As I work with many senior supply chain executives, a common question I hear is: how can we be viewed more as margin contributor and less as a cost center?
The question isn’t surprising given the current economic environment. While as a whole the economy is performing extraordinarily well, there are underlying challenges the industry faces including intense competition, rising inflation, labor shortages, and soaring transportation costs due to capacity constraints and fuel increases. Add to that pile the uncertainty surrounding tariffs and it’s easy to see why senior financial executives remain cautious about future profit forecasts.
In this ever-dynamic industry, what’s the role that supply chain plays and how do we shift the conversation from cost center to margin contributor?
Wilhjelm Says... |
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| Nowadays, supply chain organizations are also sales enablers in a fierce battle for consumers’ hearts and wallets. |
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The Past
I think it’s safe to say that in the past supply chain’s role was to get the product from point A to point B as quickly and – more importantly – as economically as possible. Most retail organizations – particularly merchant organizations – believed that “if you buy it, they will come.” With money being cheap, the path to profitability was simply a factor of opening as many stores as possible, stocking them with as much inventory as you could, and letting top line growth lead the way.
Meanwhile, wholesale distribution organizations were rallying to a similar cry: “if you stock it, they will come.” The idea was that you beat the competition by stocking more lines than they did, as all customers seemed to care about were are price and service levels .
For both retailers and wholesale distributors , supply chain’s marching orders were similar: get it there quick and get in there cheap. You were measured by cost as a percent of sales. Supply chains were architected around how senior executives were incentivized, resulting in long, slow, and typically unresponsive supply chains.
Now
So how did we get to where we are now? We’re seeing record store closings while digitally native vertical brands are popping up all over the place and experiencing unprecedented growth. Does that mean retail as we know it is dying? Far from it. As astutely conveyed in a recent webinar conducted by IHL Group, retail has actually grown at a rate of 4.5% in 2017 and through July of 2018, has increased 5.5%. This is a far from the “retail apocalypse,” as noted by the IHL Group in "Retail’s Radical Transformation/Real Opportunities."
In the wholesale distribution space, we are witnessing organizations configuring their operations to offer more retail-like fulfillment capabilities to their customers. Apparel brands are bypassing retailers altogether by opening their own stores and by selling directly to consumers on exchanges like Amazon and Walmart. Retail isn’t going away; in my opinion, it’s fragmenting as the traditional lines of retail are being blurred by other providers.
So, what has changed and how did we get here? While there are a multitude of explanations from technology to competition to the well-publicized Amazon effect, at the end of the day I think it comes down to the fact that consumers’ expectations and consumer behavior has changed.
The Future
Today’s fast fashion is a perfect example of changing consumer behavior and demand. The typical fast fashion retailer’s products are relatively inexpensive and they change their assortment frequently.
With lower price points, the consumer, typically a younger demographic, can change their style frequently and not break the bank. The impact to supply chain, however, is dramatic. In the fast fashion example, the typical lead time from idea to shelf went from 6+ months down to 3 weeks as noted by IHL Group.
Fast fashion isn’t alone as all supply chains are seeing pressure to compress lead times. The days of the long, slow, low cost supply chains are no longer sustainable for most industries. At one end of the supply chain, you have consumers demanding products cheaper and faster than ever before across multiple platforms. At the other end, lower price points combined with rising transportation costs and the end of cheap money are leading to the potential erosion of profits. I believe therein lies the opportunity for supply chain.
The Opportunity
With the days of the long, slow, cheap supply chains coming to an end, supply chain professionals are suddenly thrust into the spotlight to perform what seems – on appearance alone – to be impossible. They must not only improve service levels while reducing costs but also contribute to top line revenue growth through in-store and in-stock availability. Gone are the days when procurement and merchant organizations alone competed for market share. Nowadays, supply chain organizations are also sales enablers in a fierce battle for consumers’ hearts and wallets.
They are fighting the fight by ensuring stock is on-time and complete. And while there are countless tools to improve visibility, execution and inventory integrity, at the end of the day it will be incumbent upon the supply chain professional to traverse across these various systems to produce the winning combination of speed, low cost and higher margins. And now I insert the requisite cliché, “within every challenge lies opportunity.”
Side Note
As I wrote this article, Gartner just announced its top 25 Supply Chain Graduate programs. It doesn’t seem that long ago there weren’t 25 supply chain undergraduate programs, period, much less 25 graduate programs. I believe human capital, along with technology will be a big part of the equation moving forward.
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