by Suhas Sreedhar, GT Nexus
This year's holiday shopping season is shaping up to be a brutal bellwether for the runaway erosion of the traditional retail market. Shoppers spent 6.4% less on average1 this Thanksgiving weekend than in 2013. That's despite the economy and unemployment doing much better overall.2 The reason for the downturn in spending is a complex cocktail3 of demographics, changed buying habits, and cultural shifts.
An added complexity on top all those ingredients is the rise in online shopping, or e-commerce. Online sales rose 26% to $1.2 billion this Black Friday,4 while in-store spending tanked5 and overall Black Friday sales declined by 11%.
The obvious question for retailers then is, why not just pivot heavily toward e-commerce?
Going E-Commerce Isn't Easy or Necessarily Profitable
For customers, online shopping isn't just about greater convenience or assortment. It's about cost. Customers expect online goods to be cheaper, while still being delivered quickly and conveniently with free shipping and returns. Retailers entering into the online game face costs that can run as high as 25% of sales.6 Companies like Kohl's, Wal-Mart, Target, and Best Buy are reporting their online operations to be far less profitable than their stores. Online infrastructure costs tend to swell while sales margins tend to emaciate. There's also the fact that PayPal processed 47% more payments from mobile devices than last year,7 which signals that retailers can't just have a great website, they need to invest in mobile technologies like apps, platforms, and partner ecosystems to succeed. Competing successfully for customers requires differentiating not only on price and convenience, but also on overall customer experience – a task demanding innovation and creative thinking, which are two goals tough to achieve on slim margins.
It's on the Back End, Not the Front, Where Retailers Can Profit
The days of padded margins are certainly gone. To eke out a profit, retailers will need to cut costs while still exceeding high customer expectations. How is that possible? It starts with an agile supply chain.
The concept of an agile supply chain means more than just finding the quickest, most efficient way to get goods from supplier to customer. An agile supply chain can restructure on a dime – flexing, twisting, adjusting, and adapting to harsh, capricious market conditions. It has two main components:
360 Visibility: This goes beyond "end-to-end" visibility. Value chains are becoming ecosystems8 – vast interconnected webs of suppliers, manufacturers, logistics providers, carriers, distributors, and retailers. The number of transaction points, hand-offs, and processes involved is enormous and the links between them are no longer straightforward – they overlap, circle back, and interface in multiple ways. Without granular knowledge about what exactly is going on where at any given instant, maintaining agility becomes almost impossible. Visibility in all directions is crucial for knowing which parts of the supply chain can contract and expand to meet changing demand and for taking action.
Network DNA: In the era of low margins and volatile demand, the businesses that will operate best are the ones that operate as networks. Just as omni-channel has demonstrated how critical it is to not silo inventory into specific channels,9 e-commerce's onslaught on brick-and-mortar should warn retailers that differentiating by innovative customer experience is vital for their survival. Doing this requires thinking big – operating beyond themselves as individual companies and, instead, as parts of vast, collaborative and competitive networks that spans across the globe and as well as physical and digital boundaries. Networking should be placed at the core of supply chain architecture so that all partners can work tightly together in lockstep whenever they need to shift tactics to meet demand.
Retailers wielding an agile supply chain have insight into all inventory residing in-store, in DC, on-truck, on-ship, or in factory. The supply chain's network acts as a central nervous system connecting supply and demand signals making data available to all parties and, in some instances, automating changes and adjustments in real time. The network also gives rise to higher brain functions – the big data and analytics tools that empower it to operate as a system of engagement10 to direct the flow of goods. This opens the door to a smarter way to allocate goods, ship directly from factories, and make smarter decisions about the positioning and movement of inventory, increasing overall adaptability.
Underpinning this network and modernizing supply chains is the digital transformation brought on by the cloud, which also happens to be changing industries all across the board.11 The cloud centralizes and abstracts away supply chain function from form, allowing for unprecedented flexibility, speed, and communication. But perhaps the most exciting thing about an agile cloud supply chain isn't even its ability to cut costs or increase efficiency – it's the opportunity created to invent new business models that drive growth and tackle larger issues. Levi Strauss & Co., for instance, recently partnered with the International Finance Corporation (IFC) to offer low cost financing12 for suppliers in developing countries that have conformed to Levi's sustainability policies. At a time when customers are increasingly concerned about how their products are made,13 such actions differentiate businesses from their competition while also solidifying their own infrastructure.
What's in the cards for future holiday seasons? Will e-commerce continue to thrash brick-and-mortar sales? Will omni-channel save retail? Will new models of fulfillment arise? One thing is clear – in this new, uncertain age, your biggest assets for survival will be who you are (your purpose14) and what you're made of (your supply chain) – two things very much under your control.
Suhas Sreedhar is a Strategic Writer at GT Nexus, a cloud supply chain provider that connects retailers, brands and their trading partners on a global network. Sudas writes frequently on technology, supply chain, Internet of Things and retail. His work has been featured in Forbes, IEEE Spectrum and various industrial blogs and trade publications.
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