Escaping the supply chain Catch-22: customer service vs. rising costs

Nov 5, 2019  |  4 min read

supply_chainRetail supply chains catching up to Amazon

Competition to make and distribute consumer goods is at an all time high. Despite cries of a retail apocalypse, retailers like Walmart, Costco, and Target are all outperforming Amazon in the stock market this year. By competing with Amazon on convenience and leveraging the competitive advantage of their physical presence and human touch, these organizations are reinventing the importance of physical retail as we prepare to enter 2020.

The brick-and-mortar titans have made great progress toward cementing their share of the new retail status quo by delivering on omnichannel convenience. Going forward, the brands they carry must take on the same mindset if they wish to maintain distribution power. Retailers are sending a clear message to brands: keep up, or lose shelf space.

Walmart introduced OTIF (on-time and in-full) requirements in 2017, and since then has raised the standard of service every year for the brands they carry. Additionally, in order to tighten margins and reduce inventory, Walmart is placing smaller, more frequent orders, pushing additional costs onto their suppliers.

Consumer and retailer expectations for convenience and availability have outpaced most consumer brands’ supply chain capabilities. However, if they fail to meet these rising standards, their products will lose market share and fall into irrelevancy.

Keeping up with expectations is a life-or-death imperative, but can brands rise to the challenge without incurring margin-slashing costs?

Retailers passing supply chain costs to upstream suppliers

Sales, supply chain, and finance all feel the pressures associated with increased consumer and retailer expectations. Unsure of the size and frequency of orders, brands have to hold more inventory and frequently expedite freight in order to sufficiently service retailers. These added costs eat into margins, but raising prices is a non-starter in highly competitive categories.

Between 2017 and now, many Fortune 500 CPGs experienced costly inventory growth, as well as increased costs from expedited freight. Brands also bore the costs of more spoilage and returns, as retailers or distributors over-ordered without having to pay the costs of expired inventory. On the flip side, companies that tried to be too cost conscious suffered from chronic out-of-stocks and missed orders, both of which significantly hurt retailer relationships, brand perception, and ultimately, market share.

Today’s consumer goods companies find themselves in a bind, having to choose between shrinking margins or lagging customer service. Many enterprises have made substantial improvements in their supply chains, creating data-driven processes to align to new standards like OTIF. However, these same companies are still suffering from substantial margin loss. Kraft Heinz is a perfect example, experiencing a 500-basis-point decline in EBITDA margin Y/Y (due primarily to inflating supply chain costs) at the same time the company has overhauled its ability to deliver on retailers’ new service level expectations.

Continuing to improve customer service while keeping a lid on inventory and freight costs is going to require a paradigm shift across the consumer goods industry. Fundamentally, many companies are still operating based on how much product they are shipping into their distribution channels. They plan, forecast, and execute based on purchase orders coming from retailers, and in doing so, are failing to utilize their best available demand signal: granular point-of-sale data from their retail partners.

Paradigm shift: Get closer to true demand with granular POS data

SKU/store-level POS data typically lies in retailer portals, EDI feeds, and legacy sales reporting solutions that seldom make their way further than weekly dashboards prepared by analysts. To start, companies must move this data out of siloed, legacy systems, and into platforms designed with their data in mind.

When this granular demand signal is combined with forecasts, inventory, and other upstream data, supply chain and sales teams can start better aligning decisions with demand across every retailer. Managing these inputs in one system allows for predictive metrics like forward-looking weeks-of-supply, a continuously updating estimate of how fast the inventory at any supply chain node will deplete. Under this new paradigm, companies will operate with benchmarks for appropriate inventory positions throughout the supply chain, and extend best practices across teams.

The promise of demand-driven supply chain analytics

With performance metrics likes weeks-of-supply, supply chain teams will start moving the needle on some of their most valuable KPIs:

  1. Inventory carrying costs: better visibility into partner inventory and increased order predictability helps reduce safety stock requirements across all warehouses.
  2. Logistics costs: use forward-looking metrics to anticipate upcoming pulls, reducing the need to expedite shipments to fill unforeseen inventory gaps.
  3. Service levels: maintain industry-leading service levels by having or shifting inventory where it’s needed.

Retailers will learn to expect superior in-stock percentages and inventory turns from truly demand-driven brands, and teams will preserve their seat at the table (and on the shelf) to protect and grow market share.

As market pressures from consumers and retailers mount, the only way supply chains can maintain customer service and systematically reduce costs at the same is to make every decision with a more complete picture of demand. For an assessment of your supply chain, reach out to us for a consultation at inquiries@alloy.ai or get started here.

Posted by Alloy