On June 26 forty-two years ago the first retail product with a Universal Product Code was sold.  The immediate consequences were modest and actually increased marginal costs across the supply chain.

By the 1990s UPC and related processes had informed a stream-lining of logistics that substantially reduced distribution costs among leading competitors.

In the last decade these tracking technologies have transformed commerce by facilitating the capture and communication of increasingly granular expressions of demand... and the revolution is really just beginning.

The intersection of tracking buying behavior with online -- and especially mobile -- retail creates the potential for mass customization of production, distribution, and delivery that will drive competition for the next generation.

Sears and Roebuck claimed the potential of telegraph and railway. Sam Walton recognized the potential of Interstate Highways and UPC-driven supply chains. Jeff Bezos is battling with Sam's successors and others to own digital demand.

Data streams from consumer behavior -- facilitated by UPC-related technologies -- now allow designers, manufacturers, and retailers to "hear" and target demand as never before.  Most are not listening.  These will die.  Those who listen are more likely to continue competing, even as the digital domain dramatically increases its decibel level.

Earlier today I provided a colleague with information on the 2016 Allianz Risk Barometer and realized that somehow I failed to link 6/26 to this year's version when it was released early this year.  Worth correcting now. Once again at the top of the risk continuum:

The impact of business interruption (incl. supply chain disruption), market developments (volatility, intensified competition and market stagnation)and cyber incidents are the major risks occupying the attention of companies at the start of 2016, according to the fifth annual Allianz Risk Barometer, which surveys over 800 risk managers and corporate insurance experts from more than 40 countries.

Many of the other risks queried against -- fire, cyberattack, natural disasters -- are experienced as supply chain disruption.

Writing in Modern Materials Handling, Bridget McCrea suggests that the demands of ecommerce are pushing major changes in processes, technology, and expectations related to the "last mile."

In the last thirty years line haul costs have fallen fast and far as a proportion of total costs.  In the next ten years last mile delivery will almost certainly follow.

The Council of Supply Chain Management Professionals (CSCMP) has released its 2016 State of Logistics Report.  According to Jeff Berman, writing at Logistics Management:

Among the report’s key conclusions is the logistics industry is entering a new era. The report predicts over the next decade, the logistics industry will face “disruptive forces,” including technology and operational constraints that threaten to fundamentally change the rules of the game. 

It may already be starting. Motor carriers are experiencing rate weaknesses, especially in the $278 billion truckload market, as temporary overcapacity has given shippers some pricing power. The report concluded that TL rates and demand for transportation are “soft, and continue to fall.” 

While this is occurring, the TL sector copes with nearly 100 percent driver turnover as the truck driver shortage continues. “Despite softening demand and slower rates, competition for drivers remains intense,” the report concludes. 

There are bright spots for asset providers, however. The $82.2 billion parcel and express sector, fueled by double-digit growth in B2C online commerce, continues to grow. Its main drivers are the “explosion” of B2C e-commerce and omni-channel retail, the report says.

The revolution in ecommerce depends on agile, adaptable, affordable surface transportation. Even as ecommerce explodes, many traditional delivery mechanisms are taking-water.  Because the traditional Truck Load providers are being replaced by non-traditional alternatives?  Because parcel delivery is the ecommerce center of gravity? Because LTL is rising? Because inventory costs are creeping up. Because speed-to-market is becoming more important than cost-saving?  Because [insert your best guess]?

Journal of Commerce reports on how the shipping industry is not adapting to the new demands of ecommerce.

The main challenge is in communications, he said. “Vendors are trying to get product from the port faster, but the communications layer is broken. They’re using a lot of work-arounds,” he said. For example, building inventory stockpiles inland and shuttling freight to stores. 

“They’re doing that because they can’t guarantee they’ll meet a must-arrive-by deadline,” McCandless said. The blind spot on inbound freight can be quite big. “We’re working with one large U.S. retailer that has a 30 percent black hole on inbound tracking,” McCandless said. 

Where are the communications connections broken? Pick your location. The transfer of a container from ship to shore is one data problem point: When will a container be unloaded, where will it be stacked and when can it be pulled by a drayage operator?
As a shipment heads inland, how are dray deliveries scheduled? Are shippers notified when a container has been deconsolidated and when a truckload or intermodal shipment has been dispatched? How are landside shipments tracked in-transit? How are delivery appointments scheduled at inland distribution centers? Are shippers alerted when a less-than-truckload shipment is dispatched to a store or factory? How is data transferred for last-mile deliveries? 

...“The industry needs to fundamentally rethink how it does business and not just try to out-Amazon Amazon,” said Richard Metzler, chief marketing officer at uShip, an online transportation marketplace. “All the retailers are struggling to figure out what to do against Amazon. There’s too much inventory from a cost and service point of view. It has to change.”

The article gives especially helpful attention to the tendency to assume that effective information-sharing requires something akin to Electronic Data Interchange (EDI).  More often all that's needed to facilitate hand-offs across demand and supply networks are a set of thin Application Program Interfaces (APIs).  EDI requires the intimacy -- and complications -- of sex.  API is more like a friendly kiss.

US ecommerce sales growth year-over-year provided by Internet Retailer

A recent DCVelocity story offers a very helpful overview of how ecommerce is reshaping Distribution Centers.  According to the authors:

Customer expectations and competition from e-commerce are driving widespread changes to warehousing and distribution operations. Direct-to-consumer growth is not only affecting retailers, but also manufacturers, wholesalers, and 3PLs. Warehouses and warehouse fulfillment operations are increasingly playing a greater role in commerce due to disintermediation and a reduction in retail sales through stores. On top of that, the relationship between retailers and upstream partners is changing, as wholesalers have increased their presence in retail and retailers have pushed direct-to-consumer responsibilities back onto their suppliers. As a result, warehouse footprints are expanding, responsiveness and adaptability have become more important, parcel shipping has grown, and labor efficiency remains as important as ever.

The authors make the case that many of the efficiencies supporting the last generation's supply-and-demand networks are counter-productive to the speed and specificity of ecommerce.  We may be making a turn from pallets to pieces.

When Jeff Bezos suggested Amazon would begin delivery-by-drone, some perceived a Machivellian effort to distract competitors with an ecommerce "space race".

But according to the Xinhua news agency;

Chinese online retailer JD.com has begun using drones for deliveries in the countryside of east China's Jiangsu Province. 

The service around Suqian City, hometown of JD.com's founder Liu Qiangdong, can more than halve the cost of delivery to less than 0.5 yuan (7.6 U.S. cents) per parcel, said Xiao Jun, vice president of JD.com. 

At a delivery depot in Suqian's Caoji township, two drones are capable of handling 200 parcels a day. The drones can each carry 10 to 15 kg of weight and fly 15 to 20 km at a speed of up to 54 km per hour, said Xiao. 

They can automatically load and unload goods and operate in moderate rain and wind with a speed of up to 38.5 km per hour.

Meanwhile Walmart is getting lots of positive attention for its plans to use drones to speed-up Distribution Center operations.  According to The Street:

Walmart appears to be taking the sensible route when it comes to integrating drone technology into its business operations. For one thing, the company plans to use only remote-controlled flyers, rather than self-autonomous. The first application for drone technology will be in taking inventory. It takes Walmart warehouse workers about one month to check what goods need to be restocked, according to Reuters.Using a frame rate of 30 per second, drone-mounted cameras will be able to accomplish this in a fraction of the time.

Amazon is reportedly looking to test use of drones for home delivery in Ireland.  Several tests are also underway to use drone delivery in disaster situations.

June 21 Update: New US regulations continue to restrict the use of drones for ecommerce deliveries.

The June 3 Walmart annual meeting spawned numerous news stories, features, and analyses on the giant retailer's competition with Amazon. This competition can be abstracted to encompass issues beyond the two players: virtual inventory versus customer-facing stock, digital space vs physical space, even between saving money or saving time.

As this blog has noted previously, it is certainly a competition related to how and by whom and from where demand is expressed.

But what all of these diverse angles on the competition share is a dependence on supply chain velocity, as in speed and direction and, I add, depth.  "Owning" demand is only meaningful to the extent demand can be effectively supplied.  Speed without precision targeting -- in terms of time and space -- is a waste of energy.  Careful curators can claim narrow niches, but mass customization requires more choice, not less.

On June 4 The Economist offered this overview:

Rather than driving to a big box, many Americans are shopping online instead. American e-commerce accounted for 10.4% of retail sales last year, up from 9.3% in 2014, according to Morgan Stanley, a bank. Amazon is the force behind this, with sales in North America rising by nearly 30% in 2015. The choice for bricks-and-mortar retailers is clear: evolve or decline. 

Amid this tumult Walmart remains a titan. It is not just the world’s biggest retailer but also its largest private employer and company, measured by revenue. Last year it raked in $482 billion. Walmart’s empire is global, but America is its particular dominion, accounting for three-quarters of its sales. And on home turf Walmart still towers above Amazon, accounting for 10.6% of America’s retail sales, more than twice Amazon’s share, according to Cowen, a financial-services firm.

Yet Amazon is still growing fast, and Walmart may be past its peak. In 2009 Walmart commanded 11.6% of American retail sales. By 2018 Cowen reckons its share will be stuck at 10.6%, whereas Amazon’s will have jumped.

Strategically -- perhaps culturally -- the long-time focus at Walmart has been supply chain efficiency to achieve price advantage. Walmart also began and continues as a mostly non-urban enterprise.

The origin of Amazon was a bit (but only a bit) less focused on price while very intent on convenience.  It was born mostly agnostic in terms of urban vs. non-urban, but in practice is especially favored by younger, more affluent, and more urban demographics.

Each enterprise started life by disrupting non-perishables:  Amazon with books, Walmart with clothing.  But in 1987-1988 Walmart entered the grocery sector.  Its success in grocery -- surprising many and confounding most grocery leaders -- revolutionized the US sector and set the foundation for the behemoth Walmart has since become.

I perceive that the real battle between Amazon and Walmart is just beginning and will likely be decided in terms of how each claims and protects grocery market share over the next ten years.

At its annual meeting Walmart announced it is, "partnering with Uber, Lyft and Deliv to begin testing last-mile grocery delivery services. Walmart expects to start the pilot program within the next two weeks in Denver and one additional, unspecified market. This is on top of a smaller pilot program in Miami between Sam's Club and Deliv, which started in March. That said, it's clear Walmart has figured out how it can leverage its massive brick-and-mortar footprint -- where 75 percent of the U.S. population lives within five miles of a Walmart store -- to bring down costs and expand online grocery services more rapidly than the rest."

By reconceiving Walmart Supercenters as ecommerce cross-docks, the retailer could offer much higher velocity grocery services without anything close to the same capital costs that will be necessary for Amazon or other new grocery sector entrants. By partnering with innovative transportation partners,Walmart can forward deploy its preexisting supply chain investments for a whole new customer base.  That's a big head start.

It does not solve some serious marketing problems.  It does not solve potential SKU proliferation problems.  It will not happen overnight or without headaches.  But if the existing Walmart supply chain can be adapted to effective on-demand delivery, this will complicate market entry for others and support Walmart's ability to extend ecommerce advantages beyond grocery.

Last fall Neil Ashe, Walmart's head of global ecommerce, told financial analysts, “Online retail is hard, grocery retail is really hard, so online grocery is of course really, really hard. We are uniquely positioned in this space, we've 15 years of experience from the U.K. and experience now over the last couple in the U.S.,” he said. “We know how to execute this and we have got the physical footprint to make it work.”

The last ten weeks have -- obviously -- taken me away from this blog. I did, however, continue to read, collect links, and try to think (at least a bit).  Following are a few highlights of what caught my attention over this period:

On May 20, FM Global, the insurance company, released the 2016 update of the well-regarded Global Resilience Index that gives particular attention to supply chains.  According to the update:

Supply chain resilience is vital to robust business performance. Threats to resilience—such as depressed oil prices, natural catastrophes and the spread of terrorism—are keeping financial executives around the world up at night.

Details from the Global Resilience Index are available online.

In an interview with FEI Daily, the CFO of FM Global offered the following judgment:

FEI Daily: What can be done to mitigate risk when it comes to selecting suppliers and siting facilities? 

Jeff Burchill: The first step is to understand the supply chain risk inherent to the region you’re looking at. That’s what the Resilience Index helps you do. Conducting all that research yourself without a tool like the Index would be a tremendous undertaking for any individual. However, regardless of how you gather the information, such data helps you be more prudent as you go about making supply chain decisions. For example, we see a lot of executives wringing costs from their supply chains and making them lean – often too lean. When you’re too lean, especially in a high-risk region, your supply chain can get brittle and prone to disruption. For example, tight production supply chains were blamed for Toyota’s shutdown after the April earthquakes in Japan. 

So to mitigate risk, look at every link in your supply chain, how likely it is to break, how much money your company would lose if it did, and your options for avoiding disruption.

***

Chartered Institute for Procurement and Supply (CIPS) working with Dun & Bradstreet has also developed a quarterly global supply chain risk index.  In their report on the final quarter of 2015, the researchers found -- among much more -- that, "In China, risk is related to regions where industry has considerable over-capacity and local governments have propped up employment through their influence over local banks, raising both the risk of corporate defaults in the longer term, and higher credit risk."  This macro-factor can obviously have a whole host of micro implications.

***

Seismic activity in southeastern Japan during the middle and second half of April caused death and destruction. According to Reuters, "Factories for major manufacturers including Toyota, Sony and Honda were closed, disrupting supply chains around the country."

Since the March 2011 Triple Disaster most Japanese manufacturers have given increased attention to operational resilience.  Despite this, several of the best were hit hard by the April earthquake.  Writing in Forbes, Jonathan Webb explains that Toyota, "suspended production in 26 out of 30 production lines in Japan as inward components ceased to flow from wounded suppliers. 80,000 units have been impacted. The cost of the current quake could reduce operating profit by 30 billion yen ($277 million)."

On April 22 General Motors announced that it was "taking proactive steps to mitigate a part supply issue and is adjusting production schedules at four of its North American assembly facilities. The manufacturing operations at the following GM North America assembly facilities are currently expected to be down for two weeks beginning April 25, 2016: Spring Hill, Tennessee.; Oshawa Flex Assembly, Canada; Lordstown, Ohio; and Fairfax, Kansas."

The supply chain effects of the earthquake were still being experience in late May. Several component manufacturers did not expect to return to full production until late June or July.

***

A few weeks before the earthquakes GT Nexus and YouGov released the results of a December survey that found: 

• 40% of manufacturers have been impacted by a supply chain disruption in the last 12 months
• 27% said keeping up with customer demands is their number one supply chain challenge
• 12% said their primary challenge is dealing with the high level of risk in global markets
• 11% said having a globally dispersed network of partners is their top challenge

The report's authors also found and argue: "Despite such high levels of risk and uncertainty, it was surprising to find that only 24% of respondents currently have a Chief Supply Chain Officer in place. That leaves 76% without a strategic leader and visionary at the helm. Lack of a C-level leader limits innovation and strategic transformational initiatives."

***

Yet another angle on global supply chain risk is offered by BSI, once upon a time the British Standards Institution.  Their spring update calls-out the biggest threats to the global supply chain as:

• Global cargo theft cost estimated to grow by a further $1 billion in 2016, with increased concerns in China, Germany, India, Mexico, South Africa, and United States
• Continued tensions in South China Sea predicted to lead to further protests and disruptions
• On-going conflict in Syria will continue to impact supply chains including the migrant crisis will continue to lead to port disruptions and European Union/Schengen border controls predicted to have far-reaching impact.
• ISIS is predicted to remain a significant threat to disrupt supply chains
• Labour unrest in China is predicted to persist, as a slowdown in the Chinese economy continues and more jobs move to neighbouring countries.
• Weather disruptions e.g. La Nina phenomenon
• Global health crises e.g. Zika and Ebola.

As the increasing number of supply chain risk products suggest, the hidden costs of network disruptions are not as hidden as just a few years ago.

Geekwire is reporting:

Amazon filed suit Monday against a 16-year veteran of the company, Arthur Valdez, alleging that his new job as a high-ranking supply chain and logistics executive at Target Corp. violates the terms of the non-competition agreement that he signed as part of his Amazon employment. 

The suit, filed a week before Valdez is scheduled to start his new job, alleges that he “cannot lead Target’s supply chain operations without referencing confidential information learned and developed by him at Amazon to drive superior performance in exactly the same areas.”

Amazon claims that Valdez has already started spilling the beans to Target executives, in the process of interviewing with the rival retail company.

Amazon is asking the court to enforce a provision of the non-compete agreement requiring an 18-month “time out” before employees such as Valdez can work in comparable positions for competing companies. These non-compete clauses have long been a standard part of Amazon employment agreements. Valdez first signed his agreement in 1999, when he joined Amazon, the company says in its complaint.

Here's a copy of the Amazon complaint filed in King County, Washington Court.

Fred Smith, founder and CEO of Federal Express, knows about -- even personifies -- disruptive innovation. So his comments during a March 16 call with financial analysts received considerable attention.  According to the Memphis Daily News:

Smith said the industry disruption discussed since Amazon announced plans to lease 20 Boeing 767 planes from Air Transport Services Group has been “fueled by fantastical articles … and reports which are devoid of in-depth knowledge of logistics systems and the markets FedEx serves,” Smith said, emphasizing that he specifically chose the term “fantastical.” Smith also said he doesn’t see the big three of e-commerce shipping – FedEx, UPS and the U.S. Postal Service – changing. “It is highly likely these entities will remain primary carriers for e-commerce shipments in the U.S. for the foreseeable future,” Smith added.

(Fantastical or not, here's a recent report on Amazon's expanding in-house operations.)

Smith actually never uttered the word Amazon.  But his meaning was clear enough.  It was also clear that Fedex was signaling whoever would listen that its own strategy is not keen on loss-leading behavior.

In an interview with the Wall Street Journal related to Wednesday's quarterly results, Smith said: "There’s an enormous interest in people having things delivered to themselves. It does not change, one iota, the input costs of the delivery."

One way that FedEx intends to boost its e-commerce returns is by increasing fees attached to the growing number of large shipments such as kayaks and other items that don’t fit into its ground network. 

Mr. Smith blamed some of the trend in low-cost e-commerce expectations on the U.S. Postal Service, which it and other delivery companies, including UPS and Amazon, use to deliver packages the most expensive leg of the trip—to resident’s doors. 

“The postal service’s rates, which are the primary driver of e-commerce…they’re going to have to go up as mail service goes down,” Mr. Smith said.

According to several reports Amazon does not constitute more than three percent of revenue for Federal Express.

Inditex SA -- owner of Zara and the world's largest clothing retailer -- has once again posted impressive gains.  It has also announced plans to slow new store launches and focus more on online.

According to the company:

Inditex Group's net sales increased by 15.4% in FY15 (1 February 2015 - 31 January 2016) to €20.90 billion, underpinned by growth in all of the Group's geographic regions. Sales growth in local currencies reached 15%. Net profit was €2.88 billion, up 15% from FY14. Meanwhile EBITDA registered growth of 15% to €4.70 billion. Like-for-like sales growth was 8.5%, on top of 5% growth in FY14, with positive growth in all geographies and across all the formats.

Despite the continuing recession in much of Europe, the slowdown (or worse) in China and other BRIC-like economies, and uneven growth in the United States.

According to Bloomberg:

Since Inditex’s 2001 initial public offering, the retailer has boosted its sales more than sixfold through aggressive expansion of its eight chains. Two-thirds of its 7,000 stores have been opened or revamped in the last three years.

But the company is applying the brakes to more bricks-and-mortar.  Several new stores -- including massive brand-focusing flagship stores -- will continue to open. Others will open for the first time in selected emerging markets.  But the company perceives it has sufficient physical presence in existing markets to support strong online growth. Zara promotes both in-store pick-up and return on its products purchased online.

Zara does not usually report online sales separate from other retail. But on March 9 the company reported, "The Group will complete its online presence in all the European Union markets in April when its online sales platform goes live in Slovenia, Malta and the Baltic States. Meanwhile, the Group is planning to launch in five new markets with physical stores in 2016 (New Zealand, Vietnam, Nicaragua, Paraguay and Aruba)."  This means that across several brands, the company now has customized online platforms operating in 29 national markets.

Inditex is famous for its well-integrated and agile supply chain.  The company was a relative late-comer to online, but the "fast-fashion" functionality of its supply chain is especially well-suited to online consumer preferences.

According to its most recent quarterly report, Inditex has steadily rolled out radio frequency identification technology (RFID) to improve stock management across its store base. At year-end FY2015, this technology was up and running in 1,542 stores in 64 markets and had been fully implemented in 48 of these countries. By the end of 2016, the Group plans to have installed this technology throughout Zara's more than 2,000 stores.

ProPublica looks at the impact on chemical and energy supply chains in case a major hurricane pulverizes the Houston area. One quick excerpt: "Beyond the pain a scenario like Mighty Ike would inflict locally, a storm that cripples the region could also deeply damage the U.S. economy and even national security. The 10 refineries that line the Ship Channel produce about 27 percent of the nation’s gasoline and about 60 percent of its aviation fuel."

Fortune magazine focuses on the optimization -- or sometimes rationalization -- strategy being adopted by Target and others:

The discount retailer, the third largest U.S. store chain, is deploying workers to pore through the many categories of products its sells to see how many different formats and pack sizes of products like bottled water or soap it really needs to stock in its stores. 

For Target Chief Executive Brian Cornell, it’s a matter of being more efficient in what are staples for the retailer so it can focus more on categories it has made a priority, like wellness, stylish home goods, apparel, and baby products... 

The store will start by removing some items at one location, and then roll out to other stores in its 1,800-store fleet if it doesn’t face customer feedback. “We are not taking a blunt instrument approach to this,” Cornell said. 

The efforts mirror those of Walmart WMT 1.65% which has also grappled with out-of-stocks and wants to reduce the expense and time of having workers constantly restock shelves. By October, Walmart had eliminated about 15% of its assortment by doing things like offering a ranch dressing in one size rather than six, the Wall Street Journalreported at the time. 

Many consumer and packaged goods companies seem to have been expecting this development. Former Procter & Gamble CEO A.G. Lafley told fellow industry leaders last June that consumers are put off by too much choice.

Target is giving significant attention to supply chain strategy, operational fixes and optimization. Their March 2 Financial Analyst Community Meeting was replete with a variety of presentations.

I heard a management team being honest with itself and with the financial community... a bit less common than might be hoped.

What they discussed-aloud is similar to the issues a wide variety of retailers are facing.

Here are some excerpts:

We expect to invest $2 billion to $2.5 billion in capital expenditures per year, focused on technology, supply chain investments to modernize our operations and to support flexible fulfillment... 

Over time, we've been adding stress and complexity to systems that frankly were built for another time to keep pace with our changing guests, to consistently deliver what our guests expect and position Target for the future, we must zero in on critical pieces -- supply chain, stores, technology -- and put our guests at the center of all of it. 

For 50 years, we were working off a pretty linear system. It started by moving product from our vendor partners into distribution centers and then out to our stores. The whole system moved from the left-hand side of the page to the right. Today, the world couldn't be more different. Today, guests can still shop our stores to get the products they need and even pick up a few they didn't know they wanted. But they can also shop online and have the order delivered to their home...

We continue to send product to stores to support an in-store shopping experience. But we are also shipping directly to guests from stores, DCs, even vendors and we are sending products to stores for online order pickup. In fact, the number of Target.com orders our guests chose to pick upin stores grew by 60% in the past year, almost double our full-year digital sales growth. And sure, overall digital demand is growing, but this also reflects our guests' increasing desire for the convenience of picking up their orders in store, usually within the hour. 

All these changes are in the name of making sure we can deliver the products our guests want fast. In our stores, they are more important than ever. They've become showrooms, fulfillment centers and pick-up locations. And the people inside them are there to help. 

Sounds great, right? But here's the rub. We can't continue to add this kind of complexity without ensuring the foundation can support it. Earlier, you heard a little bit about our guest immersion experiences and I can tell you from my own guest conversations that Brian's summary was right on. Hearing from guests was both uplifting and humbling to realize how much they love us and how much work we still have to do to deliver the experience they expect... 

So in the past year, we've put a lot of thought into tackling these challenges and we found it doesn't necessarily require investing in new, but often entails using what we have, like systems and talent, more effectively to deliver a better experience to our guests. To reduce back-room inventory, we are redesigning shelf presentations to put even more product on the sales floor and surgically reducing the number of SKUs in particular categories. We are also optimizing case pack sizes to get down on the number of times our teams are touching a product.  

Imagine for a minute that a store receives 24 jars of peanut butter in a case, but the shelf only holds 18. So instead of being able to pull a case pack directly from a delivery truck to the sales floor, teams have to break open the package and store the extra six jars in the back room. And as soon as we sold through the shelf, they have to make an extra trip to the back to replenish. You don't need an advanced degree to see the math on that scenario is not good. Three times the touches and a huge drain on payroll productivity. So we are working with vendors to send case-pack sizes that match each product's rate of sale and allotted shelf space... 

When you talk to our guests, the number one pain point is that we are out of stock and when it's for an item we've promoted, it's a double whammy in disappointment. We've offered a great deal, they came to the store and when they got there, they couldn't buy what we said we would sell them. 

So we established an action team last summer that has been digging category by category into the root causes of persistent out-of-stock challenges and the results have been very positive. We finished 2015 with out-of-stocks 40% lower than the year before. And for a set of focus items we've designated in essentials, our out-of-stocks are better than we have ever measured. 

On top of that, those results came from process changes that are simple, repeatable and sustainable. So in many cases, we can apply the same fixes across the business. What we've done to reduce out-of-stocks in paper towels, for instance, is working for us in diapers, given they are both high frequency, large pack size products. The solutions we've started to put in place are helping to address some of the fundamental issues, but we've uncovered other parts of our operations that need more fundamental change. 

It was clear we needed a dedicated team that could focus on transforming our supply chain to lay the foundation for tomorrow without the burden of the all-consuming responsibility of running day-to-day operations. As a result, we carved out a small team last fall comprised of functional experts from across the organization and we asked Karl Bracken to head up this effort. He had led several parts of our supply chain and merchandising functions and set up our flexible fulfillment capabilities. 

After identifying a long list of work we could tackle, the team narrowed on a focused set of priorities that would have the biggest impact. For example, work is already underway to solve for the variability of when our products arrive in our distribution center. Some products arrive late, some products arrive early and in general, the windows we specify for our vendors are far too wide. That inconsistency upstream makes it harder to keep our stores in stock or provide tight shipping windows downstream.

There's much more, most of it applicable to any consumer-facing supply chain.

In a new report on supply chain risk and resilience sponsored by DHL, the authors conclude:

Increased supply chain risks have been the major unintended consequence of two of the most significant business trends of recent decades: globalization and lean production. Driven by the quest for lower manufacturing costs or access to specialist capabilities, the increasing willingness of companies to source materials and components from around the world has greatly increased the potential points of supply chain weakness, especially as some key production sites are now located in regions more vulnerable to natural disasters.  

And supply chains have also increased their vulnerability. Short product life cycles and the desire to conserve working capital encourages companies to keep inventories and buffer stocks as low as possible. It’s an approach central to the Japanese philosophy of “just-intime.” When supply chains are running smoothly, this way of working has proved incredibly successful: cutting manufacturing costs, improving companies’ ability to respond to market shifts, and simplifying quality control. But when problems do occur, there is far less slack available, leaving companies with less time to react before the impact of problems reaches their customers. 

Target has hired an Amazon alumnus to reform its supply chain.  According to the Wall Street Journal:

Target is racing to modernize its supply chain operations to handle all these jobs as it addresses problems that cropped up during the transition. In recent quarters, Target has struggled with inventory shortfalls as it tried to cater to online and in-store shoppers at the same time... 

To help address the new challenges, Target on Monday hired retail supply chain veteranArthur Valdez as its chief supply chain and logistics officer. Mr. Valdez, who spent 16 years at Seattle-based Amazon.com Inc., will join the retailer March 28. He is the most senior hire that Target has made from the online retailer, which formerly ran Target’s Web operations for a decade until 2011. 

He joins Target amid top-down reviews of its supply chain and a separate project designed to transform grocery operations, where there are even more problems to fix. The future look of its supply chain is expected to be one of the areas Target executives will discuss on Wednesday during an annual meeting with Wall Street analysts.

The Economic Integration Group has produced an extensive analysis it calls the Distressed Communities Index (DCI).  The level of distress reflects seven measures:

1. No High School Degree: Percent of the population 25 years and over without a high school degree
2. Housing vacancy: Percent of habitable housing that is unoccupied, excluding properties that are for seasonal, recreational, or occasional use
3. Adults not working: Share of the population 16 years and over that is not currently employed
4. Poverty: Percent of population living under the poverty line
5. Median income relative to state: Ratio of the geography’s median income to the state’s median income
6. Change in employment: Percent change in the number of individuals employed between 2010 and 2013
7. Change in business establishments: Percent change in the number of business establishments between 2010 and 2013

On the map above darker green reflects less distress, deeper red more distress.  It is interesting to compare this map with where Walmart has decided to close stores or where Amazon is concentrating its fulfillment centers.

Demand growth is likely in green areas while per capita declines are occurring in red zones.

Walmart says it is making progress in forward deploying product to customer-facing rather than other shelves.  In a teleconference with investors and analysts, CEO Douglas McMillon said:

We continued to make progress in managing inventory. Overall inventory grew 0.9 percent, or approximately 25 percent the rate of total sales growth. Comp store inventory declined 2.9 percent, as we remained focused on cleaning up our backrooms and using processes such as CAP and top-stock to ensure better in-stocks for our customers. Inventory will remain a key focus area for us in this new fiscal year. 

The Wall Street Journal explains:

Wal-Mart has been trying to gain better control of its sprawling supply chain, in an effort to ensure more goods are put before consumers on store shelves, rather than gathering dust and racking up costs in warehouses. The latest numbers indicate the retailer is succeeding, though that may be small consolation if sales don’t pick up.

Amazon long-ago labeled its supply nodes as "Fulfillment Centers" (not distribution centers).  As a matter of fundamental strategy Amazon is a demand fulfillment enterprise, not a producer or distributor of supply. The company seeks to "own" demand by providing consumers with an easy and seamless way to express demand that the firm will fulfill in a manner that increasingly causes consumers to simply neglect potential competitors.

Last summer my wife ordered a jar of ginger jam from a small English firm that sells through Amazon. The package arrived broken and dripping.  Before she had time to complain to the seller, Amazon asked about her "experience".  Amazon then facilitated the quick receipt of a -- much better wrapped -- replacement.  Demand was fulfilled, expectations (regarding Amazon) exceeded.

According to internal documents reviewed by Bloomberg, this attention to detail is part of an ambitious strategy to expand the "Fulfillment By Amazon (FBA) service, which provides storage, packing and shipping for independent merchants selling products on the company’s website."  By serving -- and mentoring -- these independent merchants the once-upon ideal of a Whole Earth catalog would not only be achieved but supported with easy payments, quality assurance, and rapid delivery.

While FBA is demand-facing, the supply-facing operation will be a new venture called “Global Supply Chain by Amazon." According to Bloomberg, "The new business will locate Amazon at the center of a logistics industry that involves not just shippers like FedEx and UPS but also legions of middlemen who handle cargo and paperwork associated with transnational trade. Amazon wants to bypass these brokers, amassing inventory from thousands of merchants around the world and then buying space on trucks, planes and ships at reduced rates. Merchants will be able to book cargo space online or via mobile devices, creating what Amazon described as a “one click-ship for seamless international trade and shipping.”

I still contend Amazon has every plan and intention to continue to use existing shippers.  But if GSCA is successful Amazon will have almost complete power to set shipping terms and convert systemic savings into an immense price advantage.

In early January the Washington Post developed a very helpful analysis of how the recently announced closing of 154 Walmart stores in the United States relates to issues of population density and household income. Most store closures were concentrated where both factors are low. Here is one visual analysis. More detail is available by accessing the original story.

In a 10-K filed for its fiscal year that closed December 31, Amazon -- for the first time -- identifies itself as a "transportation services provider".

Transportation costs are a major expense for Amazon and a significant source of revenue for UPS, FedEx, US Postal Service, and other delivery companies. 2015 the company spent more than $11.5 billion, a $2.8 billion increase over 2014 levels.

The SEC language has spurred further (well-informed) speculation that Amazon is targeting its current vendors -- especially UPS and FedEx as competitors. 

I'm not so sure.  Given the level -- and dynamism -- of demand in many growth-markets and the outer limits of any supply operation, I can more easily imagine Amazon developing its own multi-capable fleet even as it continues to engage several third-party providers.  This "all of the above" delivery strategy is fairly typical in the highest velocity markets.

Picture by Sam Yu, The Frederick News-Post

Across the mid-Atlantic, January 21 and 22 saw the typical surge in snow-storm grocery shopping. The spike in demand for French Toast -- bread, eggs, and milk -- was predictably repeated. Are nutmeg, cinnamon, vanilla extract and brandy also hoarded? (There is parallel hoarding of liquor.)

The major distributors had good warning so the grocery supply chain probably peaked on Thursday night-Friday morning.  Then given the weather forecast, mostly shut-down for the weekend.  Monday was a day for digging out. Tuesday there was movement, but major impediments.  Wednesday (today) and probably tomorrow will see about as much volume move as the same days last week.

There were, of course, empty shelves.  Research suggests that as voids appear shoppers are predisposed to buy anything still available. But most grocery retailers reopened on Sunday.  Some even kept the doors open for the duration.

According to its just released quarterly report, the industrial property firm Prologis is seeing significant and sustained growth as a result of increasing demand for e-commerce fulfillment and distribution space.

"Financial and operating results in 2015 exceeded expectations and reflected outstanding execution by the team and favorable market conditions," said Hamid Moghadam, chairman and CEO, Prologis. "We enter 2016 with record occupancy levels, substantial requirements from our customers to further optimize their supply chains, and strong institutional interest in our co-investment ventures.” “In spite of macroeconomic uncertainty, vacancy rates are at all-time lows. Discussions with our global customers support our view that the power of domestic consumption and the growth of e-commerce will continue to drive demand for well located distribution space, particularly in major gateway markets,” Moghadam added. “Given our expectations that supply and demand will reach equilibrium by the end of 2016 in the U.S., we anticipate an extended period of low vacancy that will support favorable operating conditions." 

In comments to the Wall Street Journal the Prologis Chairman and CEO added,

"Products sold online can take up about three times as much space as products waiting to be shipped to and sold in stores, Mr. Moghadam said, mainly because online orders require individual packaging and shipping boxes, rather than being stored in pallets or large batches.

E-commerce sales increased about 9% over this past holiday season over the previous year, while overall retail sales rose about 3%, according to multiple industry estimates.

“If you even see modest growth in e-commerce, you have significant grown in demand for industrial space,” Mr. Moghadam said. “Online retail is a much less efficient supply chain in terms of space usage.”

"Gateway Markets" as used above is yet another moniker what I am trying to label Demand-Growth Markets.  Largely urban, younger than many, creative more than extractive economies.

According to the National Retail Federation:

Holiday sales in 2015 increased 3 percent to $626.1 billion... NRF forecasted total growth, including online sales, of 3.7 percent. Non-store holiday sales grew 9 percent to $105 billion.

As often noted, if a market is being cannibalized, you want to be your own cannibal.

In the just released Global Risks Report by the Word Economic Forum, supply chains are characterized as one of several crucial networks consisting of highly interdependent relationships, all of which are in need of attention and any of which might serve to differentiate resilience from catastrophe. The authors write:

...a renewed focus on prevention, preparedness and resilience, rather than reaction and compliance, would likely improve security actors’ ability to manage known and unknown security risks. There exists important know-how and resources in the private sector that can improve preparedness and mission-critical planning processes in a global security context – using data to track the progress of risk factors, sharing information on where and when crimes occur, and establishing mechanisms for harnessing industry supply chains during complex emergencies – are a few examples of how security arrangements could be updated. Rather than wait for crises to happen, or sleepwalk into the dystopian scenarios described above, it is critical to identify potential inflection points and focus on finding solutions rather than just containing problems, and adapt relevant structures accordingly. 

It can be helpful to state what ought be obvious, but is too often neglected.  The author also write,

The resilience of any individual business depends heavily on the resilience of its suppliers and purchasers, whose supply chains can span many countries. Increasingly, businesses need to strengthen their scenario and emergency planning capacity to analyse complex and often uncertain interdependencies if they are to build resilience to global risks. 

The scenarios offered by the Global Risks Report are, as noted above, dystopian.  If the WEF reflects the worldview of the so-called One Percent, they envision an increasingly risky world.

Three hypotheses for the new year and next few years:

• Demand growth will be more geographically concentrated.
• Demand volumes will experience increased volatility and related unpredictability, especially in areas experiencing the most demand growth.
• Supply systems -- especially retail distribution/fulfillment -- will focus comparative advantage on speed, reliability, and customization.

Wealth is increasingly concentrated in fewer locations. Six metro areas — New York, Los Angeles,Chicago, Washington D.C., Dallas and Houston — account for almost a quarter of the US economy. Add the next seventeen largest cities and roughly half the national economy is generated within the fairly narrow, often overlapping, boundaries of two-dozen metro areas.

Moreover, even within the economically most robust urban areas, demand growth will be much more prominent in select locations.  As recently summarized in The Atlantic:

The Atlanta metro area is a notable example of a “thriving” place where per capita income has nonetheless fallen farther and farther behind that of cities like Washington, New York, and San Francisco. So is metro Houston. Per-capita income in metro Houston was 1 percent above metro New York’s in 1980. But despite the so-called “Texas miracle,” Houston’s per-capita income fell to 15 percent below New York’s by 2011 and even at the height of the oil boom in 2013 remained at 12 percent below. It’s largely the same story in the Mountain West, including in some of its most “booming” cities. Metro Salt Lake City, for example, has seen its per capita income fall well behind that of New York since 2001.

Increase in Per Capita Income for Three Cities Compared to Rise for U.S. as a Whole

There are several factors causing this divergence, but regardless of cause these trends have been building for two decades and are unlikely to reverse in the next few years.

Even within the narrow category of wealthy urban areas there can be considerable difference in the potential for demand growth. The key factor is availability of real disposable income. For example, fifty-seven percent of households in the San Jose-Sunnyvale-Santa Clara (CA) Metropolitan Statistical Area have incomes over $75,000 compared to barely forty percent of those in the Philadelphia MSA.  Almost 48 percent of Boston area households have incomes over $75,0000, while less than thirty percent of households in Bakersfield, California. Housing is much more expensive in the Boston and San Jose than in Philadelphia or Bakersfield, but the higher cost also reflects a greater sense of economic confidence and likely liquidity.

Retail turnover--and \potential demand growth--is also amplified when affluent consumers are concentrated within walking distance (less than one mile), as is the case in Boston, San Francisco, New York, and increasingly Washington DC. Concentrations within concentrations.

Demand is increasingly volatile. Within these fertile concentrations of affluence, demand can experience sudden flood or drought. Greek yogurt can move from less than 1 percent of the market to over 35 percent in less than five years. Macy's is closing stores while Zara might claim to be driving demand.  In early 2016 the mere rumor of declining demand for the Apple iPhone 6s and 6s plus has stock prices tumbling across the product's entire supply chain. 

Some suggest that over the next several years the entire ecology of the retail sector -- generating roughly $5 trillion in annual economic value -- could be transformed by a combination of demographic trends and online behavior.  But not necessarily online purchasing.  While digital will be critical, it will not decimate every storefront.

According to Women's Wear Daily:

Millennials are forcing brands to engage with them differently — over social and digital channels versus in more traditional ways — but they are still making their way into stores. In fact, more than 92 percent of Millennials expected to shop in stores at least as often in 2015 as they did in 2014. Additionally, it should come as no surprise that Millennials crave personalized attention and instant gratification. They have bought in heavily to the concierge economy — the idea that services and goods are available and brought to you almost instantly, at the click of a button. When asked if they would make online appointments with retailers, 59 percent of Millennials said “yes” — the highest of the demographics surveyed. With Baby Boomers favoring in-store shopping and Millennials demanding increasingly customized assistance, the shift from online buying to in-store service can only be expected.

The WWD author is in a slight state-of-denial regarding the growth potential of online purchasing, but the data -- from The State of Retail -- is persuasive that cultivating a meaningful digital relationship is an increasingly decisive factor in which brands are engaged by consumers: online or off. 

According to Treacy and Wiersema (and their disciples since) firms operate along three value dimensions: “operational excellence”(cost), “product leadership” (innovation), or “customer intimacy” (customization).  Until about 2007 we were supposed to choose one.  Now retailers (and many others) must compete on all three fronts and do it both face-to-face and as Facebook friends. Cost is important for perceived commodities. Innovation and customization are crucial for everything else.

Volatility is the friend of those able to ride the crest sweeping away their competitors.

Innovation and customization of supply will be a principal way to compete on cost.  Effective integration of digital processes for monitoring demand and targeting supply will be critical to meeting consumer expectations in a financially sustainable way.

Trucking and other forms of delivery are likely to remain in tight supply. The biggest suppliers will manage risk through longer-term contracts with 3PLs and increase ownership of delivery capacity. Experimentation and investment in alternative delivery formats will proliferate. All of this will increase marginal costs. Those that can not afford these costs will pay the ultimate price. At least fuel prices are likely to remain low.

Warehouses, distribution centers, fulfillment operations and related properties will continue to enjoy high demand.  Lease prices will climb. Demand for such properties reflect both growing and changing needs -- especially for locations closer to populations that are a source of demand-growth -- and hesitation to invest in new construction.  According to the Wall Street Journal:

Jeffrey Havsy, CBRE’s chief economist for the Americas, said that the crunch is a result of steady growth in demand as the economy improves, paired with the fact that few new warehouses are being built.

“We didn’t build a lot coming out of the Great Recession, and it’s only recently that rents have gotten back to where people can justify building new space,” Mr. Havsy said. “Global trade is still growing, though slowly… We’ve been taking small bites, over a long period, and when you’re not building a lot, after a while, you end up eating up a big chunk of the available space.”

Builders completed construction on 41.5 million square feet of industrial space last quarter, down 13.6% from the same quarter a year earlier. By contrast, construction completions never fell below 50 millions square feet per quarter during 2006 and 2007, before the recession struck. Rents, meanwhile, have risen 15.4% over the last eight quarters, CBRE says.

E-commerce is also driving demand for smaller, older industrial properties that are closer to population centers, Mr. Havsy said, as users lease more warehouses that can help fill orders for same-day delivery.

Property development, truck purchases, and hiring/training drivers will continue to lag major market movements.  How existing properties are utilized and how current trucks and drivers are deployed can, however, potentially lead the market. 

In a Forbes piece, Greg Petro claims, Zara --a retail brand of Inditex group-- :

... focuses solely on following the latest trends as soon as they appear, using an extremely agile supply chain to meet customer demand. It doesn’t matter that the trends change so quickly – Zara is already ahead of the curve. Zara broke the traditional fashion supply chain rules by cramming the entire production process into a 10- to 15-day time span. The Spanish company uses its arsenal of automated factories located in its home country as well as a network of over 300 small finishing shops through the Iberian peninsula, North Africa and Turkey. The automated factories constantly create unfinished “greige goods.” As soon as Zara pulls the trigger on a new design, the greige goods are sent to the finishing shops and turned into products ready to ship – a textbook example of applying “just in time” manufacturing to fashion.

Outsourcing, near-sourcing, flexible finishing, and fast delivery allows Zara to optimize specific advantages across the global supply chain to fulfill the often fickle interests of urban consumers with higher than typical disposable income. Medical Goods suppliers, such as Owens & Minor, offer a similar process to serve the needs of particular surgeons and surgeries.  Kroger will source Chilean blueberries and local blueberries and bake in-store blueberry torts; responding to whatever wants are emerging. 

Moreover what Zara, O&M, and Kroger all share is the human and financial capital needed to capture and make-meaning of customer data -- not just purchasing data -- to anticipate where markets are moving.  While others wait to see, those that own the data are setting up pop-up shops, new displays, or website screens... whatever it takes to engage the customer.

Next: Implications for Supply Chain Resilience

Arash Azadegan, Ph.D, a colleague at Rutgers University, presented yesterday to the Transportation Research Board on a study he has been conducting for quite some time. According to a report in Fleet Owner:

“Because of JIT [just in time] practices, the Internet, and globalization, the ‘dominoes’ of the supply chain are now very close together – and the closer they are, faster they fall,” Azadegan said. “It’s what called the ‘ricochet effect.'"...“We also found that as the disruption changes, the leadership characteristics should change with it.”

Over the “four phases” of a typical supply chain disruption identified by Azadegan – the “signaling” of the impending disruption, the start of the damage, the escalation/peak crisis point of the damage, and finally the dissipation/recovery period – the best supply chain managers were direct, decisive and controlling at the start, then switched to being more accommodating to input and ideas to gather solutions in the middle, before “switching back” to being more direct during the resolution phase.

Effective leadership is contextual. It is also conditional. But Arash is beginning to expose effective leadership is also principled. More to come.

According to the State of Retailing Online 2016, conducted by Shop.org, Forrester Research Inc. (Nasdaq: FORR) and Bizrate Insights, mobile as a percentage of both online sales and traffic is now led by smartphones and not tablets.

Specifically, retailers surveyed report smartphone sales accounted for 17 percent of their total online sales in 2015, edging ahead of the 14 percent generated via tablets. Overall, retailers said sales from smartphone devices grew 53 percent over the previous year, while sales from tablet devices grew 32 percent.

Several news outlets -- and a company financial statement -- indicate that Finish Line, the Indianapolis-based retailer of athletic shoes, lost over $30 million when a new supply chain system did not operate as anticipated. According to the company:

“Our third quarter performance was severely impacted by a disruption in our supply chain following the implementation of our new warehouse and order management system,” said Glenn Lyon, Chairman and Chief Executive Officer of Finish Line. “Specifically, in October, we began experiencing issues flowing fresh inventory into our stores as well as fulfilling online orders as the new system was unable to process freight at volumes necessary to support our sales plans. 

According to RetailDive,

Sportswear retailer Finish Line Inc. will close up to a quarter of its 600 name-brand stores, and replace CEO Glenn Lyon, the company said Thursday. President Sam Sato, a Nordstrom veteran of more than 20 years, will replace Lyon, who will remain as executive chairman through the end of the year and then serve as nonexecutive chairman. The store closures reverse the company’s expansion efforts. The company lowered earnings estimates for the year; including Thursday’s share price loss of 11%, its stock has fallen 33% in the past 12 months.

It is worth remembering that both Nike and Starbucks (more) have experienced epic failures of supply chain implementation.