Saturday, February 25, 2012

The Evolving Retail Supply Chain

The US retail industry is in the midst of change which will surely have lasting effects on the supply chain. Although the recession is over, high unemployment and persistent problems in the housing market continue to keep consumers spending in check.

Retailers have responded by closing stores, expanding into new and different markets and launching multi-channel initiatives. Still, rising costs persist and consumer spending remains sluggish. Q4 2011 earnings for such retailers as JC Penney, The Gap and Sears were dismal.  The earnings declines have prompted each retailer to undertake corrective measures. For example, JC Penney is introducing a new pricing strategy and changing its in-store shopping experience by developing mini-shops.  The Gap is closing more than a fifth of its stores in the North America while expanding abroad and Sears is spinning off parts of its business and selling 11 stores.

While Brick and Mortar stores attempt to revive store sales, e-commerce sales are on the increase. According to the US Department of Commerce, 2011 e-commerce sales totaled $194.3bn, a 16.1% increase over 2010. Thanks to the popularity of smartphones and other technological advances over the past couple of years, a new renaissance in online shopping is occurring. As such, retailers are incorporating ecommerce into their overall growth strategy. TJX, parent company of TJ Maxx, Home Goods and Marshall’s, plans to re-enter online retailing after it shut down its US e-commerce business in 2005 due to $15m in operating losses. Dillard’s, a regional department store, invested $4m in Acumen Brands, an e-commerce company that operates 12 specialty shops online. The investment will allow the department store to enhance its web presence. Finally, Nordstrom Inc. plans to invest almost $1bn over the next 5 years to support its e-commerce infrastructure.

All these changes are transforming the retail supply chain. The shift towards e-commerce favors more frequent small parcels which will surely benefit FedEx and UPS. E-commerce is also causing changes within the warehousing and distribution market as many retailers opt to build e-fulfillment centers close to their customer-base. Changes in merchandising mix will also result in the need for inventory and vendor management solutions.

To avoid brick and mortar stores from turning into showrooms in which consumers utilize and then buy an item online at a more attractive price, retailers such as Target are requesting suppliers to provide special, differentiated products for only their particular stores. This strategy will impact sourcing, supplier and inventory networks. Retailers will need to be able to manage these networks carefully or it could backfire on them.

As the retail supply chain changes, logistics and transportation providers are also taking note and are investing in the changes that are occurring within the industry. UPS recently acquired specialized delivery company Kiala to expand its presence in the European e-commerce delivery space. FedEx’s SmartPost service has noted increases in volume due to online sales. The US railroads appear to have benefited as well due to more small parcels and containers being shipped via this mode.