Cathy Leonhardt, Co-Head of Consumer Retail, and Jason Russell, Head of Industrial Technology & Software, discuss the growing need and opportunity for investment in supply chain and logistics management in light of the new market environment created by COVID-19.
Jason Russell: 0:04
As we look forward, I think one thing is clear. Supply chain logistics management has become table stakes for Commerce. We expect to see companies shift their investment strategies coming out of COVID, making larger investments in supply chain and logistics technology and expanding capabilities.
Cathy Leonhardt: 0:22
Thank you for joining. I'm Cathy Leonhardt, co-head of the global consumer retail practice at PJ SOLOMON. For those of you who know us, we have a 30 year history advising consumer and retail companies across cycles, providing independent strategic and financial advice. And I will say that we're in an unprecedented cycle. I'm joined by my partner Jason Russell. He leads our supply chain and logistics technology coverage. Like most of us, Jason and I are speaking virtually from our home, and I think as we look out our windows during the quarantine period , As you point out Jason, and we all hope for normalcy, what we're watching is countless delivery vehicles that are endlessly looping through our neighborhood. You know, as we think about the context, the impact on supply chain and logistics management is becoming really, really clear to everyone. So our topic today is very timely and relevant to clients across both of our practice areas. And I will say from a retailing perspective, going into this crisis, supply chain and logistics technology were already a priority of management teams of retailers, omnichannel, retailers and brands. But the impact of COVID-19 on supply chain and logistics management is heightening this focus and the need for technology investment. Jason, can you talk a little bit about your background and how you see this increased emphasis on technology investment by major companies and retailers?
Jason Russell: 2:00
Thank you, Cathy. It's a pleasure to join in this call. My name is Jason Russell. I head the industrial technology and software team at PJ SOLOMON. We really cover three different areas. One of supply chain logistics management technology, which involves everything from where the order is created to where it gets delivered. Commerce technology, which is really around the purchasing experience and the B2B network and in industrial software. And, you know, I do think it's a really important and timely topic, particularly from where my clients that spend most of their time trying to figure out how to get goods to businesses and to consumers and obviously with your clients which are driving the purchasing experience, so I think is really interesting topic and is timely, especially around what's happened with COVID, you know, trying to synchronize both the frontend and the backend experience, which creates, obviously, a lot of complexity and need for technology investment.
Cathy Leonhardt: 2:48
It is an important topic. Just for context, the retail backdrop is unlike any we have ever seen. There's a dramatic shift in the way consumers shop. Consumers are experiencing this firsthand when they seek to order goods online that are out of stock. And as we step back, the impact of COVID-19 on supply chain and logistics management is going to heighten management's focus on the need for technology investment. I think this is going to be front and center for a long time to come. So with that Jason, how do you see priorities changing as a result of COVID-19 and how are management team's going to address supply chain and logistics going forward?
Jason Russell: 3:31
I think this will spark change. COVID-19 has exposed very wide-ranging systemic issues in supply chains. Companies are going to need to invest in technologies that help them seamlessly deliver the omnichannel experience both how goods are ordered from a omnichannel perspective, either on the phone in home or in store, and how those goods are ultimately delivered, whether that's curbside pickup or contract shopping , like Instacart. The challenge in this equation ends up being the complexity and technology capabilities of the supply chain. From a complexity perspective, we just think about it where you might have had six distribution centers before distributing products that were ordered online, you may now have 3,000 stores across the U.S. that are acting as distribution nodes. That in itself creates a lot of complexity in terms of understanding where the inventory sits and ultimately understanding how to deliver those goods in a timely fashion to consumers. So complexity is the first piece of this equation. The second piece of the equation is technology. So you need to have technology when you have that complexity that's created around the different distribution systems, you need to have technology to make it simple. And the fact is is that there's still a lot of paper-based systems being used in supply chain, which makes it very difficult to coordinate activities across the network. So I think the companies that are going to succeed post COVID, and you're already seeing this with the dramatic changes that are happening on the retail front, is the companies that are going to succeed are the ones that can perfect this coordination of the purchase experience with the supply chain, logistics management, delivery and distribution experience. I think those companies are goIng to thrive in the long run.
Cathy Leonhardt: 5:09
When you think about ‘how do companies bring all this together,’ what are the areas, specifically the potential areas for investment, both macro and micro?
Jason Russell: 5:21
There's kind of four things that we've identified. One is fulfillment flexibility, two is sourcing flexibility, three is visibility, just period and then four is network. So I think all of those things will be important in any strategy going forward. So if I break those down a little further from a fulfillment flexibility perspective, what we mean by that is diversifying the ways that a customer can receive goods. You know, anyone that can do that in a more dynamic fashion, and its not one size fits all because the reality is, is that during COVID, you know, pick up curbside might be the predominant way to receive staple goods. But the fact is, it could change further down the line where consumers are back in stores. So I think having flexibility in the options around, you know, how you ultimately get the goods to the consumer is the important points, the flexibility in the fulfillment versus the fulfillment itself. So I think that's a really important went to get behind.
Jason Russell: 6:18
The second one is what I call sourcing flexibility, which you know you're seeing this today. There's a lot of bottlenecks and across the global supply chain, you know when it used to be a very simple, when I say simple, a more linear supply chain; it’s not linear anymore. And the reality is that small changes or disruptions here or there, you know as an example, maybe a port get shut down and if the port gets shut down, you may not have, you know, enough medical masks to get to the hospitals, So I think there's going to be a big focus on diversification and localization of the supply chains going forward.
Jason Russell: 6:53
I think the third area, which has always been a continuous focus that you've heard about in the last three years around visibility. This is a top priority and everyone we talk to says how important it is. And what I mean by visibility is if something gets delivered out of a warehouse, having some sense of when those goods will arrive, it's basically signals that get put into the ecosystem, digital signals, is critical. Once you have full visibility over what's happening within your trucks, within the warehouses, within the ports globally, you can then mitigate and manage disruptions to the supply chain a lot easier. I think this actually does extend not just from sort of the manufacturer to the warehouse. I think this extends in the last mile. You know, the fact is, because alot of it's outsourced, the shippers actually don't know when those goods, will and are delivered to the consumer, and let alone letting them giving them a heads up in terms of when that might occur. And the fact is that last mile piece is what really impacts the customer experience. So I think there's a lot of focus on to sort tying that full supply to visibility into the shipper.
Jason Russell: 7:59
So that's the third area and the fourth area is around network. Network really ties it all together. It has to do with, you know, getting these, you know, thousands of suppliers on a platform to be able to communicate together. There has been a fair amount of investment from a lot of my clients to build what they call 'collaboration networks' and be able to saddle those collaboration networks into the retailers,. But, this is critical because to have a truly collaborative, adaptive supply chain, you have to have both visibility and the network and ability to communicate between these different nodes of distribution and suppliers.
Cathy Leonhardt: 8:31
Can you bring it down a little bit? You know, in terms of specific technologies and things that underpinned these core things you've outlined Jason?
Jason Russell: 8:41
I will say that there are 20 different verticals within supply chain and logistics management that are relevant here. It is complicated, so there's many different sub-verticals to solve many different problems. But, if I had to sort of drill it down to a few, you know, I think there will be a lot of focus and investment around 'micro-fulfillment.' And, you’re already seeing some of this from a few companies like Bond as an example. that effectively has many warehouses within the urban locations where you can do contact list pick up. There's automation that's put into there, and there's real estate. So I think these 'micro-fullfillment technologies' will be pretty important, because it also gets you closer to the end -consumer.
Jason Russell: 9:17
I think the second area is a planning process, which is traditionally you sort of come up with a plan and every six months and people work towards that plan. The reality is that this is going to turn a much more of a dynamic process because consumers do change their behaviors, having a dynamic planning process and tools that allow the different buckets of participant periods to communicate is going to be really important.
Jason Russell: 9:40
The third area I get alot of attention around is 'return logistics.' Obviously, as ecommerce goes up, so do the number of returns. You know, you have to have a way to get those goods back and do it in a cost-efficient manner. Otherwise, its uneconomical to sell goods frankly.
Jason Russell: 9:53
So, I think returns could be a big area of investment. And then it really ties back to network. And it was talking about before, one area of network is we call 'drop ship.' And, you know, 'drop ship' when it comes to 'endless aisles', as you call it inretail. The way that you enable that is, you can identify and find goods within suppliers’ warehouses and have them shipped direct to a consumer, because, in fact, that supplier might be closer than your warehouse is to the consumer. So 'drop ship', I think is a really relevant investment area. And to get that to work right, you have to have the network. So, their systems have to be integrated with the retailer to provide that seamless experience, whether that's coming from your own warehouse or from a supplier.
Cathy Leonhardt: 10:35
I think every major retailer gets that this frictionless supply chain is critical to delivering that customer experience. Let’s shift gears for a minute. How important is M&A in the decisions that management is making on supply chain and logistics? Can you talk about recent activity and where you see that might be headed?
Jason Russell: 11:01
Yes. So I think we're at the early days of consolidation within the supply chain as a very fragmented space. I think we're also at the early innings of big investments into the supply chain technology arena from the large retailers, and you can speak more to this because you're also having alot of those conversations, but you're also seeing this sort of in the numbers. As an example, Target, spent a good amount of money buying two different companies two years ago, one was Grand Junction, which is a software platform that connects retailers and distributors to help manage the local delivery networks of more than 700 carriers. And then Shipt was another acquisition that they did, which is really the community of shoppers that are able to help with the fulfillment of goods when it comes to getting your groceries into the home. Those two acquisitions they spent a decent amount of money. Platform investments for sure are paying big dividends because Target is able to stay relevant in this environment. So I think you're going to see more platform plays like that, you know, in the future. We just saw Costco, as you know, buy a last mile specialist called Innovel. Looking at Amazon doing a lot of investments around robotics; Kiva Systems and Canvas. That's really because they own their own warehouses and they want to make it more efficient and dark, if you will. You know, Shopify is interestingly looking to invest more money into fulfillment. They bought a company called Six River Systems, which is a robotics provider for the warehouse. Shopify really provides the platform to sell, but clearly if you're helping enable the small businesses to sell, you also have to help them fulfill. Some other investments they have done is on the drop ship side with company called Oberlo. They did a B2B platform acquisition called Handshake, and they've invested in a return management software with an acquisition called Return Magic. So you know, those are kind of the on the retail side, and you're also seeing, obviously, in the consumer good side as well, what a company like Nike buying into a demand sensing and analytics platform called Celect. So I think either whether or not you're a consumer goods company trying to go direct or trying to figure out a way to optimize your own channels or a retailer themselves expanding what they can offer, I think technology is a critical piece to all of this. And the reality is that our clients are going to have to make real decisions around what they want to own, because the partnership approach over the long run doesn't necessarily create a competitive advantage. It could be great because it drives efficiency, but when it comes to creating pure competitive advantage, owning some of this technology will be very important
Cathy Leonhardt: 13:31
And for those tuning in –Jason's written a report that outlined the supply chain and logistics challenges that businesses are facing and and how they can contemplate this level of investment that meets consumer expectations and also provides that ever needed point of competitive differentiation. And you can find that report on the PJ SOLOMON website - www.pjsolomon.com - in the News & Insights section. Thanks everyone for tuning in!