Retailers and manufacturers hoping to compete in the $2.3 trillion global e-commerce market rely on a supply chain under increasing pressure from competitive innovation fueled by rising consumer expectations.
To withstand that pressure, the concept of the traditional supply chain is evolving into what Deloitte calls a “digital supply network,” or DSN.
In the DSN, information in the digital world connects to a decentralized physical world and informs critical operational and strategic business decisions. This new version of the supply chain promises to improve cost efficiency, expand revenue streams, and create new business models.
What does that mean for manufacturers and retailers? Before we can answer that question, you first have to understand the technology driving the transformation.
What is the Future of Supply Chains?
Two major, ongoing innovations are the engines driving the evolution of the traditional, linear supply chain into this modern, Distributed Supply Network. Rising consumer expectations are the fuel.
The first innovation is the ease with which organizations can now access and manipulate information to gain operational insights. Take the grocery retailer, Tesco, and their use of predictive analytics, for example.
Tesco feeds localized weather data to inform its individual store forecasts for 18 million items. That forecast is updated three times per day and instantly shared with suppliers in a web-based system called TescoConnect. According to Paul Miller of Forrester research, this single application of predictive analytics in Tesco’s supply chain reduces stock-outs by 30 percent.
The second innovation is the increased flexibility and efficiency of manufacturing equipment which allows production centers to locate closer to local demand. You can see the manifestation of this trend in the recent strategic decision by the United Parcel Service (UPS) to start offering 3D printing services.
In addition to package delivery, UPS has a lucrative store and ship parts business that it offers to manufacturers. However, with the increased availability of 3D printing, this business is under threat because manufacturers can have parts 3D printed on-demand and shipped wherever they need them rather than storing them.
UPS now has 3D printers at 60 stores in the United States in a bid to meet the changing demands of manufacturers and to neutralize the threat to their traditional store and ship parts business model.
Thanks to improved cost-efficiency and greater flexibility to meet end-customer demands, the firms leading the charge into the future of supply chains can afford to deliver their goods and services exactly when, where and how the end-customer wants them.
The result is a positive feedback loop.
In this loop, innovation improves supply chain efficiency, which improves service levels, which heightens consumer expectations, which increases the pressure to innovate, and the cycle continues at an increasingly rapid pace.
This is why, as a MetaPack survey showed, consumers now expect “a range of options to secure the most expedient time or location” to receive their orders. It also explains what’s driving 63 percent of millennials to expect package delivery within 24 hours.
Failing to innovate means failing to improve service levels, which makes it impossible to meet changing consumer expectations. In turn, technological leaders will siphon off market share from entrenched, tech laggards in much the same way Amazon did to traditional retailers.
The Impact on Manufacturers and Retailers
Put simply, manufacturers and retailers will have to change the way they view their supply chain to survive in this changing landscape. Otherwise, they’ll continue to lose market share to competitors who can leverage DSNs to produce and distribute goods more efficiently, unlock new revenue streams, and more effectively meet their customers’ rising expectations.
A well-known case in point is Amazon, the e-commerce giant that has disrupted the retail market, gobbling up market share by building a network of fulfillment centers that enable them to sell products to the growing contingent of customers who want (and will pay for) 24-hour delivery.
Yet another threat to both retailers’ and manufacturers’ market share resulting from the rise of DSNs comes from direct-to-consumer companies, such as the men’s clothing retailer, Bonobos.
In 2013, with zero physical stores, Bonobos generated revenues of almost $70 million while selling a single pair of corduroy pants. Because of their direct-to-consumer model and minimal overhead, Bonobos could focus on winning market share by differentiating themselves with an incredible end-to-end customer experience.
Initially, this manifested in the form of superb customer service and a no-questions-asked, free return policy. Later on, in 2011, Bonobos started providing showrooms where customers could try on clothes. Yet Bonobos still kept costs low by fulfilling in-store orders online.
Just as Amazon set the standard among consumers for fast delivery, Bonobos and others are setting the standard for a more flexible, personal shopping experience. Enabling it all is a supply chain that’s more distributed, customizable, and on-demand.
Fortunately, though success in this new landscape requires significant change, the technology needed continues to advance, both in terms of capability and affordability. The hard part is the strategic shift in thinking that retailers and manufacturers must make to transition from a traditional supply chain to a DSN.
The Change is Underway
In 2014, Colliers International released a report that showed that 82% of manufacturers “consider proximity to the end-customer as vital to their business model.”
That was five years ago, a strong indication that the transformation of supply chains—aided by 3D printing, robots, and big data—is well underway. At the same time, it’s clear that there’s still a chance to take advantage of the opportunities presented by the newest evolution of the supply chain.
Even Amazon is investing hundreds of millions to continue to expand its shipping and logistics capabilities. In other words, the battle is far from over, and opportunity abounds for retailers and manufacturers alike.