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February 16, 2017 - Supply Chain Flagship Newsletter

This Week in SCDigest

bullet Irrational Shipping Prices and the Demise of Brick and Mortar Retail bullet SC Digest On-Target e-Magazine
bullet Supply Chain Graphic & by the Numbers for the Week bullet Holste's Blog/Distribution Digest
bullet Cartoon Caption Contest Continues bullet Trivia      bullet Feedback
bullet New Expert Column and Gilmore's Jab bullet On Demand Videocasts


Download the Complimentary White Paper to Learn About the Downfalls of 2016 and What Issues Need to be Addressed in 2017


first thought


Supply Chain Graphic of the Week
Digitization of the Supply Chain is Low on CEO Priority List


Walmart Makes Changes to Procurement Organization

Tens of Thousands of US Bridges Need Repair
Lululemon Sees Big Gains from RFID
Another State Goes Right-to-Work, More Coming


January 17, 2017 Contest

See The Full-Sized Cartoon and Send In Your Entry Today!


This White Paper Discusses the Downfalls of 2016 and Reports the Main Features That Need to be Addressed in the Upcoming Year

Holste's Blog: Shippers Operating in a Quick Response Environment Need Real-Time Information

Weekly On-Target Newsletter:
February 15, 2017 Edition

Cartoon, Truckload Q4 Results , Why Lean is Hard, RFID Don't Lie and more

Regulatory Compliance in a Changing Environment

by J. Anthony Hardenburgh
VP, Global Trade Content
Amber Road

Planning Optimized - A Journey of Excellence

by Henry Canitz
Product Marketing & Business Development Director

In Modest Surprise, JDA Brings In New CEO Girish Rishi to Run Industry's Largest Supply Chain Software Firm
By Dan Gilmore, Editor


Truckload carrier Werner says it invests in "the Five T's” of its business. What are they?

Answer Found at the
Bottom of the Page

Irrational Shipping Prices and the Demise of Brick and Mortar Retail

In 2015, I wrote a column titled "Amazon's Stock Price and the Fate of Omnichannel Commerce" based in part on a presentation I had just given on ecommerce at a supply chain forum at Penn State.

The thrust of that piece was this, before I take the thinking even further:

Before my presentation, a retail executive gave an interesting presentation on omnichannel, which included this emphatic statement: "There is no free shipping!"


The simple reality is that in most cases, the in-store price should in fact be lower than the on-line price.


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He explained: "The last time I negotiated with UPS or FedEx or the United States Post Office, none of them were talking about shipping our orders for free."

The situation of etailers giving away shipping simply can't last, he argued. It has to end or no one will make any money. That's when another supply chain executive said (paraphrasing) that "Our board and shareholders expect a given rate of return and profitability, and it will be difficult or impossible to hit those objectives if free shipping continues.”

My question to the speakers: "Is that a prediction or just a hope?"

Not long ago, this viewpoint would certainly have been correct - the financials would push etailers away from free shipping eventually. Heck, it wasn't that long ago that many companies, certainly catalogers selling direct to consumers, used shipping as a clear profit center. What a quaint notion in 2017.

Of course, now Amazon sets the bar. Its free two-day shipping with Amazon Prime is hugely popular, and it also discounts most other shipping. 

This is plenty costly. In 2016, Amazon had an incredible $8.97 billion just in shipping revenue - its shipping sales alone would make Amazon about the 50th largest US retailer. 

The problem: it spent an equally incredible $16.16 billion on shipping last year - and that is just shipping, not other fulfillment costs. So Amazon had a net loss of $7.19 billion in shipping during 2016.

That surely contributed - at one level - to net profit margins of just 2% of sales, though that is better than the losses or breakeven results it saw a couple of years back. I say "at one level,” because obviously those shipping losses play a key role in the tremendous revenue growth - still close to 30% for merchandise - Amazon enjoys.

And Amazon's stock price keeps rolling along. It dipped a few percentage points when it released its Q4 results in late January, falling just a bit short on the top line from Wall Street estimates. But that stock price is up about 127% over the past two years, and 358% over the past five years. Amazing.

The main point of my piece in 2015 then was this: In a normal world, as that retail executive pointed out, Amazon's lack of profitability would lead to the stock also getting hammered. But of course it has that incredible growth, and investors continue to believe that all this investment will eventually pay off in big profits some day. And it just might - though they have been saying that for at least a decade. Maybe in 2025.

I added that if Amazon's stock did take a plunge over lack of profits, it just might be forced to ease up on free shipping to shore up the bottom line. But the stick price just heads up instead.

It simply may be that for quite some time Amazon will force free shipping and thus ecommerce losses on all on-line merchants no matter how irrational it seems to its competitors.

So here in 2017, I am going to take this a step further. The free/highly discounted shipping policies of Amazon, other retailers, and even UPS itself is accelerating the demise of brick and mortar retail at a faster rate - perhaps much faster - than would otherwise be the case. This is an incredibly important point.

In other words, is the growth of ecommerce - and major financial woes in some but not all sectors of brick and mortar retail - something of a fraud, based on irrational shipping charges by virtually everyone in the market?

We know what is happening with shipping and on-line retailers. But did you see the rather astounding news that profits at UPS were down in Q4 - because it saw too much growth in its ecommerce business?

UPS says it makes greater margins on its traditional B2B business, because there are fewer, generally closer stops, often delivering many parcels at a time, versus onesies with trucks driving around neighborhoods like yours and mine to make a stop at house here and there.

So, costs per delivery in B2C are generally higher than B2B for sure - but margins obviously are a factor of both cost and revenue. So UPS (and we assume FedEx) either can't or for some reason hasn't taken ecommerce delivery rates to the point that they can earn equal margins with B2B.

And why is that? In large part because retailers such as Amazon and almost everyone else are giving away or deeply discounting the shipping to consumers, so they have to negotiate like the dickens with UPS/FedEx to avoid losing even more money.

And that's because consumers either just won't pay for it, or have been trained not to buy if shipping costs are actually realistically charged.

And it gets worse for about everyone but Amazon. Why? Because for Amazon, every on-line order is new revenue and margin. But for traditional retailers, much of their ecommerce sales (it varies) are cannibalizing sales at their brick and mortar stores, where profits are much higher for each sales dollar, after considering order picking and shipping costs, returns, etc. required for ecommerce.

There is some debate about where brick and mortar retail is right now. Some say the numbers show it is in decent shape. But ecommerce sales are growing 15% year over year every quarter, and by definition that has to be largely coming out of brick and mortar business - consumers are not spending more overall on retail shopping.

Clearly the growth in on-line is a big factor in the wave of brick and mortar store closings (Macy's, JCPenney, Sears, The Limited (going purely on line), Men's Warehouse, Aeropostale, Abercrombie & Fitch, many others.).

Many shopping malls are in deep trouble. We recently reported on the growing trend of mall owners defaulting on loans for troubled mall properties and simply handing the keys over to lenders, who will have to close the properties or somehow revitalize them. 

The US Commerce Dept. said true retail sales (excluding autos, restaurants and other things that sometimes get reported in retail sales numbers) were up 2.9% in 2016. That's OK, but: (1) it includes inflation, so knock a percentage point or so off that; (2) it includes the rise in ecommerce sales, so deduct a bit more; and (3) some retail sectors are faring much worse.

That would include department stores (sales down 5.6% for 2016), apparel stores (up just 0.8%), and electronics stores (down 3.2%). I will note that Amazon's apparel sales are expected to reach $28 billion in 2017, moving past current number 1 Macy's, which analysts predict will see $22 billion in apparel revenues, a 4% drop from 2016.

So here is the trillion dollar question: what would be happening with the growth of ecommerce sales, causing all this change and turmoil, if actual shipping costs were reflected in the price consumers have to pay for delivery? I'll tell you what would happen: the growth in ecommerce would slow dramatically. I've seen presentations from folks like CEO Patrick Byrne on how shipping prices dramatically move the sales needle up or down. I know my family's own habits in on-line ordering.

The simple reality is that in most cases, the in-store price should in fact be lower than the on-line price.

So retailers are moving business to money losing ecommerce channels, thereby seeing need for fewer actual stores, because they don't charge what it costs to pick, pack and ship on-line orders. Abetted in part by UPS and FedEx undercharging for B2C deliveries.

All, in the end, driven by Amazon, though someday that retail exec quoted above will finally be right, and investors will demand that shipping costs are indeed paid for by the buyer - after much of brick and mortar is gone.

Other media, email me if you want to discuss this subject in more detail.

Do you agree with Gilmore's analysis - or not? What would happen if retailers actually charged what it costs to pick, pack and ship ecommerce orders? Let us know your thoughts at the Feedback button below.

View Web/Printable Version of this Column

On Demand Videocast:

Innovation in Shipper-3PL Relationships Benchmark Study Results

New Research will be Unveiled from SCDigest and JDA On This Increasingly Important Topic

In this outstanding broadcast, SCDigest and JDA recently completed new research study on innovation in shipper-3PL relationships, with the goal of obtaining the perspectives of both shippers and service providers on this increasingly important topic. All registrants will be sent a copy of the report will all the data shortly after the Videocast.

Featuring SCDigest editor Dan Gilmore and Danny Halim and Lori Harner of JDA.

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On Demand Videocast:

New Cloud WMS Solution is Game Changer for Warehouse Management Deployment and Flexibility

New Technology and Deployment Approach Offer a Simply Better Way to WMS Implementations - Learn How

In this outstanding Videocast, we will cover the latest in each-picking robotics, co-bots, artificial intelligence, autonomous vehicles, sensors, drones and droids.

Featuring  Dan Gilmore, Editor, along with Mark Hawksley and Bruno Dubreuil of TECSYS, a leading provider of WMS solutions.

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On Demand Videocast:

Successful Supply Chain Vendor Compliance - for Retailers and Beyond

Author Norm Katz on Vendor Compliance "By the Book"

In this outstanding Videocast, Katz will summarize key elements of book, to include: Compliance program guiding principles; What is permissible under the law relative to vendor chargebacks; Common mistakes companies make in rolling out and maintaining vendor compliance programs; The many "E's" of successful vendor compliance, from "Envision" to "Ethics."

Featuring  Dan Gilmore, Editor, Norman Katz, consultant and author of "Successful Supply Chain Vendor Compliance," and Greg Holder, CEO, Compliance Networks

Available On Demand


This week, more of the many email were received relative to SCDigest Editor Dan Gilmore's column on A Supply Chain Christmas Wish List for 2016. Great feedback - more next week.

Feedback on A Supply Chain Christmas Wish List for 2016:


As always an insightful and truly thought provoking "First Thought."

Maybe the cause is industry has been so beaten down by government regulation, financial crises etc., it is has just been in a survival not thrive mentality and thus offering reflect what they will buy?

It seems demand for real supply competitive advantage projects has narrowed to fewer industries and shrunk. Hopefully some of the leadership changes in government is about to re-spark this desire to gain advantage? I think exception to this is Amazon, which I see using basic competitive advantage efforts to out maneuver their competition. As far as I know they buy nothing but build all their own solutions?

The leadership you describe seems to be have been replaced by professional Olympic water treaders… no Michael Phelps? The current leaders use the term supply chain even try to use S&OP to sell marketing noise around Cloud, largely useless but expensive technology, powerpoints consulting process and theories that serve some niche agenda or narrow profit opportunity for the sellers but rarely if ever return the big ROI for clients.

Real supply chain/S&OP efforts are ALL about competitive advantage… not treading water.
These breakthrough S&OP/supply chain efforts ONLY work when they embrace people and understand the overriding problem is a distributed data / inventory production synchronization / work effort coordination problem. Thus cannot be solved by synchronous computing apps in isolation (99% of what is offered today). By the way synchronous computing applications is about all 90% of IT professionals are comfortable with….thus a big problem, big gap but big opportunity?

What is sad is still maybe less than 5% of the extended enterprise coordination of resources is being done anywhere let alone everywhere. Thus the opportunity to use basic problem solving approaches applying communication, workflow, and optimization technologies and adherence to rigorous finance thinking present probably unbounded business profit opportunities.

For example leverage of postponed manufacturing to promote US jobs, protect IP, grow profits, create more choice for customers… as one small example I mentioned in response to your Trump supply chain article?

Like you I think there should have been 50 Hau Lee's, Sanjiv Sidhu's, Jim Moorehouse's, Bob Delaney's minted in past 10 years.

I have seen this gap in industry and have frequently turned to academia in engineering and MBA programs to see if they want to grab the torch and set out BHAG (Big Harry Audacious Goals) What I find they are all fishing for corporate money to grow the size of their programs and thus take their lead from these same "treading water” or niche signals.

Time to break the cycle?

Jon Kirkegaard
DCRA Solutions


The reason why we hear all about the supply chains of the big companies is that they are big companies, and that is what the press typically gravitates to. This was not always the case, but in these times of the sponsored stories in the trade press, where the story supports the advertisers in the publication, we hear about the things the big companies do because that is what those advertisers want to cover.
Think of the economics of the issue. If you are the VP of sales and marketing at a software company, consulting firm, a 3PL or a carrier, what size of client do you want to use as your prestige example? You use the big company that has name recognition. If you are in that same position, what do you want to have as accounts, 10 big name companies or 10 no name SMBs? Shoot, you might need to have 100 of those SMB customers to equal the business that one big name brings you, so where will any smart VP of sales and marketing focus?

The idea that SMB (Small-Mid Market Businesses) don't have the same issues and problems to where they are not as interesting to work on is not accurate. SMBs have all of the same issues that the larger companies have, except for scale. Scale makes solutions easier. A SMB does not have the resources in people, process or capital that a larger company has. In my time at Pep Boys our freight spend alone was more than the total revenue of many of the clients I serve with my consulting practice. However, the problems are the same and are much more challenging to solve due to the lack of people, resources and capital to deploy. The tools that the bigs use, the "double comma” priced SCM systems, just do not scale down to what a $10MM or even a $100MM revenue company can justify. However, the SMBs still need to manage their inventory, they still have to fulfill orders, ship orders, and deal with returns. I have come to the opinion that it is much harder to solve these problems, and that the solutions must be deployed with great care in a SMB environment because the typical SMB can't tolerate the errors and variance that the big companies can. An error that would be a rounding issue at a Fortune 1000 company can be devastating at the SMB level.

Scale matters. In the SMB world the person that manages the warehouse, and perhaps transportation, may be managing the day to day of order processing and picking. Even in $500MM companies, the talent pool is small and shallow. The leaders can see what needs to be done – they get the strategy. They may even understand the tactics. But they sure don't have the depth in resources to start executing the tactics.

The SMB community is being served SCM material to think about and deploy. However, that content is not coming from the usual suspects in the SCM world. They get information from their industry associations, industry specific trade publications, from conferences focused on that industry segment, or from the Vistage, YPO and similar groups. They talk to other owners they know at the local Rotary or Lions Club meetings. In the SMB world the CEO is often just a few steps from the warehouse or the plant floor. They don't go to CSCMP or WERC conferences because they don't know about those organizations, or when they look at what the conference offers they see problems and solutions that are not what they as leaders have to deal with.

Can the SCM trade press do a better job of servicing the SMB market? The short answer is YES. However, it is going to take a different mindset, a focus on providing more than just the strategy and some of the tactics of SCM. It will take a level of commitment that the trade press may not be able to make, considering the cost of running those businesses. It will require writing about solutions that may not bring in advertising revenue, writing about solutions that some of the large vendors may not want covered, because there are solutions that provide the same functions for the SMB world as the big systems do, for far less money. In a publishing business model that depends on 100% advertising revenue for survival, can the publishers afford to provide the level of coverage that brings value to the SMB world without the advertising support that supports that mission?

David Schneider
David K. Schneider & Associates



Q: Truckload carrier Werner says it invests in "the Five T's" of its business. What are they?

A: Trucks, trailers, terminals, technology and talent.

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