Monday, August 31, 2015


Planning for Higher Interest Rates and Restricted Bank Lending: The Impact on the Supply Chain

interset rates
While the recent market correction may call into question the Fed’s expected trend to raise interest rates, it is inevitable that interest rates are going to climb in the coming years – the question is “when” and not “if.” But whether a rise in rates is combined with further restrictions on lending to small (read: risky) businesses due to the need to maintain more conservative lending standards – thanks to the latest Basel III restrictions – is perhaps just as important a question to ask.  
Certainly, even a double whammy of higher interest rates combined with restrictive bank lending could have a significant impact on the ability of suppliers to access capital on reasonable terms. In the coming weeks on Trade Financing Matters, we’ll explore the potential impact of these challenges as well as potential approaches to proactively reduce supply chain risk.  Today, we’ll start by tackling how such a climate could impact suppliers – and procurement.
Either or both of the above-described events could have a cascading effect on supply chains:
  • Many suppliers will face additional margin pressure as bank and non-bank lending options become more costly
  • Smaller businesses may find it more difficult, generally, to access capital through traditional lending options
  • Vendors will cut corners in areas that may not create additional risk at first,  such as by reducing inventory, but will lower the ability of supply chains to “flex” in times of increased demand
  • Owners and management teams at vendors may be forced to make short-term decisions to access capital at higher rates that could have long-term negative ramifications – but that might not show up in a credit score
  • The risk of vendor bankruptcy is likely to rise at all tiers within the supply chain, but especially lower-tier suppliers
  • The most sophisticated buying organizations with access to rich supply risk information will be able to take action more quickly than others, leaving the majority of customers of at-risk vendors with fewer options in the event of a supplier insolvency or financially-based supply disruption
Given this context, what types of actions can procurement organizations proactively take to mitigate potential risk factors? A number comes to mind – and implementing trade financing programs, especially those that leverage technology, to provide options to suppliers is high on the list. But other types of proactive investments are important as well. These include not only supply risk management, supplier management and supplier information management solutions and surrounding content to provide continuous visibility and intelligence into the condition of suppliers but also payment analytics, spend visibility and even network-based solutions that bring additional benefits.
As this series continues, we will turn our attention to how procurement (as well as accounts payable treasury and supply chain team) can become more proactive in rising to the interest rate and bank lending challenge.


If customers really wanted to go to a store to pickup their E-commerce orders, then why didn't they just go to the store to buy it? Is click-and-collect an anti-customer experience?



Interesting that retailers doing E-commerce Immediacy are not using usual Logistics Service Providers.  Many LSPs are--

E-COMMERCE IMMEDIACY— Five Supply Chain Keys

E-commerce is the new retailing.  So why do firms use the old supply chain—and fail to deliver the Customer Experience?  The New Supply Chain delivers the customer experiences and builds repeat business.  The New Supply Chain is not a choice; it is a requirement for E-commerce Immediacy.
Brick-and-mortar retailers have had the most impact so far with e-commerce.  Stores, with stocked shelves, often lack true identification with customers.  E-commerce is all about the customer.  Online sales have moved past just having a website and shipping orders.

New companies dominate global retailing—Amazon, Alibaba,, and Flipkart.  Walmart, the top global brick-and- mortar retailer, is dwarfed in online sales by Amazon.  Big retailers, such as Target and Home Depot, are making significant investments in their supply chains to aggressively grow and participate in this new world. 

Online sales have created emphasis on omnichannel and multiple touch points with customers.  In turn, there is mCommerce for the ways customer reach websites. And, Amazon with its Immediacy—delivering orders within 48 hours (or faster) of placement—has changed supply chain management.  E-commerce Immediacy is global.  It is happening in the US, China, Germany, India, Spain, and more.  And it can take brands to new levels.
Current, standard supply chains were designed for a specific purpose.  Omnichannel means a multipurpose supply chain—or more accurately, multipurpose supply chains. 
The New Supply Chain is redefining supply chain management and best practices.  This New Supply Chain that drives E-commerce Immediacy is about—
  InventoryVelocity2 .  Many companies struggle with inventories for multichannel sales.  No matter what and how many channels, inventory should flow.  From both a lean view and a liquidity view, inventory that sits does not create value.  Some companies have problems with stock outs.  Others struggle with omnichannel with mistakenly increasing inventories and/or trying to allocate inventories across channels.  Allocating is arbitrary.  The best practice is to move inventory faster through the supply chain from end to end.  It provides products to sell in the various channels.  It also improves liquidity with less capital tied up in inventory.  With the New Supply Chain, inventory velocity moves to a higher level to become InventoryVelocity2.
  Time Compression.  Borrowing from Lean, extra time adds waste to the supply chain and hurts responsiveness.  There is no value created—and customers determine if there is value made.  Inventory is a buffer to uncertainty.  And the longer the time, the more the uncertainty—and the more the inventory.  The additional, unnecessary time occurs both inside the company and outside.  Value Stream Mapping is a good way to see the waste of time--and its internal and external causes.
  Upstream Extension of Supply Chain.  Extending upstream is more than collaboration with suppliers.  Supply chain effectiveness begins with the inbound supply chain. The outbound portion cannot function well if products are not available.  The inbound supply chain is also a big factor when it comes to compressing time and gaining inventory velocity.   Improving supply chains must recognize that there is no single supply chain.  There are supply chains within supply chains.  Look at the Mississippi River; it is made up of hundreds of streams and rivers.  That is how supply chains are.    There should be elevated integration with key suppliers and logistics service providers.  It should work like de facto vertical integration.
ü  Process. Gaps in the supply chain are holes where problems can hide and where delays can occur.  With supply chains within supply chains and suppliers for suppliers, this is a challenge—but necessary.  Integrating stakeholders in the supply chain—participants acting in coordination-- is necessary for the New Supply Chain.
ü  Technology.  LTD views technology as a process enabler and is vital given the length and complexity of the global supply chain.  Gaining complete visibility can be challenging since there can be up to 17 parties involved in an international shipment. But there is more. The technology must provide exception management—what is not happening and where is it not happening.  That enables attention on potential and real problems.  Extending the supply chain upstream means the technology, the interconnection, should also be extended.  Technologies--WMS, supply chain execution, and more--must be used and integrated.
  Network alignment and inventory positioning.  The present network was built on markets, customers, and conditions that are changing.  Trying to force fit the existing network to also handle e-commerce can be a recipe for operating and customer service problems  A network for e-commerce must be created, and inventory should be positioned to support the networks.  Different SKUs to support sales can be placed in respective networks.  Servicing omnichannel markets can raise questions about multi echelon supply chains and what value is created—from a lean perspective—with them and what they contribute—or not—as to time compression and inventory velocity.
The New Supply Chain brings new best practices as the above shows.  These best practices are central to the New Supply Chain.  They are not functional ones that reside within a supply chain.   These drive growth and create opportunities. 
There is more going on---robotics, possible delivery of orders by 3D printing delivery trucks, and questions on whether traditional logistics service providers can adapt to E-commerce Immediacy and to the growth in e-commerce. 
The Last Mile gets attention with e-commerce.  It often arises with companies using their monolithic supply chains and trying to force them to be agile and do more than they were designed to do.
It will continue to change and evolve.  The future, such as virtual reality retailing, will generate larger orders with more products.  That will necessitate modifications to the New Supply Chain.
One-size-fits-all supply chain is facing its end.  It served its purpose.  Traditional supply chains deal with cases and pallets and with large shipments. Immediacy is often about eaches and small shipments.  It is faster, leaner, and responsive.  
But it was not really agile.  The New Supply Chain is agile—and more.  It is dynamic and fluid.
Reality is there will be supply chain duality.  The present/existing supply chain is designed to serve its traditional purpose, such as retail stores, while the New Supply Chain delivers the Customer Experience for e-commerce sales.  This creates organization questions and different performance measures—since these serve different channels.
The Immediacy of E-commerce will not stop with e-commerce.  It will move across channels, markets, industries, and the world.  Companies should choose to be leaders in this innovative change.  

Saturday, August 29, 2015


China's shipping giants face oversupply and weak demand

PUBLISHED : Saturday, 29 August, 2015, 12:14am
UPDATED : Saturday, 29 August, 2015, 12:14am
China's shipping giants face strong headwinds from fleet oversupply and sluggish global demand, after reporting a weak performance for the first half.
China Cosco Holdings, the country's biggest shipping company, reported a 7.9 per cent year-on-year decline in revenue to 29.93 billion yuan.
Helped by 4 billion yuan in government subsidies on scrapping old vessels, the company made a net profit of 1.9 billion yuan, swinging from a loss of 2.28 billion yuan a year ago.
China Shipping Container Lines, the second-largest shipping firm, posted a 97.5 per cent plunge in net profit to 10.64 million yuan.
Container and dry bulk freight rates dropped sharply in the first six months, with the Baltic Dry Index down 47 per cent year on year at an average 623 points, the lowest level since the global financial crisis.
"We expect the price to stay low as global overcapacity will persist due to weakness in the euro zone and emerging economies," said Ma Zehua, China Cosco's chairman.
"The slowdown in China plus the fact that we will not receive any government subsidies in the second half means we will face a lot of pressure," chief financial officer Tang Runjiang added.
To support the industry, Beijing has been granting 1,500 yuan per gross tonne to shipping companies to replace obsolete ships. The award is settled in the first half of every year.
"With the massive influx of new shipping capacity, the shipping market will face even more uncertainties," CSCL said.
China Cosco projects the Baltic index to rebound to 1,100 points, but analysts think it is "too positive".
"The index will be below 1,000 points," said Daniel Meng, an investment analyst at CLSA. "The dry bulk sector needs two years to pick up while the containers sector may recover a bit next year. The shipping market as a whole will still have a tough time in the short term."
According to Clarkson, global container and dry bulk shipping this year will see capacity growth of 6.5 and 2 per cent, respectively, exceeding demand growth.
To cope with the headwinds, China's shipping leaders are making efforts to cut costs and optimise fleets.
China Cosco's director Jiang Lijun said the company would focus on integration strategies for the container and dry bulk sectors to improve efficiency.
The market expects a possible merger between the mainland's two largest shipping and logistics conglomerates, China Ocean Shipping Group (Cosco) and China Shipping Group.
China Cosco, the flagship of state-owned Cosco, on Friday declined to comment on the merger plan.


Guessing game on companies vulnerable to Chinese yuan depreciation

Lower interest rates are a boon for the property sector and a smaller reserve requirement ratio will re-energise lending, but if China’s recent monetary easing further depreciates the yuan, which companies are exposed and which provide safe harbour?
China stocks snapped their torrid run this week in a reversal of sentiment after the central bank signaled Beijing’s commitment to maintaining economic growth, ordering cuts expected to spur activity and inject some 700 billion yuan of liquidity.
But analysts at BNP Paribas note that a lower interest rate will exert depreciation pressure on China’s currency, the unpegging and subsequent devaluation of which reverberated around the globe and put equity markets into their latest free-fall.
With further devaluations in prospect, it’s possible to separate winners from losers by testing companies’ earnings sensitivity at milestone US dollar-Chinese yuan rates, and also looking at the denominations of their assets and liabilities.
Unfortunately for Hong Kong listed companies, a majority would be losers if China’s currency falls further, according to Barclays researchers.
For the companies studied, if the yuan were to trade at 6.50 to the dollar, full-year earnings in 2015 and 2016 would be reduced by 3.1 per cent and 0.8 per cent respectively. If the exchange rate slid as far as 7.0, those earnings would be reduced by 5.5 per cent and 2.5 per cent. Of the 135 companies in the study, only 28 are expected to be unaffected by changes to the yuan exchange rate.
“For most of the sectors, a weaker yuan is generally negative for earnings,” said Paul Louie, an equity researcher at Barclays. “In fact, out of 17 broad sectors, only the oil and gas, oilfield services and technology sectors would be expected to see positive earnings sensitivity to a weaker yuan.”
But for oil stocks, the currency advantage fails to outweigh the poor outlook on fundamentals amid a protracted slump in oil prices, while tech stocks are of mixed standing, Barings analysts say.
The sweet spot is where solid fundamentals align with an earnings benefit from yuan depreciation. Barclays analysts have made their picks: Bank of China, Samsonite, Sinotrans Shipping, Hilong Holdings, PAX Global Technology, BYD Electronic, ZTE, FIH Mobile and Sunny Optical.
All of those would gain from yuan depreciation in 2016, and only Hilong would take a hit in 2015. Sinotrans would see earnings-per-share increase by between 24 and 28 per cent at a yuan rate of 6.5 to the dollar, which jumps to more than 100 per cent if the yuan falls to 7.0.
Although all 14 internet stocks in the Barclays study would be hurt by yuan depreciation, they were the quiet heroes of the piece, with 12 of them maintained at overweight despite that handicap.
Among all companies, yuan-denominated assets formed 65.8 per cent of the asset base, while 54.5 per cent of liabilities were denominated in yuan. “Most sectors appear to be relatively balanced with the percentage of assets and liabilities almost evenly balanced,” Louie said.
Results were mixed for the asset-based property sector, which would see weaker earnings across the board. Among Hong Kong property developers, eight of 13 remain overweight, while 10 of 15 China developers held that rating.
But if the yuan rate weakened to 7.0, Barclays estimates China developers would lose an alarming 16 per cent of their net asset value, forcing them to work much harder to realise the upside from lower rates. Hong Kong firms would drop just 2 per cent in that scenario.
It isn’t clear whether such an extensive devaluation will happen. Credit Suisse predicts a drop to 6.5 yuan and emphasises that some industries should continue to grow apace despite yuan fluctuations.
The tourism sector, which the Chinese government is helping to boost via travel-friendly policymaking, is one example. Credit Suisse expects the sector to grow at 7-11 per cent over the next five to 10 years, outpacing GDP growth.
“Both ageing population and rising household income will likely lead to higher tourism demand. We don’t think the recent market correction or yuan depreciation will change this long-term secular growth trend,” said research analyst Sophie Chiu.
Other sectors will have their own factors to consider, like China telecommunications firms which earn yuan but quote in Hong Kong dollars. But for most, adding up overseas business and loan exposure will be key to understanding the earnings and value impact of currency movements.


Virtual Reality retailing will up the ante for Ecommerce and Immediacy. The New Supply Chain can adapt. The same old supply chain cannot.


Friday, August 28, 2015


Strong E-commerce sales and repeat business are about delivering the Customer Experience with the New Supply Chain. 


Wednesday, August 26, 2015


(Tianjin disaster) Tianjin Port Holdings chief charged; Ruihai Logistics chairman detained

Prosecutors have accused 11 officials and port executives of neglecting the management of dangerous chemicals storage and transportation in the Tianjin port, where explosions killed 139 people.
The officials from various government departments, including Tianjin local transportation management authorities, work safety regulatory agencies, land resources authorities, Tianjin local customs office and a state-owned port company, were investigated for “dereliction of duty" and “abuse of power," according to a statement from the Supreme People's Procuratorate today.
The prosecuted officials include Wu Dai, head of Tianjin Municipal Transportation Commission, and Zheng Qingyue, president of Tianjin Port Holdings Co.
Police detained 12 suspects from Tianjin Ruihai International Logistics, which operated the warehouse that allegedly stored dangerous chemicals and which exploded.
Police said the company and the detainees were suspected of illegally storing dangerous materials. The detainees included board chairman Yu Xuewei, vice board chairman Dong Shexuan and three deputy general managers.
Police also announced an investigation into Tianjin Zhongbin Haisheng, a company suspected of illegally helping Ruihai acquire safety evaluation papers.—Xinhua

Tuesday, August 25, 2015


China market slump: Central bank cuts interest rates

Chinese trader
China has reduced its main interest rate to boost growth in its economy.
The People's Bank of China cut its key lending rate by 0.25 percentage points to 4.6% in an effort to calm stock markets after two days of turmoil.
It is the fifth interest rate cut since November and will take effect on Wednesday.
The move has boosted global share prices further, with Wall Street's Dow Jones index opening more than 1.7% higher after the move.
By the close of European trading, London's FTSE 100 was up 3%, while Germany's Dax gained 5% and the Paris Cac rose by 4.1%.
Other European markets, including Lisbon, Madrid, Moscow and Milan, all closed sharply higher.
Follow our live coverage of global markets.
The People's Bank said that the interest rate cut was to reduce "the social cost of financing to promote and support the sustainable and healthy developments of the real economy".
It also acted to increase the flow of money in the economy by cutting the amount of cash banks must keep in reserve, effectively freeing them to lend more cash.
The central bank's move was broadly welcomed by economists.
A research note from JP Morgan stated: "China's decision to cut... will be regarded by many investors as overdue. The litmus test will come overnight, however, and the efficacy of the... cut in boosting the domestic stock market."
Singapore-based investor Jim Rogers said he thought the panic over the Chinese market would be over soon: "I haven't sold any Chinese shares. A couple of days ago, when they really collapsed, I bought more. Of course I'm losing money now on those.
"That kind of panic selling usually means the bottom is coming and I would suspect before too much longer the bottom will be in place."

Growth fears

The Chinese authorities have taken a number of steps to help stem stock market losses since the market began a series of heavy falls in June.
Earlier, China's falling stock market had hit markets around the globe on Monday, and - although Asian markets were again hit overnight - European stocks had already opened in a more optimistic mood on Tuesday.
Shanghai Composite
The main Shanghai Composite index ended Tuesday's session down 7.6% at 2,964.97 points. Japan also saw more sharp falls, sending Tokyo's Nikkei index down 4%.
The global sell-off has been driven by fears that China's slowing growth means less business for everyone else.
China's imports

Analysis: Robert Peston, BBC business editor

Beijing will be hard pressed to meet its target of 7% GDP growth this year without doing the opposite of what is needed to put the economy on a sustainable footing, which is to curb debt-fuelled investment in infrastructure, construction and lame-duck heavy industries.
Also very difficult to gauge is the scale of the negative impact on the spending habits of investors whose wealth has been mullered and on the investing habits of companies whose share prices have been poleaxed.
But there is a serious risk of economic aftershocks from the market quake: multinationals with production in China aimed at Chinese consumers tell me they are significantly scaling back their manufacturing plans.
The big point about today's Chinese monetary stimulus is that it may revive growth and the stock market in the short term - but it will further inflate China's dangerous debt bubble and will increase the longer term risk of a crash.
Read Robert Peston's blog in full
Duncan Weldon: Stock falls don't mean recession
The six Cs of the China stock slump
The stocks fall in facial expressions
Andrew Walker: How the China share slump affects the rest of the world
Karishma Vaswani: China counts cost of Black Monday

Investors globally are worried that firms and countries that rely on high demand from China - the world's second-largest economy and the second-largest importer of both goods and commercial services - will be affected.
But although the slowdown in the Chinese economy will have a bearing on Chinese firms' profitability, many view the stock market as grossly inflated.
The main Shanghai index more than doubled in the 12 months up to mid-June.
Weak manufacturing figures from China prompted a massive fall in shares on Friday, which was followed by another, the biggest in eight years on Monday, triggering a mass sell-off across the globe.
Media caption How China slowed global markets - in 90 seconds
The government, which has both the money and the power to influence what are not free markets, has taken steps to lower the value of the yuan in order to boost demand for Chinese goods overseas.
Although very few Chinese people own shares - only about 2% of the population - they are extremely active on its stock market. They are responsible for the majority of daily turnover and the government is trying to reduce the impact of the trading rout on those individuals.
Many bought shares with borrowed money, and as those investments fall in value, they are now selling them to pay back their debts.
The interest rate cut should make their debt levels a little more bearable.


E-commerce is the new retailing. Why do firms then use old Supply Chains--and fail to create the Customer Experience? It is time for the New Supply Chain.



  It is obvious these Retailers and E-tailers failing to change to the New Supply Chain. 

UK in-store and online retailers find it a struggle to meet consumer expectations

By Mike Wackett
08.25.2015 · Posted in Loadstar posts, Supply chain FavoriteLoadingAdd to favorites
Despite heavy investment in technology to predict customer demand, there is a “massive gap between consumer expectations and retailers’ ability to fulfill them”, according to a recent survey.
The online survey, conducted by Oakland, California-based cloud supply chain platform GT Nexus in association with UK polling company YouGov, found that in the past 12 months 83% of UK consumers had found a product they wanted to purchase unavailable in a store, while 70% had found the same problem shopping on the internet.
These so-called ‘stock-outs’ can, say the authors of the survey report, result in retailers paying a heavy price – 57% of the respondents that recalled the disappointment of not finding the product in-store took their business elsewhere or did not buy at all.
The impact of stock-outs is more acute for online retailers, as 67% of those frustrated shoppers bought from another site or abandoned their purchase.
The unavailability of fashion goods and footwear ranked high on the list of frustrating experiences for consumers, with a third of in-store and online shoppers saying what they wanted to purchase was not available.
Boris Felgendreher, of GT Nexus, says the results illustrate an interesting contradiction.
“Retailers have invested fortunes in technology to predict customer demand. Yet, many still struggle to co-ordinate the flow of products based on their predictions and taking account of all the unexpected disruptions than can occur that are difficult if not impossible to plan for.”
Indeed, shoppers expect to find the product advertised available in all sizes, and the survey found they had “limited sympathy” for retailers that faced issues that impacted stock levels, such as strikes or natural disasters that interrupt the supply chain.
“Stocking the right goods, at the right time, at the right place, in the right quantities is an enormous co-ordination effort, but that is what today’s shoppers have come to rightly expect,” said Mr Felgendreher.
The continued investment in the front-end of retail businesses, such as customer-facing websites and in-store promotions, is not being enhanced by their ability to sense and respond to demand, according to Mr Felgendreher.
And when retailers do respond to ‘the rush’ it is normally too late, given the complexity of modern supply chains. For example, UK and European forwarders importing from Asia, already having factored in allowances for slow-steaming, are now challenged by a raft of cancelled sailings and transhipment that not only delays cargo but also reduces visibility in terms of the arrival of the container on the quayside.
As a consequence, shippers are obliged to overstock product as they can no longer rely on the ‘just-in-time’ concept for Asian imports.
This is one of the reasons why warehouse demand has soared in the UK and facilities such as the logistics park at DP World’s London Gateway is brim full of Chinese imports awaiting the call forward from major retail stores.

Monday, August 24, 2015


Devalued and Risky: Should You Proactively Finance Chinese Suppliers?

Chinese yuan
The level of nuanced arguments surrounding China’s dual-move to a more freely floating currency, combined with an immediate devaluation – close to 5% at the time of writing this piece – has reached a fever pitch in international business circles. Aside from my own views about China’s general behavior from a business context, I personally believe it’s an ingenious move of desperation that would have been difficult to predict ahead of time.
Some context is in order here – I spent many years engaged in China sourcing projects, including visiting and working with suppliers on-the-ground in the region.  And today, our parent company, Azul Partners, also has resources on the ground in China for our coverage of the local metals markets. We also work with numerous organizations in an advisory capacity that are deeply engaged in sourcing from and developing Chinese suppliers.
From a sourcing perspective in terms of negotiation with suppliers over price decreases, we recently shared some advice for our subscribers on Spend Matters in a research brief, What a Devalued Chinese RMB Means For China Sourcing Strategies. But speaking more broadly than negotiating price decreases as a result of the devaluation, there is the broader question of supply risk with Chinese vendors – and the level of action companies should take to protect their supply chains through active trade financing programs.
Chinese suppliers previously had many sources of capital available to them to fund operations – VAT rebates schemes, bank loans, third-party non-bank loans, online lending schemes (which the government started cracking down on this summer, labeling some as simply ponzi schemes). But today, except for state owned companies, capital availability can prove challenging, especially for smaller manufacturers. Moreover, the move toward open account trade and away from letters of credit can further delay payments to vendors exporting their goods.
Given this situation, Trade Financing Matters strongly recommends that companies either sourcing from China for export or engaged in working with suppliers to support local operations consider taking action by implementing payables financing and invoice discounting programs – or even PO-based financing.
This is not a question of “profiting” from the supply – it is about reducing supply risk. The same strategies hold true of working with suppliers in Southeast Asia, which tend to move in lockstep from a risk perspective with the situation in China.
But where to begin? At the very least, consider the L/C again as an option on the export side, with the ability for suppliers to draw down on it based on triggers before an invoice. Also consider getting suppliers engaged in an invoice discounting program. More advanced companies may also consider setting up buy/sell or trading operations to take control of different levels of the supply chain, as many high tech organizations have.

Sunday, August 23, 2015


Amazon seems to work on the basis of Do It with Supply Chain Management to grow. Many firms and experts are too rigid to understand and change.


Friday, August 21, 2015


More coverage is on ports and mega ships than on financial condition of maritime industry. COSCO-China Shipping merger is first casualty of maritime financial tsunami.


The New Supply Chain that drives E-commerce Immediacy is redefining supply chain management and best practices. 


These firms are adopting and adapting to the New Supply Chain.

Reality is margins with e-commerce and its individual orders cannot be measured against stores "mass" buying.

Retailers See Gains in Serving E-Commerce Supply Chains

With online sales growing faster than store revenues, big U.S. retailers say distribution to digital consumers is getting more efficient and even becoming a better financial proposition

Home Depot plans to expand online delivery from its stores over the next year, one of several strategies big retailers are using to try to manage the costs and expectations of e-commerce consumers. ENLARGE
Home Depot plans to expand online delivery from its stores over the next year, one of several strategies big retailers are using to try to manage the costs and expectations of e-commerce consumers. Photo: Bloomberg News
Retailers may be figuring out the logistics of e-commerce.
The largest U.S. retailers reported strong online sales in their second-quarter earnings reports this week, extending a trend that has seen e-commerce revenue expand far faster than store sales, and several said they are making strides in delivering goods to consumers more profitably.
Home Depot Inc. HD -3.63 % said its online sales grew 25% in the second quarter from a year earlier compared with 4.3% total sales growth, and now represent 5% of the company’s total revenue. The home improvement giant, which said in the same quarter a year earlier that high transportation costs weighed on its margins, attributed a slight increase in its gross margin in the June quarter to improved logistics, including increased productivity in its distribution network and lower fuel costs.
Target Corp. TGT -2.80 % , which said digital sales grew 30% in the second quarter compared with 2.4% overall sales growth, said on Wednesday it is setting ambitious online sales targets and reported a small increase in its gross margin, to 30.9% from 30.4% compared with a contraction in the same period a year earlier to 30.4% from 31.4%.
The gains come as traditional retailers are struggling to catch up with rapidly changing consumer purchasing habits and competition from online specialist, including Inc. AMZN -4.13 % While online shopping is often a boon to sales, it can be a drag on profits as brick-and-mortar retailers ship products to their customers’ homes while maintaining storefronts. Delivering goods to stores and to consumers at their homes requires different distribution channels and retailers are trying to minimize the costs of maintaining parallel delivery networks.
The Commerce Department said this week that e-commerce retail sales grew an estimated 4.2% in the second quarter, far ahead of the 1.6% growth for overall retail sales. At $89.2 billion, the online sales make up 7.2% of total sales, but the rapid growth in the business and the impact digital commerce has on consumer behavior has an outsize impact on retail supply chain.
The big retailers said in earnings calls with analysts this week that they have seen greater efficiency this year in using dedicated fulfillment centers for online orders. Home Depot, Target, and Wal-Mart are building out fulfillment centers to package and ship parcels.
Target Chief Executive Brian Cornell told analysts in a conference call on the company’s earnings that the shifting delivery needs had stretched the company’s supply chain “well beyond its core capabilities.” Target now has six dedicated fulfillment centers for online orders, the company said.

top logistics news

  • Get the latest logistics and supply chain news and analysis via an email newsletter. Sign up here.
Wal-Mart Stores Inc., which said e-commerce sales contributed 2% to its overall orders in its most recent quarter, is opening two automated fulfillment centers in the next six months. Home Depot said it is close to bringing its third e-commerce fulfillment center online in Ohio, which executives said will expand its distribution footprint enough to enable two-day parcel delivery to 90% of its U.S. customers.
Retailers that move products in large volumes and which have invested in e-commerce infrastructure now are seeing their investments “fully in action,” said Burt White, vice president of industry supply chains at consulting firm Chainalytics.
At the same time, the retailers are beefing up ability to ship from store, which adds complexity to figuring out the most cost-effective way to fulfill orders, but gives online shoppers access to more inventory.
Home Depot is offering delivery from its stores to online shoppers in four markets, and will expand that dual use of stores through next year, said Executive Vice President of Supply Chain Mark Holifield. “We’re working to really perfect that, and make that a flawless customer experience,” he said.
Mr. Cornell said Target has expanded its ability to use stores as fulfillment centers, with plans to ship online orders from 450 store locations by year-end, up from 140 stores now. “Ship-from-store capabilities allows us to balance inventory across the network, leverage the capital and labor already in our stores and reach guests more quickly,” he said.
The company also will test a program to give online buyers a better idea of when to expect delivery of purchases, usually providing a two- to three-day window.
Wal-Mart, still deep in the investment phase of its e-commerce strategy, said its e-commerce investments contributed to an 8.2% decline in operating income last quarter from a year earlier. The company said e-commerce sales world-wide grew 16%, compared with overall global sales growth of 0.1%.