Pop-Up Supply Chains:
Published on: Mar 4, 2016
Transcripts - Pop-Up Supply Chains:
Pop-Up Supply Chains:
Leveraging Network Assets
for Dynamic Distribution
3 Inflection Points
Distribution Center Locations
Manufacturing Plant Locations
6 What is a Pop-Up Supply Chain?
Leveraging All Potential Distribution Points
The Supply Chain People
A ‘perfect storm’ of conditions in recent years has created The more recent phenomenon of channel proliferation
new and greater pressures on supply chains than ever is a result of the Internet changing the way consumers
before. Laying the foundation was the rise of e-commerce prefer to do business. Retail and direct channels no longer
and the Internet in the late 1990s; consumers have become simply co-exist. They now intertwine. This juxtaposition is
more educated and more demanding than ever before. more than just buying online and returning at the store. A
This demand manifested itself in multiple ways. First, was customer’s store buying habits should be reflected in how
SKU proliferation. The ability to research and ultimately the he/she is treated and marketed to online.
ability to customize dramatically increased the volume of
Early on, this new complexity could be addressed with
SKUs supply chains had to manage. Retailers introduced
brute force—extra inventory, extra labor and expedited
‘endless aisles’ allowing consumers to buy more products
transportation. However, the surge in oil prices that started
online or at a kiosk than a retailer could possibly stock.
with Katrina and pushed higher with the rise of the BRIC
economies ratcheted up financial pressure. Ultimately, the
slowdown of western economies is forcing the hands of
many supply chain operators.
How do companies today best cope with these accumulated
pressures? An efficient supply chain is no longer enough.
Supply chains need to be nimble and agile. Trading partners
need to do more than simply supply or ship. A fulfillment
point may ‘pop-up’ quickly, serve a new purpose and
then fade back to its original state. It takes organizational
flexibility and supporting technology to help create this
kind of network. This paper will describe in more detail how
we got here and what a ‘pop-up’ supply chain looks like to
enable companies to thrive in this environment.
Drop ship direct from supplier 56%
to customer 49%
Buy in-store to fulfill through 44%
other channels 42%
Buy online or from catalog to 38%
pick up in-store 35%
In-store visibility into online 36%
inventory availability 33%
Online visibility into in-store 47%
inventory availability 36%
0 20 40 60 80 100
All Respondents Large Retailers (>$5B) Winners
RSR Research, 2008
Pop-Up Supply Chains 2
While there are many conditions that led to this state, it (and therefore greater lead times) is tolerable because the
usually takes one that is easily measurable to help define a cost of higher safety stock levels is still less than the freight
tipping point. For our purposes, the metric is directly related expense. Historically, companies with smaller freight spends
to the cost of oil. In particular, it is the ratio of transportation could not justify implementing a TMS. Even though these
cost (essentially tied to fuel) to that of carrying inventory businesses may not have grown, their freight spend did,
(largely a factor of interest rates). In our study, there are driving growth in the adoption of transportation software.
actually two inflection points. Similarly, rules around inventory planning were adjusted to
provide for fewer, larger shipments.
When oil is plentiful and inexpensive, it is ideal to make
goods as cheaply as possible (i.e. off-shore) and store Unfortunately, fuel prices have kept climbing. We are quickly
them centrally to keep as low an overall inventory level as reaching the next inflection point—one that was always
required to maintain good customer service. Air freight and thought to be in the distant future. When diesel reaches a
expedited shipping (and therefore high customer service certain price level (again it varies by industry, though $5/
levels) are relatively low cost, so supply chains are designed gallon seems to be a fair consensus) the cost equation
and software is configured to minimize inventory levels. changes yet again. Even high inventory levels aren’t enough
to offset the cost of transportation. For the first time, the
While the inflection point differs by industry and product
cost of building and operating new distribution centers,
mix, most companies have crossed the threshold. For
along with the inventory necessary to stock them, is less
many, this was between $1.50-2.00 a gallon for diesel fuel.
than the freight cost to sustain shipping from these larger,
Suddenly, no matter what your credit rating (and therefore
more centralized distribution centers.
carrying costs), transportation became simply too expensive.
At this point, the idea of using lower cost shipping methods
Pop-Up Supply Chains 3
Distribution Center Locations
As described above, once this inflection point hits, the math of a single facility offset the cost of shipping. However , if oil
changes. In a study performed by ILOG (now IBM) in 2008, prices rise, the network becomes sub-optimal. Supporting
a consumer goods manufacturer’s network was analyzed. western customers from a single warehouse, with ship-
The current network design, with five distribution centers ments in excess of 1,000 miles, is no longer practical. Using
(in New York, Chicago, Atlanta, Dallas and Albuquerque), network optimization tools, this study determined that the
supports the business very well when oil is $75/barrel. The Albuquerque warehouse should be replaced with three new
western half of the country can be serviced from a single warehouses—in Los Angeles, Portland and a scaled-down
distribution center in New Mexico. Even though the dis- operation in Albuquerque.
tances are great, the labor, real estate and inventory savings
Network optimization tools are used to determine optimal locations for warehouses.
Pop-Up Supply Chains 4
Manufacturing Plant Locations
Of course, the impact on facility location is on more than producing overseas is somewhat mitigated. Third, recent
just distribution. Depending on the nature of the business, quality scares from products manufactured in China are
manufacturing is also affected. For the last 10+ years, giving pause and giving marketing benefit to the classic
manufacturing operations have been leaving the U.S. ‘Made in the USA’ label. Finally, and most importantly are
in droves. Low cost labor was (and is) in ample supply transportation costs—for all of the same reasons distribution
in many parts of the world. However, four factors are networks have to be evaluated.
now making U.S. companies reconsider. First is simple IBM also studied this manufacturer’s production operations.
economics. With so many manufacturing jobs moving to This company had three potential locations for production—
China and other parts of the world, the standard of living, Juarez , Mexico (the lowest cost/unit), Philadelphia (the
and hence the cost of labor, is naturally going to rise. To highest cost/unit) and Omaha, Nebraska. At $75/barrel, the
continue at current cost levels, operations have to move Juarez plant would supply more than 75% of the customers.
further and further inland, where logistics infrastructure is At $200/barrel, Omaha comes into play to help support
lacking (increasing lead time and variability). Second, the much of the upper Midwest (nearly 25% of all customers).
weak U.S. dollar means that the cost benefit of
Manufacturing operations can be analyzed to determine optimal locations in an effort to reduce costs.
Pop-Up Supply Chains 5
What is a Pop-Up Supply Chain?
Moving warehouses and factories is a great long-term Chain is to leverage all available assets in a network to
solution, but it requires significant up-front capital, is not dynamically flex the nodes available for distribution as
always practical and is difficult to derive near-term savings. demands change throughout the course of the year. Let’s
This is why Pop-Up Supply Chains can really benefit look at a few examples:
companies. The basic premise of the Pop-Up Supply
Many retailers are already practitioners of Pop-Up Supply Supporting this strategy requires logistics flexibility
Chain philosophies. During the holiday season, they would along with system support. Certainly, implementing a full
like to have a presence in some areas where they do not warehouse management system (WMS) isn’t practical for
have a permanent store. The solution? Temporary kiosks at a facility with a four-month life expectancy, nor does it
local shopping centers or malls that ‘pop-up’ in November make sense for what is likely to be a very small operation.
and disappear by January. This way, they have the benefit On the other hand, manual, paper-based environments
of a storefront, without the initial investment or year-round result in holes in visibility and often times poor operational
expense. This philosophy can and should be extended to performance. To solve this, ‘extended enterprise
distribution centers. management’ systems can offer light-weight warehousing
capabilities over the Internet. Functions such as receiving,
Given the high cost of transportation, there are certain
packing and shipping are all that are really needed to gain
areas of the country that could benefit from a regional
visibility and assure store service levels. These virtual WMS-
distribution center but don’t warrant the investment on
lite systems can be rolled out in days and offer a good,
a full-time basis. An example is seasonal destinations.
hybrid solution for this need.
Parts of the upper peninsula of Michigan or Maine have
a huge influx of tourists during the summer. Consumer
demand for groceries, drug stores and sporting goods
spike during summer months. However, during frigid
winters, the population shrinks and demand subsides. Ski
resort areas of Colorado, Utah and other states experience
similar curves around the winter season. Retailers and
their suppliers could pop-up smaller distribution facilities
on a 3-4 month schedule to benefit from the lower net
transportation costs but without the major investment to
build a facility that may go unused the rest of the year. This
feat could be accomplished with an organization’s own
logistics department (through short-term leases or the use
of a public warehouse) or through innovative arrangements
Example of a temporary kiosk at a local shopping center or mall
with a third party logistics provider (3PL). that ‘pop-up’ in November and disappear by January.
Pop-Up Supply Chains 6
Leveraging All Potential Distribution Points
While running a temporary distribution center is the what kinds of services their existing trading partners can
most radical way of flexing a supply chain, it is not the provide. A few examples:
only way. Most companies will be surprised if they ask
Most companies work with their suppliers in a traditional of shoes in time for a hard launch. Rather than pushing
way—purchasing (or manufacturing) and shipping into this massive quantity of footwear through their supply
distribution centers to build a base of inventory from chain (which would have been a huge strain), Under
which to fulfill demand. However, other companies Armour coordinated with their factories to ship directly
have begun working with their suppliers in a more from China to retailer distribution centers.
creative way. One retail example is Nordstrom.com. The Much like with temporary distribution centers, a strong
Nordstrom web site carries a far greater assortment of technology foundation is necessary to support these
shoes than they actually carry in their Iowa distribution kinds of models. In the case of the retailer/supplier
center. This is important as a means of providing the relationship, advanced order management systems
top-notch quality, selection and customer service that need to be able to recognize what product is available
Nordstrom is known for. To accomplish this ‘endless aisle’ in-house, what products can be offered by suppliers
of selection, they have crafted partnerships with many and accurate lead-time information to provide reliable
of their suppliers. When an order for a pair of Keds is promise dates to the customer. Furthermore, while some
placed, it will actually seamlessly transfer to Stride-Rite, suppliers will have warehouse management systems that
who will fill this order from their distribution center and can support shipping on behalf of the retailer, not all will.
ship it directly to the consumer’s house, complete with a Some suppliers are smaller, ‘mom-and-pop’ operations
Nordstrom packing list, so it would appear as if it came that have relatively unsophisticated systems. For these
from Nordstrom directly. suppliers, a ‘virtual WMS’, much like the one described
This kind of arrangement benefits above, can help provide the tools necessary to support
both Nordstrom and Stride-Rite. this business model.
Nordstrom can offer an incredibly In the case of Under Armour, or any
diverse selection of products manufacturer working with overseas
without the investment in inventory, factories, the same ‘virtual WMS’ is needed. Of course,
transportation or distribution needed if they carried all of the requirements for this system are a little different. As
them in-house. For Stride-Rite, they benefit from greater a supplier that is either owned or under contract with
exposure of more products and better visibility to actual the manufacturer, there is an opportunity to get greater
customer demand. visibility into the manufacturing process. Even more
For manufacturers, a similar arrangement can be made importantly, quality assurance is a must, as the goods are
with factories overseas producing their goods. In 2008, shipping straight from an off-shore factory to a customer.
Under Armour launched a massive roll-out of Trainer So inspection techniques and documentation are a must.
shoes (‘the new prototype’) simultaneously across their Finally, the system must be translated into Chinese and be
retail customers. This involved distributing 500,000 pairs able to work over sometimes spotty Internet connections.
Pop-Up Supply Chains 7
With the prevalence of off-shore manufacturing, In the spirit of pop-up supply chains, 3PLs can be used to
particularly in Asia, almost every manufacturer and help this. While they are handling the goods in the port,
distributor imports product through the west coast ports. the 3PL should be able to support direct shipping (when
To that end, most of these companies work with some sort applicable) to customers and stores on the west coast,
of 3PL or freight forwarder to manage their product into, thus bypassing two major legs and a cost center in the
and often times out of, the ports. For companies with their supply chain. Recently developed ‘flow management’
primary distribution centers in the Midwest or on the east systems help companies with this approach. These systems
coast, it is common to ship product into Los Angeles and factor in demand forecasts and orders, inventory positions
then east across the country, only to send a large portion and service level strategies to postpone the inventory
right back out west to customers or stores in the southwest deployment decision until as late as possible. Based on
or the northwest. In fact, for one footwear manufacturer, these factors, instructions can be given to the 3PL to divert
this represents 27% of total volume! Think about the part of the shipment and direct it to regional customers.
repercussions of this approach: the freight costs, the labor,
the unnecessary warehouse space. Not to mention the
impact on lead time to the customer.
For companies with primary distribution centers in the Midwest or on the east coast, it is common to ship product into Los Angeles
and then east across the country, only to send a large portion back out west to customers or stores in the southwest or northwest.
Pop-Up Supply Chains 8
Lastly, retailers have one additional way to meet customer inventory levels, it is impossible to know if product is even
demand—the store. Multi-channel commerce evolution available in the store. Once accurate levels are attained,
dictates that stores and web channels need to intermix. a distributed order management system is needed to
The customer is only one customer, after all, not an determine the optimal fulfillment center to ship an order
instance of a store customer and a separate instance of a from. Factors that should be considered in this decision
web customer. That being the case, leveraging the store include the obvious (inventory availability and proximity)
as a fulfillment node becomes more attractive. Retailers but also the more sophisticated (transportation costs,
have begun offering a wide variety of options such as inventory segmentation across channels and forecasted
buy online, pick up at the store or buy online, return to demand for the store).
the store. A few retailers are also beginning to deploy
a third method—buy online, ship from store. For some
regions and product mix, this simply makes sense. Grocers
such as Safeway and Tesco now offer the ability to shop
online and have groceries delivered to your home. These
groceries don’t come from a warehouse, they are picked
and delivered from a nearby store. Other retailers starting
to do this include Bed Bath and Beyond and Johnston
and Murphy. This represents a great way to leverage a
common pool of inventory to maximize profits and minimize
markdowns. Additionally, back-of-store labor tends to
be less costly than warehouse order pickers. While their
efficiency isn’t as high, the model still works rather well.
There are two primary technology considerations to
support a store-fulfillment model. The first is store
inventory. Many retailers simply do not have accurate
inventory levels in the store (hence the frequent overnight
and weekend physical counts). Without dependable
Retailers have begun offering a wide variety of options such as buy online, pick
up at the store; buy online, return to the store; and buy online, ship from store.
Pop-Up Supply Chains 9
Today’s environment offers greater challenges to supply However, pop-up supply chain concepts can be applied
chain professionals than ever before. It is fair to say that if to many networks right away for immediate effect. More
we haven’t yet reached the second inflection point, then importantly, the future network structure will likely have
without major changes in energy policy and technology to be re-evaluated once again, as macro-economic and
we probably will in the next few years. Large-scale, long- technology conditions change. The pop-up supply chain
term network optimization projects are the most obvious can help companies navigate the difficult transition
answers to meeting this inflection point. periods between these transformations.
Pop-Up Supply Chains 10
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optimization core to their strategic market leadership. The
company’s supply chain innovations include: Manhattan
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