What does the logistics network of the future look like? How can we quickly and efficiently distibute stocks from various inventory points? This video draws a paralel between sending an e-mail and shipping a parcel.
New technologies such as cloud, mobile, social and big data are changing the way companies do business. In our previous report, we outlined the supply chain of the future in which modern technologies redefined the rules. In this report, we want to show you how to create a contemporary business model with these new rules that helps you to make a huge dent in your market…
Enlightened business model
Over the past decade we have seen a number of companies, Amazon, Airbnb and Uber are good examples, that conquered a large slice of the market, from scratch, using modern technology and an enlightened business model. All in all, these developments have made the market more transparent, making it increasingly difficult for companies to play with their margins. Through Alibaba, nowadays anyone can buy directly in China. A recent report by ING emphasized that especially wholesalers are facing hard times. They feel pressure both from logistics service providers, as well as manufacturers and retailers that do business directly.
Businesses reinvent themselves
What we want to show in this report, is that the new way of working is not restricted to innovative newcomers only. Also existing businesses can reinvent themselves and ride the new waves. US retailer Macy’s, with its proclaimed omnichannel strategy is a good example.
The question now is how modern technology can help to strengthen your company’s proposition so that customers naturally choose for you and keep coming back. We see four opportunities.
- Virtual stock
Deliver goods that are not in stock
- Virtual stores
Sell goods/services through new sales channels
- Virtual warehousing
Create a seamless distribution network
- Virtual Platform
Let others act through your platform
The essence of your new supply chain is that you can always deliver. Both products that are temporarily sold out as well as products that are not standard in stock. Dutch department store Bijenkorf makes stocks, which are not present in store, available via tablets of salesclerks. These virtual stocks are delivered to customers from other branches (ship-from-store), from warehouses or directly from suppliers (drop-ship).
Virtual stock can be lucrative. A notable example comes from Hema.nl. Products sold by the webshop, come from the e-commerce distribution center of retailer Hema. If a product was not present there, then it could not be delivered. As of February 2014, however, stocks in the retail distribution are also made available to the webshop, but with one extra day for delivery. Instantly, online sales went up by 14 percent. Although recent research shows that Dutch webshops mainly compete on speed of delivery, it seems that availability is a better bet. Customers are looking for that one unique product. If they find that in your shop, then chances are that you also get the rest of their order. If, conversely, that one item is missing, you might lose the entire order.
Fourteen percent revenue growth is wonderful for any business. Yet, there is more. Let’s see what else you can earn with virtual stocks. According to the Pareto curve, product ranges typically consists of 20 percent fast movers that generate 80 percent of sales, while the last 50 percent slow moving items contribute just 5 percent. For fast movers, it is not difficult to have enough stock. Lost sales are mainly found in slow movers with irregular demand. Virtual stock is the answer, turnover rises and existing assortments can piggyback ride on the extended product range.
Except preventing lost sales, virtual stock offers more opportunities. You may expand your assortment with extra items in a virtual longtail. These are typically extreme slow movers, for which it is not profitable to keep them in stock. However, with a huge item range, still interesting sales volumes are at your grasp.
Other industry segments
Furthermore, you can virtually extend your assortment with products from other industry segments. This is particularly interesting, since these are not only slow movers as in the long tail, but also fast movers with a lot of extra revenue. This explains why Amazon is rapidly adding new product groups to its portfolio.
That virtual stock can be lucrative, is illustrated by the following comparison. Amazon and Zalando achieve impressive growth, but margins still are at the zero line. Both companies run mainly on their own stocks, while stock-free Alibaba shows a profit margin of 43%.
So far, we have looked at the benefits of virtual stock. The next opportunity, on your way to market leadership, is the virtual store, a point of sale without physical stock. This may start with a webshop or a spot on popular portals like eBay or Amazon. Moreover, we see that companies, especially wholesalers, make their assortments available online to webshops of resellers without physical stocks. Typical examples we see in consumer electronics, such as Ingram Micro or Tech Data.
Also, mobile apps are hot. Plux, the app of Dutch computer retailer Paradigit, offers its own products and, recently, also books from Libris and sister chain Blz. More retailers will follow, according to Paradigit. Samsung opts for yet another channel to reach additional customers. The electronics manufacturer places video walls at various European retailers where consumers can view and order products.
All in all, your supply chain will need a substantial overhaul to link these virtual stocks and virtual stores. Virtual warehousing is a distribution form in which it no longer matters where stocks are situated, they are directed efficiently to their destination via a seamless distribution network. A good example is Cycleon. The company orchestrates a pan-European returns network for various brands in consumer electronics and fashion from a central control tower. They do this without bricks or wheels of their own.
City distributor Greencity, the Dutch counterpart of Shutl, directs local transports through a control tower of Istia. With mobile app Greendropz, users can have their packages rapidly delivered within the city through various local (bicycle) couriers. Modern technology makes it relatively easy to develop such networks of multiple carriers, including tracking & tracing, proof of delivery and billing. This creates new opportunities for companies that want to deliver to consumers directly, for instance, manufacturers who wish to skip the middlemen or retailers who want to offer same-day delivery from stores to local consumers.
If goods for a customer have to come from multiple sites, then this may require quite some additional movements. VDS Fulfillment runs a multichannel warehouse in the Netherlands with stocks of both wholesalers and retailers in consumer electronics. As a result, clients of retailers can receive products from both stocks in a single package.
In a while, your new initiatives attract many customers and you host a seamless distribution network. Then you have the opportunity to create a virtual platform for other vendors. You provide commercial, financial and/or logistical services on their behalf. At the same time, your customers benefit from an even wider product range. Among others, C&A and Esprit put their stocks at Wehkamp.nl and let their products be sold and supplied through the network of the number 2 in the Twinkle Top 100.
Besides suppliers, you can also give customers access to the virtual platform. Amazon allows individuals to sell used products through their webshop. Amazon receives a commission on these sales. This principle is also applicable in business to business settings. By allowing your customers to exchange their products through your network, they do not get stuck with obsolete inventories. In the short term this might cannibalize your sales, but in the long term it lowers barriers for placing orders and the supply chain as a whole will sell more.
And are you a market leader by now? Probably not. Though you may have taken a major step forward. The graph on the next page gives an indication on how you may double your sales with the new virtual initiatives. Customers appreciate the convenience and know that they can get any product quickly and reliably. This will set the wheels in motion, making more and more customers naturally select you as their preferred vendor. So it went happened for Amazon and Zalando. And before you know it, three years later, you have indeed become market leader in your segment.
Entrepreneurs, from Amazon to Zappos, disturb existing markets with innovative business models that build upon modern technologies. In this report we share our vision on tomorrow’s supply chain. A supply chain where customer demand can always be met, while inventory risks remain low and logistics efficiency is kept up. Clearly, the new way of shipping goods fully capitalizes on the capabilities of modern technologies. We call it the Triple Con Supply Chain.
Let’s see how Internet and mobile technology have changed the way we do business. We see three common principles:
- Connected: Everyone has access anytime and anywhere. Users can log on easily via the internet or mobile apps. Employees are connected everywhere, not only in fixed workplaces, but also on the way. Uber drivers get to see where they can pick up their next passengers via their smartphone
- Controlled: There are no more people behind the screens to orchestrate processes. Intelligent systems do this automatically. This not only saves time but also provides more efficient processes. Unilever saves 20 percent on its transport miles with continental control towers where smart software ties trips together.
- Consolidated: Companies not only utilize their own resources, but also draw from resources of others. Macy’s is expanding its in-store assortments in a digital way with inventories of other branches, distribution centers and suppliers, thus preventing lost sales.
These three principles are reflected in many initiatives. They offer easy access via Internet and mobile apps (connected), provide smart matching of supply and demand (controlled) and make fully or partly use of resources of others (consolidated). Check out the following examples.
|Shutl||Fast local deliveries|
Easy access via the internet and apps is well regulated in all examples. Smart matching is done in various ways, from personal filters (Tinder: What do I seek in a future partner?) and geographical positions (Shutl: which driver is currently in the neighborhood?) to ratings (Airbnb: how do others appreciate a place to stay?) and big data (Amazon: customers who bought this product, also bought…). Ultimately, they combine own products or services with those of others.
The newcomers offer convenience, a wide product range and have less capital risks than traditional businesses. Without exception, they provide excellent services in which the needs of customers are central. Traditional companies may find it hard to compete here. The many lawsuits against taxi service Uber speak volumes in this respect. In comparison, traditional companies run a relatively cumbersome and costly business with a lot of waste: unnecessary handling, outdated information, delays, unexpected fluctuations in supply and demand, lost sales, superfluous inventories and environmental pressures.
The pain in traditional supply chains arises mainly from uncertainty. Companies make or buy what they expect that they can sell. Despite forecasts and predictions, actual demand will be different and shortages and surpluses are the result. On the one hand, companies lose both revenue and margin when they have to disappoint customers and on the other hand they suffer from severe depreciations on merchandise that they cannot sell.
Triple Con Supply Chain
So the time has come for a supply chain in which we have up-to-date information anytime and anywhere. In this way, uncertainty reduces and we become less dependent on forecasts. Modern technology makes the supply chain connected, controlled and consolidated. Therefore, we refer to this new supply chain as the Triple Con Supply Chain. Products that are not locally available, can easily be sourced from elsewhere. The traditional buy-hold-sell model shifts towards sell-source-ship.
A popular example is Macy’s. The retail chain has touchscreens in stores where customers can order products that are currently not present. Orders will be delivered from the central warehouse or from another branch with sufficient stock. Perhaps, otherwise, the product would have stayed in that other branch until the end-of-season sale. In this way, Macy’s kills several birds with one stone: Satisfied customers, additional sales, better margin and less obsolete stock.
Let’s draft the Triple Con Supply Chain. The diagram below outlines the supply chain from manufacturer to consumer. We recognize the red arrows as the traditional flow of goods. These provide economies of scale and work excellent for fast moving products and products with predictable demand. For these products there is a low risk on inventory, so the Triple Con Supply Chain opts for efficiency. The green arrows depict the various flows of slow moving products with unpredictable demand. These typical long tail products may lie at various places in the supply chain and when demand comes, we efficiently direct them to their destination.
So the green flows primarily consist of occasional small shipments that must be bundled in order to create efficiency. In 2001, we published the report Virtual Warehousing which sketched a consolidated network for fast and efficient distribution of small shipments. Unfortunately, little was done with it in practice at that time. Probably because technology was not yet ready.
Meanwhile, time seems ripe. In the consolidated distribution network we preferably put goods close to the source, for example at the manufacturer or in a distribution center near ports where goods enter the continent. Then we combine separate shipments from different inventories into full truckloads through a network of warehouses and cross-dock centers. Finally, we keep limited forward stocks at points near markets to meet local demand during the replenishment of stocks. Thus, total inventory remains limited, nonetheless we are able to quickly and efficiently meet demand anyway. This applies to continental networks, but also on a smaller scale. Think of a regional wholesaler with various suppliers and customers, or a retailer with multiple stores. The only condition is that a plurality of storage points become connected with each other.
We have seen that new businesses, from Amazon to Zappos, conquer huge market shares by linking surprising business models to modern technology. Such businesses require a new supply chain: The Triple Con Supply Chain. It serves customers better than traditional supply chains. Products are practically always available, product ranges are wider, shipments are delivered quickly and efficiently and yet inventory risks remain low. Clearly, traditional companies can also benefit from these new opportunities. For instance, Macy’s expands its offerings with virtual stocks in stores to prevent lost sales and Unilever builds smart distribution networks using these new technologies.