Next week officially kicks-off the holiday buying frenzy with the celebrations of the Thanksgiving Holiday in the United States as well as the Black Friday and Cyber Monday shopping events that extend out to the following week. In its recent update on the U.S. online retail economy, analytical firm ComScore predicted that based on prior year sales and order volume trends, both the Black Friday and Cyber Monday periods will represent this year’s expected highest peak in shopping volume, perhaps more so with Black Friday.
In previous Supply Chain Matters commentaries we have advised online and traditional as well as B2C focused supply chain planning and customer fulfillments team to take a cautious but diligent perspective to daily customer buying actions over the coming few weeks. This diligence includes paying close attention to overly optimistic forecasts of expected retail sales among various channels and especially diligent in working with brethren sales and marketing teams in managing what is turning out to be a lighter inventory positioning heading into the prime holiday period. Forms of product demand sensing capabilities are obviously essential.
As business media has pointed out, third-quarter financial reporting by major retailers indicates a consistent theme of reduced inventory levels with expectations for higher margins and lower costs for the all-important and most profitable Q4 holiday period. The added costs of online fulfillment needs are a special consideration for managing costs. Lower inventory directives compel planning teams to determine the best consensus as to which merchandise will experience the highest sales volumes and when. Such bets were established weeks ago and hopefully monitored continuously. This upcoming period will be the time where tight collaboration with marketing and merchandising focused on the timing and seamless execution of targeted promotions will pay the most dividends.
For the first time, Amazon is charging sellers of the Fulfilled by Amazon program a hefty premium for storing inventory during the November and December timeframe, while offsetting some of these costs by lowering holiday focused fulfillment fees. All Black Friday and Cyber Monday focused inventory was due to Amazon warehouses last week. The cutoff for Christmas holiday focused inventory is December 2nd. That is another weighting for the stakes related to accurate inventory planning. Reports indicate that Wal-Mart has shifted more than half its inventory supporting Black Friday to its dedicated online fulfillment center warehouses. Once more, this retailer has made plans to have thousands of more items from its online catalog available for same-day in-store pickup.
The reality that many Sales and Operations (S&OP) teams often know is that over the next two-week period, there is little time to re-plan, especially with overall inventory levels being low. However, senior management expectations for higher margins and profitability are very high and thus many hopefully well informed decisions will need to be made in a very short time interval. Replenishing hot selling items runs the risk of insuring that this merchandise arrives in time or better, there are enough firm back orders from customers willing to wait. Electing not to replenish implies a plan to make-up any revenue shortfalls with all other existing inventory, thus the need for on-the-fly collaboration in merchandise promotions.
One other critical data point from ComScore’s latest update is that for online buying, the data concerning the correlation of Free Shipping to actual shopping cart completion is compelling. During the full 2015 holiday period, Free Shipping accounted for 68 percent of all online transactions vs. 55 percent in 2014. Online retailers hoping to preserve margins by allocating more of the shipping expense to customers may experience a challenge. Thus, S&OP teams will be educating and influencing senior executives with data indicating the predictive buying tendencies related to Free Shipping along with the importance that timing has to optimized inventory management.
The other wild card and implied white knight for the next few weeks will be responsive suppliers, transportation carriers and logistics fulfillment networks. We surmise that best-in-class teams have already collaborated with key suppliers on responsive back-up contingency supply plans to be able to quickly replenish hottest selling inventory. The question is what may be sometimes defined as “key supplier.” Is the supplier domestic or internationally based in terms of transportation lead time? Is the supplier one that we always pay on-time and has consistently made good on commitments? Does the supplier or distributor really have that on-hand inventory?
Regarding transportation networks, a learning that came out of last year’s holiday fulfillment surge was that there were bottleneck vulnerabilities to large carrier’s hub networks. Both FedEx and UPS labored during and after the peak periods to dig out of volume bottlenecks. Likewise, air freight carriers have removed a lot airlift capacity from their networks, and the fallback position appears to be more and more parcels flying in the bellies of commercial airlines. We all know that expedited shipping implies unplanned expensive freight costs and throw-in any occurrence of severe winter storms and the expense line grows further.
The coming two weeks will be the most stressful among B2C retail teams and this will be the test where the previous investments in people, process and technology are proven.
For our part, Supply Chain Matters will be monitoring ongoing events and providing periodic insights as the surge period unfolds and as the results are tabulated. For those of you working long nights and weekends who need a respite as to the big picture, check us out.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.