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How The Modern Retail Store Is Wreaking Havoc on Wholesalers

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The Connected Commerce Economy Has Changed How Inventory Is Handled

inventory replenishment strategyThe proliferation of digital, not just as a technology but as a connected commerce economy, has had a profound and unexpected effect across the supply chain. Everyone expected that digital technology would make connected commerce faster and more efficient, but few people anticipated the added inventory management complexities that have been created.

Connected commerce has affected change at every echelon of inventory asset management. The ability to shop anywhere at any time ­– combined with in-store fulfillment options like buy online, pick up in-store – has created new opportunities for brands, leading to the rejuvenation of the retail store. As a result of the connected commerce evolution coupled with the exponential increase in promotional events, the modern retailer is wreaking havoc on wholesalers. There is a greater focus on meeting customer demands, and wholesalers will now have to embrace a new set of capabilities to fulfill their role in delivering on the customer value chain.

In this article, we’ll take a closer look at the effect of connected commerce on wholesalers and why they need to develop a customer-centric inventory optimization strategy to improve service levels for their large, tier-one customers.

The Unavoidable Change

The term “customer-centric inventory optimization” may sound nebulous for wholesalers, but inventory optimization is prevalent amongst their customer base. Retailers have been leveraging technology to fine-tune their inventory management for several years. And the science of optimization technology has gotten better in the last few years. As a result, omni inventory optimization has been the lynchpin of the retail store revolution, counteracting the “Amazon Effect.” Retailers are using cutting-edge demand forecasting and inventory optimization to improve accuracy and to prescriptively locate products in stores to deliver the optimal end-user experience – while also orchestrating inventory to maximize profitability. These decision-enablement solutions utilize advanced data science in machine learning and artificial intelligence to efficiently balance inventory with demand, regardless of channel.

Wholesalers are at the threshold of their optimization journey. Many have implemented strategies to manage service levels – inventory segmentation – to support their key customers’ changing business models, but these strategies are not enough. The accelerated pace of change requires a more sophisticated approach in distribution networks to manage the execution of the customer value chain and meet demand, without having too much or too little inventory.

Wholesalers must implement a strategic inventory management solution to facilitate replenishment for their tier-one customers. That, in a nutshell, is a customer-centric approach to key customer management. It is the ability for a wholesaler to prescriptively anticipate the unpredictability of key customers’ selling channels, develop replenishment strategies and then accurately forecast demand – even when it is driven by proliferated promotional events. This gives wholesalers the ability to orchestrate a customer-centric replenishment service levels and execute it seamlessly while keeping inventory carrying cost low.

Over the past few years, there has been increasing interest in suppliers having a more sophisticated, interconnected inventory management network. Retailers and other wholesaler customers have been optimizing their distribution and fulfillment models to closely align with their consumers’ demand and buying behaviors.

Walmart executives recently outlined the company’s plans for tightening the demand, supply and replenishment cycle. To keep inventory low and shelves stocked in its battle with Amazon, Walmart has raised expectations for its suppliers. Now, the company will penalize suppliers for missed deliveries; they will be required to deliver full orders within a specified window, 85 percent of the time or face a fine of three percent of the cost of delayed goods.

Industry experts believe Walmart’s strategy is optimization centric. Walmart wants to order more frequently, but in smaller quantities to balance on-hand inventory against stock-outs.

Balancing Demand, Supply, and Replenishment with Customer-Centric Inventory Optimization Strategy

To balance demand, supply, and replenishment in the connected commerce environment, where customers orders are driven by multiple channels, a customer-centric approach gives wholesalers an entirely new way to forecast demand by customer and/or SKU. The wholesaler gains insight into critical data that helps them isolate, identify and analyze the order patterns that have the most significant impact on inventory to proactively plan its replenishment strategy.

Retail has changed, and now wholesale must do the same.

Rob Nugent has 14+ year experience as a technology sales and marketing manager. He is currently a Senior Product Marketing Manager at Manhattan Associates and is responsible for developing the strategic product marketing direction for Demand Forecasting and Inventory Planning solutions suite. As the platform evangelist, Rob develops and launches customer insights, go-to-market plans, and product messaging. He has a BS from Adelphi University and an MBA from Penn State.

To Understand a Supply Chain, You Need to Model It With Supply Chain Design Tools

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I am slogging through the book “Thinking, Fast and Slow” by Nobel Prize winning economist Daniel Kahneman. The main premise of the book is that the human brain has two systems for thinking: one that is “fast,” uses simple rules, and learns patterns; the other is “slow,” requires great effort, and is the source of greater rationality.

However, because people so often use “fast” thinking, and prefer to use it because it requires less effort, people are prone to making systematic errors. These biases recur predictably in particular circumstances. All of this is a big problem for economics because the field has historically been premised on rational and self-interested market participants.

I, however, was trained in rhetoric in college, on how to use emotional appeals in conjunction with logic to make persuasive speeches. Since then, I’ve never assumed that people are logical. In fact, I assume people are about half logical and half emotional. And after every political campaign, I think I may be overestimating how logical people really are.

So what is the point of this extended introduction? I think it is very easy to talk glibly about supply chain without really knowing what you are talking about. If you really want to understand a supply chain, and the levers that matter and those that don’t, you need to model it with supply chain design tools. Supply chain network design tools used in conjunction with multi-echelon inventory optimization are the core tools.

Supply chain network design tools help companies design a low cost supply chain aimed at satisfying demand at a particular service level. Some of the problems network design tools help to solve include:

  • Understanding the right number, location, and necessary capacity of production and warehousing facilities;
  • Understanding which customer territories should be supported by particular warehouses;
  • Understanding what products should be made by particular factories or sourced from a particular region;
  • Understanding how product should flow through a supply chain; for example, should a product be completely manufactured and packaged at one factory or should there be light finished production facilities closer to customers?

While network design tools can handle inventory costs, “they do so at a high level by using the turnover in a facility and the carrying cost,” says Edith Simchi-Levi, VP of Operations at OpRules. What they cannot do, however, is determine the inventory impact of changes in the network, which is why multi-echelon inventory optimization solutions are also important.

Typically, a small number of potential network configurations are determined using the network design tool, and then the multi-echelon tool is used to look at the different amounts of inventory the different networks would carry. Therefore, network design plus strategic multi-echelon inventory optimization allows companies to best reduce total supply chain management costs across a supply chain network.

Supply chain design projects are, of course, driven by a company’s desire to find ways to save substantial amounts of money. Companies that have not conducted a supply chain design project in several years can expect to reduce supply chain costs by 5 to 15 percent.

But you shouldn’t ignore the ability of these projects to make key executives “smarter.” It is very easy to talk about particular supply chain strategies without fully understanding the ramifications. Once executives have seen the analysis from a network study, they begin to understand the core tradeoffs and supply chain performance levers in a way that is all but impossible without this experience. And in fact, many of the smartest people I’ve talked to in supply chain management work with supply chain design consulting or software companies.

(Note: I want to thank the following people for their thoughts and contributions: Edith Simchi-Levi, VP of Operations at OpRules; Jeff Metersky, VP of Supply Chain at CHAINalytics; Mike Jones, the CEO of St. Onge; Jeffrey Karrenbauer, President at Insight; and Don Hicks, CEO of Llamasoft.)

O’Reilly Auto Parts Uses Distribution Excellence to Differentiate Itself

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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.

“Platform Thinking” at Manhattan Associates’ Momentum User Conference

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I’m just back from Manhattan Associates’ Momentum 2010 User Conference. The theme this year was “Platform Thinking.” Manhattan, an ARC client, has been on a four to five year journey to bring its applications onto a common supply chain platform. Its warehouse management system (WMS) application was just added to the platform this year. The only applications not fully on the platform today are demand planning and inventory optimization.

Manhattan Associates was hurt by the recession last year. This is not surprising based on the fact that a relatively high percentage of its customers are apparel and other upscale retailers that were themselves hit hard by the recession. However, the company posted good growth last quarter. In separate conversations with some of Manhattan’s top executives, all of them said that one key reason the company bounced back was its ability to demo the platform to customers and the value proposition is resonating with them. 

What is included in Manhattan’s platform? I’m not going to review all of Manhattan’s applications, but let’s just look at its core applications:

  • Extremely functionally-rich warehouse and transportation management systems.
  • Demand management and multi-echelon inventory optimization. These Manhattan solutions don’t get nearly as much publicity as its WMS and TMS solutions. It was nice to see two customers at the conference, both auto parts retailers, publically stand up and talk about how they were able to reduce inventory levels while maintaining or improving service levels. NAPA’s goal is to grow by over 50 percent in the next few years without carrying any extra inventory. Uni-Select has implemented the solution in Canada and has reduced inventory by 10 percent with no degradation in service levels.
  • A distributed order management (DOM) system. This system takes customer orders and decides which warehouse is best suited to fulfill them based on inventory, inventory in transit, and delivery requirements. Recent functional enhancements have been added for multi-channel retailers. In order to have a robust supply chain platform, DOM is a critical application. 
  • An interesting new “total cost to serve” analytics application that we’ll write more about down the road.

In most distribution-centric supply chains, the greatest savings will come from reducing system-wide inventory rather than from cost savings associated with more efficient transportation or more productive warehousing. Therefore, it is interesting that Manhattan, as well as other best-of-breed supply chain software vendors, have been more successful at selling WMS than TMS, and at selling TMS than replenishment solutions. However, it is clear that these applications work together and reinforce each other. Without good system-wide inventory visibility, which comes mainly from WMS, you can’t effectively optimize your inventory stocking levels and placement strategies. Once you do multi-echelon inventory optimization, you reduce the inventory you need to hold across your network. This means your warehouses have more storage capacity and potentially shorter travel paths. You also reduce the need to shuttle excess inventory from one warehouse to another, or to take back inventory from stores, which reduces transportation costs. 

A platform needs both applications and an intelligent technology stack. Here are some of the areas where Manhattan has made enhancements:

  • Manhattan’s WMS remains a configurable solution, but recent architectural enhancements and tools should greatly increase its flexibility and the speed with which upgrades can be done. This is something that I addressed in “WMS Architecture and Total Cost of Ownership.” 
  • Manhattan has added mobility capabilities to its platform. This solution is really part tech stack, part light application. Right now Manhattan is concentrating on two nodes: hubs/crossdocks and stores. For example, in a hub warehouse located at a port, a company might not need a full WMS with RF scanners, but rather just light functionality for receiving and shipping. It might not be able to justify an RF-based station and terminals, but would rather just have a few wireless terminals with scanners. In the stores, Manhattan’s handheld terminals could be used for scanning inventory into the store and for a light, store-specific form of cycle counting. Manhattan’s product manager told me they are already getting customer requests for a proof-of-delivery application.

To wrap it up, I particularly enjoyed this event. The customer case studies were very informative, it was great to network with the attendees, and the venue location was perfect (Westin Diplomat in Hollywood, FL). Also, this was only the second time in my fourteen years as an analyst that I’ve managed to talk my wife into accompanying me to a user conference. Now that the kids are older, I hope this happens more often.

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