Safety stock…no longer a four letter word.

A recent piece in the WSJ focusing on the shortages we are experience in the paper towel market – click here. A great piece describing all the components that it takes to get a roll of Bounty to your local store shelf. Well worth the read. But this isn’t about getting your paper towels, it is about the underlying message from the piece – supply chains need to rethink how we view safety stock.

We have discussed this here before, Covid has turned our supply chains upside down. Shortages befell our supply chains across the board. As consumers we saw this when we made our trip to the grocery store – no toilet paper, no cleaning products, no milk etc etc. Bare shelves and forced limitations on what we could buy, became the norm. Supply chain professionals were not surprised, a perfect storm. Unexpected spike in demand, no safety stock and a leaned out supply chain that could not react. So what does this mean long term?

• We must rethink safety stock. The WSJ piece had a great quote – “There is appetite for more safety stock going forward,” said Kellogg CEO Steve Cahillane. “That is something that everybody is talking about.” Yes! We have to rethink how we view safety stock. The entire lean philosophy, which has many positive virtues, has some repercussions. Notably what we are witnessing now. And the lack of safety stock isn’t simply in what we are suffering as consumers, it has also slowed down other parts of the supply chain as materials are in short supply. Think automotive, pharmaceuticals, health and beauty. But this change will only occur when supply chains and companies’ balance sheets are not over scrutinized for the amount of working capital they have on their books.
• Flexible capacity has to be infused into the supply chain. Supply chains need manufacturing capacity, that can flex faster and more effectively. Granted this is easier said than done. There is a lot of talk about making supply chains more “resilient.” This starts with the ability to spin up more manufacturing, add greater fulfillment to meet the rise and fall of demand. For example, I was speaking with Philips earlier this summer. They provided a great example of this ability to flex manufacturing. Running a factory out of eastern Pennsylvania that made CPAP machines. The demand for the sleep apnea device had dried up, doctors were not meeting patients and therefore could not prescribe the device, so Philips rapidly switched this facility to making low cost ventilators. Supply chains need to take this lesson and think about how they can become more agile.
• Speaking of manufacturing…fulfillment needs to be flexible as well. Fulfillment capacity must also be capable of flexing up and down. We are already reading headlines of surge pricing for last mile transportation for the remainder of 2020. Carriers have been pushed to their limit due to the explosion of e-commerce as well as spikes in replenishment needs from retailers. Supply chains are going to have to look at their fulfillment assets, and plan for increased access to regionalized resources to ensure being able to deliver product in a timely and cost effective way. It is not simply the logistic assets but also the warehousing assets. Supply chains will have to strategize about having access to more nodes – warehouses, micro fulfillment centers, dark stores to name a few. As demands fluctuate, there will need to be inventory (aka safety stock) strategically placed within the network. Readily accessible when demand calls for it. Not simply finished goods either, but the components necessary to keep production flowing.

Safety stock, working capital and excess capacity should not longer be viewed as 4 letter words. I hope that we rethink how we measure supply chains and how we value businesses. There has to be some happy medium when it comes to leaning out supply chains and having more “fat” in the supply chain. How this evolves coming out of Covid 19 is worth keeping an eye on. But viewing safety stock as an evil part of supply chain has to stop.

More direct to consumer…means more warehouses. Or does it.

There was a recent article talking about the surge in demand for warehouse space in North America in large part due to the explosion in eCommerce. According to the article there will be an additional 1 billion square feet of storage needs by 2025. Impressive numbers. With eCommerce number predictions ranging between 18% to 26% of overall retail over the next 5 years, many are pointing to this upwards curve as the leading indicator of the need for more warehouse space. Where else will you hold all that inventory needed to fulfill the orders?

But not so fast. Yes, there will be a greater need for the warehousing space. However what some we are missing is that not only is online commerce driving the linear flow of inventory, but the way we fulfill orders is itself changing and adapting. With that, where inventory flows is also changing.

More warehousing!

• More warehousing…no doubt. There will absolutely be a need for added warehousing space. Not only will we need an influx of warehouse space, but how that space is being utilized will also have to adapt. From assembly, kitting, customization and intaking returns, the warehouse of tomorrow is no longer a simple rest stop for inventory on its way to a customer. So yes, we will have to continue to ramp up the available warehouse space, but how that space is utilized will also have to evolve.
• Stores become more flexible inventory dispersers. Dark stores are all the rage these days and the pandemic has only accelerated a trend that has long been baked into the fulfillment cake. Moving forward, it will be more than dark stores that become an integral part of how we fulfill customer orders. Look for stores to become integral to micro-fulfillment clusters. Rather than relying on mammoth distribution centers to service large swaths of real estate, image networked clusters of localized stores (both dark and normal stores as well as smaller DCs) being able to service demand on a block by block, or street level geography.
• Drop shipping becomes a growing method of fulfillment. Want that product tomorrow? Maybe we need to ship it to you right from the factory. I worked with a large sneaker manufacturer that was manufacturing customized sneakers on the same manufacturing line as their traditional make to stock production. It was interesting that they could manufacture both in the same plant. But then it was fulfilled via traditional methods. What if you dispatch those made to order items directly to the end consumer? Drop ship the custom pair of sneakers? You might incur shipping costs with this strategy, but as you get a better handle on that aspect, being able to fulfill directly from the manufacturer could eliminate some of the strain on other parts of your fulfillment channels.
• Circular economy leads to more fulfillment from the returns. I mentioned above that one aspect warehouses will have to contend with, his how to handle ever growing deluge of inventory coming back. Returns is an ever growing aspect of the supply chain that is a cost center, but should be seen as an opportunity. According to market research firm IHL, global returns are approaching $1 Trillion. 50% of all online apparel is put back into the channel via returns. Why put this inventory back into the stores or distribution channels, why not send them directly to consumers? Think of a eBay coming to the returns channel. You purchased a new Xbox, but you realize that the PS4 is a better route, so you initiate a return. As that return is being processed, another customer orders and Xbox. Rather than you shipping the Xbox to a return facility, imaging being able to ship it directly to that other customer. Retailers and brands could initiate some simple ways to “check” the product – upload pictures of the product, guarantee certain functions still work and the retailer/brand could keep track and financial incentivize the parties. This would reduce the added costs associated with all the touch points needed for returns.

So will we need more warehouse space? Absolutely. But the way retail and the manners in which we fulfill customer needs, are evolving. Evolving in such a manner that we need to think of multiple ways, not simply more warehousing, to satisfy those demands.

How the pandemic has impacted the physical space.

By now we most of us are used to working from home, shopping almost exclusively from home and for the most part limiting our exposure to others to a bare minimum. Granted as more of the United States and Europe start to open, and Asia has already reopened to some degree, we are moving to another phase of dealing with the pandemic. But one aspect that is worth watching, is the usage of physical space within our supply chains. From the factories to the distribution centers to the stores and of course the offices, the physical assets in our supply chains are constantly being reassesses as to how they will be leveraged moving forward. So what should we expect?

• Working from home – once the pandemic hit, many of us were forced to work from home. Unfortunately others lost their jobs, while many essential workers did not have the option to work from home. So what does this mean with regards to office space? Do we need to be physically “together” to work? Reality is – digital has made remote work much more viable well before the pandemic. I remember working at Forrester Research in the late 1990s when we first started looking at remote work. Our first remote worker, set up a video meeting room in his home. It was a large, bulky and expensive set up. But it worked. Fast forward to 2020, as I sit here writing on my MacBook, I have a camera looking at me, my iPad next to me has a front and back camera as does my iPhone. No shortage of tools for video conferencing. We also have Slack, Google Meet, MSFT Teams, Skype to name a few tools to allow communication and collaboration. Oh yeah…and email. Will we go back to the office? Sure. For important meetings, client visits and the free trail mix. But being tethered to a desk from 9-5 was going away prior to Covid, this has just accelerated its demise.
• Going to a store. Much like the office, the physical store has seen traffic slow down to a halt in many cases. Granted, when the government shuts down in person shopping for all but essential retailers – grocery and pharmacies – it is easy to see why stores go dark. The reality is prior to Covid-19, the role of the physical stores was already in question. With eCommerce approaching 20% of overall retail, it became apparent that physical stores and malls had to be redefined in their role within the retail supply chain. Yet it was also clear that physical stores were important, as digitally native retailers such as Bonobos, Warby Parker and the grandfather of all eCommerce, Amazon were all opening up locations. So what will stores look like once we emerge from this pandemic? Experience centers? Inventory hubs? Returns nodes? All of the above. While some might completely abandon their physical presence – see Microsoft. Most other retailers will continue to look to modify their stores. Arguably they will look to enhance the experience portion of their stores, and keep a keen eye towards ensuring safety and hygiene. Some stores will be turned into micro-fulfillment centers or return hubs, allowing for BOPIS, BOPAC and BORIS. The store is not going away, it will change, and it was changing before Covid 19. The pandemic has just accelerated that change.
• Factories and warehouses. At the heart of our supply chains we still have the facilities that have to produce and move our goods. These, for the most part, involve a wide array of people to ensure they function properly. And at times these environments call for people to be physically close to one another, so now what? For example, when it comes to picking in a warehouse operation, humans remain vital to the process. Automation has become an integral part of the process, but the human operator remains key. We have seen evidence of this as through the early stages of the pandemic, large fulfillment operations from the likes of Amazon and Walmart were looking to add to their staff rather than reduce them. The challenge is how to ensure the safest working environment? This is where automation can also play a role. There are device manufacturers who have added features to their equipment personnel leverage in these environments to monitor how close people get to one another, warning them if they stand to close for too long. Automation solution providers can ensure the picking robots keep employees a safe distance from one another. The idea of a dark warehouse or dark factory may still be dancing in the minds of some supply chain professionals, but these might not be feasible nor desired in the long run. But how we ensure our labor is safe within the factory and warehouse is not simple with regards to the machinery and objects but now with regards to their fellow workers. Supply chains will have to take this into consideration in a post-Covid 19 world.

How we start interacting with one another, once we have found a way to manage the pandemic is still “tbd.” But we know that one aspect will be how do we handle the physical spaces that make up our communities. Clearly this will change.

My hope for our supply chains post Covid-19.

Our planet has been engulfed with combating the spread of Covid-19 for the better part of 2020. There have been some glimmers of hope and some harsh realities. We are all looking forward to the days when we can once again leave our homes, attend social events, go shopping, go back to work, see our friends and return to some “normal.”

So what will that look like when this happens? Here are some ideas of what we can expect, maybe these are more aspirational, but a blogger can dream.

• Retail gets knocked down…but gets back off the mat. No surprise, but retail is taking a beating during this global pandemic. Retailers such as Macy’s and Ross Stores are having to furlough a large number of their employees. Even eCommerce giants such as Amazon are struggling to keep up with demand…I just ordered some toilet paper that is scheduled to be fulfilled early June! Of course grocery stores cannot stock their shelves fast enough, especially when it comes to items such as toilet paper, cleaners and pasta to name a few (plenty of pineapple frozen pizza available, however). So retail is really dead? Not at all. My hope – retail shows how resilient it is, it has shown this the past few years even as pundits have decried the “retail apocalypse.” Retail will find a way to bounce back, some will go out of business, no doubt. But that void will be quickly filled by existing brands ready to pivot or new entrants. Brands such as Bonobos and Ministry of Supply emerged from the 2008 financial crisis. Adversity will see some retailers not be able to keep up, while it will create opportunity for other.
• Supply chains have a new “normal” to now prepare for. Humans are resilient. While we have our faults, we have proven to have the capability to overcome numerous hardships. And supply chains are at their core run and managed by humans. History has shown us that disruptions have impacted our supply chains since the dawn of time – natural disasters, wars, labor issues and the list goes on. Of course Covid-19 is a black swan event, a global disruptor of our supply chains. My hope – we emerge from this stronger and better equipped to handle the next disruption. Some questions we will have to ask ourselves: do we need to revisit safety stock strategy? The financial world has hammered supply chains for as long as I can remember to reduce waste, to remove inventory from the supply chain, to embrace just in time. Make your margins and working capital, look good. But what happens when that 1 month of buffer gets consumed in a week? What happens when your policies to squeeze every last dime from your suppliers means their shortages slows down your ability to produce your goods? A new normal for supply chains might start with rethinking our supply chains and the way measure their financial success.

Maybe I am too optimistic, but I believe that both retail and supply chains will emerge from this okay. Granted there will be some battle scars. But retailers and supply chains need to reassess how they can better prepare themselves from the next disruption. And there will be another disruption. Whether on the global scale we are experiencing today, or the more “traditional” ones such as labor strife, natural disasters or macroeconomic driven ones.

For now we all need to focus on being safe, washing our hands and staying 6 feet apart while in public! Of course keep first responders, doctors, nurses, scientists, grocery workers and all those deemed essential in our thoughts. Be safe everyone.

Retails secret weapon? Fulfillment.

A few recent items caught my attention, from a recent wave of advertisements from Target about their fulfillment options for customers as well as retail giant Walmart pushing their curb site delivery for grocery. Why is this interesting? These retailing giants are not advertising the amount or mix of their inventory they are offering consumers or their latest President’s sale. Instead they are touting their fulfillment services.

We have all heard the discussion around the need for retail to becoming more about experiences, customer service and personalization. The old adage from Morty Seinfeld that “cheap fabric and dim lighting” is what moves merchandise, does not apply in today’s digital world.

So what should consumers and retailers expect from this new digital world of retail, where fulfillment is becoming crucial to experience?

• Retailers look to lean on their physical assets to compete: Big retailers such as Target and Walmart will continue to find ways of leveraging their physical assets to offer greater fulfillment options. Look for more “frenemy” relationships to emerge – similar to Kohl’s accepting Amazon returns at their stores. As these retailers adapt their fulfillment options, they will need to revamp their physical assets as well. New warehouse layouts, smaller form distribution centers, stores taking on greater functionality, usage of different transportation means (think smaller form vehicles and even autonomous delivery), and least we ignore the labor aspect. Labor – in the store, in the warehouse and in delivery – all touch the customer at some level. Retailers need to recognize this need – hire, train and retain – accordingly. Brick and mortar retailers will find new ways to leverage their capital investments.
• Consumers expect greater options when it comes to fulfillment: Retailers will be forced to offer a greater range of fulfillment options, because we as consumers will expect this! Currently we are being told that next day delivery, even two hour delivery is the norm. Really? Why can’t I determine what day I receive my delivery? Or where it gets delivered, and I am not just suggesting my home or office. What about getting a delivery to the hotel I will be staying at for vacation? We are already seeing delivery to lockers or even the trunk of our cars. Apps like TripIt and Tripsource, are already scraping our data to organize our calendars. Telling us the weather and what sites to see based on our travels. Imagine marrying that information with fulfillment options? As consumers, we will start expecting that fulfillment will be a vital part of the overall retail experience.
• The rise of the fulfillment network as a service: Retailing giants such as Target and Walmart are two examples of new fulfillment hubs that will emerge. You might say, but isn’t that what Fedex, UPS, DHL etc etc have been doing? Absolutely. However we will start seeing a growing number of these hubs, driven not simply by aforementioned logistics players. There will be technology players such as Amazon, Shopify and eBay creating and driving their own fulfillment networks. Of course look for new entrants such as Roadie potentially adding increased physical assets, think warehouses, to their existing last mile fulfillment network. We will truly start seeing more fulfillment as a service offerings. Like mentioned above, this will create some potential frenemies. Regional retailers might leverage the Walmart fulfillment network to warehouse and fulfill online orders. Might sound crazy…but did anyone imagine Kohl’s letting in Amazon into their stores?

Fulfillment used to be seen as a cost center. Something that you had to spend money on…because you needed to get inventory to your stores in an inexpensive and timely manner. Today, fulfillment has taken on a much different role, a strategic on. Amazon has made it is priority to master this part of their business. Other retailers and brands are quickly catching up and in some cases offering some unique and innovative services.

A final question to think about…does the USPS have a play? The postal service has long been THE fulfillment network. But they have seen their value proposition erode away with less traditional mail being moved. But they have the infrastructure and most importantly the feet on the ground. For example, I spend 15 minutes the other day talking to Joe my postman. We talked about our dogs etc. He has a personal relationship with those on his route. As more fulfillment will be done away from stores and other physical locations, Joe becomes your interface with your customer. Can USPS leverage this?