Retailer Target puts the spotlight on supply chain

Plagued by a huge security breach a couple of years ago and a botched attempt to enter the Canadian market, the US retailer Target perhaps took a wise step this past week in naming John Mulligan COO and responsible for the company’s supply chain. Mr. Mulligan will certainly be kept busy particularly as Target’s CEO noted the retailer has an “incredibly complex supply chain” for unacceptable stock levels.

In fact, in its recent earnings conference call, Target admitted its supply chain was built to serve an outdated model in which product flowed from vendors through distribution centers to stores. “To serve guests today we are becoming much more flexible in a way we fulfill demand for products and services. And this is stretching our supply chain well beyond its core capabilities. And frankly, as a result some retail fundamentals have started to suffer.” As a result, Mr. Mulligan’s first task is to “focus first and foremost on improving the capabilities of our supply chain, working across organizational boundaries to understand and address root causes that are hampering day to day execution”.

That’s a big task particularly as Target continues to test out various initiatives to boost store and digital sales. It should be noted that while overall second quarter sales increased 2.8% year-over-year, digital sales as a percentage of total sales increased only 0.5% for the same period.

So, among the initiatives currently underway are shipping from stores. Currently the company is shipping digital orders from 140 stores but by the end of this year it expects to be shipping from 450 locations. The company noted that this will allow it to balance inventory across the network. Sounds good and many other retailers are already doing this. Target is also testing what it calls “available to promise” in which it will provide a guest a specific delivery commitment of typically 2 or 3 business days. Perhaps more information is needed about this new promise but it seems to me that retailers/shippers have the capability to narrow this delivery time even further?

Furthermore, a more “localized” experience is being tested in Chicago to test changes to assortment, presentation and inventory commitments on certain items. In addition, Target replaced its third party recommendation engine with an internally developed product – Cartwheel- which incorporates both in-store and online guest history. According to Target, it has generated incremental sales of $50 million to $100 million so far this year.

And finally, the company plans to test and introduce a more flexible format in various locations. According to Target, it opened a store in Boston next to Fenway Park stating “It simply reflects our goal to become flexible and how we fit into every community with an ability to open up a variety of stores, different sizes and layouts, offer a locally relevant assortment and provide guests with easy access to items from our entire digital assortment through in store pickup.”

All these initiatives sound exciting and show the company as interested in testing out new ideas but it also needs to be mindful of how each affects its supply chain and that apparently is where Mr. Mulligan will come into play – to help create a supply chain that matches the flexibility the company is striving towards in how it displays and sells its expanding merchandise categories to customers.

Port of Long Beach Reports a Record July

The month of July was the Port of Long Beach’s strongest month on record. Total TEUs increased 18.4% with loaded inbound up 16.2%, loaded outbound up 15.9% and empties up 24.3%.

Meanwhile, the Port of Los Angeles reported a down month with total TEUs down 2.5%. Loaded inbound were down 3.5%, loaded outbound down 16.5% and total empties up 11.2%.

Officials at both ports cited more vessels involved in ship alliances calling at Long Beach than at Los Angeles.

LA and LB

Where is Airfreight Heading?

As we head into the final months of 2015 questions abound regarding how the airfreight market will perform. Will it rebound strongly in the same manner as last year? Or will it continue along as is? Insight into associations and individual carriers and airports indicates a mixed bag.

The latest figures from the International Air Transport Association (IATA) are for the month of June which show demand increased 1.2% year-over-year. Not a bad figure but compared to May’s gain of 2.1% but does this indicate a slow down? According to the IATA director, “The remainder of the year holds mixed signals. The general expectation is for an acceleration of economic growth, but business confidence and export orders look weak.”

But, according to the WorldACD, it depends on the product. The group’s figures indicate that pharmaceuticals and perishables generated the biggest growth in global airfreight volume with absolute growth of 37.5% for the first half of 2015. Middle East-South America and Asia-Pacific were the two largest regional lanes for both products.

This pharmaceutical and perishables gain appears to have benefitted Amsterdam Schiphol, Europe’s third-largest cargo airport which has a special emphasis on cold chain/pharmaceuticals. Its June traffic increased 1.9% to 123,000 tonnes and a 2.1% first-half year-over-year growth to 802,000 tonnes.

In comparison, Frankfurt’s airport, Europe’s largest air freight hub, posted a 2.5% monthly decline in traffic in June and a first half 2015 decline of 2.1%.

And while Europe’s airports appear to be experiencing a ‘mix bag’, Asian airlines are noting declines as conditions at US West Coast ports ease. The Association of Asia Pacific Airlines indicated that moderation in air cargo markets extended into June. For the month of June, The Journal of Commerce reported that for Cathay Pacific, the region’s largest cargo carrier, tonnage growth “fell well short of the increase in capacity, and the business continued a softening that began as the U.S. West Coast port disruptions ended”.

Things appear a bit brighter for US airports for the month of June. Chicago’s O’Hare reported domestic freight up 4.26% and international freight up 8.13%. Mail was the main driver for each but while international express declined 1.16% for the month, domestic freight was up 14.29% year-over-year which may be an indication of increasing focus on regional supply chains. For LAX, freight was up 3.43% year-over-year for June. Like Chicago, mail led this growth but freight was up 2.5%, a positive indication of the US’ expanding economy.

So, what’s ahead for the airfreight market? It’s likely we’ll see random spikes for the rest of the year depending on threats and risks affecting the supply chain. Last year and into this year, the US West Coast situation resulted in a shift to airfreight and perhaps for the next few months, we may also see a pick- up in demand for airfreight into Beijing and surrounding area because of the recent Tanjin port explosion.

For 2014, IATA reported air freight up 4.5% for the year thanks to a strong final half of the year. It’s doubtful we’ll see the same strong growth for the last half of this year.

Chart: Monthly IATA Air Freight Data

Based on IATA data, freight-tonne kilometers (FTKs) began to outpace available freight-tonne kilometers (AFTKs) in February 2014 perhaps because of the timing of the Chinese New Year holiday. Typically, however, airfreight levels off within one to two months after the holiday but this was not the case in 2014. FTKs continued to outpace AFTKs throughout the year. In particular, FTKs were high the last half of 2014 as the US West Coast labor contract remained unsigned and congestion increased at these ports.

The beginning of 2015 continued to see strong FTKs but as congestion eased and a contract was finally agreed upon, FTKs leveled off in March and has continued this trend through June.

IATA FTKs AFTKs

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Different Focus but It’s Still About Logistics

Alibaba’s recent announcement concerning its investment of $4.6 billion in Suning definitely created a buzz but what seemed to have taken a backseat was JD.com’s $700 million investment in Yonghui Superstores just a few days prior to the Alibaba-Suning announcement. Interesting announcements from China’s two largest ecommerce providers that tout the benefits of online-offline services (O2O) which according to Reuters is what Chinese companies as well as Chinese government officials advocate as a financially beneficial business model. But perhaps, the real benefits lie more in the logistics aspects within each announcement.

According to the press release, the Alibaba-Suning alliance will allow Alibaba’s online customers to visit any of Suning’s 1,600 outlets in China to try out a product before purchasing it on Alibaba’s online marketplace using their smartphone. Additionally, Suning will join Alibaba’s distribution network to deliver goods in as little as two hours.

Suning already has an extensive logistics network. According to Want China Times, it owns about 4.5 million square meters of warehouses, 12 automated sorting centers, 50 regional logistics centers, 300 city delivery centers and 5,000 community delivery stations. In addition, it provides next-day delivery to 90% of Chinese cities.

But, this isn’t the first time that Alibaba has formed such an alliance. In late 2013, it invested $361 million in Haier Electronics Group and took a 9.9% stake in Haier’s online marketplace, Goodaymart. The joint-venture has formed the basis of a logistics platform for large-sized goods. In addition to Haier retail outlets throughout China, Want China Times noted at the time of the announcement that Goodaymart had 9 shipping bases nationwide including 90 delivery centers and more than 2 million square meters in warehouse space. In addition, Haier Electronics Group had logistics and distribution sites in more than 2,800 counties across China and operated more than 17,000 service points.

Meanwhile, while JD.com’s mere $700 million investment in Yonghui Superstores seems to have not received quite the buzz within the industry. However, it is certainly one to watch and perhaps for Alibaba to take note of as well. In its press release, JD.com noted its investment in Yonghui would provide improvements in “supply chain management capability through joint procurement” and would also “explore opportunities in O2O initiatives”. The investment gives JD.com a 10% stake in the supermarket. Yonghui is China’s fifth largest supermarket with 350 stores and fresh food accounts for 45% of its total sales.

This latest investment by JD.com will help extend its cold chain delivery network by leveraging its online platform with Yonghui’s fresh food supply. For Yonghui, it plans to use investment received from both JD.com and Dairy Farm* to expand its supermarket chain and logistics. But this is not JD.com’s first venture into ‘Fresh’. In May, it invested $70 million in FruitDay, a Shanghai-based importer of fresh produce. FruitDay plans to use its investment to build out additional infrastructure to store, ship, and track fresh produce.

Of course the potential expansion of the O2O business model will certainly bring benefits such as pickup and returns alternative locations but this concept (similar to omnichannel) combined with the logistics networks that each of these alliances bring to Alibaba and JD.com will further fuel expansion of these two ecommerce providers’ logistics network across the vast geography of China.

*Dairy Farm, part of Jardine Matheson, announced the same week as JD.com that it had invested $210 million in Yonghui and took a 20% stake in the retailer.

Same Day – Is it Worth It?

Evidently plenty of start-up companies seem to think Same Day delivery is worth it just by the number of new start-ups either popping up or existing ones expanding into a new city. For the traditional delivery companies i.e. Post offices, DHL, FedEx, UPS etc. many either offer their own solution or are testing the service in certain locations.

A recent Forbes article, Tech Is Enabling Same-Day Delivery, But Is It Really Worth It For Retailers? suggests the same day delivery market is currently valued at $40 billion. Furthermore, the article quotes Michael Pachter, an analyst at Wedbush Securities who describes same day as a “logistical hell.”

So do customers really want same day delivery? You’d think so with the flurry of activity going on but a 2013 survey of online shoppers conducted by Boston Consulting Group (BCG) found that only 9% of the 1,500 U.S. consumers surveyed “cited same-day delivery as a top factor that would improve their online shopping experience, while 74% cited free delivery and 50% cited lower prices.”

Perhaps consumers have shifted in their opinions since the survey was conducted. In fact, a survey in late 2014 on behalf of PricewaterhouseCoopers, found that 61% of consumers surveyed indicated they would pay for same-day delivery, while 58% would pay for one or two-day delivery. 37% said they would pay for 90-minute delivery for a store-based purchase.

Meanwhile, Amazon continues to get closer and closer to the customer with fulfillment centers and its same-day delivery service, Prime Now, while Deliv has recently announced it had expanded into additional cities thus allowing such retailers as Macy’s to expand their same-day reach.

“When we piloted same-day delivery in eight markets initially last fall, we learned that our customers appreciate the additional option of having their purchase brought to their home or office in a matter of hours,” said R.B. Harrison, Macy’s chief omnichannel officer. “Our ability to expand same-day delivery is rooted in local merchandise inventories at Macy’s stores, as well as a newly expanded delivery footprint of our partners at Deliv.”

And there’s the catch…brick & mortar retailers are taking advantage of their brick situation and by implementing technology tools have transformed physical stores into fulfillment centers. Combined with partnering with such delivery companies as Deliv or Laser Ship, retailers are finding it a bit easier to offer same day delivery.

But, as same-day delivery catches on, business models of some of these delivery companies may be questioned and result in increased delivery charges. Many have started out as crowd-sourcing companies – relying on contractors to make the deliveries – but a good many of these companies are reclassifying contractors as employees which may result in additional costs for the companies and as such questioning the viability of the crowd-sourcing model.

Still, for many consumers, same-day delivery may remain one of those “just in case” delivery options that occasionally will be needed. So, is it worth it? For customer satisfaction and loyalty, probably so for the retailer that is battling a fierce market.

Record Breaking Fiscal Years for East and Gulf Coast Ports

Record freight is being reported at US ports as memories of the US West Coast dilemma refuse to fade. In fact, the Georgia Port Authority (GPA) attributed part of its latest record breaking fiscal year to the “labor woes” on the West Coast. In its annual report, the GPA reported an 8% increase in cargo tonnage – 31.69 million tons. This included a 17% increase in containerized cargo which, for the first time in the port’s history surpassed 3 million container units. Break-bulk cargo also enjoyed a healthy fiscal year with a 7.6% increase. This included a record 714,021 units of autos and machinery.

But is this the only reason? Perhaps not according to some port officials who attribute an improving US economy to the boom as well. The Port of Houston Authority is predicting record levels of cargo for this year. According to the Port’s Executive Director, as of June, almost 20 million tons of cargo had moved through it. The port did benefit from the West Coast problems as well as container volume jumped as high as 30% from last year as vessels were diverted to Texas. Officials note that container growth has subsided and now is running about 19% higher than the previous year.
In addition though, “People don’t realize how international this economy is,” noted the Senior Vice President of Research at the Greater Houston Partnership. Officials further noted that much of the cargo passing through the port is related to local industry – plastic resin and chemicals that come from oil and gas. Raw materials and retail products also make up a lot of the traffic.

The 2016 opening of the Panama Canal is expected to also play a role in the shift favoring East/Gulf Coast ports. According to Boston Consulting Group and CH Robinson, up to 10% of cargo moving from Asia to the U.S. could shift from West Coast to East Coast ports. The Port of Houston Authority is preparing. It is investing $68 million to deepen its waters as well as addition $50 million in four cranes weighing 1,505 tons, nearly three times the other cranes at its Barbour Cut terminal which will go into operation later this year. The GPA is also investing in its ports in preparation as well with new equipment and deepening its waters as well.
Even still, the Boston Consulting Group/CH Robinson report concludes that while significant volumes of cargo are likely to shift their routes, the West Coast will hang on to the majority of trade from East Asia. As reported by the Wall Street Journal, clothing companies may opt to continue to use West Coast ports because maritime routes to the East Coast take significantly longer and it’s worth paying slightly more to get those goods faster to market.
But with the majority of the US population residing east of the Mississippi River, it seems that East and Gulf ports will likely continue to benefit from tonnage gains in order for shippers to get goods as close to customers as possible.