SUPPLY CHAIN OPTIMIZATION MUST RESPOND TO NEW MARKET REALITIES

Supply chains must be optimized to achieve efficiency

Supply chain is a very comprehensive and complex subject to talk about. It’s the backbone of any business, and especially – retail or e-commerce business. We live in times, when any company’s operations and business processes must be completely redesigned.

The Millenial generation is the largest generation in the US history (92 million people) and their habits will shape the future of retail and e-commerce. One of the most common characteristics of the Millenial generation has been cited as desire for instant access to products and services. In the world, where Amazon and other companies strive to meet these new customer requirements and deliver the products within one (and, in some cases, within the same) day, there is absolutely no doubt that companies’ supply chains must fundamentally change.

Supply chains of any retail or e-commerce business consist of the following participants:

Supply chain participants

- and they evolve around 5 major subject areas: manufacturing, inventory management, location (location of distribution centers), transportation/delivery and information*. Given the need to provide stellar customer service to the customers, companies need to optimize their supply chains in a way that would empower them to deliver high-quality products almost instantly. This means that all the supply chain participants must act as one. And it’s a difficult goal to achieve, given that the majority of companies abandoned the old concept of vertical integration. Now almost every company specializes on a specific thing it does best (for example, manufacturing, warehousing, delivery, etc.) and relies on other supply chain participants to execute on their own areas of expertise. This approach makes it even more difficult to ensure optimal and efficient operation of the supply chain. Suppose you operate not just a simple Shopify e-commerce store, but an e-commerce marketplace (Amazon, Walmart, Overstock, Jet, Groupon, etc.), where every day you deal with tens and hundreds of thousands of merchants and millions of products, - now the task you have at hand seems almost impossible. How do you coordinate efforts among such a high number of merchants, 3PL service providers, manufacturers and other supply chain participants? Maybe that’s the reason why Amazon is moving back towards vertical integration of their supply chain and created services like FBA (fulfillment by Amazon)?

Here is what needs to be changed in a retail or an e-commerce company’s supply chain to address new challenges:

1. Real-time information flow

Historically, retailers have been hesitant to share real-time (and any) information about demand and inventory levels with other supply chain participants because they viewed this information as confidential. Thus, even minor spikes in customer demand could cause a so called "bullwhip effect" across the whole supply chain, and this would lead to major inefficiencies and losing control over the production and distribution levels. In the era of digitization and immediate access to all kinds of information, it seems necessary to start sharing as much information across the whole supply chain as possible. For example, if you operate an e-commerce store, make sure that your vendors know how much of their product has been sold to what types of customers and through which channels. This would allow for better transparency and increased trust and would lead to faster inventory replenishment and more efficient inventory management. Efficiency is further increased through providing your vendors with electronic and real-time access to your internal inventory and order management system, which should also update, ideally, in real-time.

2. Collaboration

Collaborative supply chains are still very rare on the market as retailers still consider themselves customers of distributors and manufacturers, rather than partners. Obviously, everybody is in business to make money but it is much better to work together towards one goal rather than try and squeeze everything you can out of your “partner”. To address the new Millenial generation requirements, the nature of supply chain participants’ relationships must change. A retailer should collaborate with a manufacturer and they need to work together to meet new customer demand and make new products. For example, a retailer, being at the forefront of the market demand and communicating with the customers directly can gather information about new products the customers would like to buy and pass this information along to the manufacturer, the manufacturer would, in turn, work with raw material suppliers to build those products.

3. IT systems' integration

Companies within the same supply chain often use different IT systems. This complicates communication and delays action. In one of my companies we dealt with a number of suppliers each of whom had their own IT platform and didn't want to switch. We've had multiple issues with delivering purchase orders, invoicing and billing, and, most importantly, the information wasn't shared among supply chain participants well enough, so we lacked transparency. As a result, it was difficult to align objectives and business processes and achieve much-needed seamless flow of information throughout the supply chain. So we had three options in this situation: hire more people to address the issues manually, build a platform that would be able to connect to other participant's IT systems seamlessly or convince everybody to switch to one single software solution. We chose the second option and built a solution which could integrate with other supply chain participant's platforms. In order for the companies' supply chains to react to changing market conditions quickly, the supply chain participants need to make sure their systems can talk to each other in a fast, reliable way.

4. ​Vertical integration

The days when the vertical integration in retail was common are gone. However, for some types of businesses it would make sense to consider building a vertically integrated supply chain. Given my own experience with 3PL operators, I have seen first-hand how difficult it may be to rely on their services, especially during peak seasons when the operations must be ramped up quickly to address increasing customer demand. Though they are experts in their own area, 3PL operators will never focus solely on your own business and this may lead to very significant imbalance of your supply chain. Building a logistical operation in-house is very costly but it might make sense to consider doing this, if you have the necessary resources.

Today companies operate in a very dynamic market environment. I remember the world without computers when I had to type my freshman college papers on a typewriter and nobody could call me before I get home because  there were no cellphones. 20 years later most people have laptops and use mobile phones to connect with another person in any corner of the world instantly. Markets change with lightning speed and this speed is increasing exponentially. In these conditions, companies must provide the highest level of customer service to attract new customers and to retain existing ones. This can only be achieved through fundamental changes in company operations and the best place to start is the supply chain. It used to be the case that retailers competed with each other, now is the time when we will see more supply-chain-to-supply-chain competition*. To win the hearts of the customers and to provide excellent customer service, the retailers and e-commerce companies need to build very transparent, collaborative and, in many cases, vertically integrated businesses.
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* I found the book “Essentials of Supply Chain Management” by Michael Hugos very useful in explaining the fundamental concepts of supply chain management and would strongly recommend it to anyone who wants to better understand how supply chains operate.