SCALA: What the rise of the convenience sector means for the supply chain
Dave Howorth, director of SCALA, a leading provider of management services for the supply chain and logistics sector, gives his expert insight into the consequences of the rising convenience sector for the modern supply chain.
The Co-op announced at the beginning of the year that it plans to open 100 new food stores in 2019, marking the fourth consecutive year that it has opened 100 new stores or more. With a particular focus on key city centre locations, transport hubs, university campuses and, new communities in high rise residential developments, this is a savvy move for the retailer, which has seen over four years of like-for-like convenience sales growth.
The Co-op’s success in this area seems to reflect the IGD’s prediction for strong continued growth across the whole of the convenience sector, with the food and grocery research body forecasting that the UK convenience channel will increase by 17.6% between 2018 and 2023, giving it a value of £47.2bn.
The growth of the convenience sector has been attributed to a significant cultural shift that has been gradually taking place in recent years. With lower levels of car ownership among young people and increased time pressures, consumers have been moving away from doing one big weekly shop, instead choosing to shop little and often.
This rapidly growing network of convenience stores offers potentially lucrative new business opportunities for both the suppliers and the logistics providers that serve them. Those who are able to identify and respond to the unique needs of convenience retailers have the potential to become valued and trusted partners. However, if this process is not managed carefully, they may find that doing so could incur greater operational expense.
Here are a few considerations that suppliers and logistics providers can take into account, to ensure that the costs of servicing the convenience sector do not outweigh the benefits:
The majority of suppliers will supply into a retailer’s distribution centre, rather than direct to a convenience store. With the number of convenience stores growing, so too will the number of distribution centres that suppliers are required to deliver to. Suppliers might also be expected to increase the frequency of their deliveries to each distribution centre, in order to help retailers to manage demand volatility while holding minimum inventory. Both of these factors have the potential to affect a supplier’s cost-to-serve, which should be monitored closely.
The demand volatility faced by convenience stores varies greatly depending on their location. Those in commuter train stations, for example, will experience heightened demand at certain times of the day, for city centre stores certain days of the week will be most busy, and if situated in a student hub then demand will be far greater during term time. Therefore, in order for suppliers to support these retailers effectively, a flexible and high service approach to fulfilling demand is critical. Understanding their cost-to-serve will be vital for suppliers when considering their capabilities to service particular distribution centres more frequently, offer weekend deliveries, and shorten lead times.
The rise of the convenience sector also has implications for the wider supply chain. Smaller stores, with limited shelf and storage space, and a different target customer, require different pack sizes and even products to larger supermarkets. The suppliers that recognise and respond to this by offering a greater variety of ‘food to go’ and other easy to prepare foods stand to benefit the most from the growing network of stores. However, doing so will lead to the need for greater manufacturing flexibility and possibly for co-manufacturers and co-packers, all adding complexity to the supply chain.
When choosing a logistics provider, retailers will be looking for businesses that can demonstrate a deep understanding of the convenience sector and how to overcome its specific challenges.
With convenience stores often situated on busy high streets or in transport hubs, littered with pedestrians, delivery access can prove difficult. It can be impossible for large delivery vehicles to park close to stores, and some cities, including London, place restrictions around the movements of heavy goods vehicles. This means that it might be necessary to use smaller vehicles when making deliveries. These vehicles might also have to be capable of multi-temperature delivery, which, together with the smaller delivery sizes than those required for large supermarkets, contributes to a very different distribution cost and complexity profile.
Delivery windows are also a lot narrower when it comes to convenience stores compared to larger shops. With a smaller number of staff to receive deliveries, timeliness and precision is key, and drivers should be prepared to offload and assist with the delivery process. The smaller delivery size leads to a higher multi-drop environment, creating more difficulty for logistics providers to maintain a consistently time-sensitive service. Those that prove they have the capabilities to do so will benefit from repeat custom as the market continues to grow.
In order to achieve this excellent level of service, despite the low drop sizes and high frequency fulmilment required by convenience retailers, logistics providers need to be shrewd with their distribution centre locations. They must invest in regional distribution centres that are close to as many of the stores that they deliver to as possible. Urban ‘campuses’ that are equipped to service multiple customers can be a strong solution that enables the sharing of costs and assets whilst delivering a high service solution.
The rise of the convenience sector offers the chance for both suppliers and logistics providers to take advantage of new business opportunities. By pre-empting the needs of the retailers and expanding their own services accordingly, they will be able to capitalise on an increasingly valuable market. While this has the potential to raise their operational expenses, by closely monitoring their cost-to-serve, they can ensure that they are able to make the necessary adjustments before rising costs cause any long term issues.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”