Staples’ bid for Office Depot creates a $15 billion web merchant

 BY MARK BROHAN Research Director

Staples announced today a $6.3 billion deal to acquire Office Depot, a deal that would create a $39 billion company generating about 40% of its revenue online. Regulators will weigh whether competition from online retailers like Amazon and discounters like Wal-Mart can justify the merger of the two remaining national office supplies chains.

In the world of office supplies in the end there was one big one—and a giant one at that, online as well as offline.

Staples, No. 3 in the Internet Retailer 2014 Top 500 Guide announced today a stock deal valued at $6.3 billion to acquire rival Office Depot Inc. (No. 9). The move completes the consolidation of what were once the three national office supply chain retailers. In November 2013, Office Depot acquired OfficeMax in a deal valued at $1.17 billion.

Staples will acquire all outstanding shares of Office Depot for $11 per share. The deal has been approved by both companies and their boards of directors and the transaction is expected to be complete sometime in 2015. A final date wasn’t announced.

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Staples suggested it will close stores and reduce headcount. “Staples expects to generate at least $1 billion of annualized cost synergies by the third full fiscal year post-closing and the majority of these synergies would be realized through headcount and general and administrative expense reductions, efficiencies in purchasing, marketing, and supply chain, retail store network optimization, as well as sharing of best practices,” the company said in announcing the deal. “Staples estimates one-time costs of approximately $1 billion to achieve its synergy target.”

The combined Staples and Office Depot would create a company with combined total sales of $39 billion and Internet Retailer-estimated web sales of $14.5 billion. Those sales still would have ranked the combined organization No. 3 on the Internet Retailer 2014 Top 500 behind Amazon.com and Apple Inc. Before any bricks-and-mortar locations are closed the combined entity would have a base of 4,244 stores.

The merger will enable Staples to “invest in pricing, service, product assortment, e-commerce capability because these companies are very complimentary companies and we think there’s a lot of opportunity in combining the two,” Ron Sargent, Staples’ CEO, told analysts on a conference call this morning.

“It’s going to give us this one time opportunity to accelerate all the things we’re doing,” Sargent told analysts. “We still have a ways to go to become even more competitive particularly among some of the online competitors. 46% of our sales were beyond office supplies this year.”

As customer demand continues to shift online, Staples is going up against a wider set of retail and online competition, Sargent said. “We are now selling over a million SKUs through our online business,” he told analysts. “That’s an opportunity to expand that product assortment to Depot customers. We have invested very heavily in e-commerce over the last couple of years as we’ve tried to reposition the company.”

Sargent says he will stay on as CEO of Staples after the acquisition closes. Over time, Staples expects to consolidate the Office Depot and Office Max brand names and get to one global brand, Staples.

The burgeoning Staples won’t necessarily be any more of a frightening competitor to smaller e-retailers than it was before, says Seth Newman, president of Envelopes.com, No. 519 in the Internet Retailer 2014 Second 500 Guide. “The big keep getting bigger and that’s not necessarily a bad thing for smaller merchants. Many times the larger companies are slower to react to changes in the market and new opportunities while smaller firms can adapt quickly,” he says.

Envelopes.com serves a niche left behind by the “big guys” as they rationalize their inventory offerings to only the most popular items in a category, Newman says. "We counter that by offering the long tail of all sizes, styles and colors of envelopes and paper products and offering value-added services such as printing, addressing and fulfillment that these traditional firms do not,” he says. Through the Staples/Office Depot transition Newman says he will pay close attention to what the combined companies offer and try to fill the gaps left when they discontinue items that customers are still seeking.

The proposed deal is certain to be scrutinized by regulators. The Federal Trade Commission approved the 2013 merger of Office Depot and OfficeMax largely on the basis that the combined companies would provide stronger competition to Staples. “Office Depot will have to convince the government of its claim that eliminating the competition with Staples poses no threat to prices because of competition from Wal-Mart and Internet players,” says Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “That won’t be easy.”

Staples tried to buy Office Depot in 1997, but that deal was killed after the FTC sued. However, the rise of the Internet and e-mail has dramatically changed the office supplies business in the 18 years since.

With businesses and consumers buying fewer pens, envelopes and staplers in the digital age, Staples has been moving aggressively to expand into new categories and to beef up its online business. The retailer announced in late 2013 plans to expand into such product categories as restaurant and medical supplies and gardening equipment. The retailer unveiled in December 2014 a new online marketplace called Staples Exchange, a service that lets suppliers offer their products on Staples.com and then drop-ship orders to customers, a move to compete more effectively against Amazon. Staples has also said it wants to bring more of its e-commerce technology in-house in order to keep up with web rivals.

In 2013 Staples opened an e-commerce and engineering “Development Center” in Seattle. That followed the late 2012 launch of its e-commerce-focused Velocity Lab in Cambridge, MA. Both were designed to help the retailer develop e-retail and mobile commerce programs.

Returns Processing is a Vital Part of a Successful Omnichannel Strategy

Feb 05, 2015 3:06 PM By Murtaza “Zeke” Hamdani

Much has been written about omnichannel strategy from the perspective of driving engagement and conversions. However returns processing is one aspect of the shopping journey that is an extremely important part of the customer experience yet is often glossed over.

Many retailers understandably view returns as cost centers and conversions as profit centers, and we all know the lackluster attention cost centers often receive. However, returns comprise a large component of service level and that means they are key to cultivating loyalty.

Returns deserve time in the omnichannel conversation because whether retailers like it or not, customer expectations on return procedures have kept pace with their evolving expectations for the shopping experience. Just as they expect consistency across every touchpoint in the purchase journey – even when they span multiple channels – they also expect it in returns.

Increased commerce options and social sharing has shifted power almost entirely from retailers to consumers. So it goes without saying that a failure at any touchpoint can easily result in a lost customer. Service recovery is most important at the return level because those customers are already dissatisfied. The return process is often the last chance a retailer has to recover patronage.

The same advances in retail management software that have enabled omnichannel shopping efficiencies extend those capabilities to reverse logistics. The first step to successful returns management is implementing a platform that can perform the following steps. Assuming that functionality is present, these tips will help preserve customer loyalty while also protecting your bottom line.

Manage returns against purchases

Handling returns as separate transactions from purchases is the worst thing a retailer can do to both customer-facing service levels and bookkeeping. When a return enters the system, it should provide full visibility to the original transaction. Returns often do not occur in the same channel as the original sale, but consumers expect retailers to have immediate access to every transaction regardless of where it originated. Further, you should be able to locate the original transaction by searching the customer name or using other identifying data as many consumers don’t keep receipts.

Processing returns against original purchase transactions is a convenience for customers, but it also saves time and money for retailers. It ensures that refunds or store credits are issued for the correct original price paid, and prevents “over returning,” when consumers attempt to return more items than they bought.

Mine return data

Return data contains a wealth of business intelligence. Tracking items that are heavily returned is nothing new, but tracking by channel can help identify problems. If certain items sold via ecommerce are returned more often than the same item purchased in store, it may indicate a problem with the way it’s presented on your site. Or it may mean the item is not being packaged properly and is getting damaged during shipping. It might even indicate buyer’s remorse is high on the item. Robust return reporting raises red flags and draws attention to problematic items.

This data can also identify problematic customers. While returns are a normal part of commerce, most retailers face “serial returners” at some point. These customers can cost significant money, and return reporting capabilities help discover customers that are abusing return policies. It can also flag accounts so that future returns from them can be denied.

Return forms simplify ecommerce returns

While ecommerce has matured, retail still has not fully solved the problem of consumer fear of online purchase dissatisfaction and inability to easily return it. When ecommerce orders come with a pre-printed return form that has ship to and return addresses, this eases those fears. It’s even better when the return form is printed right on the packing slip.

Return forms reduce the time and labor involved in processing. Bar codes printed on the forms let staff call up the original transactions instantly with a scanner, and pre-printed labels prevent package misdirects due to customer error or ambiguous handwriting. Most importantly, customers are more likely to become repeat buyers when they feel confident that the return process is easy should they ever need it again.

Streamlined return processing benefits both retailers and customers, and the right software makes it easy to implement. The ROI from providing an overall shopping environment – including returns – in which customers feel protected and covered are massive dividends in loyalty and goodwill.

Four Steps to Omni-Channel in 2015

BY SCOTT FENWICK ON FEB 5, 2015

It’s no surprise that omni-channel appeared in Gartner Inc.’s recent list of the 10 most overusedmarketing words. In describing the list, Gartner analyst Jake Sorofman criticized the term, saying it had too many meanings and that it’s used too frequently.

This is probably a familiar sentiment to those working in sectors such as retail, finance, insurance and consumer goods, in which omni-channel is commonly used to describe the ease with which consumers hop between channels. But confusion stems from the term’s association with a variety of business technologies, platforms or strategies, which may only be loosely associated with true omni-channel offerings.

Creating a Seamless Experience Profitably

However overused as a term, organizations that differentiate themselves with omni-channel are those that look past defining it, and focus on reacting to and executing on omni-channel strategies.

In retail, omni-channel execution can be defined as meeting or exceeding customer expectations by providing a seamless, confluent brand engagement across every channel. To meet this strategy, more retailers are investing in technologies to support their ability to offer a seamless consumer experience. A recent analyst report by the Aberdeen Group, “Rethinking Merchandise Optimization in the Connected-Customer Era,” describes findings that show 61 percent of retailers implemented omni-channel fulfillment strategies, up from 50 percent in 2013.

Another recent report, resulting from joint research by EKN and Retail Integration Systems News, echoed these findings. Called “A Step-by-Step Approach to Improving Omni-Channel Customer Profitability,” the January 2015 study reveals that, among leading omni-channel capabilities of “extreme importance,” 80 US-based retailers ranked inventory planning (77 percent) and merchandise allocation (65 percent) ahead of customer relationship management (64 percent) and promotions (50 percent). Similarly, retailers rank the importance of inventory visibility across channels higher than a customer convenience capability,y such as buy-online pick-up in store—52 percent to 40 percent, respectively.

These findings exhibit that retailers are favoring technology that enhances fluidity from the warehouse to the in-store associates’ point-of-sale device over pure customer relationship services. This trend also acknowledges that organizations are turning toward a single platform to maximize sales and profit, optimize fulfillment and minimize inventory replenishment imbalances.

While consumers frequently jump between devices and shopping experiences, omni-channel activity creates significant new challenges behind the scenes for retailers. Retailers must replenish stock across multiple channels in ever-quickening cycles, without draining resources in one area to satisfy another. They must be able to create a single pool of inventory, dynamically segmented based on the needs of each selling channel. Then, they can optimize how the order is fulfilled, all based on a variety of strategic planning and daily operational variables.

Four Omni-Channel Steps for 2015

If 2014 was the year in which retailers embraced the concept of omni-channel, this will be the year in which they focus on reconfiguring their business model to remove barriers between the digital and physical worlds. With older retail models treating these two worlds as distinct entities now obsolete, organizations need a new roadmap to fulfill profitably irrespective of the sell channel—and it starts with these four steps:

Gain Not Just Visibility, but Availability

Retailers are gradually making the transition from siloed pools of inventory to enterprise inventory sharing, but complete visibility of inventory alone does not improve allocation and fulfillment, and ultimately, the customers experience with your brand. They need to see what stock is available on hand—and what’s already on order, in transit or returned—across networks to create complete operational control across their enterprise.

Once the retailer has a holistic perspective of inventory, they need the sophistication to control what inventory is truly available for sale based on the inventory location and disposition, the selling channel and often the type of customer they’re interacting with. For example, when new items are introduced into stores, only a portion of that inventory may be made available for sale on the web to protect the in-store shopping experience. However, later in the season, more of that inventory may be made available to the web in order to increase overall sell-through and avoid unnecessary markdowns.

This can’t be done with legacy systems, which are unable to integrate information across channels.

Put All Inventory to Work, Regardless of Location

Being able to fulfill orders quickly and profitably means being able to use every supply source to meet customer demand. This includes stores, which are playing an increasingly important distribution role, and improving the customer proposition, allowing online ordering and physical pickup within one hour, for example. Retailers also need to move toward enabling returns in any channel or location, so unwanted stock can be easily turned into available-to-purchase inventory, and this relies on an omni-channel solution capable of processing transactions across the network.

Make Decisions Based on Total Insight

With the capacity to know exactly what inventory is available to sell through each selling channel and the capability to fulfill orders from any point within the business, retailers will find themselves in a powerful position. Upon reaching this point, the key to maximizing profitability on fulfillment is an efficient omni-channel order management solution, which can automatically determine optimal fulfillment plans that can maximize sell-through and margin, while expediting product to your consumers.

Empower Employees to Deliver Outstanding Customer Service

Centralizing inventory and order data doesn’t just give retailers the ability to make more profitable fulfillment decisions; it can empower customer-facing associates throughout the business. Through a single view of the customer, her transactions and her preferences, sales staff can provide a more compelling and confluent brand engagement. By combining an up close and personal mobile engagement, a quality digital experience and the ability to sell inventory from anywhere in the network, interactions are ensured to result in stellar shopping experiences for your customers.

Maintaining profitable margins while executing on omni-channel is the next big critical focus area for retail organizations as they compete against online-only retail that can afford slimmer margins. Solutions that comprise the backbone of omni-channel—distributed order management, store fulfillment and digital selling—emerged as the platform to enable retail to combine profitability with meeting customer demand in digital or physical realms.

These solutions, along with other emerging technologies, such as mobile selling and clienteling for in-store customer servicing, provide the expected omni-channel experience for the customer. Despite the apparent overuse of the term in multiple industries, omni-channel can drive better business performance and a successful omni-channel implementation can revolutionize an organization’s brand experience.

Omnichannel, Big Data…What’s Next? Predictions for 2015

Feb 02, 2015 10:27 AM By Graeme Grant

If I had to summarize 2014 for the retail industry, it would be the year of buzzwords. From omnichannel to big data, new “solutions” were being discussed every day and all of them were touted as the latest-and-greatest in the ongoing quest to meet customer demands and increase revenue.

That’s not to say that many of these solutions haven’t been successful in what they were intended to do. In fact, many retailers did succeed in making their mobile apps more customer-friendly or providing in-store and online experiences that catered to how individual consumers preferred to shop. But in the year ahead, I’m hopeful that retailers will strive for something even better than simply jumping on the buzzword bandwagon. I predict that 2015 will be the year of the customer.

How will they do that? Here are my top three predictions for the retail industry in the coming year:

 Prediction 1: Retailers will start acting as a brand, not as channels

Over the past year, omnichannel has been one of the most used terms in retail strategy. It is meant to convey the idea that there needs to be full synchronization between all the selling channels a retailer has. It is a further evolution of the concept of multi-channel. But even though omnichannel is pointed in the right direction, I don’t think it goes far enough. The problem is that it is still focused on the retailer-centric concept of “channels.” But consumers don’t think about channels. Ask any consumer on the sidewalk which “sales channel” they prefer and you will be met with a puzzled stare because “channel” has no meaning. To them, they shop with a retail brand. Period. I shop at Staples. If I give my money to them, I expect that the brand of Staples will provide me with the service, products and value I expect. And it is irrelevant whether I do this via mobile app, website or store. I get frustrated at attempts to make me use one channel instead of another (e.g. coupons only good in-store!), or when retailers throw up artificial, channel-centric barriers that make my life harder (I can’t return an online purchase in store for a full refund? Are you joking?!…). These are supposedly “omnichannel” activities, but do this to me too many times and I quickly switch to another retailer who understands that they are serving me, not the other way around.

One customer. One retail brand. That is what omnichannel needs to evolve into to keep up with the demands of today’s consumer.

Prediction 2: The value of data will shift from strength in numbers, to strength in action

There is no doubt that the concept of “big data” has become an established concept over the past couple years. However, despite its acceptance as a valuable tool for business intelligence, many retailers still believe that its significance lies in simply how much data they can amass. The more data the better, right? Actually, no!

Of course it’s important to collect customer data across every touch point, but the real value is in the insight gleamed from the data and how you use that insight. Specifically, using data to improve every interaction you have with your consumers. As they say, “retail is detail,” so it is critical that data is used pervasively at the very tactical, execution level. This is where you can really move the needle.

Think about it: because the average customer will shop with you so infrequently, you need to nurture each individual in between their isolated transactions. Nurturing is not a single campaign. Instead, nurturing is a commitment to be that much more relevant and attractive to a customer with each and every interaction. The goal is that you can move customers from shopping one to two times a year to two to three times. That may not sound like much, but if you make that impact across your customer base then that is a 30 to 50 percent increase in your business!

At the end of the day, the power of data is not dependent on quantity, it’s dependent on how well you use it. And in 2015 I predict that retailers will move away from collecting data for the sake of collecting data, and adopt more tactical approaches that enable them to use the insight pulled from the data they already have to deliver the personalized experiences customers have come to expect.

Prediction 3: Retailers will leverage specialized partners to accomplish their customer-centric goals

So you’re collecting data and know you have to use it to deliver value. Now what? The key is being able to utilize the leading-edge data science to paint a complete picture of each and every customer, and finally move beyond the run-of-the-mill “Hi [insert first name]” personalization. The next generation of personalization requires predictive intelligence that doesn’t just react to a customer’s actions (e.g. an abandoned cart message), but proactively predicts what a customer wants before that customer even knows it.

Accomplishing this level of personalization isn’t easy, and the truth is that over the coming year, retailers will continue to run into road blocks such as lack of talent and poor internal infrastructure. Unfortunately, good data scientists are extremely challenging to hire for retailers, the retail IT infrastructure is not designed for big data and the investments a retailer needs to tackle big data themselves are large and long term. That’s the bad news.

The good news is that the in-house, do-it-yourself approach is not the only option. External, third-party providers of predictive intelligence solutions are becoming more established and are offering the triple-value of world class data science, modern cloud-based infrastructure and a SaaS pricing model that is far more affordable than DIY tactics. In 2015, I expect that retailers will start to realize that they don’t have to go after their goals for personalized, omni-channel messaging alone and that predictive intelligence is key to successfully engaging with and meeting the demands of consumers.

2015 is here. Will this finally be the “Year of the Customer?” While I don’t have a crystal ball and can’t say for sure, what I can guarantee is that the retailers that implement the necessary strategies and tactics to become truly customer-centric are the ones that are going to reap the benefits in the year ahead.

E-Commerce Sales in China Will Reach $1 Trillion By 2019 Thanks To Mobile, Says Forrester

Posted 17 hours ago by Catherine Shu (@catherineshu)

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A new report by Forrester finds that online spending in China will reach one trillion dollars by 2019. The growth will be fueled by mobile apps and improving logistics networks, which have helped e-commerce companies reach new customers in smaller cities.

This is good news for Alibaba, which saw its shares fall after its latest earnings reporttriggered concerns about the impact of its investment in mobile on its revenue growth.

Forrester’s report also says that despite JD.com’s efforts to grow, which include partnerships with Tencent, one of China’s largest Internet companies, Alibaba’s Tmall and Taobao will continue to dominate the market.

China became the world’s largest online retail market in 2013, when total sales reached $307 billion. Forrester estimates that figure will hit $440 billion in 2014 (or 9.8 percent of total retail sales in China) and continue to grow at a compound annual rate of 19.9 percent every year until it reached $1 trillion by 2019.

Mobile driving growth
Investing in mobile apps is key for e-commerce companies because most people in China now use mobile devices to access the Internet. Last year, 25 percent of respondents told Forrester that they shop on a mobile phone at least weekly, with 15 percent logging on daily and 4 percent several times a day.

The e-commerce market is currently divided between two websites, Alibaba’s Tmall and JD.com, which hold a 57 percent and 21 percent market share respectively. Alibaba, however, dominates mobile commerce, with its mobile apps and sites for Tmall and Taobao holding a combined market share of 85 percent, compared to JD.com at 7.1 percent and VIP.com at 1.6 percent.

All of China’s top online commerce players have been growing their mobile sales at a rate that surpasses their U.S. counterparts, like Amazon. JD.com, in particular, has the advantage of a strategic partnership with Tencent that makes it the first shopping channel integrated into WeChat, China’s top messaging app with 468 million monthly active users.

Forrester believes, however, that Alibaba will be able to hold onto its lead.

“The top players have been trying to seize control of the mcommerce market by enhancing their mobile investments and improving their customer experience, giving the runners-up little chance of threatening Tmall’s and Taobao’s mobile dominance in the foreseeable future,” writes Forrester analyst Vanessa Zeng.

The importance of logistics
Logistics may not be the sexiest topic, but building out a solid delivery infrastructure that spans all of China is important to the future of e-commerce companies. Both Alibaba and JD.com have invested heavily in their logistics networks.

For example, Alibaba has poured $16.3 billion into a smart logistics network called Cainiao, with the goal of getting packages to any address in China within 24 hours. JD.com, meanwhile, provides same-day delivery in 111 counties and districts and recently opened its first automated warehouse in Shanghai.

One key to building in-house logistics networks is government support, which includes improving shipping capacity along the Yangtze River. The river flows through several key Chinese cities, and, in acknowledgement of how important e-commerce is to the country’s economic growth, the Chinese government is building logistics centers in economic zone that surrounds it, which accounts 40 percent of China’s total GDP.

The McDonaldization of American pet food.

By Drew Harwell February 5 at 8:26 AM  

Good boy. (Photographer: Adam Rountree / Bloomberg News)

The Big Food giants that feed your family are increasingly eyeing a new market: Your pets.

J.M. Smucker -- the megabrand behind Folgers coffee, Jif peanut butter, Pillsbury, Crisco and its namesake jam -- announced this week that it would pay about $5.8 billion to buy Big Heart Pet Brands, maker of Meow Mix, Milk-Bone, Pup-Peroni and Kibbles 'n Bits.

That's following last year's $2.9 billion gobbling-up of pet-food lines Iams and Eukanuba by Mars, the candy titan behind M&M's, Snickers and Skittles -- a deal that bulked up Mars' pet-brand portfolio, including Whiskas and Pedigree.

For big businesses already feasting on human-food dollars, there are few more enticing growth opportunities than the chow bowl of the American pet.

The nation's pet-food sales have nearly doubled since 2000, to more than $22 billion last year, American Pet Products Association data show. And the bestsellers for dogs and cats are the pricey "premium" lines, which attracted a record-breaking $10 billion in sales last year.

That bounty has led to "rampant consolidation pressures" over the past half decade, Euromonitor International industry researchers said, as well as a series of big buyouts and megamergers under a shrinking number of conglomerate owners.

With "an increased consumer awareness of healthy diets and intensified pet humanisation," analysts said, Big Food has sought to scoop up household names in hopes of securing a strong market share across all prices, brands and blends.

The pet market offers a lucrative new chance for Big Food to wiggle its way into shopping carts. Consumer surveys by market researcher Mintel found that 79 percent of U.S. pet owners said the quality of their pets’ food is as important as their own.

For corporate owners, gathering up big kibble brands also offers a few extra treats. The food giants can use them to diversify into new markets, grabbing buyers beyond the traditional staples. They can even save money, by sharing ingredients later packaged into different foods for people and pets..

Big Pet Food now has nearly unshakeable control of pets' mealtime, Euromonitor data show. About 93 percent of the mid-priced dog and cat food sold in North America goes to only three companies: Big Heart, Mars and Nestle, the giant behind Purina, Dreyer's ice cream and Hot Pockets.

The corporate clumping is not just restrained to pet food, either. In December, a group of investors landed the biggest private-equity buyout of the year when it paid more than $8 billion to acquire PetSmart, the strip-mall pet-supply chain. Its stock has since hit all-time highs.

Smucker will buy Big Heart, the purveyor of GravyBones,Snausages and Kitten Li'l Nibbles formerly known as Del Monte Foods, from a team of private-equity firms, agreeing to hand over nearly 18 million Smucker shares and $1.3 billion in cash while taking on the firm's $2.6 billion of debt.

But the deal remains a huge get for Smucker: Big Heart is America's biggest seller of pet snacks, with about $2.3 billion in net sales over the past year, the company said. Smucker expects pet food will contribute more to its bottom line than Jif, Pillsbury, Crisco and its namesake jams and jellies, combined.

"We recognize that pets are cherished members of the family," chief executive Richard Smucker said in a statement. "With approximately two-thirds of U.S. households having at least one family pet, we will now be able to serve the mealtime and snacking needs of the whole family."

The Supply Side: Welcome to the supply chain revolution

Submitted by The City Wire Staff on Mon, 02/02/2015 - 2:29pm

story by Kim Souza
ksouza@thecitywire.com

There have been few major changes in the physical retail supply chain that has served big box retailers for more than three decades. But as more consumers shift to online shopping and the “omnichannel” retail model becomes the norm, experts say the old supply chain model is beginning to see fundamental changes.
E-commerce sales are growing at a healthy clip and are expected to account for more than 10% of total retail sales by 2016. As much as 60% of all retail sales originate online even though they may be completed at a brick-and-mortar retail store.
“Changes in retail are being driven by technology advancements and that we can’t control. Retailers, their vendors and third party logistics partners had better be aware of these changes and make better use of technology themselves,” said Anníbal Sodero, assistant professor supply chain management at the University of Arkansas.
Sodero said third-party logistics providers and those who can supply final mile services have a huge market opportunity as this shift continues. John Larkin, a transportation analyst with Stifel Nicolaus,recently spoke on the shift in the supply chain. Larkin predicts that transportation miles will be shorter as suppliers and retailers move individual item inventory closer to end-users versus stocking retail stores.
OMNI SHIFT
He and Sodero said there are also key advantages for suppliers as they shift to serve the growth of omnichannel – consumers using various methods and devices to research, purchase and receive goods – retailing.
“Search costs are lower in the virtual retail world and firms can position inventory somewhere upstream in the supply chain which helps them gain a lot efficiencies and the main reason they are able to offer lower prices,” Sodero said. “Better yet, the omnichannel model allows for larger assortment possibilities, endless aisles.”
He said the Amazon model is becoming more mainstream for retail. Amazon has worked in recent years to balance its network and move product easily between fulfillment centers which are now located on the edge of major urban cities. He said this inventory consolidation has helped Amazon gain efficiencies and make use of fuller truck loads. But the retailer also slows down delivery in some cases when the consumer can afford to wait.
“They are now giving bonus dollars back to the consumer if they can wait an extra day. They also have the capability to deliver in one hour in Manhattan given their closest fulfillment center,” Sodero said.
In a move toward this new model, Sodero said other retailers are playing catch up. He said Wal-Mart operates two separate inventory and delivery systems – one for physical stores and one for e-commerce. However, he sees the tests and trials underway at Wal-Mart from shipping to lockers to site to store, home grocery delivery and the in-store pickup for online orders as moves that allow the retail behemoth to leverage its physical size.
Sodero said the separate systems are the easiest way for Wal-Mart to balance its inventory, but to be true omnichannel the systems would need to be merged. In so doing, Sodero said there could be huge efficiencies gained. He said there is more risk in owning the inventory and storing it down the supply chain near the consumer, which is the present retail supply chain model.
DROP SHIPMENTS
Sodero expects more retailers including big box stores, to move toward drop shipments in the future which is a direct shipment from the supplier to the end-user. He said drop shipments are a “powerful weapon” for retailers.
“Instead of stocking inventory in a retail store you can keep inventory upstream which also provides for lower safety stocks and lowering the uncertainty that exists at the retail stores,” Sodero said. “The downside is the lack of inventory visibility and loss of control of the service to the end-user.”
He said there are opportunities for third-party logistics (3PL) providers to partner up and give the retailers the inventory visibility they need and guarantee quality service to the end-user.
Dan Sanker, CEO of CaseStack, a third-party logistics firm based in Fayetteville, recently told The City Wire that suppliers are already shifting inventory into multiple regions so they can be closer to the end-user. CaseStack uses technology to provide the inventory visibility and tracking the products through each phase of the supply chain.
Challenges for 3PL providers going forward are the cost of infrastructure expansion to service higher demands and sourcing the qualified tech talent, Sanker said.
FINAL MILE
Sodero said final mile of delivery is the costliest part of the supply chain, comprising about 25% of the total expense. He said the Uber model for the final mile holds much opportunity for new players in the supply chain. The Uber model uses crowd-sourced consumers to pick-up and drop-off ordered items to customers at a far cheaper rate than traditional courier and short-distance shippers.
Sodero said more retailers are signing on to the Uber-like final mile service and he expects to see more it in the future.
Larkin said final mile is also a challenge for transportation providers whose pricing models have been built on long hauls. He said the demand for final mile delivery will only increase and carriers need to figure out how to take advantage of the change.
INVENTORY INACCURACIES
Another area of concern voiced by Sodero is the inventory inaccuracies that exist with the traditional retail supply chain. Integrating big data should help, but Sodero’s research found that only a few retailers are integrating social media and other big data into their forecasting models. He said 25% have not yet begun to apply big data and a vast majority are just now starting to make initial investments in this area.
“Inventory inaccuracies are still a huge problem for the retailer and the suppliers and arguably a big problem for customer service. Using point of sale data (POS) has been the main source of inventory planning for a long time. But POS data is truncated and it depends on the ability one has to position inventory and then sell it. By bringing social media and other key factors such as weather events, the retailer and supplier should be able to do a more thorough job of forecasting and ultimately getting inventories in balance with demand,” Sodero said.

Wal-Mart’s new Retail Link 2.0 being slowly rolled out to suppliers over this year is the retailer’s attempt to do a better job of sales forecasting and keeping better track of its global replenishment systems.
Sodero said suppliers and other supply chain partners have to do their homework and they also must become more integrated as the supply chain of the future will be an open system dependent upon unique and advanced technology.
“Suppliers have to integrate from the top to bottom of the chain and then within their companies. It’s going to take more investment in technology for most if they are able to become more responsive and agile so that they can bring products fast to wherever they are required,” Sodero said.