Evolving The Supply Chain in the Ecommerce Age

Aug 12, 2013 8:55 AM  By

handheld-scanner-inventory-300All retailers are expected to thank you for shopping with them. But in the new world of ecommerce, this sentiment of gratitude has taken on a more sarcastic tone. When the U.K.’s largest camera chain, Jessops, went under earlier this year, the staff at one specific store posted a sign that was both sweet and sardonic: “Thank you to all our loyal customers and to everyone else, thank you for shopping at Amazon.com.”

There is no way around it – on this and that side of the pond, Amazon is a disruptive force that is upending both retailers and ecommerce companies. But its enormity is only the tip of the iceberg when it comes to Amazon’s competitive advantages. So how can you keep up with their incredible rate of innovation? It starts with your supply chain.

Retail has an $800 billion problem, according to research firm IHL Group. That is the collective cost of inventory distortion in out-of-stocks and overstocks among retailers today, and it could increase same-store sales by 9.2% if completely fixed. Like every problem that needs solving, it is easier said than done.

While the Internet has eased merchandising constraints by enabling retailers to sell to consumers anywhere in the world, there are still significant geographic constraints on the logistics and fulfillment of supply. Even with distribution centers across the country and the planet, supply can still be restricted because of the costs that come with buying and holding inventory, not to mention building and maintaining these facilities.

Despite these widespread inefficiencies, the priority for many has revolved instead around consumer-facing omni-channel retailing. It is important to provide flexibility to purchase your items at a store, on the Web or on mobile devices, but a plethora of platforms fail to do much good if you have supply chain woes that prevent quick and efficient order fulfillment.

For the brave new ecommerce-enabled and -disrupted world, supply-side innovation is the key to winning. What makes Amazon and Walmart ecommerce and brick-and-mortar giants, respectively, is that they have supreme control over their supply chains. Although we tend to primarily view them as marketplaces, the reality is that they are massive supply pools first, with the unparalleled ability and coordination to oversee virtually billions of dollars of inventory.

For mid-market retailers to remain relevant, the flow of inventory needs to change from a product push and predictive supply chain to a product pull and reactive supply chain. That means instead of making educated guesses as to what consumers want and adjusting supply accordingly, we let consumers dictate what they want and respond with the kind of agility that made Amazon king of the retail/ecommerce jungle.

If there is one thing we know about consumers, it is that they love having an abundance of choice. Shifting to supply-side mentality requires a strong commitment to managing logistics and investing in technology, but the end result is a wider assortment of products that actually reduces inventory risk. To accomplish this lofty goal without escalating costs, many retailers have adopted supply chain management techniques such as drop shipping (including you-know-who).

While there are many benefits to this streamlined approach, I want to highlight three key competitive advantages they provide:

Endless Aisle
By effectively matching supply and demand in real time, you are helping consumers access what they want, where they want and from whom they want. That means selling more products, in more places, more accurately.

Competitive Pricing
To compete, you need competitive pricing. Increasing visibility of products also helps reduce prices of products by bringing down overhead and fulfillment costs.

Reduced Costs
While the opposite is expected to be true, increasing selling opportunities does not have to equate to increased transportation and storage costs. In Q4 2012, third-party sales made up 39 percent of all units purchased on Amazon, contributing significant revenue while having an almost non-existent effect on cost structure. In fact, Amazon doesn’t have to pay for third-party inventory that it moves through its distribution hubs.

Analysts at Baird Equity Research say that third-party sales are 100% gross margin for Amazon, meaning the only cost Amazon incurs when providing third-party fulfillment is money they would have spent on the infrastructure, labor, transportation and other direct sales operation costs anyway.

Jeremy Hanks is Founder & CEO of DropShip Commerce

  • BAndersen6

    Good article. Retailers need to constantly change strategy , evolve and ensure they stay ahead of the curve. Came across this whitepaper on emerging trends in retail http://mcgladrey.com/Consumer-Products/Thinking-about-tomorrow-Post-recession-strategies-for-retailers

  • Michael Hogue

    I agree with the need for retailers to create a “pull” system both for on-line and brick and mortar stores. But will they invest in the technology necessary to deal with the replenishment aspect of their retail outlets? Many will perish if they don’t change their attitude about investing for the long term rather than the short term perspective they now use.