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What’s going on in the last mile?

What’s going on in the last mile?

A look at how Kroger, Target, and Home Depot are adjusting their supply chains to meet customers’ omni-channel fulfillment needs

Overview

Free two day delivery and grocery pickup are quickly becoming customers’ ‘standard’ delivery expectations. However, customers’ expectations won’t stop there as more and more retailers figure out better ways to meet customers’ desires for where I want it, exactly when I want it, and cheap delivery. So, how are retailers enabling themselves to provide the next generation of delivery options while still maintaining reasonable profitably? We’ll take a look at how Kroger, Target, and Home Depot are adjusting their supply networks to do it, and, we’d love to hear more from you on what you’re seeing.

Kroger

While Kroger joined the omni-channel world later than many of the other players, they’ve made huge steps in the last 6 months to meet customers’ new delivery expectations. Today Kroger Pickup has expanded to the majority of their stores, and they’re rapidly expanding home delivery through their partnership with Instacart. They’ve also acquired Home Chef to enter the meal kit delivery service. So, how are they doing it today and what are their plans for the future?

Currently, all of Kroger’s picking and packing for digital orders is done in store, but they’re rapidly building out the capability to do that at dedicated fulfillment centers. They’ve entered a partnership with Ocado Group, the UK grocer and technology company, to build 20 highly automated fulfillment centers over the next 3 years. Rodney McMullen, Kroger CEO, described the overall strategy in their Q1 investor call as “what we're really trying to do is to make sure that we have an overall infrastructure for digital that can support whether it's 5% of share or 30% of share. If [digital] ends up being 30% of share in grocery..., you'll have more [Ocado] sheds and they'll be used to take pressure off of the store, and the store will become more of a distribution point.”

In addition to the investments in picking and packing, they’re working to add more convenient and efficient distribution options. Kroger has entered into a partnership with Walgreens that will enable customers to pick up their Kroger online grocery orders at their local Walgreens store.* And, in more of a moonshot, they’ve partnered with Nuro to pilot the use self-driving cars for same-day grocery deliveries.

Target

Target is leading the pack on fast and free delivery by offering free 2-day shipping without a minimum purchase. They've also expanded their delivery options by adding ‘Drive Up’, their store pickup option, to over 50% of their stores and have expanded the availability of same day delivery through Shipt which they acquired the end of last year.

Unlike Kroger, Target is looking to make the store the center of their fulfillment and distribution network. At their 2018 financial community meeting, Target’s COO, John Mulligan, stated “[b]ecause our stores are the fastest and most efficient fulfillment method, they'll continue to be our preferred shipping point in the long run.” Mulligan also explained that the economics of store based fulfillment trump that of  fulfillment centers due to lower shipping and capital costs. They also see store based fulfillment as a huge enabler for serving peak demand because they don’t have the same physical capacity constraints as fulfillment centers and can easily scale up their volume.

To support the strategy of fulfilling digital orders from stores, Target is adapting how inventory flows into their stores. They are looking to stock stores with exactly what they need and then be able to quickly respond when things change. They’re moving from a typical forward replenishment inventory strategy that ships in packs or pallets to a strategy that replaces exactly what was sold in or fulfilled from a store. And they do mean replacing exactly what sold; they’re adding robotics and other material handling equipment in their store distribution centers to enable them to ship to stores in any quantity from eaches to pallets. Finally, they’re also increasing the frequency that they ship to stores which allows them to respond faster to unexpected changes. They report that their test in the Northeast has cut out of stocks in half and has lowered store backroom stock. They plan to use the newly freed backroom space to add sorting and packing stations to support fulfillment from store.

Home Depot

Home Depot has long offered a wide variety of delivery options from same day in-store pickup to delivery in the next few days to delivery within a specific time window. Most recently, they added same day delivery through their partnerships with Roadie and Deliv. While they offer a nearly complete set of delivery options, they’re focused on making each option more cost effective.

Home Depot describes their “downstream” supply network as fragmented. They service pro customers’ deliveries and all next-day and same-day orders out of their stores. They have specialized facilities dedicated to appliance delivery. They have facilities dedicated to serving their maintenance, repair and operations (MRO) business, which they acquired from Interline Brands. Finally, they have 3 fulfillment centers dedicated to consumers’ 2-day and ground home delivery orders.

With all this fragmentation, they see great opportunity to provide faster delivery at lower cost by consolidating, regionalizing, and specializing their “downstream” supply network. So, over the next 5 years, they plan to invest $1.2 billion and completely revamp their downstream network. Here’s some of the major changes they’ve announced -

  • Increasing the number of large fulfillment centers (moving from 3 to 7)

  • Adding 25 local fulfillment centers to support next day and same day delivery in their top 40 markets. These facilities will support both their consumer, pro, and MRO businesses.

  • Adding 40 flatbed fulfillment centers to support delivery of lumber, drywall, and other bulky goods.

  • Removing all fulfillment from stores in their top 40 markets.

  • Supporting same-day, next-day, and bulky fulfillment for their non top 40 markets from a limited # of “market delivery” stores.

  • Adding 100 cross dock/market delivery operations to support delivery of bulky product such as appliances and patio furniture


What do you think?

Three big players are plotting out very different strategies to meet the demands of customers’ omni-channel order fulfillment. Kroger is focused on centralizing and automating it’s network, Target on making stores the center of its delivery network, and Home Depot on regionalizing and consolidating its specialized network. We’d love to hear what you think about how the supply chain should evolve to support the next generation of fulfillment. A few questions that come to mind -

  • What’s the role of stores in supporting digital orders? Target is charting a very different course than Home Depot and Kroger. Can the economics at stores be better than at fulfillment centers? If so, what will drive that? Does a focus on fulfillment in stores distract from assisting customers?

  • What role does automation and robotics play in warehouses and fulfillment centers of the future? Will they be highly automated, high capital cost options, like Ocado, or more along the lines of traditional sortation systems?

  • Does it make sense to invest in more pickup locations like Kroger is doing with Walgreens? While the costs are significantly lower, this method is still less convenient than home delivery.

  • When will autonomous vehicles or other highly efficient home delivery options become feasible/practical?

  • How should smaller retailers, which don’t have the same scale, look to provide these same delivery options efficiently? Will 3PL’s step in to provide local delivery options?

  • What other changes should retailers be making to their supply network?


About Us

Cognira is a boutique consulting and software analytics company that focuses exclusively on retail merchandising and supply chain. Cognira’s goal is to make science easy for retailers, and to help them get the most value from their advanced science solutions. We bring decades of experience leveraging science, analytics and scalable technology to improve retail decisions.


* Be on the lookout for additional distribution announcements. Kroger’s announced that they want to serve all of America, and they’ve hinted that expanding grocery delivery into the Northeast, where they don’t have stores, would be it’s next step.

Supply Chain Brief

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3 Ways Excess Data Can Stunt Your Growth

3 Ways Excess Data Can Stunt Your Growth

We love data. But we also know too much data can be a bad thing.  Here are three ways we’ve seen retailers using data to their detriment.

And some ideas on how to avoid these pitfalls.

1. Analyzing anecdotes

One data challenge we've seen is people manually reviewing too much data anecdotally.

Examining sales volumes for the last time you ran that promotion is valuable. But a single person can only consider a few data points at a time. And that data is open to interpretation, which is often biased.

At one retailer, team members in three functional areas, were each reviewing historical anecdotes, estimating the impact of the same up-coming promotions, and arriving at different conclusions.

Analyzing anecdotes uses valuable time. And bias can lead you in the wrong direction.

Strong analytics will curb reliance on anecdotes.

Your teams will always want to see sales history. Making it efficiently available brings a lot of value. To deliver even more value, provide demand insights based on proven modeling techniques. These will steer teams to better informed, less biased decisions. This investment in data analysis, paired with an explanation of insights will also curb reliance on so much historical data.

2. Divining too many details

Want to know whether a discount with a recipe sent to Jasmine’s mobile account will inspire her to buy that lemon-infused Tunisian olive oil when she walks into your Kansas City store the second week in July - if July 4th falls on a Wednesday – and it’s raining, but just a little bit?

While many systems can mechanically model customer demand at very, very specific levels of detail, taking into account nearly unlimited factors, often the data cannot support reliable results.

Systems with erratic recommendations are burdensome to manage. And these systems don’t get used, leading to less effective decision making.

A balanced approach will help ensure rich and reliable results.

Well-equipped implementers, data analysts and solution providers can balance detailed insights and dependable results in a variety of ways.

However, when one retailer reached out for help with their forecast challenges, they painfully admitted - “Our last implementor was very good – they did everything exactly as we asked them.”

Pushing for very specific approaches to demand modeling may pressure your implementor or data teams to make you happy in the short term. Instead, being clear about where you are looking for value, how you will leverage the forecast, and your bandwidth to manage exceptions will help produce detail-rich forecasts in which you and your teams can have confidence.

3. Bigger is better syndrome

With so much data available to retailers today, some can become eager to leverage more of it than is necessary to address today’s most pressing opportunities. And that data can be difficult and time-consuming to access.

Data-intensive analysis can leave other important, more easily addressed challenges unattended. Valuable insights are left unmined and unseen. Out of tune systems continue to misbehave, getting you into who knows what kind of trouble.

The right data for the job will help give you higher returns on your effort.

Petabytes of data and shiny, new tools can be enchanting – and in many cases, are worthwhile. But the most powerful and valuable approaches to leveraging data in retail are not all new. Being open to a variety of data sources and solutions can help you get the most value for your investment.

Can you think of other ways too much data can stop progress or bring harm to your business?

 

A little bit about Cognira

We’ve helped retailers get value out of big data and little data. Using the most modern cognitive and machine learning tools. And time-proven, robust statistical techniques.

Supply Chain Brief

What Your Inventory Can Tell You About Your Promotional Strategies

What Your Inventory Can Tell You About Your Promotional Strategies

Many retail challenges, like promotions, impact and require coordination across many areas of the business. We find it helpful to work across functional areas and bring different perspectives to the table. Below are some thoughts about promotions from the POV of an Inventory Manager.

Inventory Managers can see that there is no turning back time on the discount clock.  Promotions are totally ingrained into our customer’s buying behavior, even (or especially) for the most loyal of customers.  What do we see?

Customers will wait for promotions on products they already want to buy.

We’ve seen products where up to 90% of sell-through happens at discounted prices, products which consumers will not buy at regular price.  These items could be fashion items or consumable products that are on sale frequently. 

If customers know significant price drops are coming, they can wait to buy the fashion item.  And the consumable product has a shelf life that extends until the next promotion, why not stock up?   

Other circumstances we've seen are retailers who have one or two major sales per year, during which they do the majority of their business.  They sell expensive items at a good discount.

 
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Why do Inventory Managers care?

As we condense our sales of our items or business into fewer time periods the volatility increases, and demand is more challenging to predict.  Achieving high service levels for our customers is more difficult and expensive. - It’s harder to move inventory through the supply chain quickly in response to sales. Sometimes, to chase demand, we have to use alternate sourcing, which increases costs and strains the supply chain.

Customers are given offers they cannot refuse.

Limited time offers and bundled offers can convince customers to buy. They may purchase items they don't really want or spend more than they planned. 

 Free shipping on orders over $50

$20 off when you buy $50

40% off marked items, today only!

 
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This is awesome, right?  From a customer standpoint, the risk is limited, because they can always take the items back, and we do get sales we might not have otherwise.

How does this impact Inventory Management?

It’s not unusual for 25% of online fashion sales to be returns and returns for these types of promotions are even worse.  

This impacts our stocking strategies. Sometimes we cannot track it or transfer it because the items aren't ranged to sell in that location.  We have to mark it down to sell it. Other times we have stores package it to fulfill online demand. 

It’s almost too easy to connect with Customers

The email you send out today impacts what customers buy tomorrow.  Anywhere from single person to all loyalty or potential customers could be targeted.  When customers share promotions on social media and third party sites publish them, the promotion audience can grow amazingly fast.

 
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What burden does this place on Inventory Management?

We may see sales spike and discounts applied, without insight into the promotional types or vehicles.  If we don't know in advance what offers, we can't respond in time to get inventory in the best locations.  Even if when we do know a promotion is coming, the results are difficult to forecast, because we don't know important details.

What can retailers do?

These practices add a lot of uncertainty, causing us to lose sales or increase costs.  It’s a balancing act; we need to work together across functional areas to make the best decisions. 

We can:

Share data and create good analytics

If the data is not centralized, each group may only see a part of the puzzle.  Don’t assume everyone is looking at what you are.  Information is the first step.

Are we able to answer important questions with our data? 

  • Does pantry loading drive traffic or higher spend overall? Under what circumstances?

  • Are we running promotions on competing products at the same time?

  • What promotions are driving cherry pickers?

  • How much inventory is orphaned by returns coming into stores? What is the impact of these un assorted items on markdowns, store labor?

  • What is our promotional service level? How much inventory does it take to support different types of promotions?

Objectively assess our forecasting ability

Promotional forecasting is challenging, but some practices make sales even more difficult to predict:

  • Promotions that recur within a short time frame

  • Promotions with unpredictable audience, e.g. social media for example

  • Promotions that move majority of demand to short time frames

A review of promotional predictability could reveal more.

Reviewing promotions can help categorize the impact on the promoted item's sales, and the impact on other items and locations. Understanding the uncertainty associated with the promotions helps highlight promotional risk. 

These insights can inform stronger decisions upstream and downstream, encourage tighter collaboration.

Understand and agree upon stocking strategies

Imagine being able to have these discussions:

These items are frequently on promotion, have huge pantry loading effects. - 80% of sales are at a discount.  Do we want to continue these promotions? If so, what should our stocking strategy be?

Another group of products are expensive, highly price sensitive, and are rarely promoted.  We are confident in the total sales but to have high service level at the store, we will risk overstocks after the promotion.  We'll hold inventory back at the warehouse, replenish during the promotion and offer customers home delivery if we stock out.

Occasionally, let the tail wag the dog

Listening to your Inventory Managers and Supply Chain can help you see your promotions from a different perspective and may inspire you to tweak and align practices to improve your promotional performance.

 

About the author

Linda Whitaker has worked with hundreds of retailers applying data science and artificial intelligence to a wide variety of areas including merchandise planning, pricing, promotions, customer insights, demand forecasting, replenishment, allocation and supply chain. Prior to joining us at Cognira, Linda served as Chief Science Officer at Quantum Retail Technology (which she co-founded) and 8th Bridge (now part of Fluid, Inc.). 

 

Supply Chain Brief