The Fourth Development

A new challenge for the supply chain manager.



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In the several decades I have been in the  supply chain industry, I have seen any number of changes in almost every aspect of the function. There have been just three, however, that forced supply chain managers to adopt radically new mindsets and develop improved skills and processes.

The first was technology. The advances in technology over the past 20 years have changed not only supply chain management, but the way most of us live and earn a living. Second, globalization brought an entirely new dimension to supply chain management and forced us to expand our knowledge of various currencies, cultures, customs regulations, and shipping methods. The third impact came from Walmart, which singlehandedly raised the level of supply chain operations to an art form; and with 40 regional import centers, 140 domestic warehouses, 7,000 tractors, 5,000 trailers, and 4,600 stores, it could be called a state-of-the-art supply chain that happens to sell merchandise.

But now, there is a fourth significant development: the dramatic changes in customer ordering patterns and expectations. With the increase in online purchases, expected to total $1.4 trillion by 2015, consumers have become more demanding, and overnight service is no longer enough. With an increasing frequency, buyers are requesting same-day delivery. And ready, willing, and to a large extent able to make that happen is a companion development — possibly even more of a game changer than Walmart — Amazon.com. Since 2010, Amazon has spent almost $14 billion on new distribution centers. It now has 89 facilities and more planned. Their goal is to be in a position to deliver most of their orders the same day they are received.

In addition, Amazon recently initiated a program they call Vendor Flex. Under this scheme, Amazon sets up a “warehouse within the warehouse” of manufacturers and distributors. In seven Procter & Gamble distribution centers for example, Amazon has dedicated space. P&G delivers pallet-loads to the Amazon space, and from there Amazon ships the smaller online orders. So far, Amazon has installed the Vendor Flex program in distribution centers of P&G, Kimberly-Clark, and Georgia Pacific, but the concept is sure to expand. This new program appears to be cost effective for both parties.

eBay has a new program called eBay Now in New York and San Francisco, and is about to expand to other cities, whereby a customer orders products online and has them delivered to his or her door within one or two hours. The order entry system simply dispatches one of eBay Now’s valets out to buy the products and deliver them on foot, by bicycle, taxi, car, or whatever it takes. The minimum purchase is $25. The fee is $5 plus tip.

But Walmart, with its vast network, is not far behind. They can provide same-day delivery from any one of their 4,600 stores. In March 2013, Reuters reported that Walmart was exploring the feasibility of asking store customers to drop orders off to online customers on their way home. There could be some liability issues here, but stranger things have happened.

Attempting to implement and maintain these levels of customer service is going to keep supply chain managers up at night. While most of these developments have been in the business-to-consumer sector, I expect these concepts to spread to business-to-business marketing, although probably not to such an extent. But certainly in the B-to-C sector it's possible that same-day delivery could become the new norm.

Supply chain managers are going to be faced with some difficult questions: How good does our service have to be to compete effectively? Depending on that answer , how many distribution centers will we need, and what should they stock? Where should they be located? Presumably, they will be in or close to population centers where costs will be higher. Finally, how will we deliver the product?

This suggests a wonderful opportunity for a logistics service provider to move into a densely populated area and offer a service that provides manufacturers an opportunity to consolidate their products with those of other manufacturers for same-day delivery. Savings in freight delivery costs would almost offset the extra warehousing costs. I don’t believe many firms can afford to take the Amazon approach of building huge facilities in multiple markets. Nor do I think they should. Right now, I believe many smaller competitors are frightened by Amazon’s aggressive approach.

There is no need to be. There are several different ways to skin the same cat.

 

Clifford F. Lynch is principal of C.F. Lynch & Associates, a provider of logistics management advisory services. He has authored several books and hundreds of articles on transportation and logistics. He can be reached at cliff@cflynch.com.

 

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