Supply Chain Management: Adidas and Amazon
In an amazing twist, technology is rendering the old fundamentals of supply chain management obsolete. In Russia, Adidas increased sales in Moscow by double digits in 24 hours, thanks to a supply chain initiative. At the same time Amazon is now looking at using drones to deliver products, a very expensive move, but one the company says will increase sales.
Experts would usually claim that supply chain management is about delivering the right quality at the lowest cost, with the agreed service level, right? Well, not anymore. As the two examples above show, it is also about increasing sales and profits; the supply chain is no longer just about efficiency, working capital reduction and inventory management. So, what happened?
Adidas is the leading sports’ shoe brand in Russia with more than 1,200 stores. As part of its strategy to please customers, Adidas is implementing an omni channel strategy, allowing people to buy in a number of ways (on-line or in the physical store) any product that is available anywhere in Russia (whether in an Adidas shop, distribution center or warehouse), and for it to be delivered in any way (at home, at the store or at a pick-up point). This is possible thanks to the use of RFID identification chips, “ship from store” tools, a digital “click and collect” solution and “endless aisle” technology.
Initially, Adidas implemented a trial of click and collect in Moscow expecting that just a few consumers would choose this option – to buy on-line and collect the product at a store. They expected around 10 to 20 orders per week, but consumers embraced the idea and orders reached 1,000 per week. Adidas was forced to stop the experiment and build the supply chain infrastructure needed to support such demand. Today, up to 70% of online sales are through click and collect. Similarly, other supply chain initiatives like ship from store, where goods ordered online are delivered from a store, not a distribution center, and endless aisle, in which customers can order products no longer in stock in their local store but is available in another store in another part of the country, have substantially increased sales and, logically, profits.
For Adidas Russia, the supply chain is no longer about reducing costs: It is – more importantly – about increasing sales. All of this is possible thanks to the technology being used in the supply chain. Most of these technologies belong to Industry 4.0, a high-tech strategy promoting the computerization of manufacturing. Adidas applies these technologies to the supply chain rather than just to manufacturing. This is why we call it Supply Chain 4.0, a term initially coined by supply chain professional Anne Wyss.
Something executives always knew
Executives have always known that improving supply chains ultimately improves sales. However, because the impact was very difficult to evaluate, companies traditionally approved investments in supply chains based only on the expected reductions in costs and working capital. The digitalization of supply chains, with the breadth of sales and ordering data available, now makes it possible to calculate by how much supply chain improvements are increasing sales and profits, and the numbers are often amazing.
Another example is how much more Adidas is selling in Russia thanks to the use of ship from store. In the largest country in the world, shipping from one part of the country to the other extreme can take up to 15 days using traditional delivery systems. By being able to deliver from a store, Adidas expected to reduce delivery times and to increase sales, but it also expected to increase delivery costs. To its surprise, delivery costs fell and sales increased substantially. It turns out that in certain product categories, consumers tend to return around 50% of the products they buy online, if delivery is made within 24 hours. However, if delivery takes three days, consumers may return up to 70%. Thus, increasing speed of delivery means fewer returns, which means higher sales – up to 40% higher at full price. Also, by reducing the number of returns, logistics costs go down substantially.
These successful examples lead to a redefinition of what a supply chain is and of the scope of the role of executives. In the case of Adidas Russia, one executive was both head of IT and supply chains – one executive with a holistic view of the business and with the goal of pleasing consumers and increasing sales. This combination made possible these developments. He justified investments by increased sales.
Similarly, while many logistics executives see the idea of Amazon using drones for deliveries as an “extravaganza”, it makes a lot of sense. For decades, the world of logistics has been obsessed with lowering costs. As one logistics executive put it: “We look at savings in terms of cents, not dollars or euros”. Delivering by drones looks crazy to them. However, if you are Amazon, and you lower the rate of return of products because you deliver in 15 minutes, fewer returns mean higher sales and, therefore, higher profit. The comparison is not about costs but about sales.
Until recently, we were used to looking at supply chains as cost drivers, not sales drivers. We have a lot of tools to understand supply chain costs, like “total cost of ownership”, “spend analysis” or “total landed cost”, but none about increasing sales. However, technology is bringing about a fundamental change and Supply Chain 4.0 requires a very different view – focusing on increasing sales through a better understanding of how customers behave.
Finally, we should also start to use the term Value Chain 4.0, because we might need to re-combine and re-think how we work and organize companies. The key is how to generate and capture value in the whole chain. And it looks very different from the past. Adidas is combining functions like IT and supply chains. They are doing a lot of trial and error (rather than the typical big bang of huge enterprise resource planning (ERP) or systems deployment) and they are using technology usually associated with Industry 4.0 everywhere, not just in the factory.
In short, the digital revolution is creating a whole new paradigm for what used to be the supply chain. It was once about delivering the right quality at the lowest cost, with the agreed service level; now it is about increasing sales, creating more value and capturing it.
Carlos Cordon is LEGO Professor of Strategy and Supply Chain Management at IMD. He teaches in IMD’s Digital Supply Chain Management program.
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.”