Boosting order fulfillment cycles is no academic matter. While Amazon, eBay and some other major players are the league leaders in the race to get product out the DC door and into the customer's hands, no company can afford to stand on the sidelines and watch the competition zoom by. Everyone needs to make the necessary investment to quicken fulfillment times. But that's not inexpensive, and therein lies the first hurdle: to mount the business case for spending what might be a hefty sum.
Speaking to SupplyChainBrain at the annual conference of the Retail Industry Leaders Association, Andrew Breckenridge, executive vice president at Fortna, offers some advice on how to convince the CFO that investing in transformative supply chain technologies is a sound thing to do.
Q: You've spoken about an arms race, an arms race in terms of what it costs to involve yourself in faster fulfillment. That sounds fairly provocative. What do you mean by that?
A: Breckenridge: Well, there are two aspects to it. One is a defensive posture – you have to do it because your competitors are doing it. They're offering faster fulfillment, they're offering more channels with which to supply the inventory. So, the bottom line is, if you don't compete effectively with them, they will take your share.
The offensive posture is, if you are able to achieve a faster fulfillment cycle in your operations, you then have the opportunity to grab new share in your customer base, but also to take market share from your competitors.
Q: Well, that is what it's all about, of course. But here's the money question: surely there is an expense around all of that?
A: Breckenridge: Absolutely. When you look at investment that Amazon and eBay are making, obviously investing heavily in the capability to make next-day, same-day fulfillment operations in certain metropolitan areas – this means for our clients that they have to look at their network strategy. They have to determine where to deploy distribution centers, what inventory to deploy in those distribution centers, and how to satisfy orders to distributed order management environments. Secondly, they have to look at their transportation strategy because that will have major knock-on impacts in terms of their ability to fulfill those orders in the time cycles which their marketing groups are committing to.
Thirdly, it has enormous impact on the distribution operations that they are looking after. If you look at an operation that is traditional, running an order fulfillment cycle where you have a day to fulfill an order, to get that order in the hands of their stores or e-commerce channel, that is a very different looking facility from one that has to satisfy an order in four hours or even in a one-hour cycle.
Q: The implication of that?
A: Breckenridge: The implication of this is that organizations have to make significant investments within their networks and at a strategy level. They have to really look at their transportation options – whether or not to look at different parcel services, zone skipping or even go to dedicated freight operations in some cases.
All of this goes back to the CEO’s desk, and he says, great, I have to spend a lot of money, so what are the benefits and how am I going to pay for this?
Q: What's the answer? How does he or she fund that?
A: Breckenridge: It goes back to my introductory comment. The defensive posture here is that you have to make these kinds of investments or your competitors are going to take away the top-line and bottom-line contribution to your business.
On the offensive side, it's about your ability to fulfill orders faster and enable your marketing groups to make significantly and competitively differentiated service offerings in their marketplace.
Q: An example, please.
A: Breckenridge: For instance, if you could offer 8 o’clock cut-off times in your operations, that allows you to basically pull orders in all day, satisfy the orders and then get them in the hands of customers next day.
These are things to drive top-line growth for your organization, and if you're able to do it right, it will drive profitability on the bottom line. So, as you grow your business to protect what you have, those are the major aspects in terms of which a CFO is going to understand the business case for making these types of investments.
And if it's done right, it can create an extremely virtuous cycle in the operations of your business.
Q: Like “arms race”, you've mentioned this term before as well. But let's develop it here. What do you mean by virtuous cycle?
A: Breckenridge: As you're able to fulfill your orders more frequently and faster in your operations, there are two major aspects to look at. Firstly, your traditional store fulfillment operations. If you can move to a daily fulfillment model rather than the more traditional once-a-week or every three days, what that allows you to do is to cut the amount of space required for safety stock and inventory in your stores. That space can now be reallocated to selling space or to a very hot item in the industry at this time: ship-from-store operations. So it can have a positive impact in terms of your deployment of inventory within your distribution operations – but also in your back store where you can focus your selling space – which is traditionally much more expensive than facility space – on actually selling more and driving top-line growth.
So, this virtuous cycle can drive inventory out, it can drive increases in selling space within your operations, but more importantly, it can look after and guarantee those service commitments to your customers.
Q: How about a real-world example? Do you have one?
A: Breckenridge: We're working with a $2bn distributor, and many of its products are substitutable, i.e., there is not huge differentiation in that area. Customers, if they are not able to get that particular inventory item within the time service window that they need, will simply go elsewhere.
We worked with them to develop some very sophisticated RF picking operations, enabling it to drive some process improvement in that facility. The major opportunity it gave them, it allowed them to cut off their operations at 8 at night, which allowed them to commit a $50 service charge: “If the product is not in your hands next day, we will pay you $50.”
Q: How much has that cost them?
A: Breckenridge: They've never had to make that payment to any customers. In the interim, they’ve moved from being a $1bn business to a $2bn business. A large part of that is based on service commitments they were able to provide to the industry.
The business case for their investment was driven by a commitment provided by many different areas within the company. If you're simply looking at this as a supply chain investment process, it is very difficult in some cases to really develop an appropriate business case that will justify the level of investment for transformative processes like I’ve described.
Q: So what are the different areas you're speaking about?
A: Breckenridge: In this case, the marketing group came to the table and said they were willing to make a contribution to that business case.
Q: To argue in favor of it?
A: Breckenridge: Yes, because there were significant benefits driven by not having to drive markdowns in some inventory. The bottom line is that all of the major functions and departments contributed to the business case. That justified the investment.
Q: There seems no way to go but forward.
A: Breckenridge: There are a couple of key things here. One is that, this is not going to change. The genie is out of the bottle. Our customers and our clients' customers are looking at faster order fulfillment cycles, and their expectations are increasing every day. All of the organizations that we work with are trying to do new things in this space. Nobody is standing still.
Q: What's their first move or step?
A: Breckenridge: Many of our clients are having to put together some very sophisticated business cases to justify supply chain transformation processes within their organizations. This means that stakeholder commitment is absolutely key to this.
It also means that the role of the head of supply chain is to be at the table with the CFO, the CEO, with the head of marketing, to be able to make infrastructure investments. To deliver these types of benefits, that is absolutely key.
In this competitive environment, it is worth reemphasizing that this has both a defensive and offensive posture. If our clients do not move to faster order fulfillment cycles, somebody else will in their space. So this is an enormous change for organizations to hang onto what they have, but also much more significantly, since most shareholders are looking for growth, this is a key enabler of that.
To access this video interview online, click here.
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