Complexity and cost to serve in a tug of war for the modern consumer

I’ve written a lot about digital demand and how it’s driving massive levels of complexity back into the supply chain. The never-ending parade of clever ways to grab an order while consumers go about their daily business keeps marketers on their toes with a constant re-calculation of the classic four Ps: product, price, place and promotion.

The first of these, product, is exploding in complexity as digital consumer input starts to significantly influence innovation processes. In our recent CSCO survey, 29% of respondents say they currently use social media input for new product ideas. Another 45% say they expect social media to inform product innovation in the future. This has already increased SKU counts for most.

In terms of price and promotion, digitally empowered customers are also much more likely to want a variable mix of convenience, selection, service and cost than simply the lowest possible price (47% vs 18%). This, of course, ups the ante for promotional arrangements at retail and the challenge of assuring stock availability for shoppers now accustomed to seeing such special offers in many different media formats. The weekly paper circular is no longer the only (or even main) source of fits for fulfilment teams.

Place, however, is where the digital revolution is really messing with our lean, mean supply chains of old. Innovative mobile shopping tools like ShopThis, which embed point-of-sale icons in the advertisements shown in online versions of magazines such as Vogue and Wired, offer instant demand capture.

Tesco, meanwhile, has entered the tablet business with a £119 device called the Hudl, which could be thought of as an e-reader but is really a mobile point-of-sale pre-loaded with the store’s online merchandise and other consumer apps. Impulse buys aren’t just about sweets and tabloids at the till anymore.

Cost to serve: does anyone really have a grip on this?

With so much newness, variety and special treatment increasingly baked into consumer supply chains, one wonders how we’ll stay on top of profitability. Promotions of old drove shopper traffic – and hopefully basket size – with profitability measurable at least at the store level. Loss leaders were fine as long as bottom lines grew.

Today, though, the notion of shopper traffic is as likely to align with IP assets like brands or pure content sources as with the physical real estate of stores. We know for sure that all sectors are building direct-to-customer fulfilment capabilities. We also see that most are rebuilding their distribution centres in response to these pressures. All of this means that traditional costing systems in supply chain are almost certainly going to feel obsolete by the time we’ve mastered the operations of omnichannel.

Peapod experiments

One interesting example of added complexity that’s great for consumers, but still uncertain for shareholders, is the new pick-up service offered by US online grocery retailer Peapod. Long successful(ish) in home delivery, Peapod now runs a service where consumers buy online, commit to a pick-up time slot and arrive at the store to collect a pre-picked tote of groceries. Sounds simple enough and it’s quite clear that some consumers love it.

Doing it, however, is a bit more complex. The store sets aside space, both inside and outside the building, plus dedicated staff on site and a separate call centre for problems. Orders are not picked from inventory in the store, but instead at one of two regional distribution centres that serve 30+ stores. Totes are delivered to each store and held on site for shoppers.

Missed pickups get sent back to the DC for restocking (or disposal of fresh items). All of this is free of charge, and even includes double manufacturer coupons. That’s a lot to offer in a business with 2-3% margins.

I don’t doubt that Peapod did its sums before getting into this, and I can see a path to success. What I wonder, though, is how many supply chain teams have developed the cost accounting sophistication to handle all the crazy ideas we’re going to see coming from marketing in the next few years. Without a solid handle on cost to serve, all this complexity could eat us up.

Please contact me directly with any comments, questions or suggestions. I welcome your feedback.

Kevin O’Marah
Chief Content Officer
SCM World