How is retailing driving the supply chain?

How is retailing driving the supply chain?October 2006

David BovetPartnerNorbridge, Inc.

2006 Northeast Supply Chain Conference & Educational Exhibition


My topics

Retailers Consumer goods manufacturers

Supply chain


Retail trade is growing strongly

0%

2%

4%

6%

8%

10%

0 200 400 600 800 1000

US Retail Spending: 4.9% current annual growth, 2000-05

Auto

Gas

Non-StoreBuilding/Home

Health

Restaurants Gen Merch

Food

Electronics

ApparelFurniture

Leisure

2005 Sales ($ billions)

2000

-20

05 C

AG

R(c

urre

nt $

)


Most categories have their killers …

Grocery Garments Electronics Home DIY

Upscale

Downscale

Whole Foods

HEB Albertsons

Wegmans

Publix

J Crew

Brooks Bros

LL Bean

H&M

Limited

Gap

TJX

Safeway

B&O Will Sonoma

Crate&Barrel

Bed Bath & B

IKEA

Pier 1

Home Depot

Lowe’s

Bose

Best Buy

Circuit City

Dell


… But channel boundaries are blurring

Grocery Garments Electronics Home DIY

Upscale

Downscale

Whole Foods

HEB Albertsons

Wegmans

Publix

J Crew

Brooks Bros

LL Bean

H&M

Limited

Gap

TJX

Safeway

B&O Will Sonoma

Crate&Barrel

Bed Bath & B

IKEA

Pier 1

Home Depot

Lowe’s

Bose

Best Buy

Circuit City

Dell

Nordstrom

Wal-Mart

Target

Kohls

Dollar Tree

Kohls

Costco

Meijer


Retailers face tough issues …

Big boxMarket saturation at home … category players fighting back

Battle for global domination abroad

Department storesDiscounter competition

Consumer fatigue … malls in decline

Category specialistsNew entry by big box retailers

E-retailers competing

SupermarketsSqueezed between high-end players and big box

How to grow in low-margin, low-growth markets


… And respond with tailored strategies

SpeedZara and H&M:

– Speedy sketch-to-shelf– Style … not quality– Small lot sizes– Fast turnover

Customization66 lifestyle segments

Best Buy:– Customer-centric formats– 5 customer types– Sales gains = 2X average

ServiceLowe’s:

– Knowledgeable employees– Wider aisles, better lighting

CVS– Beauty advisers for women

InternationalWal-Mart in China

Wal-Mart in Mexico

Borders in Ireland

IKEA in the US


Impacts on retail supply chains

Relentless drive for lower costs

Longer, more complex supply chains

Greater variety than ever

Faster-changing assortments

Conducting the orchestra is challenging


Manufacturing output has been flat

-10%

-5%

0%

5%

10%

0 100 200 300 400 500 600 700

US Manufactured Shipments: 0.3% current annual growth, 2000-04

Chemicals Food

ElectronicsApparel/ Textiles

2004 Value of Shipments ($ billions)

2000

-20

04 C

AG

R(c

urre

nt $

)

Plastic/ Rubber

Machinery

Petroleum/ Coal

Wood/ Paper

Minerals/ Metal

Auto/Air


What manufacturers are doing

Low-cost country sourcing

Design for distribution

Complexity reduction

Teaming with retailers and distributors

Improving new product introduction


Seven supply chain trends are underway

Globalization1. Retailers control global supply chains

2. Flows are being optimized worldwide

3. Global supply chain risks are rising

Logistics shifts4. Transport costs are up, service is down

5. Distribution patterns are shifting

The virtual company6. Information exchange is increasing

7. Outsourcing the operations “steak”


1. Retailers control global supply chains

0% 10% 20% 30% 40% 50% 60% 70%

Rest of World

Rest of Asia

China

20052020

0% 20% 40% 60% 80% 100%

Top 100

Top 20

Top 10 Retailers Non-Retailers

Retailers Non-Retailers

Retailers Non-Retailers

Retailers in the Top 100 Importers account for 9.4% of total imports

Origins

Control


2. Flows are being optimized worldwide

Payless Shoe Source shipping from Asia to Latin America via Panama, without ever touching the US

IKEA planning supply chain globally and using software to optimize its worldwide flows

Epson bringing in containers of printers direct to Peru from Asia

McDonald’s shipping french fries, packaging and toys globally


3. Global supply chain risks are rising …

Demand variabilityRegulatory scrutinyNatural disasters / disease

Supplier delaysCurrency fluctuationsTerrorist threats

Transportation issues . . .

. . . and other supply chain risks

Escalating global sourcing

Service delays: Cost hikes: Ports – rail – truck All modes


… Causing rethinking of global sourcing

Multiple supply sources

Multiple modal and carrier solutions

Contingency planning for backup

Low HighLow

High

Return

Optimal solutionOption A: “Zara-like”

3 plants in U.S. & Mexico3 distribution centers in U.S.30 days inventory

Option C: “Cost chopper”2 plants in China1 distribution center in U.S.120 days inventoryOption B: “Diversified”

6 plants in China, U.S., & Mexico6 distribution centers worldwide80 days inventory

Risk


4. Transport costs are up, service is down

Optimal mode choice is determined by considering transport cost and inventory carrying cost

– Assuming steady-state

– Assuming comparable reliability

Cost

High

LowHighLow

Time

Transport cost Inventorycarryingcost

Optimum


… Leading to new logistics solutions

Reduce transport usage

Consider slower modes – intermodal

Optimize backhauls

Use dedicated capacity

Improve planning

Coordinate with carriers

Cost

High

LowHighLow

Time

Transport cost Inventorycarryingcost

New optimum

Higher costs andless reliability leadshippers to:


5. Distribution patterns are shifting …

4 days

3 daysAsian Goods

WCPorts Old

East CoastDCs


… In response to new sourcing patterns

Logistics streamlining– Transloading into 53’ equipment at ports– Shipping direct store-ready in some cases (HP-WMT example)

Port diversification– Diverting more to Southeastern ports– Thinking about Suez – growing fast– New ports are being developed – Prince Rupert, Lazaro Cardenas

Distribution network– Creating more import warehouses– Big intermodal logistics centers growing (Alliance, Joliet, …)– Suppliers renting public warehouse space closer to retailers’ DCs


6. Information exchange is increasing

Driven by progressive retailers

Supply chain performance data shared online

Manufacturers using new software to solve supply chain problems

– Store-shelf inventory– Multi-echelon inventory– Asia lead times

Old-fashioned talking also used– Dell’s daily cross-functional team meeting – Right people and frequency– Simple XL spreadsheet


7. Outsourcing the operations “steak”

“Sizzle” is looking for someone to manage the “steak”

Value of rapid product introduction and global branding is rising

Manufacturers seek broad operations solutions

End-to-end offerings are still sparse

Cust

omer

Se

rvic

eSo

urci

ng

Prod

uctio

n

Logi

stic

s

Paym

ent

“Sizzle”

“Steak”

Information

ProductDevelopment

BrandManagement


We live in interesting times

Retailers are leading manufacturers and service providers toward the supply chain frontier

– Cheaper, faster, reliable, and convenient– Also customized and flexible

Addressing risk in the global supply chain– How can supply be assured?– How to live with congestion, high fuel prices, driver shortages, uncertain

exchange rates, avian flu, intense competition?

The good news: There are significant needs to fill!

Documents

How is retailing driving the supply chain?