GRA Partner Carter McNabb recently presented 'From Offshore Supply to Last Mile Fulfilment - Upgrading end-to-end Supply Chain Strategy & Design' to the audience of Supply Chain Innovation in Melbourne.
His presentation covered:
- Offshore consolidation centres, multiple flow paths, multi-tiered supply chain networks & last mile fulfilment. So many options! What to do?
- Integrating Supply Chain & Procurement Strategy, the next competitive advantage frontier
- Australian Case study: Offshore logistics to online fulfilment - Co-creating strategic sourcing & supply chain models to increase gross & net margin whilst improving service levels
View his presentation below.
Introduction: Carter is a founding partner of GRA. Australia's premier supply chain consulting firm, it specialises in supply chain strategy, planning and execution. Over its 23-year history GRA has helped 200 plus organisations across multiple industries, identify combined savings of more than $10 billion.
GRA is focused on practical results delivery and its mission is to turn its clients' supply chains into a competitive advantage. Carter has over 20 years of international supply chain advisory and transformation experience and taught at the master’s level within Monash University's Logistics and Supply Chain Management programme. With a series of published articles and white papers, press quotes and frequent speaking engagements, Carter is a recognised expert in his field. Carter's going to be talking about 'From off-shore supplier to the last mile fulfilment, upgrading intense supply chain strategy and design'. Welcome Carter.
Carter McNabb: So we just heard a presentation about American supply chains from an Australian, you're now going to hear a presentation about Australian supply chains from an American. And I enjoy how the topics of these presentations often link up quite well.
So the last presentation finished on the idea of differentiated supply chains. And more or less, that's what this presentation is about. 'Cause over the last few years, as we've been doing supply chain strategy network design, what we've realised it's just becoming a little bit more intricate, bit more complex, because there's a lot more options. So on one hand, that's exciting, 'cause there are options to differentiate and do other things. On the other hand, it can be overwhelming if you don't have the clarity or the operational capability to deliver against it. So, it's a razor's edge time to be in supply chain, really exciting.
And I guess another way of saying that is, there's a real opportunity, probably more of an opportunity to get it right. But the other side of that is what? There's also an opportunity to not get it so right. So, we'll talk about some of the trends that are creating that context and then some ways that some of those challenges are being addressed successfully.
So I'd like to just cover a couple of high level trends there before we move into the specifics of supply chain. The first one is a graph showing population growth. So I stumbled across this in the National Geographic a few years ago, and went "ooh". And way down here on the left hand corner, it shows the world population AD 1 at about 200 million, so about the height of the Roman Empire, about 200 million people, roll forward to 1800, so at about a billion people.
So think about the industrial and medical improvements that were starting to be made around that time, industrial improvements. But then the next thing to look, it's interesting, is then between 1800 and 1930, it goes to 2 billion oh. So what took nearly 2000 years to increase by a factor of five, the same step change happened in about 100 years. And then it's effectively doubled about every 40 to 50 years since then. So there's some people alive that have seen the population increase by a factor of four in their lifetimes, which is unprecedented.
So there's a lot of us kicking around, it's meant to plane off about 2045 at around 9 billion, that's what the estimates say. But have a think about rates of consumption as well, product life cycles. So there's a lot of us doing lots of stuff and doing it really fast. And again, the flip side to this is also... and I just like to bring in the idea of some social responsibility around this as well, 'cause this stuff's exciting, I'm not convinced it's all great.
Another thing is when I see a chart like this that shoots up rapidly, where does it end up, going? And in a lot of cases hear the other way. So, I think there's... it's exciting on one hand, on the other hand, I think there's a need to look at this a little bit more closely and, how do you feel when you see that graph? Yeah, another interesting fact that I heard once was that most living systems to acquire a calorie of energy for sustainment, expend just under a calorie of energy, human beings expend 10 to one.
So in terms of the energy usage, it would be seen to be unsustainable, and one of the reasons for that is we've figured out a way of converting hundreds of millions of years of stored solar power in the form of petroleum into immediate energy. So that's what we're up to. Just from some more cheery information.
A good friend of mine is in one of the big corporate recovery firms, and he said he's been pretty slow the last few years, but he said he's going to get really... he expects to get really busy in about 18 months. So I said, "why?" I said "Well, we had the global liquidity crisis." So he said, we solved it by increasing global liquidity by a factor of three. And we're just all the asset prices has gone up accordingly. So his view, and quite a well founded view, or well experienced view is that instead of 18 to 24 months, we might be headed back to something that's a little bit more challenging in terms of the global economy.
So it's just worth keeping that in mind. I'm certainly looking at that in terms of our business, 'cause we've got a lot on at the moment, but we've got this dance about, should we bring on and invest right now, because we're really not sure.
So we've had a pretty good rebound for five or six years, that's what happens, and then usually there's a little bit of a change, so. And the supply chains need to be resilient and adaptive around that as well. So one is the increased populations, that's one point to note. The second one is the data trail that we're leaving the use of online browsing mobile devices, having our location turned on in Google.
So there's an enormous data footprint that's being created and interestingly, it's getting more and more granular. So right down to the point of seeing when people are making independent decisions and I guess the predictive capabilities in this is really interesting.
So this was also out of National Geographic. I actually had the hard copy magazine, which shows how long ago this was, it was like three years ago, way back when. And this was the front cover of an article about MIT Labs and the little call out bubbles are predictions they can make with a high degree of confidence, very high degree of confidence, without know anything about the person. So these were things like, likelihood of repaying a bank loan. So interesting to know, the other question is, by depending on who knows that and how it's used, what might happen? Yeah? I thought one of the ones that was in some ways one of the most shocking to me when I first read it was pregnant but doesn't know it yet. So again, they'll be biochemical changes, which leads to neurochemical changes, which leads to different behaviours which can be picked up by search engines and a prediction made about a person being pregnant before that person actually knows. It's cool and kind of creeps me out at the same time. But the bottom line on all this is that it means that with that amount of data, it is, and that's the point, it's data.
So to me data, it's just bunches of bits of, look, it's this, it's that, it's that. I don't necessarily know what to do with it until I process it and turn data into information that supports decision making. So the opportunity is to , boil the data into some information that allows me to make decisions in the supply chain.
There's a lot of predictive analytic type applications that will help in this respect. And you may or may not have heard of Amazon's push to do predictive replenishment based on previous order profiles and so on. So, there are applications of this starting to emerge and some have been in place for a while. So, on one hand, we've got lots of us running around. On the other hand, we got lots of us generating lots of data.
And the third point is that supply chains are getting a little bit more complex. So, they're longer so particularly in Australia, we've been expanding out to generally to import to lower cost economies, and we'll talk about procurement supply chain strategy in a minute and how that links.
So there's a lot of businesses that have gone off-shore, so there's a longer supply chain. But then on the other side, we've got many more customer channels. So there's a much higher degree of service expectation and delivery. So it's stretched out a bit. In the middle of that there's increased complexity around new sourcing, fulfilment and customer channels.
So lots of different ways we can get the stuff in. So, do we get it from overseas? And if we get it from overseas, do we get it through a consolidation centre over there? Do we have it packed there and then bring it into our cross-dock here? So lots of options around the flow paths.
There's also lots around, again, the fulfilment methodolgies, and also the customer channels. So as I said, so, here we are, there's more of us more data. And there's more options on the supply side and more options on the customer side.
And also there's, there's more fragmentation. So broader product offers, shorter product life cycles, and again, these higher expectations. So what we're really saying is the idea of the one size fits all supply chain, which in my opinion was always kind of an idea. But, roll it back 20 years ago, they were more quote unquote, standard supply chain models that got applied.
What we're saying now, generally, is that there's almost multiple supply chains in the given business. And the thing is that you really need to tailor it, and it needs to be tailored based on what the customer expects, what the product profile is, and what the sourcing channel looks like.
All that then calls into question the need or calls into account the need for more clarity and integration in the supply chain. So this is... Here's one when we developed earlier. So this is just a model we used to look at a supply chain from top to bottom.
So on the top box, it says business strategy. So key question is what are we on about, what are we trying to do? 'Cause... and once we have a clear picture of that, then the question is, what's the customer value proposition? And then we start working out what the supply chain strategy is, and then we work out what the network looks like, and so on and so forth.
Interestingly, one of the things that I see not so well defined in a lot of cases is the customer value proposition. There's a... we need to service the customer at a very high level, so how do you define that? Sometimes that can be a little loose, that's okay. It's just that that can come at a quite a high cost 'cause it creates a lot of reactivity and lack of clarity about what's important or when we have shortages, how do we make trade off decisions and so on.
The other part of this I'd refer to, it says KPI's policies and incentives, is a common statement I hear from the C-suite is, "We don't understand why the people making the decisions "are making those decisions." And then the people making the decision say, "We don't really know what the people sitting up there "expect us to do." So again there's often a lack of clarity in what we call that policy layer is, what other delegations? What decisions can and can't I make? Whether that has to... And they don't have to be like iron clad giant things, but just clarity around what's the focus and priority, and how do we make those decisions, and it takes a lot of the frustration, and second guessing out if that's a bit clear. And then what sits, so, the three broad chunks of this is that whole top layer is really what we call more the strategy, the direction, that middle layers, the integration and the bottom layer is really all the capabilities, so people processes and systems and the data.
And again, we have to be clear about what we're trying to do up there to make sure we design something that delivers. If we now break that down into some of the trends that I mentioned before, one is the increased sourcing complexity.
So again, we've talked about increased product proliferation, longer lead times, greater fragmentation of suppliers, and more degrees of freedom within those decisions about how I allocate once the suppliers is coming my way, what do I do there? And at the same time, we're expected to have more visibility and predictability around that as well. And what we're also seeing with some of the leaders in the space do is start to really come, and I think this is becoming more and more evident, is, and I think you mentioned in your presentation as well before, is that at one point in time, the idea of network design and inventory was kind of a one than a two, we'll work up the network then will work at inventory.
Now it's much more of an iterative process. And in our judgement it needs to be because they affect one another. Very similar to procurement and supply chain in that procurement, at a very, very, very high level. And apologies if I offend anyone by simplifying this too much. But the aim of procurement traditionally has been, how do I get the best gross margin. So lowest price, where supply chain's actually looking at net margin. So it's really the cost to serve.
So there have been examples of businesses, and you may have seen it in some of your businesses, where a decision was made around a low cost supplier that had a higher ultimate net cost. Once we started looking at things like, well every now and then we have to airfreight something as we run out and not just blow away all the savings. Or we've got quality issues, or whatever. Certainly, I've seen that.
So what we're now seeing though is more of an integrated view that says, when we're looking at a supply base, maybe it's not just the lowest cost supplier and maybe it's just not the lowest cost in volume, maybe it's volume by geography. 'Cause what we need to make sure is that, we've got consolidation of suppliers by a certain porch that allows us to consolidate, so each individual supplier might not be the lowest cost, but as the total cost picture it is.
And we can get some centralization and some visibility and so on through that locale. And I think I've gotten that's what it says on the next slide. So as we've said, the lead times have increased and off-shore warehouse consolidation is becoming increasingly common. And we're seeing that typically done through partnerships in off-shore economies. And from a consolidation perspective, seeing a lot of direct-to-store pallet container prep.
Value-add processes might be picking and packing at origin, labelling, slip sheeting, and so on. And the general idea is to have that those labour costs incurred somewhere else, in a lower cost profile. And again, trying to be cognizant of being proximal to the supply base.
To give you an example of this, so this was an anonymous example, but one that was real for a business we worked with, and it was very much around this which was the... there was a push to do more importing to increase the gross profit. On the other hand, there was a recognition that that could actually increase supply chain costs.
So how do we balance that? And broadly, there ended up being four different supply to customer channels or processes that were put in place. So model one is store ready pallets. So we've got the supplier at the top, the pallets are prepared there, there's a consolidation point, in this case probably off-shore, and then that comes in, the containers are unloaded, it goes directly to the store.
So that's one model and on a a dollar for dollar basis while we do the comparison in a second, but what we found was that had a lower cost, but it's high risk from an inventory perspective. 'Cause think about it, if that's 14 weeks away, I'm having to make my inventory decisions 14 weeks in advance, which means I got to be a lot better at forecasting. And if I'm going direct to a store as opposed to like a DC then I've got to hold the safety stock in every store. Make sense? So that's the stores are covering the risks that there is an inventory trade off. And again, this is often not what's looked at. But generally speaking, this is a lower cost, higher risk type approach, and it tends to work for say promo type items, seasonal items.
And again, I don't like using generalisations 'cause every time I said that there's always an example that's not true, but in general, that's where it tends to work. The second model was more of a cross-dock. So it shipped from the supplier, but then the allocation occurs when the product's on the water. So it's coming through, it's not there yet. So there's an allocation decision made a bit closer to the point of sale.
So again we're not having to forecast as far in advance and then when it arrives in Australia, it goes to a cross-dock and then get shipped out to the stores. And this is more you call this like a medium risk, medium call sort of option. As is the second one, the flow through, where again, we're differing that allocation decision even closer to the point.
Again, if demands are quite variable this might make sense it hits and boom, we're trying to get it out. And it goes flow through to the stores.
And then the last model is is seen as more of the traditional model, we order the product and hold it in a DC. And again, you all will likely have seen examples of this or dealt with this in your own businesses, but that model four put away, that might work really well for items that are bought in bulk, low cost, low demand variability, you hold it.
Or it can be high value items, where I'm actually trying to hold the inventory centrally and minimise the amount of stock holding across the network. So I've less in the store and just drip it out. And that one, again, has a higher quote unquote logistics cost, much lower risk, because we're actually got the buffer stock locally.
But then there's an inventory cost element that needs to be put into this as well. And this is what I said before about the need to make network decisions, inventory decisions and customer decisions all at once. It's because all of these things are true.
And I've seen some decisions made, where some of these things were left out. So, the assumptions were made that this will happen, but the analysis wasn't done and it can cost. So that's really on the inbound side, in terms of some of the things that we're seeing that are creating the need to look at this a bit more closely and get the options right.
The next one is around what's actually happening with distribution centres themselves. So this is now in the distribution centre. So they've improved a lot through the technology that's been put in since the 90s, warehouse management systems and automation and so on.
And that's allowed these businesses to increase in scale without necessarily having a linear cost increase. So that's been great and that's helped. I think what's next for DCs though, is what we're really saying is, if automation becomes more and more the driver of cost, automation solutions tend to be well matched to specific product profiles and ordering patterns.
So it's now really more, it's not so much volume by facility but it's almost like volume by product profile. How does it get ordered, what are its dimensions? 'Cause the way I'm going to handle tiny little cube boxes of cute squishy toys and kayaks and then there may be a difference.
- [Narrator] So these are the Cuba robots, this is an Alibaba warehouse and that's what's called a goods-to-person system really great for each picks online fulfilment. Brings the product to the person. Not so great at using the height of the facility, notice that?
Carter McNabb: So again, what we just saw as an example of something that's really great for each picks, but doesn't really use the cube of the facility where if you go back to more of a conveyor type system or carousel type system, maybe not as applicable for each picks, but again, better utilisation and it is horses for courses, so it depends on what the product profile is and the cost associated with that. What we're also seeing in Australia is, oh. It was so good, let's watch that again.
One observation about Australia is that again, and you'd be aware of this, which is the relative size of Australia relative to the U.S. and then the population numbers and then the distribution. One of the things that I've seen in Australia is that, we still do have a lot of options, in like, a 10th of the population.
And to your point as well, we've done a couple of global study tours, going around and looking at various businesses and this sort of technology. And the general thing we've heard is that not many businesses are really making a whole lot of money out of this, but they felt it was a ticket deploy, they had to.
And the idea is once the industry consolidates and gets to a bigger point, they'll be some winners in that. And of course, there's all the information about how heavily Amazon has been funded to try to achieve that economy of scale.
But the point we're making here is that in Australia, it does seem to be challenging for a lot of businesses to be able to make a case for investing in this kind of technology by themselves.
So we're now seeing some of the 3PLs offer more product style solutions. So like this is the Toll 3PL facility in Western Sydney. And a prediction don't know if they'll come true, but a prediction is possibly that the 3PLs will become more product centric and customer centric.
So the old model of 3PL was, we'll take all of your business, it may start moving into, we'll take the parts of it we're really good at and try to get the aggregation and economies of scale that way. So the next one is the evolution of the distribution footprint itself.
So we've talked about the options of stuff coming in, procurement, supply chain strategy flow pass, we've talked a little bit about how distribution centres themselves are changing. And the next one now is really, so how do we see that footprint evolving?
And again, there are more considerations now because of the different inbound channels and outbound channels, and customer dynamics. And there's a question around fulfilment too, and this is why customer service promise makes such a big difference.
Because if I have a service promise that says, you can place an order, so we've got 100,000, so using a particular example in my mind, which I won't name but, we've got 150 stores, 100,000 products in each store, and we've got 300,000 in the online offering and we want to be able to reach 95% of Australia within a certain period of time.
So if my offer is, I place an order, but let me be clear, I don't carry that full 300,000 skew range in every store, about a third of it. But I can place an online order for any of those skews. Well, if my offer is that you get a single order and one delivery at one cost, then my inventory strategy, network strategy, is going to have to change. Relative to, I'm happy to give you two orders, one will come quick, one will come a little bit later. And we may or may not charge you twice depends.
So this is where the discussion with the marketing team becomes really important, like, that's a great offer and this is what that might cost. So there's some other options and it becomes a much more collaborative discussion. And just an example of some of the new solutions that when I say new they've been around for a few years, but this just gives you an example of some of the creative thinking. Something called a dark store, usually located in the high density areas, really good for online fulfilment. They're basically set up like a store but oftentimes with automation, because the standard distribution centre isn't really set up for each picks.
So this is an idea of how do we get something close to the customer that has a very strong setup to support online fulfilment and this says three times more efficient than traditional supermarkets and fulfilling online orders.
And there's a cost trade off there too though because the real estate is going to be more expensive closer in.
So we're seeing these blended models starting to emerge, things that used to be, it was either this or this, they're some mix solutions. And for each one of these examples I can give you, there's another couple. So again, it's an exciting time, and there are more options on what that distribution network structure might look like to meet the customer needs. Okay.
And again, I've just talked about this before, but what's becoming increasingly apparent is this idea of, it's a mixture of availability and responsiveness.
What do I have available to the customer and how responsive am I going to be to them? Those two decisions will then lead to, what does my network need to look like and where am I stocking my inventory?
And those two things are a match pair. And yes we can't really do that in isol... we can do it in isolation, it's just we don't advise it. It's like swimming outside the flags. And the last one is reinventing the last mile.
And I'll just start here by the picture of happy Jeff. Here he is, "Hey?" The idea that this last mile piece, there's so much happening here. And I'll give you a couple of examples. But it's a really rich, fertile opportunity for innovation. And I don't know what the answers to any of this is just yet. And I don't think anybody does.
There's lots of things being trialled and tested. And again, it depends what you do. So, as it says fragmentation it's prompting a required step change in the way we do delivery, strategic partnerships are becoming really important for offering this kind of convenience. Last mile delivery is really presenting an opportunity in customer experience and I'll show you a little video on that as well. And there's a whole bunch that's coming it is day one. And his quote was quite funny: "Customers are always beautifully, wonderfully dissatisfied "even when they report being happy and businesses great." a benefit of being in the Western world right?
- [Narrator] Siroop is the first online marketplace in Switzerland, what we see is that new delivery services are demanded by the customer. You must be able to deliver a product when the customer is requesting it. Once the customer has ordered. The parcel got packed at the merchant and then it's mounted below the drone. The drone will fly autonomously to the landing positions and hand the product over to the van. And then the last mile transportation is done by the van.
The logistics challenges arise in that last mile delivery when vehicles get caught up in city traffic. And this is what causes delays, unreliability and of course costs. And these are the types of challenges that we believe that we can solve by combining the Mercedes-Benz vans together with the Matternet drone.
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Carter McNabb: Now I just was thinking if someone told me when I was like eight years old, I'd be on stage one day watching a picture of someone put groceries in somebody's car and talking excitedly about it. I might have made some different decisions. All good. Okay. So I wanted to offer that as a way of just framing this next piece, which is, I think there's a big shift happening in supply chains and customer convenience as well, which is, the way it's used to work was, it's like, well, how do I need to fit my day into the supply chain?
Where it's going now is how does the supply chain fit my day? And those are some examples there. So the question is, if I have an online order, and I want to deliver it, is the offer a same day, a next day, a three to five business days? And how am I going to do that profitably? And the next one is click and collect.
So do I do that store pickup, partner store pickup and convenience channels? And just to give an overlay of some of the opportunity around that is that, in terms of the number of places I can get a morning coffee, there's 22,000 locations, there's 6700 petrol stations.
And I go to the grocery store, there's 3000 locations there. Maybe I go to the train 800 locations there, school drop off 9400 locations. And so on, there is a lot of infrastructure out there and the question is, what opportunities are there around partnerships and networks that can be created to offer something novel and not having to invest myself? This last piece is around customer experience. I think this is a really interesting model what this business does. And so I'll just again show you the video and then talk about that quickly.
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Carter McNabb: So interesting huh? So one of the points I make about this organisation is they tend to work with a very specific product set. So this probably doesn't work if you're buying corn chips or toothbrushes.
But if you... drones, technology products, and I think they've now moved into some more high value kind of luxury items as well. So it's high margin products, highly specialised, they're pretty targeted in what they're doing so the margins can absorb it.
But what else, what else have they done, they've taken the store out. I mean, they basically just removed an entire layer of the supply chain.
So, it's an older example but it's what IKEA did, some time ago which was said, oh, we'll bring furniture in, but the store is the warehouse it's flat packed. So we don't ship all the air across and then, I'm the product picker and assembler and not a particularly good assembler. So usually I call on someone and go, "I don't understand the instructions help me." But it's a similar idea, it's really looking at the supply chain saying, "What does the customer really value?" and it's an opportunity to compress something and take out a whole layer of cost. So, it's a pretty exciting example as well.
So in summary. I think it's an exciting time to be in supply chain, there's the population and data explosion on an exponential scale. Supply chains are longer, more complex and more fragmented again, which creates more options. Also it means that the need to integrate the business strategy and the customer offer again comes back to that customer offer point. To then make sure the supply chain is aligned to it is really, really key. So some tighter integration there. There's a real opportunity to get that right and make that a source of competitive advantage and it's also a great time for some creative thinking. Thanks very much.
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