did was Amazon which left others far behind - in some cases so far behind they can never catch up.
   
5. Listen to the Language Your Company Uses and Change it!:  Here is what I mean:  When Amazon discusses customer service they say, "2 day delivery".  When others discuss it (and I have heard a lot of retailers say this) they say "next day shipping".  Notice the nuance here? Amazon's statement is customer centric - when will the customer receive it.  The other statement is internally focused - when will I ship it.  This is a critical difference and it highlights the issue. 

Of course costs cannot be ignored and you have to do this in the most efficient manner possible but my point is that a growing company, with great customer centricity, can drive more revenue.  You cannot cut costs fast enough to overcome lower and lower sales (see Sears for a case study).  

Bottom line:  BE CUSTOMER - CENTRIC!

Amazon Mission Statement:  "Our vision is to be earth's most customer-centric company; to build a place where people can come to find and discover anything they might want to buy online."

Amazon Doesn't Kill Businesses - Ignoring Customer Needs Does

I am going to formulate a more detailed post on this tonight and I think this is a topic needing coverage. It is all about how Amazon got where they are.

The central point: Don't blame Amazon for killing retail.  Amazon was and still is insanely focused on the customer which causes them to innovate around CUSTOMER needs and not internal politics.

While other companies are trying to figure out how to cut out value for the customer to improve costs, Amazon figured out what will "wow" the customer and then figured out how to do this at an acceptable cost.

If others would get maniacal about serving the customer, they could compete. The funny thing is most won't do it.

The Week in Review - ELDs, Amazon (again), Foxconn, Border Adjustment Tax - Dead, and Drivers

Another week down in 2017 and amazingly just a few more weeks before those in the retail supply chain will be going crazy getting ready for black Friday.  A lot of topics to discuss from this week so let's get going:

1. Foxconn - Beside being a great job growth engine what does this really mean for those in the supply chain?  As you probably heard, Foxconn, the mammoth supplier for Apple and other electronics companies has decided to put a large plant in SE Wisconsin.  This will clearly generate jobs, will bring sub suppliers to the region and will make the drive from Chicago to Milwaukee a nightmare given the number of trucks that will move from the Chicago intermodal yards North.
   
   But, the real finding here is that the cost of production in the US is starting to come in balance with the equation of foreign manufacturing.  The "equation of foreign manufacturing" includes the following components:  Cost of MFG + Cost to move to port + cost of ocean / air + Cost to move from Port inland + GLOBAL GEOPOLITICAL RISK + SPEED + INVENTORY CARRYING COST.  The last few I have capitalized because these are normally considered "soft costs" (and therefore get ignored by many at their own peril).
   
   More will come and the "heartland" of America is where they will go due to transportation and now labor costs.  If you are a cartage company and haul boxes out of the Chicago rail yards, this is a happy day for you!
   
2. The Border Adjustment Tax is Dead - This was sold and designed to adjust the cost of goods coming over the borders to be roughly equal to the cost of manufacturing in the US.  It was to penalize those companies who move out of the US for the purpose of evading items such as labor laws, environmental laws etc.  When it was first proposed the stocks of those supply chain companies benefiting from cross border activity tanked.  Well, as they say, if you wait long enough good things will come.  The border adjustment tax is dead.  If you make your money moving products across borders and from the ports your money is safe.
   
3. ELDs are Dead, No They are Alive, No They Are Dead...    This continues to be a back and forth.  For the the life of me, I cannot understand why the industry is against this as it will level the playing field between those who cheat and break the law and those who try to run a lawful company.  But, alas, it appears a lot of people are against it.  Despite 21 Congressman co-sponsoring a bill to delay the mandate for one year,  the prevailing wisdom this week is the delay is dead and ELDS will go in as mandated.  
   
4. Amazon Files Patent for Underwater Warehouses -   I am going to leave this alone and just say nothing amazes me anymore.  I will need to have a lot more thought about this and conversation before I fully understand why you would want to put stuff underwater.  Is land that expensive?  Are the rich going to start moving to offshore locations which will need to be serviced from the sea?  Who knows.
   
5. Drivers - Hire Felons?  -  My guess is when you first saw this you figured I had lost my mind and this is the craziest thing you have heard of.  I now ask you to take your emotion hat off and put on your thinking cap.  Forget the social arguments, the fact is we have millions of non violent felons in this country who are no longer incarcerated.  There is a shortage of almost 200K drivers.  The solution seems like a match made in heaven.  That courier driver you had who just delivered a package to your door?  Today, he could absolutely be a prior felon.  Why not allow a non violent felon deliver to a warehouse dock?

A lot going on in logistics and I will be writing shortly about the growth of silicon valley's influence in the logistics and supply chain world.  Just as Detroit has learned their "center of gravity" is moving West, so too is the supply chain industry.  

Amazon and Kenmore - A Match Made in Heaven

It is incredible it took this long for the marriage made in heaven to happen. Kenmore is the crown jewel of Sears and Amazon has always wanted to capture appliance sales.  But how?  The logistics are daunting.

Enter Kenmore and enter Sears Logistics (SLS). I have always said, the best logistics company in the country is "buried" inside Sears. This has been my contention for over 10 years. SLS had perfected final mile, especially final mile for big box items, long before "final mile" was fashionable or an industry. 

Ask your parents if you don't believe me. A SLS person delivering to your home has been a staple for years.

Now, combine this with the Amazon order platform and the comfort and reliability of Kenmore and you have a powerhouse.

More to come on this but if Amazon uses SLS they have picked up an incredible scoop. And, soon, they will just buy the Kenmore brand, bring SLS with it and use the few Sears stores left as showrooms.

Welcome Back Wal-Mart - We Missed You Over the Last 5 Years.

I hesitated writing about the Amazon purchase of Whole Foods as many have written about it already and much is not yet known about how Jeff Bezos is going to use Whole Foods in the continued growth of his retail empire.  One thing for sure is whatever he does with it will be completely different than most people think.  That is what makes Bezos so brilliant and why no one has been able to beat him.  In some ways, only he knows what he really is doing.

But then I re-read an article I posted in March of 2013 titled, "The Battle for Retail is Really The Battle of Supply Chains".  In this article I opined that the big retailers are all essentially selling the same products, many of which have been or very quickly are commoditized.  This means the real value add of a retailer is in their supply chain.

I also concluded in this article that Wal-Mart should be able to kill Amazon as they already have the bricks and mortars along with the capability of great e-commerce.  Finally, I concluded that due to the age old issue of The Innovators Dilemma which was created by Clayton Christensen in his seminal book of the same name.  Unfortunately, for the last 4 years, and for Wal-Mart,  my prediction came true.

The good news is Wal-Mart, like the sleeping giant, has now been awoken.  With its purchase of Jet.com it admitted it needed great e-commerce and, in the same transaction, admitted it could not do this on its own.  The big behemoth could not innovate so it had to buy.  That is OK as it is at least now on the path to competing with Amazon.

But then a funny thing happened.  Amazon admitted it could not grow bricks and mortars fast enough in the grocery space to compete so it made a bold purchase.  In this purchase, Bezos is essentially admitting he wants to move a little more towards a Wal-Mart model and also showed, in this purchase, the only reason Wal-Mart has not crushed Amazon is due to lack of execution and lack of strategic foresight.

Well, no more.  I believe Wal-Mart truly has awoke and they are starting to adjust their supply chain very quickly to mirror a "be where ever the customer is" retailer.  This means if you are out and need something quickly, you can pull into your Wal-Mart and get it.  If you want to order on line and have it shipped, you can do that.  If you want to avoid shipping charges, you can buy on line and pick it up in the store.  Basically, any configuration of how the consumer wants to interact to get the products she needs, Wal-Mart will be there.  Wal-Mart can ship from DCs or from any of its 4,177 stores of which 3,275 are super centers.  Wow!  Wouldn't Amazon love to have that footprint.

If Wal-Mart executes they have a chance of beating Amazon.  I recently used Wal-Mart on line to buy a UPS for my computer.  It was a great experience, shipped fast and was less expensive than Amazon.

I do think the speciality retailer is dead.  Consumers want the "endless aisle" that Amazon and Wal-Mart provide. They do not want to bounce around to 100 different websites to find what they want.

Wal-Mart can do everything Amazon can do (or they should be able to do it) yet Amazon cannot come close to all the capabilities of a Wal-Mart.  If I were investing, the only stock I would buy in the retail space is Wal-Mart.  I would then go to their shareholders meeting and scream two phrases:  "Wake Up" and "Execute"!

Welcome back Wal-Mart - I missed you!

The Stay at Home Economy and Its Supply Chain Impacts - Part 1: Definition

I have noticed a bit about my own behavior and started looking to see if it was just me or was it a "trend" (I am not usually "trendy").  The behavior is simple:  I just stay at home more and I have made my home a bit of a "Disneyland".  Rather than go out for entertainment, I have it brought to me. Instead of going out to buy things, I had them brought to me.  To listen to music, for example,  I merely plug into an amp and headphones and through the power of Amazon, Spotify or Pandora I have just about every song ever recorded at my fingertips.  This is The Stay at Home Economy.

The Stay at Home Economy (SAHE for now on) is something that has huge impact on how our supply chains work.  First, lets explore why this is growing:

1. Technology: I have written a lot about how technology miniaturized or digitized just about everything and it continues at a rapid pace.  My music, my video and my books are all digitized so I get them on demand and in digital devices.  No need to shop or go to a central place to watch or listen.  In fact, my home theater and home audio equipment rivals that of professional locations.
2. Customization: Because virtually everything is available with the touch of a button, I essentially customize my experience to an audience of one - me.  Before, I would have to compromise and listen, watch or do some activity that perhaps was not exactly what I wanted to do.  Now, I do exactly what I want to do. 
3. Control of the Temporal Aspect of Activity: I do what I want (see #2 above) when I want. I no longer have to worry about "start" times or what day of week I am doing something.  I do what I want and when I want to do it. 
4. Food Delivery: This is the last bastion of home delivery e-commerce and it is coming. It is far more complex but with companies building "Meals ready to eat" (No, not the MRE's from the Army days but companies such as Blueapron) and with your local supermarket delivering, the last "big" reason to go out is starting to go away.  
5. Security: This is an unfortunate part of life these days but it is a fact - the more the aggregation of people occur at events, the more risk there is.  Why take that risk?  When I am at home I feel far more secure. 

All of these reasons lead to the idea of "Mass Customization" which has been a dream for a long time.  No longer do you have to produce a product, service or experience for the "masses" but rather you can offer a large amount of individual items and let the customer aggregate these things into the experience they want - when they want it.  

This is the SAHE and you can already imagine the impacts of this on your supply chain.  If you are not letting people customize experiences or products or you are not building a really compelling reason why someone should leave their home to go to your location, you are going to lose.  

This is also the much bigger reason why Amazon is winning - they have built out an experience, a catalog and customization capabilities for the SAHE.  One might even say they are the store for the SAHE.  It is not just a fancy website and big warehouses.  They are actually building out an ecosystem which supports the SAHE. 

Jim Cramer reported on this on his Mad Money Show and said (from Seeking Alpha):

"When Domino's Pizza (NYSE:DPZ) crushed earnings and Target (NYSE:TGT) got hammered, Cramer is convinced that the stay-at-home economy is getting strong. 

The comparisons between these two stocks are perfect metaphors for the current environment. Stocks such as Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Domino's allow people to stay at home and save money as well. Domino's delivers pizzas to you at home while Target requires you to leave the house. 

The bricks and mortars are losing in a world where consumers see stay-at-home as an advantage. This also means that companies like Home Depot (NYSE:HD) and TJX Companies (NYSE:TJX) are rallying as they make the home better. 

Netflix, Amazon and the likes have made entertainment reach home, when you want, how you want it. Gaming companies create engaging video games which people play at home. With social media, consumers are aware what's going on and do not need to leave the house. It's just that things are different now compared to how they were 10 years ago. The stay-at-home economy is touching every aspect of people's lives and it's not going to change soon."

I think it is clear the SAHE is here to stay and it is dramatically changing how people behave and shop.  My next entry will be on the implications of your supply chain - Hint:  If you are not working to support the SAHE you are quickly becoming obsolete.


  Note:  I am not making any value judgment pro or con on the SAHE - that is for social scientists and psychologists to develop.  I am merely reporting what is clearly happening and the impact on supply chains.  

The Amazon Effect

For anyone who runs a warehouse and has Amazon "come to town" you know, at a very micro level, about the "Amazon Effect".  The entire labor and transportation capacity situation in your town changes in an instant.

However, it is bigger than that from a nationwide perspective and I had the privilege of listening to a very insightful presentation given by  Eric Johnson (Twtr: @AmShipEric), research director and IT editor at American Shipper at the Jacksonville CSCMP roundtable event in October.

He had some very good insight into what Amazon is trying to become and what they are not trying to do.  My conclusion, after listening to Eric, is Amazon wants to "own the customer".  Now, of course the key question is what does this mean?

If you think about "owning the customer", it really covers about 5 major touch points:

1. Own the order experience (The first point to gain loyalty for any product).  This drives all sorts of information technology.
2. Own the delivery experience (Appointments, delivery, right to how the customer is greeted). 
3. Own the post delivery experience (solve issues etc)
4. Own the payment experience (whether they sell it to you or not).
5. Own the customer ecosystem (Alexa app, ECHO and DOT). 

If your company is not investing heavily in all of the above you most likely are going to be displaced by Amazon at some point.  This is why I published: "What Exactly is Amazon... 3PL? Retailer? IT Company? Delivery Company? - Answer: All of the Above" back in October of 2015!".  

Bottom line:  The story has not changed.  Amazon is coming for your business regardless of what you are doing so be ready to compete.  And, for those who think it is just a matter of time before they are crushed by the weight of costs, think again.  They have entered into a new space and as this article from back in February reminds us:  They are winning the race for the smart home, and no one is noticing. 

Why Logistics' Leaders Need to Recast "Cost Control"

The best presentation I have seen in a long time was given last year at the CSCMP Annual Conference and it was given by Amazon.  The topic was a general update on their supply chain however a statement was made that has stuck with me.  The speaker was asked how they decide what service to provide given the costs.  His answer was clear:

" We don't trade off.  We provide the service then figure out the cost".

This is the definition of a true customer centric supply chain.  The customer decides the service level and Amazon provides it.  It is then up to the logisticians and engineers at Amazon to figure out how to do this profitably.  

When the cynics asked him how long he can go with losing money, his answer was "We make a lot of money, we just choose to reinvest in the business".  Another great answer and given the results of Amazon in the last few quarters, I think this issue of them making money has been put to bed.  

So what is a person to do who is stuck in an "old school" business where the executives believe the only thing a logistician should do is cut costs?  Here are a few ideas:

1. Recast it into growing revenue.  Logistics systems, when planned properly and executed at a high level do more to grow revenue than most parts of the business - including sales and marketing.  If you own the final mile of the delivery then you definitely have more impact.

2. Invest in quality.  Why do I do almost all my shopping at Amazon?  It is because the quality is near perfect and it is incredibly consistent.  This, again, will grow the business. 

3. Invest in final mile and own as much of it as you can.  Amazon is learning that now with the various ways they are investing in the final mile for Prime.  You can have partners but they have to execute your system.  For example, Amazon delivers on Sunday through the US Postal Service.  However, they use the exact same customer service alerts as any other part of Amazon.  It is seamless to me as a customer.  

I heard another person talk a while ago and it was about the two major touch points for a customer. These are the point of purchase and the first point of use.  Because so much is moving to an order and deliver method of buying, the point of purchase for delivered goods is now both the on-line experience and the final mile delivery.  Make the final mile great.  

Of course, there are other items but these are the big three in my book.  Do this and you will make your logistic's systems revenue generators and not costs to be cut.  If your leaders do not see this, then start planning an exit strategy because they will ultimately lose in the market place.