Business social media site Business Insider recently published a report indicating that natural foods retailer Whole Foods “is facing a crush of food shortages in stores that’s leading to empty shelves, furious customers and frustrated employees.” That statement will obviously capture the interest of retail grocery and consumer goods industry readers. Whole Foods did not respond to Business Insider regarding its report.
However, upon our review of the report, it is important for readers to focus on the lessons related to tenets of execution of a supply chain inventory management transformation strategy vs. the headline. We do not perceive that the current situation being described has direct linkage to the acquisition of the grocery chain by Amazon, but rather symptomatic of a challenge that many in grocery and retail online customer fulfillment need to tackle, and soon.
The essence of the report is that prior to the Amazon acquisition, Whole Foods was under enormous investor pressure to reduce costs, particularly those related to procurement and in-store inventory. In February of 2017, Whole Foods CEO John Mackey informed investors that the food chain was rolling out a company-wide “order-to-shelf’ (OTS) initiative designed to reduce individual store labor, excess in-store inventories and waste.
This program was a form of what industry participants know as direct-store-delivery (DSD), or broadly known as vendor managed inventory (VMI) where producers and distributor inbound inventory is delivered directly from trucks to the retail shelf, avoiding the need for warehouse or excess back room store inventory. As many industry participants would likely attest, DSD has a very strong dependence on consumer product demand intelligence and synchronization of supply chain response, especially in periods of seasonal or unplanned product demand. The concept directly impacts the critical goal of timely on-shelf availability and takes on added dimensions when fresh food and produce are the category where spoilage is a constant challenge to overcome. Some food producers and retailers have given-up on DSD processes due to excess costs or complexities in managing such processes. The other ugly element is that the cost of a stockout in terms of a lost customer, can sometimes outweigh the cost of added in-store safety stock inventory.
The Business Insider report dwells in-detail on the results of what Supply Chain Matters would describe as the appearance of a flawed execution of DSD or OTS, a reliance on centralized OTS management control at the food chain’s corporate offices. That approach per-se, can accomplish more aggressive performance results provided that store-level consumer-buying and inventory intelligence is near real-time. The food and grocery industry further have a strong reliance on food distributors and brokers as key participants as well as stakeholders in such initiatives.
As the report notes, reduced back room inventory results in little safety stock relative to unexpected increases in shopper demand for individual items. Likewise, unexpected interruptions in store deliveries such as severe winter or summer storms further adds to disruption and subsequently empty shelves. The overall challenge of DSD processes is that of having some form of a supply chain control tower process capability than constantly monitors supply chain activity on a continuous basis and alerts to problem areas. Human and item-level intelligence at all levels also need to be a key part of such a process.
Upon reading the report, the picture painted seems to be one of a militaristic process, with buying decisions shifted from local to corporate headquarters. One Whole Foods executive is quoted as noting that the retailer goal was moving from a federated to a unified system of inventory purchasing. The key word being “unified.”
Like any other major supply chain management related initiative, transformational change is sometimes difficult, especially when it involves aggressive top-down timetables. The notions of adequately addressing the people-process-technology tenets of such transformations remain timeless. Whole Foods will undoubtedly learn from this effort, and changes will result.
We cannot close this commentary without raising the other elephant in the room, that being the new influence of Amazon as the parent of Whole Foods and the subsequent integration of the two retailers in a combination online and in-store fulfillment presence.
As many food retailers and distributors are discovering, the implication for supporting customer online fulfillment is a significantly different logistics and distribution model. Online orders are about individual line item needs rather than bulk pallets and cases. It is about seamless flow-through logistics vs. inventory storage points, sometimes adding combinations of customer pull and supplier push focused planning and distribution. The model adds another process requirement in the distribution and stocking strategy, and DSD takes on the dimension of item-level direct-to-customer. In some cases, that can translate from order-to-shelf to order direct to mini customer fulfillment centers within physical stores. Centralized management of such models take on more difficult dimensions of integrating customer buying intelligence with dynamic real-time item-level inventory management. The notions of freeing-up store employees to work with customers is sometimes about dedicating employees to online fulfillment orders.
From our lens, it is a transformation that will require the fresh thinking of both Amazon, Whole Foods and various food distributors combined. The customer intelligence is Amazon’s strength, but additional work and focus will be required on the physical process and technology aspects of transformation.
We submit that this is the reader takeaway for food and consumer goods focused industry participants. Change your thinking and biases relative to traditional inventory procurement, distribution, and store fulfillment. The new world of digital is about information related to customers, procurement, inventory, and distribution in combined virtual and physical constant motion. The context is a digitally-enabled response network supported by advanced, forward focused decision-making analytics, AI-driven planning, multi-echelon inventory management and flow-though logistics control systems.
Not all retailers have the deep pockets of Amazon or Walmart or Target, but a lot can be learned from their efforts in transforming retail fulfillment capabilities at lower cost.
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