The International Retail Supply Chain Battle

In November 2015, Beijing Century Joyo courier services registered with the US government as a non-vessel operating common carrier (NVOCC). Freight forwarding and the pricing associated with it has been considered opaque and ripe for disruption by providing better technology-enabled transparency and cost advantages. Unless you are in this business or following the news closely, you wouldn’t know this:

Beijing Century Joyo courier services is a subsidiary of Amazon!

According to David Spitz, CEO of Channel Advisor Corp. (a marketplace enabler for Amazon, Walmart, Ebay and other retailers) — products sourced from China will account for the majority of unit volume on Amazon. Also, he states that 20% of Amazon’s sales will be from its own private-label products.

Both these points seem to lend case to the greater need for a robust supply chain to help enable these drivers of growth. As part of a secret project apparently named as “Dragon Boat” and appropriately so given its focus on China, Amazon has unleashed an interesting game plan to start dominating on the logistics side. Incidentally, Amazon’s new hire focus in their Global Sourcing teams is oriented towards recruits joining their Supply Chain Optimization Technologies (SCOT) team — https://www.youtube.com/watch?v=ncwsr1Of6Cw&feature=youtu.bewhere there is a race to build next generation inventory planning platforms and other capabilities.

Amazon is trying to reduce the cost of its Fulfillment by Amazon (FBA) services given that the majority of its products originate from China. Amazon has also begun establishing shipping routes from China to North America, UK and Japan. Amazon logistics intends to create a one-stop E2E ocean freight service to its marketplace sellers. Such initiatives are also targeting the growing cross-border e-commerce trade, which is about 15% of total global e-commerce volumes.

Alibaba, not to be left behind in this race, is investing $16 billion in supply chain initiatives for its Cainiao subsidiary. Cainiao started in 2013 largely to support shipments from China. It has now expanded to 224 countries and regions. Cainiao provides a data-driven logistics platform to about 90 Chinese and international logistics companies. This is however focused on the package delivery for its larger Taobao and T-mall retail operations. Amazon is also promising to deliver small items from China in five days for its prime members.

While these initiatives are working towards the shipment of its parcel products across the globe, the sourcing of import/export products also benefits from the infrastructure advantages being built as part of these global services. Alibaba.com has a separate division Alibaba logistics that determines the shipping needs of importers and provides freight options that the suppliers can then support. Alibaba logistics has built out partnerships with UPS and Fedex for express delivery. They have partnered with Maersk for container shipments and DHL and Kuehne+Nagel for airfreight. In 2016, Alibaba enabled suppliers to reserve space on Maersk container ships through its OneTouch service. This service offers online booking on select routes between 5 Chinese ports and 8 international destination ports. In early 2017, Alibaba announced a cooperation agreement to integrate members of the world’s largest logistics network, WCA Ltd., with the Alibaba platform. In order to continue serving even small and medium enterprises, Alibaba has partnered with more than 100 logistics companies and 1700 freight forwarders.

Building a vast supplier base

Walmart.com roughly had about 2 million items up until 2013 as it revamped its marketplace program. When the marketplace program was accelerated in 2015, there was more than a 200% growth YOY in the number of items offered as more sellers were on-boarded through a seamless portal. As the mechanisms to get more sellers got better, the opportunity to offer more products to the customer increased. This is still way behind the 360 million items that Amazon offers with more than 90% of that mix coming from the roughly 2 million marketplace sellers on its platform.

Alibaba.com through its sourcing platform offering has increased its supplier base massively (although heavily skewed towards Chinese suppliers) and is continuing to offer a suite of services addressing the convenience and trust needs of its stakeholders. It has several challenges to deal with especially with many suppliers being traders or middlemen and the ability to deliver quality products is heavily dependent on the buyer’s importing knowledge and skills. Nevertheless, the platform ecosystem is in place and Alibaba is working hard to remove the outlying challenges in this complicated business.

Building a broader supplier network however helps with the ability to not only add more products exponentially, but also reduce costs across the supply chain through the consolidation of demand and supply. According to the Hackett Group, procurement organizations who work with a diverse supplier base had lower overall operating costs and spent 20% less on their buying operations.

Reducing global shipment costs

There is a cost associated with providing the trust and convenience benefits through a robust platform. This is however optimized when suppliers and retail buyers come together for repeated transactions based on realized benefits that they see. It is an unavoidable reality that trading is becoming more and more global and it is necessary to ship products at lower costs to build a sustainable business.

Amazon’s shipping costs in 2015 exceeded $5 Billion. This includes the entire domestic as well as international shipping costs that the company incurred. From a shipping standpoint, they had a net loss of $1.85 Billion.

This continuous surge in their shipping costs has prompted Amazon to invest aggressively and experiment in a host of capabilities. It is important to note that while all these investments are geared towards reducing costs to the company, however, these can be interpreted as a suite of services geared to build trust and convenience to continue creating stickiness and attract more buyers and sellers under its fold.

A few of the evolving ‘services’ that Amazon has been offering on the shipping side are:

  • Truck trailers for replacing domestic carrier networks
  • Bicycle couriers
  • Prime air drones (in UK and eventually in US and other countries)
  • Air freight
  • Prime Now delivery
  • Amazon Flex — crowd-sourced package delivery

While the initial and ongoing investments to make this happen are heavy and prone to risks of failure, the benefits are equally high if the layers of costs are peeled off and optimized in the supply chain.

The supply chain space is ripe for a massive digital disruption. Alibaba and Amazon are leading the way in this space and many players in this industry will become not only a beneficiary but a critical part of it. The question is whether you as a retailer, supplier, freight forwarder, shipper etc. are willing to be dominated by these two nimble global players?

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Driving Surety of Supply in Retail Sourcing using Blockchain

A paper on the application of Blockchain technology in retail supply chain

Surety of supply in the global supply chain can be interpreted as the ability to ensure product availability at the right time and right place to meet a planned customer demand. In the context of sourcing, it starts from identifying and working with the right suppliers in an origin market, manufacturing products to scale and plan, and getting the products to the destination market on-time. This is easier said than done due to the inherent complexity of a global supply chain: The lead times are longer, inventory demand and the corresponding production is subject to disruptions, supplier compliance and risk needs constant monitoring and finally, the total cost of inventory may end up being high due to inventory pile-up (possibly from late delivery or early replenishment or larger order sizes) at the destination DCs and Stores.

The Sourcing value chain is deemed inefficient if it is unable to identify the right suppliers for the products that retail buyers want to sell to consumers. Sourcing teams also need to ensure that Suppliers manufacture and deliver these products at the desired quality and target shipping dates. While inefficiencies can happen due to several factors that need to be individually analyzed and addressed, there is an opportunity to look at the supplier base broadly as a collective network of willing partners who want to add to and gain value from the relationship. This requires a decentralized look at the management of the value chain and at the same time, enabling a collaborative participation of stakeholder partners across the value chain.

The problem of UNMET DEMAND (and hence potential lost sales and customers) due to inability of the sourcing supply chain to ensure surety of supply is driven by the following broad factors:

  1. Supplier Readiness
    a. manufacturing production problems
    b. factory problems due to compliance, safety and labor
    c. raw material problems
    d. shipment problems
  2. Supplier Availability
    a. product supply locked with a few
    b. sudden customer demand spikes forcing change in order strategy
    c. cost and lead time considerations

The resultant impact of this supplier delivery performance not meeting the desired needs is the following:

  1. Service loss/short-term sales loss in destination markets: Immediate sales forfeited due to deliveries not received on time from suppliers for open purchase orders.
  2. Increased inventory in Import DCs (and subsequently in Warehouses/Stores): Delayed product deliveries leading to piled up stock or faster replenishment cycles to meet shifting demand.
  3. Unplanned expedites resulting in high cost of logistics: Faster shipping methods employed (air vs. ocean) to get products faster to meet the at-risk commitment (in-store date).

In effect, we have an opportunity to better manage our network of suppliers to handle demand variance and supply disruptions so that we can MINIMIZE the downstream effects it has on increased cost of inventory, supply chain disruption and lost sales.

Solution Design:

Instead of handling the problems of supply after the fact, we can look at a proactive way of handling demand-supply considerations. By means of a Blockchain model, we can attempt to identify demand (as related to buy plans and their corresponding Purchase Orders) and propose a way for an extended network of suppliers to participate in meeting retail demand before the point of failure.

The design of such a business process system could look like the below model. This is one of several variations we can achieve in modeling a supplier-participation network:

 
A simple Blockchain model for distributing and sharing PO Demand
 
 

What happens within the Blockchain?

We will use an example derived from the model to explain how a Blockchain works in managing the PO optimization process.

Supplier Diversity:

Let us assume that a buy plan was created to direct import women’s top of a particular style and product specifications. This buy plan is vetted by a Sourcing Manager who will then publish the buy plan for review by the Supplier Base. Let us assume the supplier base to consist of 10 suppliers. Of these 10 suppliers, 2 are new suppliers (Supplier D & E) and 1 is a Trader (Supplier B).

Supplier Selection:

The Supplier Base reviews the buy plan and submits a quote detailing their capabilities in manufacturing the women’s top according to the defined specifications. Let us assume the quote was supplied by two existing suppliers (Supplier A and C), Supplier B and Supplier D. The total of 4 suppliers are now under consideration for securing the PO contract to manufacture the product for the retailer.

At this stage, let us assume Supplier D was rejected. The Sourcing Manager approves Supplier A and B and puts Supplier C on a waitlist. As explained earlier, a waitlisted supplier is someone who has submitted a compelling quote but isn’t the top choice for being approved immediately for securing a PO contract. However, Supplier C will be used as a risk-mitigation option by being allowed to participate in the PO process provided priority has been given to Suppliers A and B to secure their orders.

Once the supplier negotiations and agreements are completed, it is assumed that Suppliers A, B and C are now ready to do business with the retailer.

Blockchain Ledger, Transaction Chains and Visibility:

The PO ledger is the critical element of the blockchain and defines “what” is being exchanged and updated between the various nodes (participating entities) of the blockchain. In this example, we have 4 nodes in the blockchain — the Sourcing team, Supplier A, Supplier B and Supplier C. The nodes can be expanded as desired and it assumes that all nodes receive the most recent and updated copy of the PO ledger at all times. The complexity of letting Suppliers A and B participate first in securing orders can be enabled by controlling the node participation within the blockchain (It is to be noted that the concept of an open, distributed and completely decentralized blockchain is ideal for cryptocurrency transactions and has been generally modified to be more conducive to business environments by Blockchain service providers like IBM).

The PO ledger can be defined to have any fields considered as valuable to the node network in making the right transaction decision in the Blockchain. It is suggested to have at least the following entries:

  • Buy Plan ID: The ID of the buy plan as registered in a retailer’s system.
  • Total PO Qty: The total order size desired for the products under the buy plan (in the above model, the ledger is simplified and assumes a single product as part of a buy plan. For multiple products within a buy plan, we can create separate ledgers per item under the same buy plan ID so that suppliers can bid per item to secure the PO contract). For the women’s top, let us assume the total PO Qty to be 100.
  • PO Offer Qty: The offer qty is the latest snapshot of what order quantities are available still for suppliers to secure the PO for. Initially, the Total PO Qty and the PO Offer Qty will be the same (100 in this case). If we assume that Supplier A has secured the order contract for 30 (explained further below), the remaining on offer PO qty is 70. This is open for Suppliers B and eventually C to take.
  • Target In-Store Date and Target Port-arrival Date: The in-store date and the destination port arrival dates are guidance data that will enable Suppliers to understand what is the expected timeframe for manufacturing and shipping the accepted PO offer quantities to the retailer. The benefit of tracking this within the ledger is that it allows for real-time visibility of order related parameters (another benefit of the Blockchain that will be leveraged in this model). For any reason, if there was a PO revision that updated the in-store dates, it is clear to the nodes in the Blockchain what the expected new dates are. It is however important to note that a supplier should go by the PO contract (outside of the ledger) to comply by the required in-store date. The ledger will only have the latest snapshot of the in-store dates for the offer quantity.
  • WIP (Work in Progress) Daily Order Quantity Shipped: This is a daily updated snapshot of the total order quantity shipped out by each individual supplier to the retailer. This quantity is the fulfilled order quantity that the supplier is sending via freight to the destination port.
  • WIP Daily Order Quantity Produced: This is a daily updated snapshot of the total order quantity produced by each individual supplier to the retailer. This quantity has been manufactured in the production lines of the supplier’s factories and are ready for quality checks and shipping.
  • When the retailer publishes the PO ledger with the offer quantity, suppliers get to secure the order quantity that they can produce. This will be closely monitored offline so that suppliers do not promise more than they can deliver in securing the PO. Let us assume that Supplier A has initiated a TRANSACTION to offer 30 quantities of the women’s top. If they are the first bidders in the Blockchain, they will be offered the PO contract accordingly. This can happen either through an intervention or without the intervention of an offline team at the retailer. Once the transaction is secured, a CHAIN link is formed between the retailer and Supplier A for the order quantity of 30. The PO offer quantity in the ledger is now updated to 70.

Transaction Privacy:

Let us assume Supplier B has taken up 60 and Supplier C eventually takes up the remaining 10 on offer. This will close the transaction in the blockchain for the buy plan ID. Further modifications to the PO will update the ledger accordingly. In order to secure privacy of the transactions between the retailer and each individual supplier, it is possible to given the retail sourcing team node full visibility into all the transactions while letting each supplier node only see what they have contracted to offer.

WIP Risk Monitoring and Mitigation:

Work in Progress (WIP) tracking can be done easier through the blockchain as we will have a continuous snapshot of changes in the production and shipping lines for the supplier. By building additional top up logic through algorithms to process this WIP data, we can determine at near real-time any potential risk that each supplier poses to fulfilling their PO commitments. Let us assume that Supplier C is at risk of maintaining the PO commitment as the algorithms (or manual review) has identified that two of the factories are running at full capacity and missing production targets while the Supplier itself is going through a financial trouble in securing raw materials in time.

If the algorithms fire up and determine that supplier C is at risk of fulfilling the PO for the desired in-store date, the retailer can take a proactive view into the order commitment with Supplier C. In this case, the retailer will update the ledger to remove the chain link with Supplier C for the order quantity 10 (or any other updated snapshot number) and release that as an Offer quantity for the remaining suppliers (A and B) to take up if they can. If it is possible for either Supplier A or B to take up the additional order quantity, then the retailer has an opportunity to avoid the risk with missing order shipments that may have resulted in a lost sale potentially in the stores. If Supplier A or B cannot take up the additional offer quantity that the retailer has given, we can release a new supplier node into the Blockchain assuming there is a possibility for a Domestic Importer or an agency to take up orders with a faster lead time and production turnaround.

Why Blockchain?

Do we really need a Blockchain model to achieve this Supplier-PO management opportunity. The answer is in-between a Yes and a No. However, there is a stronger case to utilize the power of Blockchains to create open networks of business relationships. What Blockchains give is the opportunity to devise working business models that take away the overpowering role of a central administrative agency in monitoring and dictating the rules of engagement for the flow of transactions (e.g. money, products and resources of any kind) between participating entities. In the financial world, crypto-currencies have challenged the hegemony of central banks for enabling the free flow of money between two transacting parties. In the business world, Blockchain has a greater application in the supply chain space where FLOW of information, money, assets and resources happens all the time. In many cases, businesses are tempted to have a centralized role in monitoring this ecosystem while it is very much possible that by letting the supply chain participants have greater visibility into the flow of asset resources, there is better participating to meet targets and avoid risk.

According to IBM that has developed a Blockchain platform — “A blockchain network for business is collectively owned and operated by a group of identifiable and verifiable institutions, such as a business or university, for example. It’s a permissioned network, where the participants are known to each other. Blockchain technology underpins the bitcoin network, but the bitcoin network is non-permissioned, which makes it poorly suited to business use cases. It has no identifiable ownership structure and is operated by a community of participants that may or may not be identifiable.”

Blockchains have the power of a distributed network providing data sharing, replication and synchronization across various entities participating in the network. This makes information management and decision making easier.

The Logistical Challenge to e-Commerce Growth

Question: What does not excite a consumer to purchase a product at an online retailer instead of at a physical retail store?

Answer: Several reasons. Starting with the idea that consumers still prefer to view/feel the products they buy to technical challenges such as fear of fraud in using credit card for payments. Most of these and other challenges have been tacked by online retailers through better pricing, greater assortment, ease of researching and ordering products and the move towards safer financial transactions.

Given this new world that has evolved over the past 3-4 years, the bigger question is how else online retailers can grow their clout in a largely changing world. According to an emarketer analyst, US retail e-commerce sales will reach $146B in 2008, up 14.3% from the previous year. However, the growth rates of online sales will steadily decline over the years. The indication in the report is that the online retail channel is maturing.

I feel that apart from several other important challenges that e-retail needs to tackle, there is one reason why customers tend to purchase offline than go online. It is the time taken to deliver the product as a function of the cost incurred to receive the product. This I believe is the biggest logistical challenge that e-retailers should find an answer for.

Question: So, how bad is it?
Answer: I tried to answer this question by doing some research on the net and came across a very good article that talks exactly about the challenge I was talking about. In an article in cnnmoney.com titled “Consumers say no to high shipping fees”, it shows that about 43% of consumers abandon a shopping cart citing high shipping fees as a reason. It also indicates that when consumers compare online and offline prices, savings is realized in the shipping fees.

Question: So, what are online retailers doing to tackle this issue?

Answer: Many online retailers such as Amazon.com are using programs such as “Super Saver” shipping and “Amazon Prime” to tackle this challenge. Wal-Mart also came up with an answer through the Site-to-Store program. Having personally studied and worked on changes to the Site-to-Store program while working at Walmart.com, I have experienced the growth potential of such cross-channel initiatives, although I feel that the program could have been well thought out and executed better in some areas. But yes, I do feel that multi-channel retailers have greater scope for innovation in tacking this challenge than pure play online retailers. The reason being that, they can offer a different shipping mechanism as compared to a standard ship-to-home option to the consumer.

Question: How can we define this challenge?

Answer: I feel that like every economic or statistical model, it can be mathematically defined by an equation.

Loosely defined, the equation could look like:
Consumer’s online purchase decision = fn(time to deliver, cost to deliver, price, availability)

There is a strong correlation between the “time to deliver” and the “cost to deliver” variables due to the challenge posed by the carrier companies that retailers use for shipping products. As is obvious, carrier companies attach a cost directly to the speed of delivery of the package, which either the retailer has to absorb or pass on to the consumer. In the future, online retailers may consider this as a single large strategic challenge that they need to effectively confront.

Question: How can an online retailer work on this challenge?
Answer: This is obviously a tough question to answer, especially for a pure play online retailer. Store retailers with an online component can still gain efficiencies by introducing multi-channel options like store pickup and online divisions leveraging the partnerships built with carriers by the store network.
Pure play online retailers such as Amazon can still leverage scale of operations for better deals with carriers. However, it still turns out to be an expensive affair given the rising costs of gas and the inability for carriers to effectively mitigate them. But, I believe there is a solution.

The solution lies in what Wal-Mart has done with its suppliers over the years and continues to do today with its sustainability initiatives. Partnering with carriers to remove costs out of the system will be the way to go. Easier said than done given that Carriers like UPS and Fedex already have exceptional processes in place to squeeze costs out of the system. But there is scope for more efficiencies in the process if retailers can use historical analysis to predict ways in which consumers place their orders and the shipping methods they employ. If this is shared in advance with their carrier partners, the carriers in turn can plan their trips to the retailer’s distribution centers and network the trips to the consumers location. To be continued in a later post…

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