Retail supply chains in the age of Amazon

retail supply chains amazon

Have you ever thought about what goes on behind the scenes when you buy something in a store or online? How was the product designed, built, packaged, shipped, and delivered to the point of purchase?  

Welcome to the retail supply chain. The supply chain is the sourcing, manufacturing, packaging, transporting, warehousing, distribution, replenishment, and “final mile” delivery arm of a retailer.  

When retail evolved in the US, manufacturers refused to sell directly to retailers. This required retailers to buy from third-party distributors. In the 1950’s Carl Buchan, the founder of Lowe’s, decided that he was tired of paying the high markup charged by the distributors and created Buchan Supply Company. Buchan Supply Company would buy directly from the manufacturers and “sell” to the Lowe’s retail stores. This was the forerunner to the retail supply chains that we typically associate with “house of brands” retailers. Sam Walton would later adopt these ideas and build the most comprehensive retail supply chain network in the world for Walmart.  

Catalog retailers grew earlier as Sears, Montgomery Ward, and JC Penney became household names thanks to their mail-order catalogs. These companies leveraged a central distribution model and would deliver directly to the customer bypassing general stores and distributors. This was the forerunner to the modern-day eCommerce distribution model.  

Specialty retail and private (house) brands add another dimension to the supply chain. Private brands require the supply chain to work with designers and merchants to find sources of manufacturing and materials for products. While the retailers do not typically own the manufacturing plants, they must ensure their network provides adequate manufacturing capacity and raw materials flow.  

Historically, retailers typically treated the supply chain and the direct-to-consumer networks as separate entities. As such, “channels” emerged. As we entered the late 1990’s it was not unusual for a major retailer to have a store channel, a mail-order channel, phone sales channel, and an emerging online (eCommerce) channel.

Today, the retail supply chain is facing mounting pressures driven by companies such as Amazon and Alibaba.  Leveraging digital technologies, these giant marketplace retailers manage massive, complex distribution networks that offer unparalleled delivery capabilities. Two-day delivery has now been upstaged by same-day delivery, with promises of two-hour delivery in certain markets.  

This level of service is achieved through massive scale of physical distribution facilities, a foundation of analytics to drive the positioning of inventory, robotics to automate the picking and packing of products, and flexible “final mile” delivery options including Fedex, UPS, USPS, and now company-owned delivery (such as Amazon Flex).   

Now let’s focus the next part of the discussion on Amazon and its impact in the United States. There are roughly 214 Amazon distribution facilities in the United States. Through these facilities, Amazon is able to provide 2-day delivery on over 20 million SKU’s to most of the country. In roughly 30 metro areas Amazon will deliver orders placed in the morning prior to 9 pm the same day, 7 days a week, 365 days a year. This puts almost 40% of the population of the US within Amazon’s same-day delivery window. Adding to their network, Amazon’s acquisition of Whole Foods added 450 additional locations across the US but these are not being leveraged as fulfillment nodes – at least for now.  

Traditional retailers may look at those facts and wonder how they can compete. But consider some of the following facts. In the US alone Walmart and Home Depot operate 140-150 and 60 distribution centers respectively. But this only tells part of the story. There are over 5,000 Walmart retail locations in the US and roughly 2,000 Home Depots. In other words, Walmart has more than 3,700 locations containing inventory, nearly 17 times more than Amazon. Home Depot has almost 10 times the inventory locations. While these locations do not have all of the products offered for sale at Walmart or Home Depot, one could make the same argument for Amazon’s locations.   

The point is there are massive opportunities for traditional retailers to use their scale provided by retail locations to find new ways to fulfill customer demand. This requires the retailers to integrate channels and systems that have traditionally been separate. It requires this integration to be real-time, all the time. By doing this, the inventory within the retailer becomes totally fungible and can be used to fill customer demand, regardless where it originated. Building flexible and responsive connections with third-party delivery agents provide the final ingredient to get the product to the customer within the timeframes desired.  

For specialty and private brands, there is even more to consider. These retailers have control of their supply chains all the way through the manufacturing process. In other words, they dictate their own capacity. As such, a common concept used by these retailers is “read, react, and chase.” Simply stated, the retailer “reads” what is selling and where, they “react” by moving available inventory to the places where demand is best, and “chase” demand by pulling in as much additional inventory as their supply chain can build.  

What if these retailers could create even tighter integrations with their manufacturing providers? Not only could it provide the ability to “chase” more inventory, it could open up very interesting opportunities in terms of product personalization. For example, monogramming apparel, creating total unique color combinations or fragrances, and customizing options. While these are possible today, the time to produce the products takes a long time. With tighter integration driving great transparency, pre-staging of inventory components, and innovative delivery capabilities, retailers can begin to offer customers personalization options unimaginable just a few years ago.  

Retailers are at a point of inflection. The traditional multi-channel operation does not provide the customer the level of flexibility and convenience that has been delivered by Amazon. As Amazon begins to build their own brands and create unique designs, the traditional retailers’ last bulkheads will be eroded. They will be totally vulnerable.  

These retailers have to learn to use their considerable assets in a manner to provide superior customer service. Technology will play a significant role in enabling these new capabilities. Developing smart analytics, automated processes, integrating systems that have not been integrated before, and building and fostering connections with specialty providers (such as delivery agents and manufacturers) will allow traditional retailers to compete.  

In short, traditional retailers now need to step up their supply chain game in order to be viable. Whether they build the capabilities in-house or leverage third-party capabilities, they must meet the customer when and where the customer demands. Make no mistake about it. This is not a battle for simply market share. This is a battle for survival.  

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