What is the internet doing to the supply chain?

Universal supply chain model

We all know that the internet has had a huge impact on our lives but we seldom give much thought to what this is doing to business relationships and the supply chain.

Traditionally the distribution of products from agriculture and manufacturing would be aggregated by wholesalers who distributed in bulk to retailers who sold goods in suitable package sizes to customers who then have their own micro supply chain to end users within their family or business site.

Manufacturers, wholesalers and farmers did not usually sell direct to the public consumer because they had significant barriers to doing so:

1. They have no relationship with the customer.
2. They could have little market penetration due to limited number of distribution sites.  One or two warehouses full of pallet racking in an industrial park does not make for a pleasing customer experience.
3. They were set up for bulk distribution not the small package supply typical of retail stores.

There have always been odd exceptions to these rules.  We have all stopped at roadside produce stalls next to the farm whilst on a country drive.  Manufacturers often have a seconds outlet attached to the factory or warehouse that sells direct to the public, but that was about it.  So what has the internet done that has changed this?

The internet has eliminated barriers 1 and 2.  The internet allows potentially deep connection and relationship between a manufacturer, or any vendor at any point in the supply chain, and the customer of their products (barrier 1).   This is way beyond anything that an old style mail order catalogue could achieve.  The advent of social media is just extending this connection even further and making it more personal.  

The internet also eliminates the need for physical retail store network.  We no longer need the retailer to explain the product to us.  Now when we walk into a retail store we usually know more than the retailer about the product we want to buy, all they need to do is show it to us and ring up the sale.  If all we are doing is going to the retail store to pick up the products we have already decided to buy, then we may as well have them shipped out to us.  Barrier 2 is now gone.  If retail is going to survive then it needs to have new reasons for existing in addition to physical distribution and product advice.

The third barrier is not impacted by the internet and is the hardest, and usually the last one addressed.  That is the organisational changes required to perform small order distribution direct to customer.  For a manufacturer, wholesaler or agricultural producer this means a fundamental change in business operations, marketing and sales that extends throughout the organisation.  Way beyond simply setting up a website and putting up product information and a shopping cart.  It means going from having only a handful of customers who buy in bulk to many thousands, tens or hundreds of thousands of customers who buy in single units and retail packs.  This means customer service, and sales support, individual marketing strategies, credit card payments, all those customer accounts and interactions when things go wrong. It is a fundamental change in business practice, and if you are not ready for it, you will fail.

The addition of an online D2C channel for a retailer would seem to be a smaller step.  After all they already have the customer relationship and the product range, all they need is a website and a distribution infrastructure.  However the number of large retailers who have been slow to embrace this strategy would indicate that this may be a bigger mental hurdle than a physical or business one.

An online sales strategy also requires a significant change in warehousing infrastructure and technology.  Bulk distribution requires pallet racking, and forklifts and stock pickers to pick pallets and cases.  A single order can have hundreds of lines and fill a semi trailer.  By contrast in a typical direct to customer business 20-30% of your orders will have a single line and ship in a post pack.  This requires a change in warehouse layout, picking methods and technology and freight arrangements.  Failure to invest in the correct warehouse processes and systems to support an online eCommerce based business will result in very high cost per transaction  This will result in either an unprofitable business or an over-priced one that will fail to gain traction in the market.

Although the organisational and operational changes required to run a successful direct to customer online business are not simple, they are not new.  They are really a re-use of existing business systems and strategies in a new context and are achievable by any business that sets its course in this direction.

In the universal supply chain diagram I have highlighted four online Direct To Customer (D2C) channels in use today in addition to the traditional customer pick up channel from the retailer.  So it is now possible for anyone to go direct to the customer.  When you combine this with the rise of contract manufacturing you have a powerful combination - isn't that right Mr Kogan?

I have described here what is possible and happening now in the supply chain. However deciding to go direct to your customers will dramatically change your business model and will of course have an impact on your current downstream distribution channels.  If you are a manufacturer then what will your retailers think if you start shipping direct and how could this damage your business in other ways?  

The classic conundrum here is when the retailers service and support for your products is intimately tied to their distribution of your products.  If you go direct, would you put your retailers (and your product support model) out of business?  Would your retailers (and wholesalers for that matter) find alternative sources of supply to their customers? (remember you may not yet have a well established relationship with your customers).  

You must expect that if you decide to compete against your upstream or downstream supply chain partners that this will have an impact on them and they will develop a competitive response.

For this reason traditional retail still works very well in a lot of industries.  This will likely change as the market gets more used to paying for services that they used to get for free.  We will come to understand that when the cost of support is no longer built into the price of the product, we will have to do it ourselves or pay for it when we need it.  Increasingly we get product knowledge and support much better from online resources or by asking friends.  This is not only free but much better.

We are still in the early stages of online commerce and the impact of the internet on the supply chain, new business models are being developed all the time and there is still a lot of room for innovation and change.  We live in interesting times!

If warehousing, logistics and supply chain are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

Global pricing transparency finally forces the big retailers to tackle the big brands

DJs drop their prices as a result of their strategy to harmonise local and international pricing to compete with overseas internet sales.  Some people are asking if we have been ripped off in the past and why didn't they do this before.  

People are blaming DJs but it is not entirely their fault. Yes we have all known about international price discrepancies for as long as we have had international travel (since colonisation). But it was and is the brand owners who were using Australia as a profitable milk cow.

Pricing into a market has nothing to do with the cost of the item and everything to do with how much the market will bear. So if the general market pricing is high then why would you price your products significantly lower than other similar brands? What has forced the change is much greater price transparency coupled with the ability to purchase that the internet has given to everyone globally.

The market is now global and the brand owners local market price gouging strategy is crumbling. Well done DJs for fighting this much needed fight. This is part of the inevitable set of permanent changes to retail that is working its way through the economy. It feels like it's long overdue but the impact of internet sales is still relatively small (5-8%) and recent. Large companies, complex systems and long term business arrangements are slow to react, but at least we are seeing a move.  I am sure the other large retailers are doing the same thing and the mid-market and smaller retailers will get the flow on benefits.

I think another factor going on is the rise of the Australian dollar coupled with the maintenance of prices on some products to maintain local currency relativity.  If the prices on some luxury goods were suddenly dropped to global pricing then previous purchasers may be upset and brand credibility and prestige would be reduced.  The extreme example of this for me is the Porsche 911 which sells here for around AUD$300,000 compared to US pricing around USD$90,000.

I expect the next few years in retailing (and B2B) to be very interesting indeed.

If warehousing, logistics and supply chain are important to your business or your personal career then why not follow this blog by email or on Google+.  To tap in to the full benefits of business and career boosting ideas I suggest you join The Warehouse Performance Initiative.

Think like a futurist or you are living in the past!

The world is changing faster than we can keep up with these days.  Almost every day I read about someone building something that for me is totally unexpected or I can see that it is a totally logical progression, but is happening now rather than several years from now as I might have expected.  You now have to think like a futurist just to keep up because the future keeps happening now instead of in the future where it used to belong.

It reminds me of the Red Queen's race in "Through the looking glass ..." by Lewis Carroll

"Well, in our country," said Alice, still panting a little, "you'd generally get to somewhere else — if you run very fast for a long time, as we've been doing."

"A slow sort of country!" said the Queen. "Now, here, you see, it takes all the running you can do, to

The last mile and the smashing of the power of centralised distribution

How to do the last mile in the direct to customer supply chain has been bothering people for a while now.  With the rapid growth in online sales, there has been a growing use of the workplace as a delivery point for personal purchases.  Whilst this may be fine for the odd delivery or two, it is obviously unsustainable if everybody is doing it, (it doesn’t scale).

I have always thought that the best person to do the last mile was the customer.  After all we are already used to doing it for our store purchases.  We stop for fuel, pick up food from the local supermarket, go shopping on weekends and carry all the stuff home ourselves.  We are now seeing the fight for commercialisation of the last mile hammering another nail in the coffin of retail stores, playing out as we speak.

Why GST free international sales are not killing local retail

With Amazon.com recently being forced to pay state sales taxes in the USA some people are raising the question again about why GST cannot be levied on overseas based online retailers.  Well, this particular issue is a domestic U.S. problem where state sales taxes vary from one state to another and no international borders are crossed, so the problem is a little simpler to solve. 

We also do not have this issue in Australia.  GST is national and is levied on online purchases from Australian companies. The collection of GST on low value purchases from overseas is said not to be economically viable; however I am sure it could be done by data collection from banks, Paypal and other

Three ways to sell online

There are three types of online businesses.  

• The single brand direct to consumer, 
• the direct retailer of many brands and 
• the brand aggregator.  

An example of a single brand would be Apple, or fashion brands like Carla Zampatti, Roman Daniels or specialty boutique brands like Farmhouse Muesli.  The single brand has a unique product story that people seek out because it offers them something they cannot get anywhere else.  This is the strongest and safest strategy, make and deliver something unique that people want and you will never have to compete solely on price.  The single brand has the luxury of being able to choose whether to outsource their logistics because price is less of an issue and their margins are higher.  If their brand has no

The Growing World of Online Supply Chain

Online retail sales were only 5% of all retail sales in 2011 according to NAB  and Australia lags behind the rest of the world, (which is unusual for us). The online retail (and online B2B) market is set to grow rapidly over the next few years and whole new supply chains are going to be established and old ones are going to die (or shrink or adapt) as the traditional retail shop supply chain