Published on: November 28, 2018
Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
This week, evaluating the innovation levels that can be found at the manufacturer end of the supply chain … and defining where the opportunities are.
And now, the Conversation continues…
KC: We spend a lot of time here talking about consumer-facing technological innovations, but I’ve been meaning to ask you about supply chain innovations … am I correct in assuming that the radical shifts taking place in retailing are likely to mean equally radical changes in the supply chain? Is it your sense that manufacturers are re-engineering their systems and infrastructures in order to adapt to the changed environment? Do you think that many or most of them are ahead of the innovation curve, or behind it?
Tom Furphy: As important as all of the business model and consumer-facing innovations are to the emergence of ecommerce and our new generation of retail, the real unsung hero is the supply chain. We often hear that the best retailers want their customers to be able to buy products whenever, wherever and however they choose. To be able to deliver on this promise, it’s imperative that supply chains adapt to be able to serve shopper needs at stores, with local delivery and with parcel delivery. This is a tall order considering that supply chains had previously been designed to get products efficiently into stores.
Because they are on the hook for satisfying the customer, most supply chain innovation has been driven (or demanded) by the retailers. As the pioneer in e-commerce, Amazon has led the charge. They’ve invested in hundreds of distribution centers, various types of automation, planes, trucks, vans and even their crowdsourced Flex program where regular citizens deliver products to customers. They have also worked with manufacturers to reconfigure shipments, accept smaller, streaming orders, and even have set up shipping lines in manufacturer warehouses so they can send products directly to consumers. Now they’re working on how the store environment and local facilities can support the supply chain. They will remain at or near the forefront of this innovation.
We’re now seeing many other retailers placing new demands on suppliers to re-engineer their supply chains through the way they forecast demand, receive and process orders and ship products to retailers. As pureplay and omnichannel retailers strive to better serve their customers with new models, they will keep up this pressure on the manufacturers. And I do think that several, arguably most, manufacturers are investing in supply chain innovation today. In our businesses we see many manufactures eager to work with retailers to shape their supply chains to new market demands.
Despite all of the great progress we’ve seen, most manufacturers and retailers, including Amazon, would assess that they are behind the curve. The entire industry is racing to create the perfect customer experience. To truly be able to deliver on the promise of serving customers needs precisely as they desire will be a constant quest.
KC: Where do you see the biggest opportunities in terms of supply chain innovation? Is there a specific challenge that you think new supply chain systems have to address?
TF: The biggest, most challenging opportunity is in ensuring the proper staging of the right inventory at stores for immediate purchase, plus having inventory in position and available for local same-day or next-day delivery, and then having the right inventory that can arrive in a few days via parcel delivery. It’s a complex but necessary proposition for ecommerce to be successful. And doing all that at costs that allow for free or inexpensive delivery will become mandatory. This is a massive opportunity that will take years of experimentation, collaboration and systems improvements to get right.
The fundamental challenge to overcome is that today’s retail supply chains have been optimized to most cost-efficiently serve the needs of large format stores. Even this optimization process took place over more than a decade led by Walmart, other large retailers and the ECR movement. Perfectly layered pallets of similar items, with perfectly cubed out trucks that serve large distribution centers or large stores simply are not optimal for ecommerce. The best ecommerce supply chains allow for the fastest moving items to sit closest to customers, with slower moving items residing upstream where they can be efficiently sent into the supply chain based on customer demand.
Further, there are also opportunities for changing product formulations, packaging, product information and even introducing new business processes and models that can all work to improve ecommerce customer experiences, efficiencies and profitability. But we can save those for a future Conversation.
So let me ask you one more thing. Is the current supply chain climate one in which start-up companies, ones without legacies and existing infrastructures, have an advantage over existing, established companies? Or do bigger companies have some sort of advantage simply because they have the financial resources to make necessary changes?
TF: I do think startup companies without legacy systems and processes are likely better positioned to be more innovative than incumbents. Even though they don’t have money, they are not encumbered with existing budgets, customers and protocols. That allows them to think freely about new ways to go to market. But these models and companies are nothing if they sit inside a bubble without money behind them. They need capital obtain new customers and to roll out at scale.
Look at Dollar Shave Club for example. They invented a new consumer-direct model, which was fairly innovative and not encumbered by existing supply chain and retailer practices. They raised money from investors and then spent tens or hundreds of millions on marketing. Once they had the customers, they were able to take significant share from P&G who still struggles to serve consumers more directly despite their deep pockets. Dollar Shave Club was fueled by innovation, then driven and scaled with capital.
Now we’re seeing a wave of supply chain automation coming, such as Dematic, Ocado and Takeoff Technologies that, in many cases, were developed without the burden of existing businesses processes. These and dozens of other earlier-stage companies are now available to experiment with, without the need to invest significantly out of the gate.
There is no reason existing retailers and manufacturers can’t harness the power of innovation inexpensively, then scale it once proven by applying their financial resources. It’s a new way of thinking versus traditional incremental approaches, but it’s mandatory today. The fact that we’re starting to see if from industry leaders such as Walmart, Kroger and Unilever, among others, is encouraging.
The Conversation will continue…
- KC's View: