The next gen supply chain will separate retail's winners and losers

August 18, 2014

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By Steve Rowen, emerging markets specialist, RSR Research

Steve Rowen

As consumers gain power, not only do they start shopping in more complex ways, they expect retailers to be able to fulfill their increasingly complex demands quickly–and without issue. As a result, the next generation supply chain is truly "the next big thing" for retail. The problem is, retailers are just getting started on what may turn out to be the most challenging part of the conversion from a store-centric retail operation to a true omnichannel offering; many of the biggest challenges they face exist within their own four walls.

When it comes to operational issues, the best-performing retailers (Retail Winners) say their biggest problem is shipping directly to consumers in a timely manner. As Amazon continues to push the limits of direct order fulfillment from two-day to one-day (and ultimately to same-day) delivery, Winners are inordinately focused on at least keeping pace (50 percent of Winners vs. 37 percent of all other retailers).

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Winners are also much less likely to blame their existing store infrastructure for their woes. Forty-two percent of average and lagging retailers say that "stores were not designed to participate in the current/projected volume of omnichannel order fulfillment." While that may be true, it won't earn much empathy from consumers. They're not interested in excuses–they just want their products, and Winners are far more aware of that.

Where this data becomes even more interesting is when viewed by products sold. Fast-moving consumer goods (FMCG) retailers are most concerned about consumer shipment speeds (56 percent say it is their top operational challenge). While their interest in timely sales is certainly understandable, their focus on direct delivery speeds may indicate that FMCG retailers are in a much deeper re-envisioning of what their customers' shopping experience may look like in coming years.

Fashion retailers are most likely to blame their stores; indeed, 43 percent say their stores simply weren't designed to handle the current (and projected) volume of omnichannel order fulfillment. In fact, it is their number one operational challenge.

Durable goods retailers' biggest concern is that marketing promotions bring about unintended consequences to their supply chain (48 percent). In theory, this should be the simplest problem to get past (predicting the impact of promotions vs. quintupling the speed of the supply chain vs. reinventing the store's role to entirely new consumers). Instead, durable goods retailers are increasingly becoming entrenched in a race to the bottom–pumping out promotions and price changes far more frequently than they should. Their model was never built to support a heavy promotional cycle, and as a result, even their supply chain is being affected by this hyper-promotional behavior.
The days of the reimagined supply chain are in their infancy, and retailers currently lack much of what they need to provide holy grail options like same-day delivery and same-day shipping–even the in-store purchase of online goods.

Inventory accuracy is a prerequisite to any of these tasks, and retailers just don't yet have the confidence in that inventory data to be effective. Thirty-nine percent of retailers cite it as a top-three inhibitor, and Winners are even less confident: 47 percent cite it as a top inhibitor to progress. And without coordination between supply chain, merchandising and marketing (51 percent of retailers cite this as a top inhibitor), any forward progress will move glacially, at best.
How do retailers plan to get past these hurdles? This data from our latest supply chain strategy report shows that, for Winners at least, the way forward is clear: It will take significant top-line involvement, a less channel-specific internal setup, and business analytics to both predict and measure the effects of their efforts.
What's even more fascinating is who retailers want in on that realignment process. The three most logical choices for who should be at the table–the VP of supply chain, the CEO and the VP of merchandising–fall lock-step with what our retail respondents chose as their top three choices in our survey.

In fact, retailers told us that virtually every position within the retail organization is not only well-represented in supply chain initiatives but, to our surprise, proportionally accurate to what their involvement/influence in those discussions should look like in the first place. Only e-commerce and finance are even remotely underrepresented, and even then only by marginal levels
If this is indeed the case, retailers' supply chain strategies are either a) light years ahead of virtually every other strategic aspect of their day-to-day business or b) so early on in their infancy that the usual rash of problems with departments being under- or over-represented in the decision process have yet to emerge.

Based on what we see in virtually all of our other retail-specific research, and in combination with what is in this report, our feeling is that the truth lies closer to the latter. In fact, we expect to see much more inequality in the coming years. As retailers get deeper into modernizing their supply chains, the push and pull of who's guiding the ship through uncharted waters will have much greater effect.