Winning Supply Chain in Omnichannel –Trends and Strategic Implications

Kellogg

2016

2

Introduction

Michael Hu

Email: Michael.Hu@atkearney.com

− Area of focus: eCommerce and omni-channel supply chain; digital transformation

− Passionate about working with retailers and brands

− 2007 Kellogg grad

− 2 year consulting stint turned into 9 years … and counting

3

• Introduction: What is omnichannel? Why is supply chain critical?

• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?

• Key trends in omnichannel and implications for future supply chains

Agenda

4

What is omnichannel? - allowing consumers to buy how they want, what they want and when they want it

Source: A.T. Kearney

TRANSACT

FOLLOWUP BROWSESTIMULUS

EVALUATE

Frictionless Consumer Journey

4

5

21

3

Digital stores and pop-ups

Curated, free home trials

One click buy on social media

Amazon dash button

Click & Collect

Locker Pickup

Time Definite Delivery

Real time promotions

Digital augmented dressing rooms

Mobile, alternative payment

Online dressing room

24/7 customer care

Endless aisle marketplace

Automated stores

Crowd sourced same day delivery

Chat-bots and shopping assistant

Smart device replenishment

5

Online sales growth and penetration significantly outpacing traditional channels

1. Euromonitor, A.T. Kearney Analysis

-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

18%

20%

0%

26%

22%

16%

6%

2%

24%

4%

Haircare

Bath & Shower

Offline Growth

Men’s GroomingColor Cosmetics

Skincare

FragrancesSets / Kits

Online Growth

Deodorants

Online vs. Offline Growth by Category(Retail Value, 2013-2015 CAGR)

Size of bubble indicates product penetration, ranging from 0% to 20% for categories shown

FragrancesSkincare DeodorantsSets / KitsColor Cosmetics Bath & ShowerHaircare Men’s Grooming

6

Mixing Centers

Distribution Centers StoresPlant

Brands Retailers

Mixing Centers

Distribution Centers StoresPlant

Brand’s .com Distribution

Center

• Homes• Lockers

Last Mile (pick-from-store)

Last Mile

Last Mile (click and collect)

Line haul Line haul

Line haul

Line haulLine haul

Retailer owned or Brand owned

Retailer .com Distribution

Centers

eCommerce assets

eCommerce flows

• Mixed or full pallets

• Line haul trucks

•Full or layer case picking to pallet

•Pallets of products pushed to stores (and end customers)

•Unit or eaches picking to basket•Pick against consumer order•Can be located 750 mile to <50 mile of demand

•750 – <50 miles (depending on order lead time: 3 days vs. same day)

•Parcel express trucks if Next -3 days•Delivery vans, courier, drones if Same/Next day

Source: A.T. Kearney

Omnichannel supply chain is different than traditional retail

7

• Visibility at pallet level• Fewer, higher velocity SKUs

• Limited need for real-time integration and analytics

• Visibility at basket level• More, thin SKUs

• Real time Big Data analyticsand integration critical

Inventory Management

Front & Back-End Systems

ChallengeTraditional Brick &

Mortar Focus Omnichannel Focus

• Store location key• Less demand volatility

• Store+ warehouse key• More demand volatility

Network Footprint

• High volume cases• Replenish stores

• Low volume eaches units • Building consumer baskets

Warehouse Operations

Source: A.T. Kearney

Omnichannel supply chain is different than traditional retail

8

Supply chain and fulfillment is critical for omnichannel success

More Direct Impact on Consumer Experience

Missed cross-dock scheduling or delay in LTL replenishment = increased likelihood of shelf Out of Stock

Delayed online order fulfillment from warehouse fulfillment = 100% unhappy customer

Brick & Mortar

Omni-channel

More Impact on Profit

1 2 3

Source: A.T. Kearney; GfK FutureBuy

Higher Consumer Expectations

9

Amazon vs. Walmart: supply chain disruption accelerating

Source: Morgan Stanley; Bloomberg

Amazon Overtakes Walmart in Market Cap

Walmart: 25 years to reach $20B (USD)

Amazon: 14 years

Alibaba: 9 years

10

• Introduction: What is omnichannel? Why is supply chain critical?

• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?

• Key trends in omnichannel and implications for future supply chains

Agenda

11

Omnichannel supply chain must start with a clear segmented view of future consumer promise

Illustrative

Customer Promise Grocery FreshPersonal

Care/BeautyApparel Electronics

Home & Furniture

Delivery Speed: <2 Day Delivery Lead Time

Endless Aisle Assortment

Free Shipping Cost

Subscription/Auto refill

Product Recommendations

Product Sampling

M-checkout and text

Click & Collect

No Hassle Returns Any Channel

More ImportantLess Important

Trade-off bets are key ! …. why place bets at all? What about Amazon?

Source: A.T. Kearney

12

Category

…

Customer Promise

➢ Assortment

➢ Delivery Time

➢ Returns

➢ Replenishment Orders

➢ Order notification

➢ Personalization

Ensure Optimal Design

• Product Cube Profile

• Peak Profile

• SKU Count

Asset

• SKU Velocity

• SKU Productivity

Inventory

• Footprint / flow

• Capacity

• Eaches picking solution

• Technology/ CapEx

• Capital outlay

Supply Chain Requirements

• Throughput

• Delivery Speed

Network

Traditional B&M Retailer Define strategy Pilot Roll out

Omnichannel

Define (Many) Strategic Scenarios

Model (Should-cost,

benchmarking) Pilot

Sequenced Roll-Out

Customer promise drives optimal supply chain design …

and vice versa

Source: A.T. Kearney

13

Delivery Speed (in business days)

Same Day9 3568 2 17 4

Big & Bulky

Consumables& Baby

Toys

Electronics

Hardlines

Apparel and Beauty

Media

2 d

ays

de

live

ry

1-2

da

ys

Sam

e-N

ex

t D

ay

3-5 days

Emerging “table stakes” in futureCurrent industry range

• Store picking • 15-20 .com

warehouses

• Store picking• 4-8 .com

warehouses

• 4-7 .com warehouses

• Leverage existing store (case picking) warehouses

Fulfillment Network Needs

Example: Delivery speed can impact DC asset and capital needs

Source: A.T. Kearney

14

• Introduction: What is omnichannel? Why is supply chain critical?

• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?

• Key trends in omnichannel and implications for future supply chains

Agenda

15

Flexible Fulfillment Networks

Global trends shaping omnichannel fulfillment and supply chain

Rise of Marketplace

Strategic Bet in Same Day Delivery

Ambidextrous Role of Stores

Blurring of Manufacturer and Retailer Value Chain

Source: A.T. Kearney

Service‒ Assortment

‒ Service

‒ Convenience

Efficiency

Best

Today

Competitive Frontier Tomorrow

1

2

3

4

5

Digital Disruption

6

16

What is the traditional role of retailers vs. manufacturers? … increasingly blurring today

1

Source: A.T. Kearney

SellDistributeDesign Source Make Deliver

• New product specifications from demand

• Bundle products into end consumer batches

• Distribute batches to points of purchase or consumption

• Discovery and trials

• Offer vehicle for purchases

• Ensure order fulfillment

Retailers

Manufacturers

Brands aggressively expand Retail Footprint and DTC sales

• L’Occitane sells 9% online, with the channel experiencing 30%+ growth in 2015

• Significant retail footprint: L’Occitane, MAC, Benefit, Kiehl’s, Urban Decay, NYX owned stores, The Body Shop; Pure online subscription services e.g., Birchbox, looking to expand with retail presence as well

Leading Beauty Retailer Strong in Private Label

• ~360 self-standing stores + ~570 within JCP

• Sephora leader in beauty Ecommerce (22%+ sales online)

• Sephora private label assortment includes 700+ SKUs

• Launched new designer cosmetic collaboration within LVMH group with Marc Jacobs

17

Depth of OfferingLevel 1 Level 2 Level 3 Level 4 Level 5

Research

Shop

Service / Omni

• Online/mobile product search

• Side by side feature comparisons

• Online memberships

• High resolution specs/photos (3D)

• Product narration

• User feedbacks and reviews

• Smart recommend

• User communities

• Buy online for

direct delivery

• 1-click and/or

mobile-payment

• Store pick-up

• Global shipping

• Store fulfill with last

mile deliveryBuy / Fulfill

• Subscriptions

• Segmented assortment by channel

• Product sampling for VIP customers

• Online customization

• Retail location recommend

• Customized order management

• No hassle

returns

• One click live

customer service

• Omni-channel

integration

Source: A.T. Kearney

Manufacturers across sectors are pursuing forward integration

1

What drives the intensity of Manufacturer’s forward integration?

18

Supply Chain Implications

Strategy

Capabilities

For Manufacturers For Retailers

Manage Channel Conflict

Improve Collaboration

Better segmentation of products and SKUs to cost to serve (manuf. direct vs. direct ship vs. retailer)

Ensure touch points are aligned to maximize consumer journey with brand (Integrated flows by category/channel that drives win-win value)

Shared asset and capabilities (e.g. manufacturer’s E-store on retailer marketplace)

Joint inbound logistics optimization (e.g. factory to retailer DC direct, etc.)

Retailer showroom integrated with manufacturer fulfillment (direct ship)

Adopt manufacturer mindset and capabilities in private label:

• Product development and component sourcing

• Lifecycle management

• Should-costing, benchmarks

• Manufacturing and contract-manufacturing

Develop segmented supply chain for private label

• More sophisticated inventory deployment

• Managing more on-hand inventory

• Eaches / piece-picking based flows

Direct to consumer fulfillment and go-to-market strategies

• Eaches picking DC and fulfillment networks

• De-centralized, forward deployed inventory flows and management

• Fulfillment network integration with retailer store/web orders

• Store and pop-up store operations and systems

1

19

Birth of the Market Place

The concept of Market Places have been around since the “Classified Ads” in the Sunday paper

Digital Market Places have existed for over 20 years

On-line retailers quickly discovered the power of the Market Place led by Amazon and eBay

2

What exactly is an online marketplace?

20

Marketplace is now a key growth platform for omnichannel

Source: A.T. Kearney

2

The Top 3

• Marketplace growth as outpaced traditional e-Commerce growth

• Lower cost, lower risk way to sell to new market

• Endless aisle, long tail marketing

Alibaba• $11B USD in Single Day’s sales (Chinese equiv. of

Cyber Monday) in 2015 • On pace to surpass Walmart in gross merchant

value by 2017Amazon• Marketplace sales growing at twice the pace of

overall e-Commerce

Why would a Retailer build a Marketplace? Why would a Brand use one?

21

Supply Chain Implications

Strategy

• Marketplaces are key consideration in almost every e-commerce company

• Can be a significant compliment to standard e-commerce sales; used by many U.S. and European retailers to expand in emerging markets

• With lower lead-time expectations vis-à-vis new product assortment and pricing in Asia, marketplaces are a low risk alternative

‒ Rapidly becoming primary e-Commerce channel in China

• Great opportunity to introduce niche products and go after niche consumers

• Emerging market locations find marketplaces to be a low risk opportunity

Capabilities

• Channel risk management (quality, imitations, lead times are risk-points for consumers)

• Integrated cost and flow modeling logic (decide between: holding inventory, cross-docking orders, and direct flow)

• Technology integration with vendor OMS

• Technology and supply chain organizational DNA, not just traditional retailing

2

22

Retailer DC

Manufacturer DC

Retailer Store

Converted / Dark Store

Home or Office

Lockers

Store for

Pickup

Movement of goods from the last inventory point to the point of consumer

chosen access in 24 hours

Order to Delivery <24 hours

What is the Last Mile? Same Day Delivery?

3

Source: A.T. Kearney

23

Drivers for Same Day Penetration …

58%-64% of Millennials want

Same Day

61% consumers willing to pay for

Same Day convenience

Supply side innovation

transforms cost economics (e.g.

crowdsourcing)

Source: Trustve; Coldwell Banker; PWC

Same Day Delivery Market – US ($B)

Source: B.I. Intelligence

Same Day is still emerging … but rapidly growing

3

What are the challenges preventing mass adoption in the US?

24

Several Same Day supply chain models emerging

3

Retailer

Managed

3PL Managed

(Owned)

3PL Managed

(Crowdsource)

Marketplace

(Outsourced)

Marketplace

(Crowdsource)

Source: A.T. Kearney

Retail owned and operated

last mile assets and drivers

Outsourced to a 3PL who executes with owned assets

and drivers

Outsourced to a 3PL who fulfills using crowd-

sourced drivers

Retail sells through a marketplace, who

in turn manages last mile delivery via crowdsourced

drivers

Control and Shopper Visibility

Scale efficiency and access to enabling capabilities

Retail sells through a

marketplace, who in turn manages last mile delivery

using owned and/or 3PL assets

Higher Lower

Lower Higher

Which brand category likely to adopt which model?

25

3

Many are making strategic bets in Same Day

US

• Offered across 11 metro areas (~25% of population area)

• $5.99 (Prime); $10+ $.99/add’l item(non-Prime)

• 500K-1M SKUs

UK

• Same day click & collect

• Order before 11AM/ready by 4pm; order by 7:45pm/ready next 8-10AM

• Free (Prime); $BP 4.99 (non Prime)

• LeveragingConnectGroup news distributor partner (500+ stores / pick-up locations today)

US

• Offered across major US cities

• $5-6 (basket >$99); $15 (basket<$99)

• Order by noon-1pm (mon-sat)

China

• Same day delivery across 40+ cities

• Piloting 3 hour delivery in 6 major cities

• Owned network of 7 DCs, 97 warehouse and 715+ pick-up stations

• In-house real-time tracking and routing technology platform

Retailer Managed 3PL - Crowdsourced

Marketplace - Crowdsourced

US

• 6 US metro areas

• $95 annual subscription or $5/order (consumer) + commission from retailer

• Strategic value sharing / conflict beyond fulfillment (consumer intel)

Source: Financial Times; Guardian; Mintel; Amazon; RILA; AT Kearney

26

Supply Chain Implications

Strategy

Capabilities

• Define clear, fact based approach to activating Last Mile

‒ Establish understanding into “should-cost” / “should-impact” drivers (e.g. cost drivers for crowdsource model, trigger point managing Uber like courier risks, etc.)

‒ Define clear inflection points between investing internal Same Day vs. 3PL managed vs. crowdsourced models (e.g. value of absolute performance vs. differentiation? First mover or Fast follow?)

• In-market product availability – ensure upstream supply chain footprint and systems can supportinventory replenishment processes and one-pool inventory visibility

• Ensure Same Day requirements linked to omnichannel consumer promise and broader supply chain strategy at the category level

• Determine which categories are candidates for same day delivery: (grocery, mobile devices, specialty products, high margin products)

• Pilot and experiment with different Same Day models, do not dismiss models pre-maturely

• Determine the reason for Same Day: drive sales, competitor requirements, marketing play/ excitement

3

27

Building a flexible network with dynamic flows will be key for competitive performance

Store DCs

combo DCs

Store

Customer

Suppliers

Inter-store “hot run” replenish

High velocity DC

Slow mover replenish

Store

DSV (direct ship vendor)

Right Mix of Flows Needed for Differentiated

Performance

SC Cost Service Variety

INV Cost

A

B

C

D

E

E

B

C

✓✓

✓ ✓

✓ ✓

✓

X-dock

D

Store-to-DC recirculate

✓ ✓

Nimble Connected Network

Same / Next day

2-Next Day

Store Fulfillment (Deliver or Collect)

A

Non-traditional supply chain flows ✓Enable best possible

Inbound Consolidate

Inbound

4

Source: A.T. Kearney

28

Lead Time

Pick/Pack

Cost

.com

Volume

Assortment

(Capacity)

Store or Mini-

Hub Picking

Store

Converted

Warehouse

High Velocity

Eaches

Warehouse

Low Velocity

Eaches

Warehouse

Same/Next Day Same/Next Day Next – 2 Day 2 – 3 Days

Low

(2-5K SKUs)

Low

(5-10K SKUs)

Medium-High

(15-50K SKUs)

High

(50-200K SKUs)

Med-High

($1-2/unit)

Low-Med

($1-2/unit)

Low

($0.4-1/unit US)

Med

($0.4-1.3/unit US)

<1MM units/year <5MM units/year >5 MM units / year >5 MM units/year

Nature of “In-Scope”

Demand

Fulfillment center design and solutions are also rapidly evolving

Low Low Med-High CapEx Med-High

4

Source: A.T. Kearney

29

Leveraging partners is also critical for flexibility and learning

3PLs and supplier direct ship as part of overall fulfillment

VOLUME >25K orders/day 1-25K orders/day <0.5K orders/day

PEAKLow Seasonal

peak

Moderate

Seasonality Highly Seasonable

SKU TYPEFast Moving

SKUs

Fast + Medium

Moving SKUsLong Tail SKUs

EXPERIENCE

Extensive In-

House

Fulfillment

Experience

Developing In-

House ExperienceNew Category

AFFINITYHigh x-Category

Affinity

Medium x-Category

Affinity

Low x-Category

Affinity

In-House Operations 3PL Partnership Supplier Direct Ship

• Optimize cost vs.

service

• Minimize over-

investment

• Invest with demand,

not ahead of it

• Grow and

experiment long tail

assortments

• Disciplined learning

IllustrativeCategory Profile

4

Source: A.T. Kearney

Owned Shared On-Demand

?

Outsourced

30

Supply Chain Implications

Strategy

Capabilities

LogisticsTechnology Organization

• Priority

– Geographic inventory planning

– Store to store transportation

– Distributed order management

• Future

– Inbound freight optimization

– Dynamic order sourcing

– 3rd party logistics integration

• Priority

– Centralized (PMO) for supply chain decision making

– Integrated, customer-centric performance metrics

• Future

– Omnichannel culture

– New employee capabilities

• Priority

– Real time inventory visibility “one pool”

– POS (demand signal) integration with OM, Replenishment

– Visible and accurate cost to serve

– Dynamic channel decisions (direct vs. 3PL vs. DSV)

• Future

– Common item file

– Local delivery TMS

DC Fulfillment

• Priority

– Right level of automated material handling (voice, pick to light, Goods to Man)

– WMS with flexible batch and wave picks

– Conveyance for multiple flows (reverse, x-dock, expedited)

• Future Capabilities

– Product customization and personalization

Iterative Design

Rapid Analytics

• Faster modeling and more predictive analytics

– Collaboration with Merchandising, Finance, Sales on key modeling assumption and inputs

– Embed “what-if” simulation capabilities

– Embed predictive analytics (forecasting, replenishment)

• Iterative refresh of supply chain design and strategy as part of annual planning cycle

– Compress planning cycle (next generation supply chain is next 1-2 years)

– Feedback and update from field experiments and pilots

4

31

Future stores will be ambidextrous, combining the right mix of Consumer Experience and Local Fulfillment

Consumer Experience Local Fulfillment

Product TrialAllow shoppers to touch and feel products

Treasure HuntIncubate exclusive or little known brands

exclusively

MerchantainmentProvide an exciting environment to

engage consumers in-store

Relationship ManagementEnhanced level of personalized service

Click and Collect (In-Store / Drive-Thru)

Pick, Pack and Ship (Same Day)

Inter-Network Transfers

Returns

Getting the right balance will be key for retailers

5

Source: A.T. Kearney

32

Americas Atlanta

Bogotá

Boston

Calgary

Chicago

Dallas

Detroit

Houston

Mexico City

New York

Palo Alto

San Francisco

São Paulo

Toronto

Washington, D.C.

Asia Pacific Bangkok

Beijing

Hong Kong

Jakarta

Kuala Lumpur

Melbourne

Mumbai

New Delhi

Seoul

Shanghai

Singapore

Sydney

Taipei

Tokyo

Europe Amsterdam

Berlin

Brussels

Bucharest

Budapest

Copenhagen

Düsseldorf

Frankfurt

Helsinki

Istanbul

Kiev

Lisbon

Ljubljana

London

Madrid

Milan

Moscow

Munich

Oslo

Paris

Prague

Rome

Stockholm

Stuttgart

Vienna

Warsaw

Zurich

Middle East

and Africa

Abu Dhabi

Doha

Dubai

JohannesburgManama

Riyadh

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