Supply Chain Frontiers issue #49
For many companies, supply chain innovation (SCI) is a key source of competitive advantage. Yet there is no clear, commonly accepted definition of the concept; one company’s SCI is another company’s process improvement. A forthcoming white paper from the MIT Center for Transportation & Logistics (MIT CTL) explores the meaning of SCI in the context of developments such as omni-channel retailing. The issues will be discussed at MIT CTL’s Crossroads 2013 conference this June.
Does the lack of clarity on SCI matter? MIT CTL argues that it does. Misjudging a new idea may result in a missed opportunity or in wasting time and resources on a concept that is still years away from fruition. Witness the flawed vision of radio frequency identification (RFID) technology that persuaded many companies to invest heavily in systems prematurely.
Also, it is easy to become mesmerized by the novelty of a new gizmo or idea. Managers fall into the trap of assuming that innovations must be new and unprecedented.
MIT CTL has launched a research project to better understand SCI, and has developed the following definition based on early observations from the project: SCI is the adoption of new processes, methods, and/or technologies that result in a positive change in cost, quality, cash, and/or service.
How does omni-channel retailing fit this definition?
Omni-channel seamlessly links the web, mobile, and bricks-and-mortar channels, so that a buyer can use any combination of these outlets to make purchases. A consumer might opt to order a product via her iPhone, for example, or use a mobile device to research products while shopping in a physical store. Orders can be delivered to the home, or be picked up from a location including a store or a locker in a designated outlet.
A senior supply chain executive from a major retail chain suggested that the term “integrated retailing” is a more accurate way to describe the concept “because it provides an environment where the buyer can purchase from any channel.”
The integrated term is certainly more understandable than the vague “omni-channel” moniker.
The idea of integrated retailing has been around for several years, but its component parts – online commerce, shopping via mobile devices, and, of course, bricks-and-mortar outlets – are significantly older to varying degrees.
Still, the model has the lure of a brand-new idea. A third-party logistics services provider that advises retailers on the concept explains the reaction of many players in this way. “There is a lot of emotion around this when senior (retail) executives realize how far behind they are. We calm them down and present them with a road map. Sometimes it’s an IT road map, or maybe they don’t have enough visibility into what inventory is in their stores. We coach them through it.”
The supply chain changes fueled by integrated retailing are in the early stages of development. One example is in-store fulfillment: using bricks-and-mortar outlets as distribution centers for online orders. As a senior supply chain executive from a leading retailing chain points out, “stores are dealing with a different customer, and for us (supply chain management) this means we are delivering to a new address, not to store 1, 2, or 3, but to 123 Main Street.”
This change requires some new supply chain thinking. What is the optimum number of SKUs a store should stock to serve this new customer base profitably with a minimum of markdowns, for example? Some retailers are offering integrated services at a select group of outlets so they can generate the sales volumes required to make the multi-channel model pay.
The model poses a number of demand-planning challenges, too. Consumer-buying patterns are more fragmented in this new retail world. Take, for example, so-called “sit-back shoppers” who might see a product while watching a TV show, and serendipitously order it via a cell phone. These orders often come in between 6 p.m. and 9 p.m., and the integrated retailer has to decide when to fulfill the order and from where it will be shipped.
A dilemma is to what extent the integrated model will undermine the competitive advantages developed by bricks-and-mortar players. For example, providing unfamiliar services such as special packaging for online customers might disrupt the supply chain processes that are geared to store-based customers.
Another change instigated by integrated retailing is express delivery. The need to meet virtual shoppers’ appetite for same-day delivery services has sparked fierce competition. Amazon has an agreement with retailer 7-Eleven to establish lockers in selected stores where customers can pick up their orders. Shutl.com offers to deliver orders within one hour to customers who are located within 10 miles of a store. DHL’s MyWays service uses a Smartphone application to coordinate deliveries by individuals who happen to be moving through the right locale.
Interestingly, this by-product of integrated retailing brings benefits to traditional players that are not, as yet, competing in this space. One such retailer that is offering lockers for an online company commented that the new business will increase foot traffic in its outlets by as much as 8% as people visit the locations to pick up their online orders.
Does integrated retailing fit MIT CTL’s preliminary definition of SCI? New approaches to inventory management and a greater emphasis on regional distribution are two examples of the positive changes associated with the integrated model. However, it is too early to judge the full impact of these developments.
Examples like this underline the importance of understanding exactly what SCI means, and the need to take a step back to assess the potential of new ideas rather than being swept along by the hype that often surrounds them.
For more information on the white paper, and the center’s research on SCI, contact MIT CTL’s Deputy Director Jim Rice.
The Crossroads 2013 – SCM as Future Enabler conference will take place on June 26, 2013, on the MIT campus. For more information and to register go to: http://ctl.mit.edu/events/crossroads_2013. At the event, Randy Strang, Vice President, Customer Solutions, UPS, will give an overview of omni-channel supply chain challenges. Also see the news item Speakers and Agenda Confirmed for Crossroads Event.