Image of Supply Chain Retail Biggest Disruptor

Blog posts

Supply Chain Might Be the Biggest Retail Disruptor

Karl Siebrecht, Co-founder & CEO, FLEXE

"Supply Chain Might Be Biggest Retail Disruptor" was authored by Karl Siebrecht, CEO and co-founder of FLEXE, and originally appeared on Supply Chain DIVE.

The forces wreaking havoc on the retail industry today sometimes seem unprecedented. Legendary stores and brands have failed—or are about to. New names pop up overnight and go toe-to-toe with venerable giants. But big changes in the way we buy goods and services aren’t new. Retailing has been continuously disrupted over the last century. And this won’t be the last time it happens.

The key drivers of today’s e-commerce transformation—speed, choice, price, and convenience—also drove every previous market disruption. It’s always about providing better service to customers and meeting their evolving demands. And those front-end service upgrades have always been enabled by back-end supply chain enhancements.

Over the next decade, the difference between the companies that thrive and those that fail will be which ones master the modern supply chain—and which don’t.

A Brief History of Retail Disruption

The timeline of modern retail disruption begins about a hundred years ago, when merchants mostly sold goods from permanent shops set up in the center of town. This was a big improvement over the ancient system where farmers and craftspeople hauled wagonloads of goods into chaotic and unpredictable open-air markets. Today, we view the farmer’s market as a charming throwback, where you can buy fresh produce directly from the grower. But if that were the only way to do business, we would be in a lot of trouble.

Consistently available goods in stores brought big benefits for customers, who could now find most of what they needed in one trip to town. Bakers, butchers, and dairies could set up shop on the same block, alongside hat makers, cobblers, and other merchants.

But that system still required multiple customer stops, which was inconvenient and slow. The underlying logistics model was inefficient. Housing each product category in a separate building required redundant end-to-end paths to market and limited the potential to scale. So the corner drugstore and the “five and dime” emerged, along with the supermarket, where you could buy more stuff under one roof. The department store further consolidated retailing, supported by the mail-order catalog. Eventually, people with cars wanted to drive to new suburban shopping malls and big-box superstores.

The difference between the companies that thrive and those that fail will be which ones master the modern supply chain—and which don’t.

Walmart pioneered the big-box retail model, which demonstrated the cost efficiencies that could be found by applying a lean supply chain model at massive scale. When it opened its first distribution center in 1970, it was developing a new business model. In 1975, it became one of the first retailers to use a computer system to track inventory throughout distribution centers and stores. In 1980, after just 17 years, Walmart reached $1 billion in sales, becoming the fastest U.S. business to reach that milestone in history.

Over the years, Walmart has owed a lot of its success to its supply chain. Committed to innovation, it has continued to win market share as the leader in brick-and-mortar retail. Walmart not only outperformed giants like Sears and Kmart, it became the world’s largest company by revenue, and biggest employer.

E-commerce Changed How Supply Chains Work

But just as Main Street’s boutique merchants gave way to downtown department stores and shopping malls, brick-and-mortar retailers today are giving way to e-commerce. Even Walmart is feeling the pressure. It turns out that having a huge assortment of products at permanently low prices is just table stakes. As in the past, retailers need to offer the same four basic front-end customer improvements—speed, choice, price, and convenience.

To deliver those improvements, retailers need corresponding changes in their distribution model because the supply chain that’s required to efficiently put products on store shelves is different from the one needed to efficiently deliver products to doorsteps. And, it turns out that one company has built a supply chain fully optimized for e-commerce from the ground up, just as Walmart did for big-box decades ago. Of course, this company is Amazon, and it has achieved the same type of breakout scale online that Walmart did offline.

This also creates opportunities for other logistics providers. Package shippers like FedEx and UPS—and even companies that make cardboard boxes—were so integral to the ascent of e-commerce that some Wall Street analysts came to view their shares of stock as a proxy for investing in the internet.

Even strong brands with past success aren’t protected from nimble, niche brands, which show up right next to theirs on Amazon.

As recently as 10 or 15 years ago, logistics was one of the business world's largest cost centers. Logistics leaders were expected to not lose or break stuff and to bring down their costs five percent a year. It was a necessary function but was several steps removed from the customer.

In the e-commerce era, logistics has graduated from cost center to strategic driver of growth and market share. Think about it: the #1 driver of shopping cart abandonment (aka lost market share) is extra fees applied at checkout (aka logistics costs). Logistics have also gotten significantly more complex. Shipping a single product directly to a consumer is much more complicated than shipping pallets of goods to a retail store. It also currently requires more employees in the warehouse. Integrating robotics and automation into the warehouse will help keep costs down and speed deliveries to customers.

Supply Chain Strategy Is the Key to Mitigating Disruption

Today, supply chain jobs are growing—a direct reflection of the increasing strategic importance and complexity of the domain. There’s actually a shortage of talent as the logistics field expands into IT and Big Data analytics. Corporations expect their logistics teams to predict which products will be in demand and in which markets, to implement delivery innovations, and even contribute to social media marketing.

The good news is that the underlying technology has gotten a lot better, including data analytics and data science capabilities. But we are just in the very early stages of adoption of these technologies, which means there’s still lots of chaos, uncertainty, and confusion. Not to mention angst and hype. It can be risky to invest now. Placing bets too early could consume a lot of capital and leave a company with outdated systems in 18 months.

The current wave of disruption sure is breathtaking. But we know how it will end.

Perhaps as a result, some traditional retailers have frozen in the headlights and failed to adapt, and they are the ones which are failing. Even strong brands with past success aren’t protected from nimble, niche brands, which show up right next to theirs on Amazon. Low-cost social media channels neutralize the advantage of expensive, traditional advertising. And the online and physical store environments are blending together, requiring new sales and delivery strategies.

Even Amazon won’t be immune from disruption if it stops innovating in the supply chain arena. Imagine a future where American consumers buy goods directly from factories in Asia, completely bypassing U.S. retailers or e-commerce venues.

More than ever, successful companies need employees who can identify and implement the technologies and systems to better serve their customers – both from the front-end and the back-end of the enterprise. The current wave of disruption sure is breathtaking. But we know how it will end. The companies that emerge victorious will have to deliver enhancements in speed, choice, price, and convenience. Just as they always have. And then they will have to prepare to lead the next phase of innovation, which is always just around the corner.

View the original article on Supply Chain DIVE.