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The supply chain: Retail’s secret weapon

21 September 2020

Times are pretty tough for retailers right now. As in many areas of life, the Covid-19 crisis has accelerated trends that were already taking place, such as an increasing shift to online shopping, argues Emile Naus.

But the fact that lockdown prevented consumers from venturing out onto the high street made life very tricky for many retailers with a strong bricks and mortar presence, not least as they did not always have the required digital infrastructure in place to cope. This meant a significant number were able to sell little to nothing for several months.

Others, meanwhile, found themselves vulnerable in an overcrowded market and the cracks that were already there truly started to show. As a result, businesses that were struggling somewhat before the Covid-19 lockdown are more often than not really struggling now.

But there are also a number of other systemic, and even existential, challenges that the industry faces, which simply have to be considered as we look towards the future. 

Firstly, it is currently an open question as to what extent bricks and mortar versus online sales will rebound. While the balance between the two is unlikely to return to that of a year ago, it is expected to even out again somewhat. Hence a growing need among retailers to cater adequately to both models.

Ultimately though, pitting online against physical stores is not a particularly helpful approach in a world where the notion of ‘shopping missions’ is becoming more common. The idea here is that, while one day an individual consumer may want the speed and convenience of online purchasing, the next they could be after a more leisurely shopping experience based around a day out with friends or family.

In other words, the keyword for retailers here is ‘flexibility’, which means being able to understand not just what customers want, but also what they want at any specific point in time.

This situation leads onto a second consideration: that different sales models impact profitability in different ways. Online shopping, for example, is fundamentally – and counter-intuitively – more expensive to enable than having customers purchase goods in-store. 

Cost versus customer service

This is because when consumers go shopping themselves, they take their own selected mode of transport, spend their own time walking around the shop and then take their chosen purchase home for themselves. But when buying online, these functions are all performed by either permanent, temporary or contract staff, which inevitably leads to high variable costs.

So ironically for an industry that has spent the last 50 years trying to cut costs by getting customers to do more of the work, online shopping - despite its technologically-advanced nature - is actually reverting to a much older model, which involved customers giving shopkeepers a list of items to go and find for them.

While online-only retailers, such as Amazon and Asos, can swallow the high transaction fees that such an approach generates as they have much lower fixed costs, the biggest of which by far is generally high street store rental, businesses with a more hybrid model tend to be hit both ways, creating a lose-lose situation.

A third challenge, meanwhile, relates to customer service. The issue here at the moment is the clear disconnect between what it costs retailers to deliver goods to consumers and what they are prepared to pay for such a service.

Put another way, it has become common practice to offer customers free next-day delivery, but even though the benefit to them in most instances is minimal, doing so adds high levels of operating cost to retailers’ warehousing and transport operations. 

A key issue here is that, if consumers are provided with the option of receiving their goods tomorrow or in three day’s time, they invariably opt for the former. But even though most are notoriously price-sensitive in relation to accepting delivery charges, it is possible to manage their expectations by linking this price to perceived value. 

One possibility, for example, is to offer a free three-day delivery service but to charge for next-day fulfilment. Another approach, taken by Amazon, is to provide customers with free next-day delivery as standard but then offer discounts for a slower turnaround time at peak periods.

A final consideration is sustainability. Despite attention having been focused very much elsewhere lately, this is a problem that has not gone, and will not go, away any time soon. 

The vital role of the supply chain

The concept covers the environmental impact of everything from packaging and the employment of plastic, particularly in a single-use context, to the carbon footprint of both the business and its supply chain. It also includes ethical labour practices and standards, not least in relation to the health, safety and payment procedures employed by suppliers to their workforces. 

But no matter how difficult it can be to achieve supply chain transparency and gain insights into what is really taking place within third party businesses, in today’s social media age, any failure to get it right is all too easy to divine and can easily lead to reputation-damaging scandals.

So if taken in the round, it becomes clear just how vital a role supply chains play in ensuring the wellbeing of the business, particularly in times of recession. By making them more efficient and taking cost out of important processes, such as customer service, especially in an online retailing context, they can become a key way of boosting the profitability of operations.

The most effective means of achieving these efficiencies though is undoubtedly via automation, whether we are talking about advanced robotics software or moving products around more quickly with conveyors.

The most common areas of the supply chain to experience automation tend to be warehousing and processes related to creating orders and handling returns. The fact that they are the most labour-intensive means the return on investment is generally highest here, particularly as systems continue to become increasingly modular. 

The upshot of this modularity is that it is no longer necessary to take a big bang approach to initiatives. Instead it becomes possible to automate elements of a given process in order to make it more effective and efficient, which in turn makes it easier to come up with a business case. 

For instance, the cost of land is expensive in the UK, which results in it becoming pricey to expand a warehouse outwards rather than upwards. There are also health and safety implications for employees working above ground level. 

But the same concerns are not true for robots, which operate just as effectively at any height. So, if the decision is taken to deploy this kind of software, not only does it take up less space than a human being, but it also becomes possible to build a more compact warehouse in terms of the amount of land required, simply by making it taller. 

Balancing risk, flexibility and cost

Another example of where automation can cut costs relates to returns, particularly in high turnover industries, such as clothing and fashion, where it tends to be a very manual and inefficient process. 

The issue is this: In an in-store model, customers typically try garments on when shopping, which means the number of returns tends to be low. But in an online scenario, it is more common for consumers to purchase three items and send back two. 

As a result, not only do retailers often have to bear the initial cost of delivery, but it also typically costs them three times as much as it does in-store to put a returned item back into the supply chain. On the one hand, most goods are dealt with in larger quantities, such as boxes or palettes, which means that for an employee to deal with a single item and find a place to put it back into existing stock is a comparatively expensive process. 

On the other, much clothing is seasonal and purchasing is often based on fashion trends. So by the time the customer obtains delivery of a garment, takes, say, another two weeks to return it, and a further week is spent processing the return, the item may well have to be marked down and sold off at a discount as its moment has passed.

By automating the process, however, it not only becomes much quicker and more flexible, but expensive manual intervention is no longer required.

But there are a couple of important things to consider in order to ensure value for money is obtained from any given automation project. First, be clear about your objectives and what it is you want to achieve rather than being beguiled by the latest shiny, new thing.

Secondly, in order to minimise risk, speak to other organisations that have gone down a similar route to gain their insights and be certain to automate in stages. Finally, always check the technology actually does what you need it to do before moving into large-scale production, be selective in your risk-taking and carefully balance the new with what came before.

The secret to success in creating a winning supply chain is always about balancing risk, flexibility and cost and, ultimately, providing the customer with the level of service that they both expect and value.

Emile Naus, partner at management consultancy, BearingPoint

For more information, visit www.bearingpoint.com