Retailers and CPG brands must operate effectively in an integrated marketplace, with increasingly networked consumers and a growing number of engagement channels. Today, there’s almost no context in which consumers are unable to shop. Wherever consumers are, they expect convenient, relevant and differentiated experiences. And with the Internet of Things, extended reality and new AI-powered personal assistants all taking off, possible points of purchase are proliferating. The bottom line? Whatever they’re buying, consumers want it now. The strength of retail and CPG brands, and consumer loyalty to those brands, will depend on the purpose the brand serves in consumers’ lives and the ability to deliver on that purpose.
Market forces increasingly constrain consumer supply chain delivery, such as consumer expectations for personalization and speed, increasing labor costs coupled with declining labor availability, an increasing urban population with disposable income, and operating cost pressure. Increased supply chain agility across all channels is required. Thanks to advances in technology and automation, enablement through analytics and artificial intelligence, ecosystem partnerships and differentiated sourcing models, that agility is attainable. Companies can increase speed to market, offer new delivery options and provide immediate access to products, deliver customized services to consumer segments, and improve inventory accuracy and responsiveness. But how do they do this profitably? How do they improve the cost to serve when delivering across not just one, but many channels?
Surging online sales growth
Most retailers are seeing sales volumes through online channels growing at double-digit rates1. The impact of this on supply chains will be enormous. At one time, the norm was annual sales growth through retail outlets of three or four percent was relatively predictable and easy to manage. But compounding annual growth of 10 percent, 15 percent or even 20 percent through online channels is another matter. Three years out, online sales volumes could be 50 percent more than they are today. Five years out, they could have doubled2.
And we know that peaks keep on getting steeper overtime. Figures from the UK Office for National Statistics for the value of internet sales from 2006 to July 2018 put this into perspective (see Figure 1)3.
To keep pace, retailers and CPG brands will need a huge shift in their supply chain capabilities and capacity. Implementation timelines for both physical assets and IT are generally not less than 18-24 months, and sometimes longer. Developing an automated warehouse can take three years and securing funding for new projects often takes at least six months. Add the challenges of large IT projects and combine that with compounding growth in online sales, and it’s clear that time-lines and decision-making are too slow to cope.
And there’s another challenge: surging online sales don’t mean profitable growth. That’s because costs to serve through digital channels are typically between three and six times greater than traditional retail4. The margin erosion this creates is clearly unsustainable. That’s why in an integrated marketplace transforming the supply chain is an existential imperative.
New channels, high costs
The home is set to be the fastest-growing retail real estate. Why? Because digital devices—from connected fridges to personal assistants like Alexa—enable direct connections between brands and buyers. Retailers and CPG companies can now "be there" in the kitchen, the family room, the home office or garage as trusted partners. But here again, retailers and CPG companies will only be as good—or trusted—as their ability to deliver on their promises and do that cost efficiently. But being there on the front-end sales side is significantly cheaper than being there from a supply chain perspective. That’s because on the front-end, being there is still virtual.
As consumers get their purchases when and where they want them, the costs of making it happen are punitive. With free returns now established as the norm (offered by 96 percent of retailers) return rates for fashion run typically at 30 percent of all online orders, compared with just 9 percent of in-store purchases.5 Fulfilling click and collect compounds the complexity, as does handling returns of online purchases in-store.
Supply chain transformation: Making the wise pivot to the New
Change is urgently needed. But the pace and extent of that change has to be realistic. A supply chain approach that achieves margin improvement and growth in today’s core business to free-up savings for investment in new supply chain services and differentiated customer experiences that drive additional revenue tomorrow.
It’s what Accenture calls making a wise pivot. See Figure 2. Rather than a single event, it’s a perpetual journey of continuous innovation. By leveraging digital to streamline and automate supply chain processes in the core business, retailers and CPG brands will be able to optimize costs and increase the flexibility and speed of fulfillment. At the same time, with intelligence embedded into KPIs and core operations, retailers and CPG companies can begin to target new growth and differentiation through greater customer-centricity. The goal? Delivering new, highly personalized outcomes for consumers.
Purpose led means asking the questions “Who are we?” and “Why are we here?” and using the answers to rethink their supply chains so they can profitably and seamlessly deliver on their purpose through multiple channels in an integrated marketplace and reduce cost-to-serve. As part of this process, retailers and CPG companies must also focus on micro-segmenting their customer bases so they can deliver to ever more specific needs and continuously changing customer preferences.
This provides a differentiated sourcing models and new ways to achieve speed to market. Not only is it much faster or more cost-efficient to collaborate with ecosystem partners instead of attempting to serve a micro-segmented marketplace solo, it also boosts overall delivery speed and flexibility. Each partner in the network delivers from their core capabilities/business (and therefore grows their core business), instead of attempting to deliver a service that is non-core and likely costlier.
Optimize inventory management: Companies need to improve the visibility, accuracy and responsiveness of the inventory they hold. In addition, serving micro-segments to ensure the right inventory placement and level of service increases the complexity of planning. The goal should be to significantly reduce lost sales due to out-of-stocks, while simultaneously lowering inventory costs.
Reduce transactional costs: Automation can be put to work to reduce the cost-to-serve in select nodes in the supply chain network. While automation typically has a long payback, of at least six years, it can deliver additional benefits of scalability and speed of throughput.6 What’s more, many of the transactional activities underpinning supply chains—such as order management—are ideal candidates for greater use of automation and AI to deliver applied intelligence and realize rapid efficiencies. What’s more the human workforce traditionally tasked with these activities can be freed up to focus on planning, strategy and driving innovation.
Establish real-time visibility and responsiveness: For retailers and CPG brands, making sure they can move the right products to the right places at the right time, and at the right price, is table stakes in an integrated marketplace. By supplementing a traditional Control Tower approach with advanced analytics, companies will gain the ability to monitor supply chain performance in real-time and drive continuous improvement.
Focus on profitable last-mile delivery: Last-mile delivery is the highly visible culmination of how a retailer or brand’s supply chain network is designed, configured and deployed to meet customer shopping and delivery expectations. It can be complicated, expensive, and can make or break a shopping experience. It is critical to get it right to stay competitive.
Using technological collaboration to create multi-partner ecosystems means that retailers will be able to fulfill every aspect of the promises they make to customers, without necessarily having to perform those tasks themselves. It’s all about becoming a one-stop shop for customers.
Without making the changes detailed above, retailers and CPG companies will be heading toward declining profitability and increasingly, irrelevance. However, massive growth in their business and revenues is a very achievable alternative. By making a wise pivot to intelligent customer-centric supply chains, retailers and CPG companies will be able to compete.
1 Center for Retail Research
2 Worldwide Retail and Ecommerce Sales: eMarketer's Updated Forecast and New Mcommerce Estimates for 2016—2021
3 Retail sales, Great Britain: June 2018
4 E-commerce Product Return Statistics and Trends
5Can intelligent fulfillment fix retail delivery woes?
6 Retail with Purpose
7 Do retailers need warehouse automation?
8 Instacart is now available to 70 percent of U.S. households
9 Aldi goes nationwide with Instacart
10 National Assembly Services = Solutions