Richard Jones, Senior Supply-Chain Analyst for IGD, analyses how well retailers are preparing for the era of multichannel supply chains.
Historically, it’s been assumed that food and drink is an industry less likely to be affected by economic fluctuations. Recently, however, food and drink retailers across Europe have been struggling with weak volume demand and increasingly with price deflation as well.
So far, there’s little sign that this deflation is delivering a recovery in volume, so retailers are looking for ways to kick-start market growth. One idea that has gained wide adoption is that of multichannel.
IGD’s latest channel forecasts show that in developed grocery markets, growth will no longer come from the big-box hypermarkets, but from the new, ‘hot’ channels of online, convenience and discount. How that growth will be shared across these new channels varies by market, and while the overall scale of impact on the supply chain is clear, exactly what it will look like is not.
Seeing It From Both Sides Of The Chain
For retailers, the multichannel supply chain has been a key focus for a little while, as they have been making and assembling orders for home delivery, replenishing smaller stores in urban areas, and generally assessing how they can compete with the ultra-lean processes of the discounter.
For suppliers, how multichannel will impact their supply chain has not been so obvious. While some are already being forced to adapt their working processes, for many, the impact has been masked, as changes have been downstream, concentrated within the retailers’ supply chains.
It may be tempting for many suppliers to try to put off the inevitable, but change will come. Avoiding change could be a dangerous strategy, as supply-chain capability is a major driver of overall trading relationships. Not investing in meeting retailer needs could result in some businesses losing out to competitors.
We’ve been looking at what multichannel means for supply chains, to understand how businesses are dealing with the challenge. We contacted both retailers and suppliers internationally to understand what’s happening, and found a marked difference in both attitude and approach.
In the retailer community, the supply-chain challenge is seen as a strategic issue, with 70 per cent saying that they have a long-term plan to tackle it. This is in marked contrast to suppliers, the majority of whom say that they deal with multichannel on a more tactical basis, addressing issues as and when they occur.
Retailers In ‘Better Shape’
This is directly reflected by how well the two constituent groups say they are prepared for the advent of multichannel supply chains as a whole. As might be expected, retailers say they are in ‘better shape’, with 51 per cent saying they are well prepared, and another 31 per cent saying they have started to make progress. Only 23 per cent of suppliers believe that they are well prepared, and another 41 per cent are starting to prepare. However, even for those suppliers that are trying to build a strategy, it is no easy task. Some suppliers say that it is difficult to get clarity on an individual retailer’s plans for the new channels, so they are finding it hard to plan their response.
The Key Challenges
To help provide clarity, we asked both retailers and suppliers about the supply-chain challenges that both felt they were facing in the shift to multichannel.
Distribution and delivery: Historically, multiple retailers have designed their infrastructure and processes to deliver large orders to out-of-town stores. For them, the distribution and delivery of small and frequent orders to small stores in urban areas and to shoppers’ homes is their biggest challenge.
Forecast accuracy and managing promotions: Another challenge is that demand patterns and promotional effectiveness vary across different channels. Forecast accuracy and managing promotions are closely related, as the demand variation caused by promotions makes accurate forecasting difficult, and without a good forecast, it’s hard to execute promotions effectively. For suppliers, the key challenge is maintaining forecast accuracy as volumes grow in these new, rapidly developing channels. Suppliers are gaining experience of the sometimes conflicting drivers of demand, but the situation is constantly evolving and needs continuous monitoring.
Order configuration and increasing complexity: A key challenge from a supplier perspective is new requirements for order configuration. This includes product needing to be delivered on different format pallets, totes and trays. On top of that, different channels need specific product formats, in both case size and the consumer units themselves. For example, convenience stores need smaller units for shoppers to carry home, and smaller cases to fit on the limited shelf space. Online dark stores often need larger products in bigger cases, as the volumes required are greater.
Although the scale of the impact on supply chain varies by channel, an interesting pattern is emerging across European markets. Looking at how many businesses have had to create new or adapt existing supply-chain processes gives an indication of the level of disruption that each of the new channels is having on supply chains.
The most disruptive channel by quite some margin is Discount, as 54 per cent of suppliers to whom we spoke have had to adapt their processes to take this channel into account. Following on from that, Convenience and Online are very close, with 36 per cent of companies having to amend their processes for the former, and 37 per cent for the latter.
There are clear areas where retailers and suppliers can work together to ensure that they are well equipped to meet the supply-chain challenges of these rapidly developing channels. Forecast accuracy stands out as a key opportunity for retailers and manufacturers to join forces.
Suppliers are seeing more variations in demand, which can be caused by volume across multiple channels being included on a single order, so the channel split can be invisible to the supplier. A simple clarification of how volume is distributed across channels would provide significant benefit to both retailers and suppliers.
For both parties, it’s clear that they need to seriously consider what the new era of multichannel shopping will bring for supply chains, which will continue to change as these new channels grow.
Those businesses that get themselves prepared and invest in their capability today will be best placed to grow their sales tomorrow. To download a free copy of our white paper on multichannel, visit www.igd.com/MultichannelSupply. Also, find out more about our brand-new conference, Multichannel Supply Chain 2015, taking place on 19 March at igd.com/multichannelsc2015.