Thursday, August 27, 2015

Tauber Institute Video

Here's a nice video describing the organization I now lead. As always, feel free to reach out if you want to connect about this.



[With apologies for going off-topic.]

Monday, August 24, 2015

Wal-Mart omnichannel strategy: ship from store or ship from FC?

We are hearing more and more about omnichannel retailers implementing store-fulfillment models: customers buy online but the products are shipped from retail stores. The purported advantages of this are many: the store network has lower average distance to the customer than the fulfillment center network, so customers can get it faster; ship-from-store allows for inventory pooling between the store and ecommerce channels; ship-from-store enables easier inventory rebalancing when some stores are overstocked and others are short, etc.

However, there are disadvantages as well. The operational cost of fulfilling ecommerce orders is far cheaper in fulfillment centers, because of labor and process efficiencies. Fulfilling from FCs also allows for inventory pooling across different regions that generate ecommerce orders.

So which is better? The answer, of course, depends on a number of retailer-specific factors such as demand characteristics, cost structures, etc. At Ross we're conducting research on this very question, although that is still premature. However, here's some evidence from the country's largest omnichannel retailer about how these costs may play out. From an article from WSJ:
Greg Foran, chief executive of Wal-Mart U.S., said on the company’s earnings call Tuesday that the company has been holding more of its inventory at distribution centers rather than in the backrooms of its stores, a strategic choice that gives the retailer more flexibility in meeting demand.
Wal-Mart reported that inventory grew 2.2% from a year earlier, slower than its sales, which grew 4.8%, or by $3.4 billion, in line with its goal of shedding excess inventory.
Supply chain experts say this is a necessary move as Wal-Mart increasingly embraces e-commerce and what the retail industry calls an “omnichannel” strategy, in which companies make the inventory across all their warehouses and stores available to all customers, both online and offline.
By keeping smaller amounts of a wider variety of goods at distribution centers, Wal-Mart can make products available to customers without having to stock the items in every store, said Kevin O’Marah, head of research for supply chain talent development firm SCM World. And if customers want an item in a distribution center, it can be shipped quickly and more efficiently than if a store employee were to ship it. 





Tuesday, August 11, 2015

Analytics, Personalization, and Omnichannel

We've known for a while that everything we do online is tracked, there is no privacy, etc. From a retailer's perspective, we've also known that if the retailer knew who exactly was on their website, they'd be able to personalize content much better and therefore drive higher sales. What I hadn't realized was how far along we are in this quest, particularly for retailers who are not only online. From InternetRetailer.com, here's something about Neiman Marcus:
The company states in its filing that personalization and making the most of customer data have been key to continued online growth. The company says it can attribute 90% of its overall revenue to specific shoppers, which enables it to create detailed profiles of many customers.
“We are able to associate substantially all browsing behavior on our digital platforms with unique individuals,” the company states in the filing. “By aggregating this data and employing advanced analytics, we are able to generate a single view of these customers' engagement with our brands. We utilize this data to enhance the interactions with our customers when they are in our stores and personalize the presentation of merchandise to our customers when they shop online.”
90% of revenue is attributable to specific shoppers! I continue to be amazed at the speed at which these changes are spreading in the industry. More opportunity for research, and more opportunity to integrate this stuff into my teaching.

Thursday, August 6, 2015

More robotics in ecommerce fulfillment

From Re/code: apparently Louis Borders, the guy behind both Webvan and Borders, is planning a new robotics-based fulfillment system for groceries. Money quote:
In Borders’s vision, less than 10 percent of orders will be touched by a human; the rest will be picked and packed exclusively by a robot army. The model has the potential to drastically reduce operating costs by 50 percent while improving delivery times, Borders said.
Unfortunately the story has no description of the actual robotics technology involved, so we'll have to wait and see. Labor costs in ecommerce fulfillment are known to be very high, particularly in groceries as documented in our study, so the opportunity for improvement via automation is certainly high.  Another interesting side note here is that another alumnus of Webvan was Mick Mountz, who went on to create Kiva Systems, the Roomba-type robotics system. Amazon then purchased Kiva, and from what I understand, Amazon's competitors are no longer able to get new Kiva installations. And more trivia: the Borders bookstore chain was of course started in Ann Arbor, and the CTO of Kiva is a UM alumnus who has frequently delivered talks in my class.

Monday, July 27, 2015

Amazon drive-through: the why and the what next

As has been widely reported today, Amazon may be soon opening drive-through locations for customers to pick up groceries and other items (first reported by Silicon Valley Business Journal, also CNBC, Telegraph, Fortune, among others). This has not yet been confirmed by Amazon, and we will update as soon as we have confirmation (or denial). In the meantime, I want to spend some time walking through why this makes sense, and what might come next.

I had predicted in April of 2015 that Amazon would do this, and outlined a number of reasons. I'll expand on that logic here. Many of the numbers quoted here are based on my white paper with Paul Weitzel of Willard Bishop, the research for which gave us deep insight into the cost structures of ecommerce distribution logistics as well as shopper preferences. So here goes:

Home delivery is costly: From our estimates, the "last-mile" cost of delivering to the shopper's home a typical grocery order is somewhere between $10 and $15. This is for a "typical" basket of approximately 50 items, valued at approximately $160. There are additional other costs as well, such as picking and packing. The amount the customer pays depends on the specific program, but I'm not aware of any program that charges more than $10. So this is a money-loser. In fact, it has been reported often that Amazon's overall shipping system is also a multi-billion dollar money loser, so this is not a surprise that Amazon wants to try and move away from the home-delivery model.

In contrast, with drive-through, the last mile cost is transferred to the customer. The retailer (Amazon) only needs to bring items in bulk (multiple orders) to the pickup point, which is what supply chains and distribution systems are optimized for. My estimate is that that would cost close to $1 for the same order (though picking and packing costs would still need to be added). This is a huge deal: the last mile is the most expensive, and drive-through transfers the last mile to the shopper.

Home delivery is inconvenient, particularly for groceries: Groceries are perishable, and often need to be kept in temperature-controlled conditions and safe from pests. Leaving a grocery order on the doorstep is typically not an option. With home delivery, this means the shopper needs to be home to receive the order (inconvenient), or the delivery arrives when the shopper is not at home and needs to be rescheduled (costly and inconvenient). With drive-through, the order is ready and waiting in climate-controlled conditions, and the shopper can pick up at their convenience. This is why my family has been using grocery drive-through for approximately 5 years now, through our local grocer Busch's.

Market exists: In our survey in the same white paper, we found that 65% of shoppers would be willing to pay $3 or more for drive-through pickup. Also, 65% or so would be willing to purchase from a drive-through service that had their order ready within 3 hours. This is from a nationwide survey of all US adults, suggesting that there is a huge market potential for such as service. Americans love their cars. Big urban centers notwithstanding, most spending power in America is in the suburbs. Drive-throughs already exist for many other services that we've all used: fast food, banks, pharmacies, etc. In Western Europe and East Asia, drive-through systems for groceries and other omnichannel/ecommerce systems are already in place.

Competition: Continuing on the theme above, similar systems are popping up in the US also. Among the major retailers, NordstromWalmart, Kroger, and Meijer are all testing drive-through pickup services on their own. Perhaps even more interestingly, many others are partnering with third-parties to set these things up. The most interesting appears to be Curbside, which claims select locations of Target and Best Buy among their retail partners.

Much has been made of brick-and-mortar retailers' ability to compete with Amazon using their store network. This has usually focused on ship-from-store capability, but with click-and-collect models (drive-through or walk-in pickup from stores), these retailers have the potential ability to satisfy customer orders very quickly and cheaply, much quicker and cheaper than Amazon's fast-increasing warehouse network would on its own. I'm sure Amazon is fully aware of this, and this is part of their response.

So what's next? First, let's remind ourselves that Amazon has not yet confirmed this. But even if it turns out to be a red herring right now, the reasoning above still stands and I still expect to be on the right side with my prediction in the next 20 months. But if it's true, here's what's going to happen.

There is going to be a rush by other retailers towards implementing curbside pickup systems. Some, such as Walmart, will expand their own networks. Others will partner with third-parties such as Curbside, because that provides an easy way to offer this capability without investing in fixed costs themselves. Perhaps the third-party delivery systems like Deliv and Instacart will also enter this space.

If I could, I'd invest a big chunk of money in Curbside right now.

Amazon drive-through

On April 13 of this year, I'd predicted that within 2 years Amazon would have drive-through channels. Well, here's a news story suggesting it might be happening soon:

Amazon is planning to open a drive-through grocery store in Silicon Valley, allowing customers to order items online and then collect them from a designated pick-up point at a pre-arranged time.
More as soon as more information is available. Fun!

Friday, July 24, 2015

Macy's, same day delivery, third parties, Amazon

The race to get products faster to shoppers continues, with Macy's announcing that it is partnering with Deliv to offer same-day delivery in many more locations. Couple of thoughts here. First, third-party delivery companies like Deliv, Instacart, Curbside, and UberFresh offer a relatively easy way for companies that are not yet big on ecommerce to engage with it (something we briefly reported earlier here). The physical operations of ecommerce (at least delivery, if not also picking and packing) get outsourced to a third-party; the retailer is able to effectively claim that they offer same-day delivery; and the costs are shared. To the best of my knowledge these operations still make large losses, but with third-parties the losses get transferred to the delivery companies. The stock market is much more patient with Deliv making losses while it scales up, than with Macy's making losses. Of course, the usual risks of outsourcing continue to hold here: losing internal capability, misaligned incentives, increasing costs, etc., and in a few years many of these companies will start in-housing their delivery services.

The second thought is that this race to faster delivery at higher costs is mystifying indeed. From the article above:
Even as Macy's rushes to extend fast delivery, many other traditional retailers are far more cautious. The costs of same-day delivery and ambivalence from many customers remain concerns, analysts say.
Nordstrom has offered same-day delivery for $15 since 2011, but the service is still only available in three markets:Seattle and Bellevue in Washington state, and La Jolla in California.
A January survey of 5,118 online shoppers by UPS and Comscore found that 85 percent of people surveyed were willing to wait five days or more for their delivery.
The thing that's so perplexing about this last mile and same day is that the consumers overwhelmingly prefer free shipping over speed," said Satish Jindel, a logistics consultant and president of SJ Consulting Group.
That could change, said David Bell, a professor of marketing at the University of Pennsylvania's Wharton School, and if consumers became accustomed to same-day service, the result would be an expensive "race to the bottom for retailers" who would not be able to compete with Amazon on the delivery cost.
This is also something we've found, from our 2015 survey for example.

I'll close this post with the following quote from the reporting on Amazon's latest financial results, from WSJ.
Mr. Olsavsky [Amazon CFO, in a call to reporters] also touted Amazon’s use of robotics in its warehouses as a way to lower costs. “We’re using software and algorithms to make decisions rather than people, which we think is more efficient and scales better,” he said. 
I could write a long post unpacking this statement and also commenting on how it relates to our research and educational mission at UM. I probably will, later.