Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

Inflation in 2022: Is the Bullwhip Effect to Blame for Retail Inventory Glut?

Demand Management | By •

inventory glutLast week I saw a news headline from the Washington Post stating Michael Burry’s ‘Bullwhip’ Tweet Deserves Serious Attention. Michael Burry (@michaeljburry) is most well-known as the hedge fund manager portrayed by Christian Bale in the movie “The Big Short.” His track record justifiably garners many followers on Twitter – 895,000 according to the account. Michael Burry’s tweet stated that the supply glut at retail is a result of the Bullwhip Effect and that there will be deflationary pulses from this. Deflationary pulses are important to understand in our current environment of widespread inflation and a recent commitment to tighter monetary policy to reign it in. Deflationary pulses seem counter intuitive in this environment, kind of a like an undertow at the beach. This talk of deflation caught me off guard.  As a supply chain analyst and an economics enthusiast, I was curious to learn more. I did a little digging to find out the specifics about excess inventory, the stated causes, and the potential implications.  Here’s my take on the topic.

Retailers’ Inventories – Just Keep your Returns?

Michael Burry’s tweet was referencing the CNN article Just keep your returns: Stores weigh paying you not to bring back unwanted items. That article stated that Target, Walmart, and others recently reported during earnings calls that they have too much inventory in certain item categories and that the cost of holding inventory is negatively impacting their profit margins. In turn, there is the possibility that some stores may not want to handle your returns, preferring to let you just keep the items.

Target’s earnings call transcript explains that it experienced a more dramatic change in its sales mix than they anticipated, resulting in excess inventory, much of it in bulky categories. Furthermore, Target stated “Apparel, Home and Hardlines, we saw a rapid slowdown in the year-over-year sales trends beginning in March, when we began to annualize the impact of last year’s stimulus payments. While we anticipated a post-stimulus slowdown in these categories and we expect the consumer to continue refocusing their spending away from goods and into services, we didn’t anticipate the magnitude of that shift.” This statement indicates that Target attributes the slowdown to a rapid shift in demand patterns and an overall softening of demand from discontinued government stimulus payments. Additional content from the earnings call indicates that the slowdown in sales was more pronounced than expected in kitchen appliances, TVs, outdoor furniture, sporting goods, and apparel.

Walmart’s earnings call transcript states “we knew that we were up against stimulus dollars from last year, but the rate of inflation in food pulled more dollars away from GM than we expected as customers needed to pay for the inflation in food.” This statement indicates that Walmart believes that general merchandise sales are being negatively impacted by increased food prices (assumedly without a corresponding amount of money to spend.).

Conclusion: Whiplash not Bullwhip Effect

It appears from these sources that retailers’ excess inventory is due to a rapid shift in demand patterns along with a reduction in purchasing power at the same time that inflation is discouraging some discretionary spending. The traditional definition of the bullwhip effect (The Bullwhip Effect in Supply Chains MIT Sloan Management Review”, 1997) was that of demand order variabilities in the supply chain being amplified as they go up the supply chain. This does not seem to be the case with Target and Walmart. It appears to mostly be “whiplash” from a drastic and sudden change in demand patterns. So let’s call it “demand whiplash”. Unfortunately, I am unsure about the order of magnitude or the duration of these inventory mismatches. But as I previously discussed, optimal order quantities go up when inflation is high with respect to the cost of capital, as is the case today. Therefore, it is likely that retailers and distributors have been ordering larger quantities and holding more inventory than they would in a low inflation environment (all else equal). And this doesn’t bode well when demand shifts are volatile.

Blue Yonder ICON: Supply Chains Can Save the World

Learning & Leadership | By •

Blue Yonder ICONAs an analyst at ARC Advisory Group, this is normally my busy travel time of the year. Along with my colleagues Steve Banker and Clint Reiser, I am usually attending a number of industry and customer events across the country. However, this year things are very different; coronavirus is pushing these events to online virtual affairs. Yesterday, I attended Day 1 of Blue Yonder ICON and DEVCON, the company’s virtual user conference initially scheduled to be held in Denver, CO. The theme for the conference was “Supply Chains Can Save the World.” Given everything that is going on today, it is a very apt theme.

Blue Yonder CEO Girish Rishi kicked things off with an opening keynote that touched upon the double meaning of how supply chains can save the world. Rishi noted that we are facing two major issues:

  • The issue of year: COVID-19
  • The issue of the decade: sustainability of our planet

Blue Yonder ICON: COVID-19

Blue Yonder ICONWhen it comes to the issue of the year, Rishi pointed out that when he speaks with customers, they have noted a dynamic shift in their business due to COVID-19. Generally, there was an old way of thinking which has changed dramatically over the past few months. There were two changes that jumped out immediately to me. First, the old way of thinking was that we lived in a buyers’ market. This means that consumers could buy what they wanted, when they wanted, and how they wanted. However, there has been a shift now to a sellers’ market. To this point, according to a Blue Yonder survey of 1,000 consumers, inventory availability now supersedes brand loyalty. The results showed that 89 percent have experienced more out-of-stocks during their most recent grocery shopping experience; 75 percent were more likely to buy the same product from a different retailer if a product was out of stock; and 78 percent were more likely to buy a different brand of a product from the same retailer if their desired brand of that product is out-of-stock.

The second change was the role of e-commerce. According Rishi, Blue Yonder’s customers view of e-commerce has gone from an auxiliary role to a necessity. With less people shopping in stores, e-commerce is growing by leaps and bounds. Rishi identified a number of key innovations that the company is implementing to help with the new nature of global business. Blue Yonder launched its Luminate platform in 2018 and has continued to make enhancements. Rishi announced the company is developing Industry Cloud, which delivers industry specific pre-configured enablement. The Luminate platform runs on Microsoft Azure and Industry Cloud sits on top of the platform. It has specific use cases for different industries, including CPG, High Tech Manufacturing, and Grocery. The portfolio of applications, APIs, and partners are all designed for the specific industry.

Industry Cloud will be available to scale and deploy on one platform. The one I found the most interesting, and most relevant to changing nature of e-commerce, is Luminate Warehouse Tasking. As Rishi pointed out, warehouses see disruptions on a daily and even hourly basis. Luminate Warehouse Tasking overlays on top of the company’s WMS, studies data of disruptions, and builds a machine learning model to autonomously respond to these disruptions. The disruptions could be that a truck is arriving early or late to the warehouse, or a new order comes in that needs to be expedited. This allows for rapid changes to be made and the warehouse to be more agile and efficient.

Another session that spoke to the changing nature of commerce was Plan and Pivot with a Modern, Synchronous Supply Chain Platform. This session featured Desikan Madhavanur, EVP and Chief Product Officer. In his session, Madhavanur highlighted the four themes that are driving the modern supply chain:

  • Cognitive Intelligence with Artificial Intelligence / Machine Learning
  • Responsive Planning
  • Digital Fulfillment
  • Synchronous Supply Chain Platform

Digital Fulfillment was the one that jumped out to me. There are four key initiatives for digital fulfillment. The first initiative is real-time inventory management capabilities. This ensures that organizations are able to look at inventory across the entire network with complete accuracy. The second is order orchestration. Order orchestration starts with figuring out what demand is going to show up and use available inventory to ship accordingly. This matches with real-time inventory to optimally fulfill order from the best location, looking at shipping time and cost associated with the shipping location. The third initiative is WMS for digital flow. This is used to serve new use cases for fulfillment, including pop-up distribution centers, smaller scale urban distribution centers, dark stores, or ship from store scenarios. The final initiative is dynamic logistics. This covers how TMS, last mile, and freight marketplaces all play a role to fulfill the digital requirements for e-commerce fulfillment.

Blue Yonder ICON: Sustainability

The second issue that was discussed at length is what Rishi called the issue of the decade: sustainability. Rishi made it clear that Blue Yonder’s response is to reduce the waste, energy, and costs required to power global commerce. A digital transformation strategy and a new way of thinking are key components to a sustainability strategy. Two customer presentations touched on these components: Lenzing AG and Albertsons.

Robert van de Kerkhof, Chief Commercial Officer at Lenzing AG, a producer of fibers for the textile industry, spoke about the importance of sustainability. He dubbed this time as an era of VUCA: volatility, uncertainty, complexity, and ambiguity. We are dealing with trade wars, climate change, economic uncertainty, imbalanced supply and demand, tougher environmental regulations, and natural disasters. This new normal is creating a difficult position for the textile industry but van de Kerkhof identified what needs to come from leadership during this time:

  • End to end thinking: the focus is on recycling. Today, they are recycling plastic bottles into fibers, but they need to be able to recycle fibers into fibers.
  • Increased commitment to sustainability: corporate goals for reduced carbon emissions and using sustainable energy sources.
  • Transparent and responsive supply chain: many of the top 100 brands are pledging for 100 percent sustainable fibers by 2025; however, most brands do not have enough visibility into sourcing. Luminate control tower provides real-time visibility and potential supply chain impacts for accurate decision making.
  • Partnering for systematic change: the company is focusing on blockchain to increase transparency with consumers and partnering with technology companies to minimize waste from inefficient order patterns.

The second customer presentation that talked about sustainability was from Rucha Nanavati, GVP, IT at Albertsons. In her session, Nanavati identified two components to the company’s sustainability plans: products and planets. On the product side, Albertsons has made the push for its own line of organic food. The O Organics brand has surpassed $1 billion in sales, featuring 1,500 certified organic items. She also said that 100 percent of its O Organics and Open Nature eggs are cage-free. The company has generated more than $2 million for community development from the sale of its organic brands since 2014.

Nanavati also highlighted sustainability plans for the planet. In the company’s more than 500 stores and warehouses, it has completed more than 800 energy efficient projects. Albertsons has recycled more than 705 million pounds of cardboard and 22 million pounds of plastic film, and 100 percent of its private fleet are EPA SmartWay certified for being cleaner and fuel-efficient. It sees Blue Yonder as a key partner moving forward with its sustainability plans.

Blue Yonder ICON: Day 2

Today kicks Day 2 of the Blue Yonder ICON virtual user conference. The theme around the event is “Supply Chains Can Save the World.” Yesterday, this theme rang true from the opening keynote and throughout, as speakers looked at the new reality of commerce and fulfillment in the age of COVID-19. The event also took a look at the longer-term ramifications that come with a sustainability plan to protect the planet. Between the two issues, Blue Yonder showed just how supply chains really can save the world. Tune in for more coverage in the coming days and weeks.

Improving the Transportation Solve: Jointly Optimizing across Inventory and Transportation

Food & Beverage Industry | By •

When a company is looking to reduce their freight spend, while maintaining or improving service levels, there are two main paths they can take.  They can buy and implement a transportation management system (TMS).  Or they can outsource transportation planning and execution to a 3PL that provides managed transportation services (MTS).

I talked to Wietse Cornelissen, who works in the Global Customer Service and Logistics department, at Heineken, on August 28th.  Then the very next day, I talked to Jordan Kass, the President of Managed Services at C.H. Robinson’s TMC division.  TMC provides managed transportation services.  The reason these conversations are linked in my memory, is that both Wietse and Jordan talked about achieving better savings by more tightly integrating transportation and inventory optimization.

Wietse is an internal consultant in the Global Customer Service and Logistics department. This department develops logistics capabilities which can be rolled out to the various operating companies within the Heineken organization. An operating company is essentially a country operation, which can have one or more breweries, depots and warehouses. Wietse is the Program Manager for the Global Freight Management Capability Program which was initiated and formalized in 2014. The vision of the program is to develop and implement advanced freight management capabilities, focused on improvements of the process, organization, and systems.

Heineken began a pilot implementation of an advanced freight management capability, using Eyefreight as the preferred TMS, in 2012 at their operating company in Romania.  The drivers for this project were a desire to reduce their freight spend, improve customer order fulfilment, reduce CO2 emissions, and generate reliable logistics data that could be used to drive a more robust continuous improvement program.

In many ways, this was a fairly typical TMS project.  The implementation took 9 months, with the strategic decision to have the Go-live after the busy summer period.  The solution helped them reduce the distance trucks travelled by 15 percent, increase truck utilization (up 5 percent), reduce maverick spend by insuring the preferred carriers on a lane got the first opportunity to respond to tenders, and helped insure they were not overpaying carriers for their work by monitoring and approving route deviations (freight audit).  In consequence, their freight spend went down 7 percent in the first year. Further, having a TMS in place has greatly helped improve visibility in key performance indicators, such as Perfect Customer Order and carrier performance.

But what was not typical about this implementation was the integration of dynamic order allocation into the transportation planning process. The dynamic order allocation functionality “is closely integrated with automated shipment planning.  Eyefreight gives us the ability to dynamically allocate customers to breweries or to create stock transfer orders based on customer sales order mix and available stock levels at the various locations. This allows us to make strategic decisions about optimizing costs whilst maximizing customer order fulfilment.”

Because of Heineken’s success with this project, they are in the process of rolling this solution out to other operating companies while using greatly improved transportation data to continuously enhance their freight management capabilities.

The TMC solution set is on a similar journey. TMC offers a global TMS platform called Navisphere. Over the past year, Navisphere has been enhanced so that their platform can also offer order and inventory management managed services.

A few other 3PLs offer similar services. This is often an inbound freight management solution that is particularly popular in the Auto industry. In automotive, it is common that Tier 1 suppliers will have a Kanban warehouse in close proximity to an OEM warehouse so that the Tier 1 supplier can make just in time deliveries to the factory. The warehouse is tasked with keeping a specified amount of days inventory coverage in storage. 3PLs, in addition to doing the route planning, order the inventory when the warehouse inventory runs low.

But according to Jordan, what TMC is doing is more complex. “In automotive, the plan for every part (PFEP) process is kind of a holy grail. This is something that is more discussed than achieved.” To introduce a PFEP system, a company needs to understand everything about every part: How each part is purchased, received, packaged, stored, and delivered to its point of use. “PFIP is not easy. The demand for parts is cyclical. Materials replenishment sits separate and upstream from transportation in many companies. It is siloed. Transportation seeks to maximize the cube. To do that you have to look at the available inventory, customer demand, and transportation.” To achieve the lowest landed cost, at inventory days of supply needs at the warehouse to be adjusted regularly and transportation strategies – milk runs versus multi-stop deliveries – also need to be adjusted.

In conclusion companies, can lower their freight spend by working with a TMS supplier or a managed services provider. There is evidence that both types of companies are improving the transportation solve by jointly optimizing across inventory and transportation.

Guest Commentary: The 4 Building Blocks of Inventory Visibility

Guest Commentary | By •

Achieving inventory visibility across the enterprise and extended supply networks has been a goal for supply chain professionals for over a decade, but achieving true visibility is no easy task. As recent analyst research indicates, while supply chain visibility is very important to almost all companies, there is a large gap between the importance of visibility and their ability to provide it to their organization.

Most attempts have failed when trying to bring together all of the disparate data sources that comprise today’s supply networks into a single, actionable view. As I detail below, there are four co-dependent capabilities required to achieve the desired visibility and the ability to react in a timely manner: internal, site-specific inventory views; external multi-enterprise inventory views; communication vehicles; and execution capabilities.

Internal Sources
At first blush it would appear that visibility to internal inventory would be easy to achieve. After all, it is all under our control, right? Well, yes and no. The problem: too many different places where inventory resides and too many systems that track it.

Many enterprises have one or more ERP systems that track inventory at a high level for financial purposes, but those systems do not track where the inventory is physically located. Often, multiple distribution systems – WMSs and TMSs, primarily – track inventory at, or in-transit between, specific locations. But these systems often aren’t integrated to provide a single consolidated view of enterprise-wide inventory. Additionally, there may be many small storage locations that are not automated. For example, many food and beverage companies have small storage facilities near retail markets for fast, easy access by delivery drivers. And of course, retailers have the bulk of their inventory on store shelves, but often not good visibility into what is actually in each store and where.

External Sources
It is rare today to find vertically-integrated corporations where all inventory resides within the enterprise. Most companies have many suppliers who provide finished goods, components or raw materials that all need to be monitored and tracked. Many also use contract manufacturers, co-packers and/or third party logistics providers as integral parts of their extended supply networks. And companies that supply retailers have much of their inventory tied up in those retail locations.

Unfortunately, the inventory located in all of these external locations is usually not visible across the supply chain. Each external company or site typically tracks their own inventory using their own systems. These external systems come from a plethora of sources, built upon different technologies and communication protocols, and hence they do not readily interact with each other. Therefore, trying to pull together a single consolidated view of inventory across the supply network is very challenging. Yet achieving consolidated visibility is essential for management to make intelligent sourcing, order management and fulfillment decisions — as well as to quickly react when disruptions occur.

Communications
Thus, having communication capabilities that can gather and translate inventory information from all internal and external sources is crucial to a successful inventory visibility program. Success requires a means for gathering data from multiple internal and external sources, which may include direct computer-to-computer communications, input from web portals, or EDI network transactions. Cloud-based connectivity applications can be especially helpful in gathering inventory information because they enable simultaneous input from many sources, such as from your network of tier 1, 2 and 3 suppliers. Mobile devices can be used to gather inventory data from small, non-automated locations.

As you gather the data, you will also need translation technology that can recognize the disparate input formats and protocols and translate them into a common input stream for use by your processing systems. The translation technology becomes the hub of your trading partner network, synchronizing data and workflows so all parties can leverage the information to better serve customers.

Execution Capabilities
Companies require supply chain visibility so they can react to changes quickly, whether those are evolving market conditions, supply disruptions, or demand volatility. Supply chain executives are now looking beyond the basics of ‘right product, right place, right time’ and are looking to develop responsive and resilient supply networks.

Responsive and resilient supply chains demand execution systems that are built to be adaptive, beginning with event management and alerting capabilities for immediate, proactive response to disruptions or other supply problems. Next, WMS and TMS systems must be able to quickly react by resourcing or repositioning inventory and re-optimizing shipments. Finally, near real-time analytic systems are required to uncover supply network trends and sources of problems for immediate action by decision-makers. It is only through this ability to “see” across your supply network and take action accordingly that inventory visibility becomes an effective business tool.

Jim LeTart has over 30 years of sales and marketing experience in the systems technology field. He has spoken at numerous national and regional trade events and his work has been published in many industry publications and blogs. For the past 13 years Jim has been Director of Marketing for RedPrairie, a leading best-of-breed supply chain, workforce and all-channel retail solutions provider, where he has responsibility for corporate messaging and content development. Jim has an Industrial Engineering degree from Marquette University and an MBA from the University of Michigan.

O’Reilly Auto Parts Uses Distribution Excellence to Differentiate Itself

Inventory Management | By •

On August 30th, O’Reilly Auto Parts gave a presentation to financial analysts from one of its distribution centers (DCs) in Kansas City, Missouri. This signaled that the company considers distribution excellence to be a core differentiator, a message that comes out loud and clear when you look through the presentation the company gave.

O’Reilly Auto Parts is an auto parts retailer with $5.6 billion in sales over the past 12 months. The company has more than 3,600 stores in 30 states and over 49,000 employees. O’Reilly serves two markets: Do-It-Yourself shoppers, folks who like to fix their own cars; and Do-It-For-Me, auto repair shops and service centers that fix cars for customers.

The Do-It-Yourself market has lower service levels. If it takes several days to get a part in, that is good enough. The Do-It-For-Me segment, however, is less forgiving. Ideally, an auto parts store will have the part right available when a customer comes in for service. But there are so many old cars on the road (new car sales have fallen from 17.5 million cars in 2005 to 11.5 million in 2010) and so many models (imports have increased greatly over the years), that having every stock keeping unit (SKU) in available at the retail outlet level is impossible. So part of O’Reilly’s competitive differentiation is enabling next-day delivery from its DCs to its stores.

To support this distribution model, O’Reilly needs a lot of DCs – the company has twenty three. O’Reilly considers these DCs as “state-of-the-art facilities” with “advanced material handling equipment, progressive slotting and picking technology.” Its current warehouse network is capable of supporting 550 more stores before the company has to invest in new facilities.

To complement the advanced warehousing, O’Reilly has robust delivery capabilities. As of the date of the presentation, the company has a private fleet of 483 tractors and 540 trailers that it uses for five-night-a-week delivery to all stores in the continental US. In addition, O’Reilly’s DCs are located in metro areas. For stores located in a metro area that includes one of its DCs, the company offers multiple deliveries per day.

O’Reilly also competes based on having broad inventory coverage. The company stocks an average of 118,000 SKUs with a total of 156,000 unique SKUs in stock. This is a multi-echelon model; most DCs are linked to multiple master inventory DCs. O’Reilly also has 314 strategically placed master inventory “hub” stores that carry an average of 17,000 additional SKUs. These hub stores can provide surrounding stores with same-day access to expanded inventory.

Ideally, service performance should not come at the expense of bloated inventory levels. O’Reilly has taken steps to make sure that doesn’t happen. The retailer uses Manhattan Associates’ Inventory Optimization solution (Manhattan Associates is an ARC client). In its second quarter financial call, O’Reilly’s CFO said the following:

“Year-to-date, we’ve opened 87 new stores with an increase of inventory of only $12 million. On a per-store basis, inventory at the end of the quarter was $557,000 versus $567,000 per store at the end of 2010. We expect to see continued reduction in our per-store inventory within the next few years. For this year, we continue to believe we can add 170 new stores with only a small increase in gross inventory.”

It is worth mentioning that spare parts inventory creates a particularly difficult inventory optimization problem. It is much easier to forecast an SKU’s demand if it comes in large numbers. Spare parts have what Operations Research folks call “an intermittent demand profile.” Special math is needed to forecast intermittent demand.

In short, distribution excellence is part of O’Reilly’s core differentiation. Because the company services the Do-It-For-Me market, the Do-It-Yourself-ers benefit with higher service levels. Further, O’Reilly’s extensive distribution network provides significant barriers to entry to competitors hoping to compete in the Do-It-For-Me segment. Warehouse automation and inventory optimization helps to ensure that high service levels don’t come at a high cost to the consumer.

It’s very cool that the company chose a distribution center to give its financial presentation. I love visiting DCs; I’m not sure how the financial analysts felt about it.

Guest Commentary: Inventory–Not What It Used To Be

Guest Commentary | By •

Remember when inventory was just something off the production line stored in a warehouse until it was pushed out to customers? In the past, companies worried about how much safety stock to keep, along with inventory turn rates and the associated carrying costs, but the most important thing was keeping production lines running, driving the most efficiency one could from the machines.

Fast forward to today, and those production lines are likely halfway around the world. The machines belong to third parties. The whole idea of inventory storage is being replaced with processes and technology to direct and speed inventory flow. Warehouses are being converted to cross-dock, mixing center and flow-through facilities. And most are challenged with direct-to-store and direct-to-consumer distribution as well.

Storage is out, and flow is in, from anywhere in the world to anywhere in the world. Life is a whole lot more complicated for supply chain professionals.

What does all this mean? For one, concerns about safety stock, turn rates, and carrying costs are taking a back seat to agility needs, and meeting ever-changing customer demand. That’s not easy when it takes 22 days just for an order to sail to the U.S. from China. After decades of buying technology to reduce safety stock and carrying costs, we have more of it than ever, spread across much longer supply chains.

Business today has to react more quickly to demand, despite longer supply chains. There’s also more competition and price pressure, so whatever anyone does to make it happen has to drive out costs.

The answer isn’t simple, but certain basic things have to happen. To start, we need to recognize that flow and silos will never work together. Most people know this, but change is often difficult to realize since performance metrics and reward systems are still based on those silos. Optimizing one part of a business might de-optimize another. Supporting flow requires a strong leader who can change the metrics and reward systems to foster cross-functional processes that obliterate the silo mentality.

Technology has to support flow as well. Industry platforms have to facilitate flow across each trading network. Retail platforms, consumer goods platforms, high tech platforms – flows are different for each industry. These platforms need underlying technology based on services-oriented architectures and Web services to support network-wide visibility and the ability to quickly adjust mid-stream to meet customer needs. The good news is these systems exist.

No, inventory isn’t what it used to be. And neither are the organizational structures, processes and technology needed to support the new flow paradigm. But we have no choice and it’s going to be a lot of fun getting there anyway. So let’s go do it.

Jim LeTart has over 30 years of sales and marketing experience in the systems technology field. He has spoken at numerous national and regional trade events and his work has been published in many industry publications. For the past 11+ years Jim has been Director of Marketing for RedPrairie, where he has responsibility for industry marketing, analyst relations and association partnerships. Jim has an Industrial Engineering degree from Marquette University and an MBA from the University of Michigan.

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