Rising complexity and cost creating pressure to upgrade omnichannel fulfilment capabilities
The need to support omnichannel fulfilment at a time of disruption and high demand for space is creating innovation and focus on distribution networks says new white paper
Supply chains to be more agile, efficient, resilient and flexible to handle a more complex world and an increasingly costly environment for space and materials says a new white paper from Reuters Events Supply Chain and AP Moller Maersk.
The white paper, which is free to download now, highlights that the design of logistics networks is undergoing a fundamental rethink as a result of the huge, and still unfolding, impact of the global COVID-19 pandemic. It has pushed e-commerce demand upwards, while creating numerous disruptions and constraint that have served to increase costs.
The big takeaway from the pandemic is you do need to be far more responsive and agile
These have “Highlighted the complexities that global supply chains have now presented for different organisations,” warns Dr. Jag Srai, Director of Research, and Head of the Centre for International Manufacturing, Institute for Manufacturing at the University of Cambridge. “The big takeaway from the pandemic is you do need to be far more responsive and agile,” he advises.
The white paper recommends that organisations “Fortify their supply chains through creating mutually supporting networks of digitally connected facilities,” in order to cope with these mega-trends shaping the transport and logistics sector while still delivering reliably in an omnichannel environment.
Critical to this will be building a hub-and-spoke model of facilities, which utilise automation and near real-time data sharing. This can reduce vulnerabilities and stock-outs, while increasing responsiveness to demand by reducing the distance to the customer and creating flexibility in inventory, while retaining cost-efficiency within facilities.
A lack of flexibility means vulnerability
The need to move towards this model is driven by a number of factors highlighted by the research.
Firstly, is the realisation that there have been significant vulnerabilities in pre-pandemic supply chain models that meant they could not respond properly as COVID-19 broke across the world.
If you look at 2019 or earlier, the whole thing was around costs: Cheap sourcing, cheap storage, and keeping inventory levels low
The “Biggest change” Bart Van de Vin, Head of Warehousing & Distribution, Europe Region at A.P. Moller - Maersk, has seen amongst his industry partners is an increase in “the flexibility they need.” So much so “that it has become actually more important, I think, than costs.”
This represents a fundamental shift, as “If you look at 2019 or earlier, the whole thing was around costs: Cheap sourcing, cheap storage, and keeping inventory levels low.”
The issue in this pre-pandemic model was that this relied upon all the pieces in the jigsaw fitting together consistently on each iteration of the journey. A small moment of failure, whether that is a key supplier going bust, a port closure, route congestion, or facility closure could potentially spell disaster for a very lean, just-in-time supply chain.
E-commerce creates strains
Secondly, there is the rise of e-commerce, which has created a world where “Some of the fabulous logistics models I've come across are now being able to respond not in three days, not next day, not same day, but in the next two hours,” says Cambridge’s Srai. “That's the typical customer service expectation that the customer has now, in a larger urban environment.”
If you cannot deliver fast enough, [the consumer] will not take the basket to the website’s checkout
However, “What we hear back from our customers is that further online growth brings capacity challenges,” says Naud Frese, Head of E-Commerce Logistics Europe for Maersk, leading his customers to ask “Do I have the right inventory at the right place to serve my customers? Is my supply chain, in that respect, fit for this growth?”
In this new environment “It's all around conversion and retention,” he emphasises, “because if you cannot deliver fast enough, [the consumer] will not take the basket to the website’s checkout.” The modern consumer is quick to note that “if the price is similar, but the delivery is faster at Channel A, B or C,” then they will put their money where the convenience is and that business will be lost, perhaps permanently.
Inflationary pressures driving change
Thirdly, there is cost inflation now ripping through supply chains.
“The COVID tail has” created an “impact on materials inflation in a big way,” says Arjun Varma, Global Director, Supply Chain & Head of Strategic Capacity Management for cosmetics giant Beiersdorf AG.
Disruptions in upstream suppliers have been seen in everything from lumber to microchips and then transportation has also been heavily disrupted in both container shipping and trucking shortages.
“From a supply chain continuity standpoint, of course, there's more volatility in the supplier ecosystem, which demands its own level of actions around mitigation and in resilience,” explains Varma, meaning many are asking “how do you continue to derive cost efficiencies out of the supply chain” even in the current difficult circumstances?
Frankly, the, the warehousing property market at the moment is like nothing I've ever experienced
Then there is also cost inflation in warehousing, where space is in extreme demand right now as a result of e-commerce growth and rebalancing of distribution networks.
“Frankly, the, the warehousing property market at the moment is like nothing I've ever experienced,” says Kevin Mofid, Head of Industrial Research for Savills. “The demand for warehouse space has grown exponentially, and the availability of warehousing … has declined at the fastest pace we have ever seen. Developers are building more warehouse space, but they can't build it fast enough.”
All of this means that although supply chain cost, efficiency, predictability and reliability has always been a competitive advantage, that edge is now emphasised in an environment that is speeding up, but most definitely not simplifying.
A move to a new model
The emerging dynamics are putting renewed emphasis on distribution network design and functionality.
Now, modern day warehousing and logistics is often the cutting edge of that supply chain conversation
“Some time ago warehousing was a bit of a dead subject,” remarks Dr. Srai, “but now, modern day warehousing and logistics is often the cutting edge of that supply chain conversation.”
Van de Vin has noted the change as well, finding that the “Last six to nine months or so much have been more focused on innovation” within distribution centres.
They basically put their blockbuster goods deeper into the supply chain, closer to the consumer, and they serve their longtail type of goods from a central positioning
The move now is towards a hub-and-spoke approach. This is “A real trend we now see happening in the market,” says Maersk’s Frese, “where brands want to make sure that they can ship faster and deliver better on consumer expectations. So, they basically put their blockbuster goods deeper into the supply chain, closer to the consumer, and they serve their longtail type of goods from a central positioning. So, taking Europe as an example, you would have your central DC in Belgium, but then you use nodes or hubs say in Spain, Italy, UK, maybe even Germany, but of course, also going east in Poland or in Czechia to basically speed up the delivery to your consumers.”
The model allows goods to sit nearer customers and for mutual support between the different nodes when exceptional events occur, or for when excess capacity is required. Risk is also reduced because there is more capacity to handle high volumes or a large range of SKUs without overburdening any one section of the network.
Future networks will be automated and open
Then inside the facilities themselves, automation and connectivity are becoming key to making this approach work, especially when space and working capital is at such a premium.
Maersk’s Frese advises that in a multi-facility network “The new model brings in potential inventory challenges … because I would basically have to take in more inventory or more working capital into my supply chain.”
You need to have a good setup of distributed order management
Therefore, you need to do “two things: One, to provide the right on-time visibility of inventory, so you know what is sitting where. But that doesn't nail it yet because you also need to have control. You need to have the right order management system to basically enable you to control your sales order.”
He recommends that “you need to have a good setup of distributed order management, which means when an order comes in … then basically the system and the technology looks and says ‘Okay, where can I best fulfil this order?’ It then distributes that order to the right fulfilment node, to the right fulfilment capability … to keep it as fast and as economical as possible.”
The intention of them is, of course, to have concurrent visibility across our entire supply chain
Beiersdorf is taking the technology-first approach Frese recommends. It is now “Running a digital transformation program in the organisation,” says Varma, “and this digital transformation is across different elements of supply chain,” covering “planning, master data warehousing, and strategic supply chain management.
“The intention of them is, of course, to have concurrent visibility across our entire supply chain,” he explains, so that as a supply chain planner, he can “have really clear visibility of our inventory at any point in time.”
This will help them “To understand how we can deploy and redeploy inventory and take tactical decisions.”
Automation is also central to their transformation. Varma says that they are looking to “Use automation to improve the speed and velocity in the warehouse of different operations with minimal investment in people needs, especially in Europe, where we are now just investing in large-scale warehouses and we are trying to have highly automated internal working systems,” such as “narrow aisle racking, and heavy Sequence Retrieval Systems (SRS).”
There's no boundaries to what we will look at. It's just got to deliver on the efficiency, cost and, obviously, payback.
Nestlé have similar goals in their automation initiatives. “One big thing was we wanted to drive a high level of throughput,” notes Andrew Shaw, Supply Chain Director, UK&I for the consumer giant in the paper. The pressures outlined above have led them towards using automation to enable “a smaller footprint, by driving more stock through it more quickly, so the speed at which you can bring pallets in and out,” is beyond what is possible through a purely manual operation.
“There's no boundaries to what we will look at,” says Shaw, when it comes automation. “It's just got to deliver on the efficiency, cost and, obviously, payback.”
The end result of investing into this kind of automation, visibility and network design is a logistics network fit for the future that is equally adept at serving customers in-store and delivering to their homes.
Doing so will require a smart top-down approach that can evaluate where customer demand is, and will be, as well as where the appropriate supporting infrastructure is situated, but the rewards are clear. There is enormous value from efficiency, sustainability, customer satisfaction and profitability standpoints in investing into an efficient, resilient, flexible, omnichannel logistics network the white paper concludes.
The Why is greater flexibility in warehouse and distribution operations so critical to omnichannel supply chain performance? white paper is completely free to download now and can be accessed here.