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Headline for the 2012 Holiday Buying Season- Overcoming the Challenges of Fulfillment Complexity

Guest Post by

Bob Ferrari, the Founder and Executive Editor of the Supply Chain Matters Blog, and a periodic guest blogger on the Infosys Supply Chain Management blog.

As was the case last year, the 2012 holiday buying season will be very much about the continued leveraging power of consumers in exercising multi-channel buying preferences and technology-enabled online tools.  An equally important test as we swing into the 2012 surge will be how online, brick and mortar retailers, along with their respective direct ship suppliers, exercise capabilities in multi-location stocking and fulfillment capability.  From this author's lens, expect the 2012 holiday buying surge to yet another stress test for managing fulfillment complexity among online, retail and B2C goods providers.

According to the National Retail Federation, online shoppers accounted for nearly 40 percent of the over $50 billion spent during the Black Friday weekend last year. As I pointed out in last year's Infosys guest commentary, seven individual shopping days surpassed $1 billion in online consumer orders, with peak volumes experienced on Black Friday weekend, Cyber Monday, and every Monday leading up to December 15th. The implication was that orders came in huge surges, and supply chains that were not prepared, particularly those without robust inventory allocation or tight inventory visibility across their brick-and-mortar retail and online retail systems paid a price in customer loyalty. The most visible incident involved retailer Best Buy, who utilized a strategy of aggressive price promotion and free shipping to lure customers away from Amazon. The result was a rather embarrassing public apology and a canceling of orders just prior to the Christmas holiday because the retailer was unprepared to deal with the crush of booked online orders. Inventory allocation processes were not able to effectively support customer fulfillment needs across both physical store and online channels.

For the upcoming holiday surge, supply chain teams should anticipate two other significant changes plus some further wildcards from last year. 

First, brick-and-mortar retailers have internalized previous learning, and this year will deploy more aggressive promotional strategies to lure consumers back into physical stores.  This includes kicking-off the shopping season far earlier, with major retailers such as Target, Sears and Wal-Mart opening stores beginning in the early evening of the Thanksgiving holiday. That has not settled well with store employees. In order to differentiate the store buying experience, stores will feature more consumer buying choices, including "stores with a store", and to buffer customer attempts to perform instantaneous online price comparison searches, stores will feature more private branded merchandise and unique branded products, with different naming and stock keeping identifiers. Combination brick-and-mortar and online retailers have invested more in their online fulfillment capabilities, and this year will aggressively discount merchandise that promotes actual pick-up of goods in a local physical store.  Not only will this drive more fulfillment cost efficiency, it reinforces the strategy to have consumers back in stores. Specialty retailer's Macy's and Nordstrom have deployed a rather effective strategies that integrate both physical store and online shopping experiences as a single set of consumer services. The implication however is that the physical store becomes a de-facto pick and pack fulfillment center subject to accurate inventory visibility.

Purely online retailers led by Amazon will continue to be price and service leaders reinforcing the consumer expectation for a painless and seamless shopping experience.  For Amazon, the 2012 surge will be the first real-test of premium cost same day delivery fulfillment, which is obviously Amazon's strategy to negate the advantage of instant gratification for buying goods at a physical store.  Amazon and other large-scale online retailers can also leverage their scale in supplier buying power to offer more aggressive pricing, as well as an augmented and much more automated distribution fulfillment network.

There are some additional wildcards to consider in the upcoming surge.  The rush to accommodate customer needs for mass-customization and to buffer consumer online price comparisons has led to an explosion of stocked SKU's.  More SKU's adds to more complexity in inventory planning, stocking, management and optimized deployment.  It also adds exposure to increased working capital costs.

The global economy is considerably different than it was last year.  The Eurozone has officially entered a recession based economy and consumers and businesses are now focused on conserving cash. Similarly, China and the rest of Asia have felt the repercussions of the European market slowdown, and their economies are not as robust as they were in 2011.  All of this will probably lead to two additional factors:  a more frugal and highly price-conscience consumer, with suppliers and retailers highly sensitive to carrying excess inventory levels, especially if consumer buying this season is more muted.

Another wildcard is a year that featured more natural disasters and incidents of supply chain disruption.  The highly populated Northeastern United States was impacted by super storm Sandy which had some significant impacts on electrical power interruption, delays in delivery of inbound holiday goods as well as to transportation and logistics infrastructure needs. Over 6000 ocean containers are in the process of re-routing to original destinations and their recipients face the added burden of unknown damaged goods and additional shipping charges. During this past fall, a higher frequency of flooding brought about numerous typhoons struck core manufacturing areas such as the Philippines, Japan, Taiwan and China, the prime supply tiers for producing consumer electronics. Whether these floods had any impact in fulfilling upcoming holiday demand for the most in-demand consumer electronics is an open question.

Last year, I closed my holiday prediction posting with a message that the importance of balancing online commerce tools and product offerings with advanced backend fulfillment intelligence processes would prove critical.  For 2012, that message is reinforced with the realities that more supply chain complexity, market uncertainty and the effects of supply disruption are going to make this season ever more challenging.

Let the buying begin.

Comments

I feel as though the holiday shopping season - especially Black Friday - has only recently become aggressive. I remember when I was younger that Black Friday was an experience, the exhiliration of finding the best deals all around town with my family. But now, maybe attribute it to age, my family does our shopping online if anything even catches our eyes. Even my deal-hungry aunt does her Black Friday shopping online because it's just not worth fighting people for deals.

I find it odd how not very many brick and mortar stores just hold more inventory. Retailers do have limitations, but an extra pallet wouldn't take up too much space, would it? Plus, everyone would be happy: more consumers get what they want, and the retailer pockets that extra profit.

Of course, my understanding of how this shopping process goes down is very shallow; I am just a student. But I think there are some obvious things that retailers could easily remedy.

Very informative post, by the way!

This article made me think of how interesting it is to see how drastically the supply chain of the retail market is evolving. In the past, hefty retail events such as Black Friday seemed to prompt firms to focus more on the inventory aspect of the logistics network. Now, with consumers leaning more towards online purchases, it seems as though retailers are adapting by focusing more on transportation, and the fulfillment center location aspects of the logistics network instead. As a result, the traditional approach of forecasting inventory levels for retail brick and mortar stores almost seems to be slowly evaporating. This was a very fascinating read, and I am curious to see how much the supply chain will continue to evolve more towards the online aspect of retail in the years to come.

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