Ripping up the retail rule book
Online retailers and customers used to have an unspoken agreement: Online retailers offered customers extensive product choices at lower prices, and customers understood that it would take time for them to receive those products. This arrangement gave online retailers time to ship items from sizable regional distribution centres, and also set the expectation that customers would have to pay a premium for faster delivery.
Then Amazon – along with e-commerce leaders like IBM and Dell – changed the game when they started offering customers next-day or same-day shipping for free or little cost. Over time, this caused customer expectations to change. Today, customers expect fast and free delivery as the standard, while also demanding the same variety of products and low prices as before.
E-commerce companies are now searching for new ways to balance choice, price and speed, says Ho-Yin Mak, Associate Professor in Management Science at Oxford University’s Saïd Business School.
‘To meet the demand for low-cost, fast shipping, many companies have moved their distribution to a larger number of small warehouses closer to customers’, Mak explains. ‘However, less space means sacrificing product range and stock. Many retailers also find their costs are higher, thanks to the increased administration expenses of running multiple sites.’
With co-authors Professor Zuo-Jun Max Shen from the University of California, Berkeley and Seoul National University’s Dr Michael K Lim, Mak studied how market leaders such as Amazon, IBM and Dell are pulling off what many online retailers can’t: offering their customers choice, low prices and rapid shipping without harming their bottom line. They found big data has helped these global players achieve supply chain ‘agility’ to become more responsive to changing environmental factors, such as unexpected fluctuations in customers needs.
Here, Mak shares three strategies for making your distribution network as agile as that of an e-commerce giant:
1. Make your network smarter
More widespread distribution networks used to mean higher costs and fewer economies of scale. However, Mak says the success of Amazon’s vast system of hubs, delivery stations and fulfilment centres demonstrates how a smart network can behave as efficiently as a single warehouse.
‘By sharing vital real-time information about supply, demand, inventory availability and replenishment schedules, smart networks maintain the optimal level of stock in all locations at all times’, he notes.
2. Use technology to exceed customer expectations
Being responsive to customer orders is vital. IBM’s ‘neighbourhood’ inventory system automatically allocates spare parts to stocking locations close to existing clients whose order history suggests they are likely to need them. The strategy has helped the firm save $5 million per year in transportation costs.
‘Dell’s smart inventory systems take this a stage further’, Mak explains. ‘It actively diverts in-transit products, destined for distribution centres, straight to customers who order them.’
3. Harness the predictive power of big data
Predictive analytics can help any business identify more efficient ways of managing a distribution network. It can also be used to forecast almost every conceivable outcome, including changes in supply and demand. This intelligence gives companies what they need to anticipate challenges and opportunities and react to them with agility.
‘It has never been easier to crunch traffic information or weather data to identify optimal fulfilment routes, or analyse massive data sets from selling platforms to predict future demand’, says Mak.
‘Agility and Proximity Considerations in Supply Chain Design’ is co-authored by Ho-Yin Mak, Zuo-Jun Max Shen and Michael K Lim. It is published in Management Science.