Weathering the Storm

Hurricane Sandy shows the need for a reset of supply chain infrastructure

By Kumar Venkataraman

Over the last decade, America’s Atlantic shores have faced the wrath of more than a dozen hurricanes, causing damage worth several billion dollars. Year after year, retailers have been learning and fine-tuning their strategies to respond to the critical needs of consumers in the impacted areas, both in preparing for a disaster and immediately after.

Examples of such refinements include capabilities such as forecasting and inventory planning. Many retailers such as Walmart and The Home Depot now have the capability to plan adequate inventory to cater to natural disasters. However, many retailers are limited by their infrastructure, most notably their distribution network, to respond quickly to natural disasters.

In the 1980s and 1990s, retailers built their supply chain focusing on cost and efficiency. Simply put, retailers created a distribution network that enabled them to move products from suppliers to their stores at the lowest possible cost. This approach resulted in a distribution network that was built for scale — i.e. consolidating inbound merchandise from suppliers upstream so that they could save on inbound transportation costs.

These large warehouses also provided other benefits. First, such large distribution centers were able to justify capital investments on automation, substantially reducing handling costs. Second, these distribution centers also allowed retailers to send full truckload shipments to the stores, saving precious dollars on outbound transportation. Lastly, scale-based networks were suited well for relatively stable demand patterns and lower SKU assortments.

However, in today’s environment, these strategies are crippling brick-and-mortar retailers. Ability to respond to markets impacted by natural disasters highlight the lack of speed and flexibility of these retailers — a result of their own making. The scale-based distribution network impedes speed and flexibility in several ways. First, the distribution centers are located far from individual stores; in many instances they are 200 to as far as 500 miles away. The fewer the number of stores in the network, the farther the distribution centers are located. Theoretically, the response time to ship merchandise to a store is at least a day, but realistically, it will take two days to fill a truck with merchandise and service individual stores.

Second, in most instances, stores are “hardwired” to a distribution center. What this means is that a store can get its merchandise only from a predetermined distribution center. So, if the designated distribution center is out of stock on an item, the store demand cannot be fulfilled by the next nearest distribution center. The store will have to wait until the designated distribution center receives the item (either from the supplier or from the nearest distribution center). This limitation is mostly a result of the lack of IT enablement — the systems are designed to single-source from a distribution center.

The irony is that, the same network that once was designed for low cost has not only become a high-cost-to-serve model but has become a source of competitive disadvantage for brick-and-mortar retailers. Some online retailers such as are experimenting with same-day delivery. Meeting these service levels can only be possible if inventories are deployed closer to the consumer, not in a distribution center that is say, 300 miles away. Online pure plays do not have to deal with high-cost, low-speed distribution networks.

Bottom line, there are several reasons why retailers should go through a reset of their supply chain infrastructure, enabling systems and processes. Such a reset is not easy. Many retailers are already embarking on this complex and costly exercise of resetting their capabilities to move from a “low-cost” network to a network that focuses on “speed and flexibility at optimal cost.” The recent hurricane event only accentuates the issues brick-and-mortar retailers face in serving consumer needs, quickly and efficiently.

Kumar Venkataraman, a supply chain expert, is a partner at A.T. Kearney, a global management consulting firm, and leads its retail operations practice.

© 2014