Fully digitalized supply chains in response to retail challenges

Fully digitalized supply chains in response to retail challenges

December 10, 2019

Future-proof retail: How to get there

The retail sector and especially its supply chains are facing drastic changes: Political and social uncertainties, the effects of climate change and demographic trends, new products and business models, as well as changing customer demands – these and other factors, internal and external, are forcing companies to rethink their supply chain strategies and adapt to the transformation going on around them. We have identified eight key supply chain paradigm shifts that retailers should make. The end result must be a radically digitalized supply chain. That said, simply jumping on the latest technology bandwagon is not the way to go. Retailers need to develop the right overall strategy for them, based on where they are now, and take the necessary steps to implement it.

To cope with today's challenges, retailers must change eight paradigms in their supply chain strategy and apply the right digital technologies to each of them.
To cope with today's challenges, retailers must change eight paradigms in their supply chain strategy and apply the right digital technologies to each of them.

Supply chains are the beating heart of the retail trade – only when they run smoothly can companies meet the demands of their customers and operate successfully. Indeed, the importance of highly effective and efficient processes cannot be overstated. Especially when considering that today's supply chains are virtually always networks of an international or even global nature, making them susceptible to a multitude of disruptive factors. Such disruption is more and more frequent nowadays, coming from the outside environment and from inside the sector alike, and it exerts a substantial influence on supply chains individually and collectively.

External factors include the political environment: An increase in nationalist and anti-globalization tendencies worldwide has brought trade conflicts, higher customs duties and added costs for companies. Not only that, but stricter climate protection laws, uncertainty and added data protection regulations and employee rights also affect the retail trade and its flows of goods, and there is often a lack of legal framework for newly emerging technologies or products. Economic development is another factor: Growth in the retail sector is now taking place primarily in emerging markets, while the concept of limitless consumption is increasingly being questioned in saturated Western markets. There are also differences in income levels, which influence demand regionally, coupled with challenges such as labor shortages in logistics in countries like Germany.

Climate change poses a challenge for supply chains

Demographics and climate change are also shaping the need for retail transformation: Supply chains contribute to climate change themselves, which means that they must be optimized to produce the least transport-related emissions. On the other hand, factors like weather-related production losses or disrupted infrastructure pose a risk to replenishment in the retail sector, which players must counteract through regional diversification. Demographic trends, for their part, are not only changing the customer base as our populations age and household sizes decline, but they are also creating logistical challenges due to the increase in urbanization worldwide and the resulting overburdened infrastructures.

Areas within the industry itself where disruption is making its presence felt include the retailer's own sales strategy: It must meet the changing needs of consumers rather than online availability, fast and convenient delivery, product experience instead of ownership, sustainability and similar criteria are taking on increasing importance. For retailers, this means more e-commerce, moving toward omnichannel retail, and a growing need for creative new business ideas such as pop-up stores or special shopping events. For this to work, supply chains need to be optimized. At the same time, retailers still have to cope with high price sensitivity from customers as well as the fact that online comparisons are always available. Thus, prices are dictated by the most efficient retailer, and others are forced to achieve a comparable level of efficiency. Added to that, there is growing competition, including from new manufacturers and brands that bypass traditional retail and approach end customers directly through online channels. The growing demand for locally or regionally produced goods, especially in the food sector, as well as ever shorter product cycles also call for new forms of procurement.

In summary, these factors taken together pose four key challenges for retailers and their supply chains: rising uncertainty that stems from political and regulatory instability and the unpredictable impact of climate change; growing complexity, partly caused by the increasing diversity of business models, channels and manufacturers; more demanding customer expectations in respect of quality, choice, price and availability of the full assortment at all times; and sustained cost pressure due to factors such as a shortage of skilled workers and scarcity of resources in the face of rising price pressure emanating from saturated markets and increasing competition.

Only radical digitalization can enable the necessary retail supply chain shifts

These challenges are forcing retailers to rethink the status quo and develop a vision for a sustainable supply chain. They need to cast aside eight paradigms and replace them with new principles:

The eight paradigm shifts needed for a future-proof supply chain

1. Information bundling

From data silos and ad hoc reports to one shared truth of financial, environmental and social data

In order to effectively identify savings potential, the full costs-to-serve must be visible for everyone from one source. Separate databases, spreadsheets and allocation keys currently create an opaque and inconsistent web of KPIs. Increasingly complex supply chains generate data floods that will ultimately exceed the limits of siloed tools, consume an exploding volume of data management resources and still deliver chaotic figures.

Added to that, the measurement of environmental and social KPIs at all times will be business critical. Once-per-year aggregated reports on sustainability don't enable levers for reducing GHG emissions to be identified, for example, and won't satisfy consumers' and politicians' demands for item-level transparency.

2. Footprint & infrastructure

From discrete optimization to continuous redesign of footprint and infrastructure

Ongoing location-based optimization of a flexible footprint will replace regular ad hoc redesign projects. As external factors such as trade policies, national regulations, wages and the climate shift simultaneously at various locations along global supply chains to an extent that is basically unpredictable, the optimal footprint today may be ineffective in a few months. Only constant, data-driven monitoring and balancing of operational vs. redesign costs will ensure a competitive supply chain in the long term.

Even the digital infrastructure itself must be set up flexibly and challenged constantly as developments in security, industry standards and regulations are constantly in flux.

3. Real-time transparency

From centralized fire fighting to smooth, autonomous real-time steering

Centralized operational planning will become obsolete when algorithms communicating within one network know the next step for each actor. Machines can communicate in real time and take into account more internal and external factors such as delays or traffic than any person could combine into one plan.

Drivers instructed in real time via apps, for example, can make deliveries to stores and warehouses based on the actual remaining inventory and predicted demand for the next few days instead of outdated projections.

Rather than delivering poor-quality workforce management plans from headquarters, Human Resources can effectively intervene in the field as soon as the software detects a problem and sends out a warning.

4. AI-driven offers

From generalized assortment allocation to touchpoint-tailored product supply

AI-driven assortment and order management at store level must bridge the gap between centralized one-size-fits-all category demand management and decentralized owner-managed stores.

One central system that takes overall patterns into account (better than the single store owner can) and has the computational capacity to detect trends and differences between store-level micro clusters (unlike the central category demand manager) can optimize inventory and service levels and maximize profits by tailoring the offer to the specific customer milieu.

This includes differentiation on micro level with niche product lines, local suppliers, or tests with startups.

5. Connected commerce

From a commoditized, operator-driven last mile to customer-centric mode, point & time of delivery

Customers who care more about access to products than about the brand or price need to be served on their terms to close the sale. The supply chain of the future is centered around on-point availability – no matter whether that means delivery on the same day, next Monday between 6 and 7 PM, on the shelf in the nearest corner store or in a pop-up store where the customer can, for example, try out online furniture in real life.

In order to reach that stage, retailers need to evolve into true omnichannel players, i.e. serving the customer at any touchpoint seamlessly from a single source. Connected commerce means that (both internally and externally) channel thinking disappears. Then the last mile can start at any point.

6. Digital omnichannel strategy

From discrete to continuous accessibility of goods

Any product that is in the supply chain needs to be orderable by anyone. To close a sale, it should not matter whether the product is currently on a shelf, in a nearby store, on a truck due to arrive later that day or still at the warehouse. What matters is that the sales person (or the customer directly in the case of e-commerce) has digital access to the item and can reserve it, knowing when and where it will be delivered – to the right customer.

The decoupling of sale and physical availability of a product is key to a truly seamless omnichannel strategy.

7. Full automation

From robotic henchmen to superhuman machines as a labor force

In a bid to decrease retail's dependency on manual labor forces, robots are taking over increasing shares of the work and are advancing from simple process automation to a replacement for increasingly complex tasks. Especially strenuous manual labor under unpleasant or dangerous conditions that few people are willing to sustain long term, such as warehouse picking, can be done around the clock by smart robots.

Where full automation is still too complex or costly, human enhancement technology can increase productivity of workers andcap rising labor costs or prevent capacity shortages.

8. New business opportunities

From return flows as a problem to circular chains as a new opportunity

Establishing an excellent process for returns will become a competitive advantage both in terms of customer satisfaction and for the e-commerce bottom line. While many take measures to reduce the return rate, the absolute volume of returns will still see an increase due to the sales growth of this channel.

With the rise of a sharing economy in consumer durables such as electronics or fashion, a circular supply chain additionally holds the promise of new business model opportunities such as rentals and subscriptions.

Even at the end of a product's lifecycle, innovative retailers can play a key role as two-way touchpoint in the circular economy that aims to reuse, up-cycle or recycle used products instead of throwing them away.

Realizing these paradigm shifts will require retailers to avail themselves of the entire spectrum of digital technologies – from robots and big data analytics to artificial intelligence. Only radical digitalization of the complete supply chain will enable the flow of information and goods to become as efficient, flexible, fast and cost effective as the retail transformation requires (see infographic).

Big data analytics, for example, facilitates a better understanding of customer behavior and allows retailers to predict when and where demand will arise. Armed with this knowledge, they can then tailor different supply chain elements, from production to delivery, to match demand. Artificial intelligence can be used to improve planning and forecasting, ensure an efficient warehousing system and optimize processes like supplier selection. And the Internet of Things enables increasingly autonomous real-time control of supply chain processes.

Comparing the available digital technologies against the eight paradigms for a future-proof supply chain reveals that there is no ONE technology that can resolve all of the challenges (see infographic). In this context, the whole is more than the sum of its parts, so a smart combination of the various digital tools is needed in order to get the most out of the supply chain as a whole. The retailer's individual situation must always be the starting point. It is therefore advisable to proceed in four steps – with each one run through not just once but repeatedly in a continuous spiral of optimization:

Doing this will allow retailers to stay in control as they transform their supply chain into a fully digitalized system. Simply following the latest trends will not lead to success in the long run. What they need to do is develop and implement an overarching strategy that can make the beating heart of retail fit for the future.

If you like to get the full study, please don't hesitate to connect with our experts Matthias Hanke

Further reading
Portrait of Matthias Hanke
Senior Partner, Managing Partner Switzerland, Central European Head of Transportation
Zurich Office, Central Europe
+41 79 372-3945