By Ian Hobkirk
Managing Director of Commonwealth Supply Chain Advisors
January 16, 2014
My issue of TIME Magazine arrived last weekend with its list of predictions for 2014. I initially cast it aside as simply more baseless speculation designed to fill magazine pages, but as the weekend wore on, I wound up picking it up and giving it a read. In the end, I actually enjoyed seeing what some well-informed pundits thought might happen in 2014, and it made me think I might throw my hat in the ring with my own supply chain predictions for the coming year.
Let me begin by stating the basis of what is about to follow. Commonwealth Supply Chain Advisors has numerous conversations with clients and prospects every day about their supply chain challenges and upcoming initiatives. Additionally, we have regular updates from technology providers on what new features they are developing to meet perceived market trends. While not as precise as a scientific survey, the sum total of all of these conversations does give us a broad perspective on supply chain trends across a number of industries.
Macro-economic conditions continue to be among the strongest we’ve seen. The Dow Jones Industrial Average gained a stunning 27% in 2013, its best year since 1995. The underlying output numbers paint a similar picture. Gross Domestic Product grew in the third quarter by 4.1% annualized, the fastest rate in two years (source: Bureau of Economic Analysis; http://www.tradingeconomics.com/united-states/gdp-growth). New orders for manufactured goods in November increased by 1.8% percent to $497.9 billion, the highest level since the data began to be tracked in 1992 (source: U.S. Census Bureau; http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf). Nearly every one of Commonwealth’s customers seems to have experienced strong growth in 2013. Most vendors of supply chain software and warehouse automation are also having record years as their customers open their pocketbooks to invest in infrastructure. It is within this context that we make a few predictions about what the coming year will bring:
1. E-Commerce Continues its Meteoric Rise
2. Omni-Channel Commerce Starts Trickling Down to the Mid-Market
3. Intra-Regional Consolidation Projects Gain Steam
4. Voice-Directed Warehousing Grows for Some Surprising Reasons
5. Software Mergers
E-Commerce Continues its Meteoric Rise
Ok, so we’ve been talking about e-commerce for a decade now, but until the last two years or so, predictions of e-commerce hyper-growth have been just that: predictions. Now it’s here. The last year has seen e-commerce sales levels increase by 17.5%, compared with just 4.7% for all retail channels (Source: U.S. Census Bureau; http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf). Volume levels this holiday season even outpaced forecasts by UPS and FedEx, resulting in both companies missing some crucial Christmas deadlines on a large scale for the first time in memory.
UPS and FedEx will be ready next year. But will the average distribution center be? In the last year Commonwealth has witnessed numerous companies implement major e-commerce transformations in their distribution operations, some of them requiring multi-million dollar investments. In my travels this year, I heard more than one story of senior executives on the warehouse floor picking and packing e-commerce orders to meet demand back in 2011 and 2012. Fortunately, these specific companies were able to invest in major warehouse automaton projects, and this year they have been much better able to handle the crush of direct-to-consumer orders during the holiday season.
The missed parcel deadlines notwithstanding, consumers seem to be continuing to embrace e-commerce at a faster pace than before. There is nothing to indicate that this will change in 2014. Companies like Amazon have invested in infrastructure – distribution centers, material handling systems, and inventory – to make a staggering number of SKUs available to their customers. Other retailers like Wayfair.com have developed complex drop-ship models that allow them to offer millions of SKUs without having to stock them in their own DCs. Smaller manufacturers and retailers are also getting acclimated to picking and packing individual items in their distribution centers as opposed to shipping pallets to stores. Freight policies are becoming more customer friendly. Visibility of goods-in-transit is improving, as is reliability of order promise dates. Customers have gotten used to the process of packaging up and returning unwanted items. And of course, e-commerce is now truly enabled for mobile devices in ways that make browsing and ordering easier than ever. (I actually ordered a Christmas present for my son this year from my phone while sitting in a taxi cab in Seattle. It was shockingly easy, and the Legos were on my doorstep 48 hours later.)
Further reading: E-Commerce in the Distribution Center, Making a Graceful Transition
Omni-Channel Commerce Starts Trickling Down to the Mid-Market
We have blogged extensively on this topic recently, so I won’t repeat myself too egregiously here, but suffice it to say that omni-channel commerce is shaping up as the strategy of choice by most retailers as a way to compete with Amazon’s “DC-in-every-state” vision. Using store stock as the inventory of last resort to fill an e-commerce order gives retailers new ways to compete against the world’s largest online marketplace.
One prediction I’ve made before is that I do not believe that the notion of “same day delivery” will catch on in the ways that Amazon seems to hope it will. I also find it hard to believe that we’ll see drones delivering parcels of office supplies any time soon (correction: ever). Special promotions aside, even with a DC in every state, a retailer would have to charge a significant premium for same-day delivery for it to be a sustainable service offering. Most people simply won’t need same-day consumer goods badly enough to pay a regular premium for them. Though there are doubtless exceptions to this rule, retailers shouldn’t fret about same-day delivery – they should focus on what they have to do to get orders shipped from their distribution centers the same day they are ordered, with later and later cutoff times. Commonwealth’s experience shows that there is still significant room for improvement in this area with distribution centers across the country.
Back to omni-channel commerce: Commonwealth has written recently about how distribution centers are responding by developing new ways to share inventory between channels (Read: Omni-Channel Inventory Allocation in the Distribution Center), and by employing technologies like Distributed Order Management/DOM to orchestrate complex fulfillment tactics (Read: What is a DOM?). Thus far, however, technology like DOM is expensive and largely only available from top-tier software providers (with some interesting exceptions: see www.Softeon.com). Expect to see some interesting offerings start to sprout up from mid-tier software developers to make these capabilities available to the masses.
A more challenging problem with omni-channel commerce involves making it work for smaller footprint stores with less available labor capacity to perform tasks like picking and shipping orders. The most publicized case studies for omni-channel success have been with retailers with big-box formats like Wal-Mart, Macy’s and Best Buy. It remains to be seen whether smaller retailers are able to roll out this strategy on a large scale.
Intra-Regional Consolidation Projects Gain Steam
2014 should see a significant number of companies moving to new distribution centers. One main driver of this trend involves companies that have a single distribution point but have experienced rapid growth and expanded into multiple overflow facilities. Now that the U.S. economy has seen several years of sustained growth, companies are beginning to believe that the trend is more than a short-term anomaly and are recognizing the inherent inefficiencies of distributing from several buildings in one geographic area. Constantly shuttling inventory from overstock facilities to forward pick locations is costly and time-consuming. Maintaining redundant equipment, dock space, and management at each facility is also wasteful. Commonwealth is currently working on more intra-regional consolidation projects than any other type of initiative, with many more on the horizon.
Voice-Directed Warehousing Grows, for Some Surprising Reasons!
Commonwealth has an upcoming article in the March issue of Supply Chain Management Review which discusses the importance of flexibility in warehousing systems, and how technologies like voice-directed warehousing are a key enabler of this. Voice installations tend to be less “IT-intense” than wholesale replacements of WMS systems, and can often offer a company new processes that their old WMS could not easily support. Commonwealth is seeing an explosion in voice deployments currently, due to some reasons which many readers will find surprising. This trend will certainly continue to gain steam in 2014. Keep an eye out for our cover article in March! (http://www.scmr.com/)
Software Mergers?
Warning: the following is more speculation, based on no inside knowledge of events. The 2000’s saw a trend of WMS companies being acquired and consolidated by larger competitors. The 2012 merger between JDA and RedPrairie saw one of the few remaining top tier WMS providers absorbed by a larger supply chain planning software firm (Read: “What the RedPrairie Merger Means to You”). Many believe that this now leaves Manhattan Associates as the last independent Tier-1 WMS provider in the marketplace. How long will Manhattan remain in this position? Will Oracle or SAP decide to abandon their quest to develop top-tier WMS systems in favor of acquiring a market leader? Will Manhattan merge with another complementary supply chain software company, the likes of GT Nexus? Will the Patriots win the Super Bowl? Alas, our crystal ball offers no answers. Some things will remain to be seen as the year unfolds!