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.

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.  

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!

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.

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!

Wal-Mart Guides Lower - Sales Weaker

Reporting this morning, Wal-Mart is describing slow sales, and it has guided the street lower for the remainder part of the year.  This is not good news but not unexpected for my readers.  Until unemployment gets to 6% or lower you can expect to see a slow tough slog on consumer goods and that will deflate the demand for trucks. If you have to continue to look at one economic number which ultimately will drive the demand for transportation, look at unemployment.

If Wal-Mart guides down 1.5% to 3%, which is roughly what the news is saying this morning, that is a lot of empty trucks and containers on the road looking for freight.

Consumer durables appears to still be a strong point in the market but overall the story of a tough slog continues to hold true.

Retailers Compete on Supply Chain - Part Deux

I have talked for years in speeches and in advising companies that the supply chain will become the competitive advantage for those trying to move products to market.  Especially if you are a retailer, you compete on supply chain in a major way.  In a blog post recently, titled Execution IS a Strategy I also talked about how great execution, more and more, differentiates the different retailers.  The same product is on the shelf and it is just a matter of who executes better. 

Adrian, over at Logisticsviewpoints highlighted the new service from Sears called "Fulfilled by Sears" (Posting titled: In Logistics, Somebody has to Own The Assets) which is an interesting development following my theory above.  Essentially, Sears is leveraging their fantastic Sears Logistics Services to become a world class 3PL in fulfillment services.  This follows the same developments at both Amazon and Wal-Mart. 

The question is why would a retailer dedicate talent, capital and executive time to opening up their logistics networks to anyone who wants to sell?  Wouldn't this be considered a distraction (especially since Sears at least is in the middle of a fight for pure survival)? The answer is twofold:

First, the simple economics are that each of these companies have to make huge infrastructure investments to keep their own business alive.  If they can leverage this infrastructure cover the variable cost of adding new clients and also contribute some to covering the fixed cost then they will be helped financially.  This is the same reason 3PLs have multi-client facilities - leverage the fixed costs.  Essentially, anyone selling through these networks is actually helping these retailers cover the cost of their huge logistics networks.

Second, they are basically saying they are the best 3PL in the nation and you should use them for that purpose.  They are competing  on logistics and supply chain strategy.  Once they get you into the fulfillment services they can sell you more and more logistics and supply chain  services. 

The group which should be very interested in this development are the true 3PL organizations.  For the vast majority of these networks, the "big 3" use their own labor and their own buildings along with, for the most part, their own software.  This is a play right out of "Porter's Five Forces" where a customer goes upstream and takes business from their suppliers. The buyer clearly is holding the power and the suppliers (i.e. 3PLs ) should be concerned with what Porter calls "Buyers threat of backward integration".    More on this interesting development later.

Is The "Final 3 Feet" The Most Important Logistics Leg?

I have talked a lot about "Final Mile" logistics especially since so many are trying to compete in this area.  From next day delivery to same day delivery to "crowd sourcing" delivery just about every retailer is trying to get an advantage over the other through a more efficient final mile delivery network.

However, 90% of shopping is still done in retail stores and the final 3 feet are the most important part of the execution of in store logistics.  Most logisticians are experts at lean and in plant logistics - getting parts and components efficiently to the assembly line to ensure a very lean and efficient manufacturing process.  But how many apply the same kind of rigor to the final 3 feet - getting product from the store room to the actual retail floor.  After all, if the product is not on the shelves it will be tough for people to buy the item they need.

In an article titled "Walmart Customers Say Shelves Are Empty" the Business Insider describes what appears to be a growing problem in Walmarts - product stacking up in back store rooms and no real system or staff to get it to shelves.  A tightly wound supply chain gets it to the 3 yard line but cannot bring it into the end zone.

Perhaps in store logistics needs to be elevated as a discipline especially as stores become larger and are managing more SKUs and product categories.  Goals of this should be:

1. Keep shelves always stocked without appearing to be stuffed
2. Keep product out of the aisles (nothing worse than aisles being used as storage space
3. Much like Disney where you never see anyone empty trash, yet it is always empty, you should figure out how to restock shelves out of the view of the customer.  
4. Have a detailed planograph for every store shelf / floor spot, have a method to measure fill rate at that point and have a detailed plan to restock. 
5. Start every day with 100% fill at the shelf level.  You will have a running start in keeping the day going well. 

The model below is a quick drawing I did on my iPad to illustrate the point:

Sorry for the quality but I needed to do this fast so I drew it with my finger as I could not find my stylus.  What the graph on the bottom shows is the level of "lean" at each stage of the supply chain from raw material extraction through conversion to the store (store room) then to the retail floor.  It is your typical bathtub effect.  We lean the heck out of the process through conversion and in distribution but then this article claims the final 3 feet is full of waste and piled up product.  

This article blames it on staffing levels and I do not know enough about the staffing levels at Walmart to either support or deny that hypothesis (although the graph below makes a compelling case) I do believe the need to concentrate and develop a solid in store logistics plan is necessary for all retailers.  No sense in having an incredibly lean supply chain if the product never makes it to the location where a customer can actually buy it.  

The Battle for Retail Sales is Really The Battle of Supply Chains

I continue to believe the battle for retail sales is really all about the underlying supply chains rather than the actual store.  The "store experience" is losing its importance to the more broader "order fulfillment" experience.  The backbone of this order fulfillment experience is the underlying supply chain efficiency of the retail company.  The key metrics for consumers include:

1. How easy is it to find what I want on your site / store?
2. Is the product readily available? (final three feet logistics which I will write about later)
3. How quickly can you get that product?
4. Is it packaged in such a way that the product can survive the entire trip (from MFG to DC to store to your house).  Of course, the store part is increasingly being eliminated.
5. How easy can it be returned?  Here I think of packaging and labeling so if I buy the product and decide to return it the process is simple for me to repackage it and put it back in the supply chain stream to get back to a returns center
6. Is it low cost?
7. How easy is it to pay?
8. How quickly do I get the credit back if I have to return it?

All of this is enveloped by world class customer service (Think Zappos) which makes you feel great and enjoy the entire experience.  Think about how Disney World makes you enjoy what is essentially waiting in long lines.  This is what the order fulfillment customer experience has to be like. 

The battle is increasingly being waged between Amazon.com and Wal-Mart's on line brand.  I will not pretend to judge who wins in this case although I think it is clear if the game ended now Amazon would win.  What is not clear is whether they can continue winning given the massive head start Wal-Mart has had in developing its supply chain.  For expertise, Wal-Mart can just hire a bunch of Amazon people so I am not overly worried about the talent pool.  

Challenges facing Amazon now include the high cost of building out a massive infrastructure (which Wal-Mart already has), the change in sentiment for sales tax collection (plan on paying sales tax on all on line purchases soon) and the high cost of final mile delivery which is required for Amazon but not necessarily required for Wal-Mart (see my posting on Wal-Mart testing out a locker system and crowd sourcing their deliveries).

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.  

For years, Wal-Mart has been known as the world class supply chain company.  However, they could be at the cross roads where their supply chain is so tightly wound and so tightly integrated to a "bricks and mortars" experience they cannot adapt to the on line requirements.  This would not be the first time a well managed and world class supply chain became trouble for a company.

Think Dell and how incredible they were in a tightly wound and highly efficient supply chain designed to build desktop and tower computers. A funny thing happened:  The consumer moved to laptops.  While no one wanted to look at desktops before they bought as most were under your desk hidden away (lending itself to a build to order, direct buy model) everyone wanted to look at laptops. Laptops are a visible appliance.  This meant a need for retail space.  Further, the build to order did not need factories.  Go to an Apple store or Best Buy, buy a laptop and right there they will upgrade memory, install devices etc. etc.  Dell's huge competitive advantage with towers and desktops became a competitive disadvantage in the move to laptops.  Due to their size, retailers were willing to display them as they did not take a lot of shelf space or store room space. Essentially the entire model for buying computers changed in what appeared to be an overnight transformation. Dell was not ready and cold not change quickly enough. 

If I were advising Wal-Mart I would study this well to ensure they do not make the same mistake relative to on line purchasing and competing with Amazon.  

In the end I believe Wal-Mart 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 Wal-Mart.  One thing we do know is due to the Innovator's Dilemma big companies tend to get crushed eventually by small start ups .  What is fascinating is how these small start ups, once they become big, make the exact same mistakes and eventually get crushed.  This is phenomenon is described in detail in Clayton Christenson's seminal book titled "The Innovator's Dilemma" and why some big companies cannot see what is clearly in front of them is described in detail in the book "Denial" by Richard Tedlow (Both professors I had at HBS).  Should be required reading and I have put a link to those books below (Yes, through Amazon).

Crowd Sourcing Logistics Comes to Wal-Mart

We have heard of crowd sourcing when it comes to many areas and specifically, mostly, in IT work.  Essentially you allow the "crowd" to do the work for you and a lot of times it is free.  Think "open-source" type work.  Everyone donates, everyone helps and everyone can become a worker for your entity.

Another big area where this is popular is in crowd source funding where just about everyone can be a mini bank and provide micro loans to entrepreneurs.  While this has been a niche area in logistics, Wal-Mart now announces they will test this for home delivery. 

Remember what I have written about which is the last mile / final mile / home delivery is the most expensive part of the logistics chain getting products from production to a consumer.  One reason why stores exist is because it allows a company to aggregate the product and you, the consumer, essentially handle the final mile to your home.

Now imagine you are checking out at Wal-mart and the following interaction occurs:

• YOU:  I am checking out and paying for my product..just as I am about to leave the cashier turns to me
• CASHIER:  I see you live on Smith Drive in Springfield.  I have a customer who just ordered some items and their house is only 1/2 mile from your house.  Would you mind delivering the product for me?
• YOU:  [GULP!]  Huh?
• CASHIER:  Yes, it is only this small bag and I will give you $10 off your purchase if you do this for me.
• YOU: [Still thinking this is odd yet intriguing] - Really?
• CASHIER: Yes, really (channeling Austin Powers).
• YOU: [As odd as it seems you think what the heck] OK, sure.

Wal-Mart gives you a $10.00 discount and off you go to deliver your product, get your $10 off and the home shopper gets very low cost home delivery.

Of course, there are all sorts of security concerns and other issues (What stops you from taking the product and never delivering it) but this is such an interesting idea I think it is worth investigating and perhaps this is the beginning of a huge trend in "Crowd-Source Logistics".  

There is a company which has a very interesting model called Zipments.  This is a fascinating idea which I must apologize I had not seen before.  Zipments matches required shipments with approved and screened couriers in big cities.  This is a little different as it is probably closer to independent contractor courier services than true crowd sourcing however it does appear this model is going to be very disruptive, in some form, to the normal delivery method. 

I could actually think about this going one step further in a Wal-Mart or Target.  I could see them having your credit card number and using the chance of a penalty charge ensuring you make the delivery and also a "load board" on the wall so even non customers could come in, see deliveries needed, and taking them.  

Everyone has a smartphone so getting a signature and passing that signature back to the company is easy.  I could even see, rather than a load board, a live APP existing where you could see what is being offered at multiple stores, bidding on the delivery, and building efficient routes all within a simple APP. 

Everyone can be a final mile delivery person!  Watch out Amazon.. Something like this will work.  

"Home Delivery" Lockers at Wal-Mart

In another twist to the race to home delivery and the attempt to de-throne Amazon, Wal-Mart is now testing lockers in their stores.  Along with a beefed up web presence Wal-Mart will try to entice you to order through the web (capture the web based buyer) however avoid the huge costs of the final mile.

This is the dilemma all of the retailers have and ultimately will have to solve:  The logistics costs of the final mile (delivery to your home) are a huge part of the total costs of logistics when you deliver to the home.  In fact, if you just measure the variable cost of sending one unit of something to your home virtually all the cost is in that final mile delivery.

If Wal-Mart is successful they can leverage the huge advantage they have in store delivery logistics while not incurring the costs for that final delivery - or they may be able to appropriately segment in the consumers mind the differential cost of delivery to the store v. delivery to the home.  This is an area Amazon cannot compete in (they have no stores).  As a consumer, because their is no option, when I order from Amazon I will accept a delivery charge.  However if I am presented with a "free" to pick up at store and $6.00 to get to the home I may think twice about the $6.00.

So, what issue do the lockers solve?  This solves the final "three feet" of the purchase experience.  I do not want to interact with a sales person or wait in line to pick up my goods.  Now I will be able to walk into the store, find my locker, get my products and leave.  It is very compelling.

I probably overstated my position above saying Amazon could not compete with this although they would need a partner.  The UPS store seems like the logical partner as it solidifies the use of UPS for the package delivery and there is one on just about every street corner.

Of course, there is still partnering with the Post Office (interestingly UPS has already started doing in the sustainability space) which I think makes a lot of sense.  We shall see how this ever changing landscape is developed.  Stay tuned.

I have two labels you can come back to for reading all the news on both Same Day Delivery and Final Mile Delivery.  If this is your topic, come back early and often for updates to these labels.

More On Same Day "Delivery Wars"

My readers know I have been blogging about this, with thoughts on what will work, for almost a week now.  I started with a post asking whether Amazon awakened the sleeping giant of Wal-Mart and also wrote about the inherent advantages of scale and dispersion that the United States Post Office possesses in this space.

Note: to follow this story on my blog as it develops make sure to click on the tag: Same Day Delivery.

SCdigest has now written about it (I must admit, I love when I "scoop" a professional journal!) and they are calling it the "same day wars".  Not sure I would use the war analogy but it is interesting they see it that way.

My experience has been same day shipping is more a "marketing gimmick" than reality.  How many people really cannot afford a quick trip to Wal-mart (which is open 24 hours a day mostly)?  Will they really pay $10 to avoid that trip?  I think same day shipping ads will draw eyeballs (which is good - creates sales) but when the customer is about to dispense with $10 or $20 extra dollars they will decide a quick car trip could be enjoyable!

Could The Post Office Be The Big Winner in Same Day Delivery?

An interesting development in the "same day delivery wars" which has been brewing as of late with Amazon and Wal-Mart.  The key question is who is going to do this from a delivery standpoint and who can do it at a very low cost?

Already, the USPS gets something to you for about .45 cents which FEDEX may charge you $5.00 or more.  Granted, they get it faster however with just a small amount of pre-planning you can change that $5.00+ charge to .45.  Most of what FEDEX is charging us for is a premium for our inefficiency and lack of planning.

Enter the USPS in the same day shipping.  As we know, the infrastructure costs for same day shipping are massive (advantage Wal-mart over Amazon since Wal-Mart has essentially 4500 distribution centers) and thus usually make it economically impractical. The USPS has some interesting, already in place, advantages:

1. Huge infrastructure - generally an office in every town regardless of size
2. Already mandated to go to just about every house every day in the Country
3. Will pick up as well as delivery and usually without an appointment. 
4. If you are not home, the trip to the USPS is generally very short (FEDEX for example has pulled out of my small town.  If I am not home when a FEDEX shipment comes and I want it I have to drive 1/2 hour to get it.. my post office is less than 1 mile away)

With some sophisticated routing tools, the USPS could, in a town, sweep the town to pick up the deliveries, bring to their "cross dock" then conduct the deliveries at night.  In some cases they can incorporate the delivery into their already established routes and in others they can utilize the equipment which is just sitting anyway.

This should be fun to watch!

Has Amazon Awakened The Sleeping Giant? - Walmart Same Day Delivery

I think one thing a lot of industries and companies have regretted is taking on Walmart.  Circuit City tried, Toys 'R Us tried and others continue to try.  Little 'ole Amazon was sitting very nicely with a great business dealing with parcel delivery in a few days.  However, that was not good enough.

They now want to turn their vast and sophisticated network of distribution centers into same day fulfillment centers.  There are pros and cons to this and clearly it is a very expensive proposition.  Except for the most densely populated areas, same day delivery is cost prohibitive.  It is especially prohibitive if you have a normal central distribution point system.  Distribution centers like Amazon has are designed to service large service areas - like 250 mile radius and are too big to blanket the Country with them.

Enter Walmart and their "test" of same day delivery.

Walmart sees the Amazon plans and basically says, "I see your same day delivery and I raise you by 4,500 stores / "Distribution Centers".  The interesting part of a Walmart store is the consumer sees it as a retail store yet the smart people in Bentonville see them all as distribution centers.  Let's say the average radius around a store is 15 miles before you hit another store.  Given this (and I am sure the statistic is available.. this is my guess.. not counting the outlands / badlands etc) you can see the advantage Walmart has and will always have over Amazon in same day delivery.  This will remain true unless Amazon wants to go on a mind boggling spree of capital investment to build out stores.  My bet is if there truly is a market for same day delivery (which is very questionable) then Walmart wins before Amazon even gets on the field.

A lot of people have lost a lot of money betting against Amazon over the years however this endevor may be a "bridge too far" even for Amazon.  My advice:  Don't take on Walmart.  Find the white space between you and Walmart (as Amazon has done so nicely over the years) and dominate that space.

The war of final mile delivery is about to begin!

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