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Amazon and Whole Foods: Four Keys to Combat Changing Grocery Landscape

By LLamasoft Editorial Team  August 23, 2017

The news of Amazon’s planned acquisition of Whole Foods in June caused quite a stir for the grocery industry. Amazon’s traction and reach only continues to expand and grocers are seeking new ways to keep the pace and remain in-the-game in an increasingly competitive marketplace. Couple that with the rapid expansion of direct-to-door services like subscription-based meal kits and the grocery industry is on an innovation track set at lightning speed.

It’s clear that the traditional grocery model is being disrupted, but how can grocers best respond? What new approaches are right for which companies? Many have already dipped a toe in the buy online, pick up in store model, but what other options are right for each company? How costly will this innovation be? Also, notably, what will the implications be for the network and operations in place today?

This is a change the retail industry has been dealing with for a long time, but only recently has a multi-channel approach become a consideration within the grocery sector. Supply chain modeling has emerged as an imperative tool for retailers to keep up with changing demands while balancing costs. So, how can grocers leverage their physical networks and adjust their operations to serve a multi-channel go-to-market strategy?

We’ve identified four keys to implementing a successful and sustainable multi-channel approach to not just keep up with the competition, but beat it, in times of rapid change:

  1. Supply Chain Network Structure
  2. Inventory Balancing
  3. Transportation
  4. Service

Supply Chain Network Structure

Customers expect the same level of service when conducting business with a brand, no matter the channel. To offer a seamless customer experience at optimal cost, grocers need to rationalize the existing supply chain network, which means an analysis of the existing network, and answering tough questions like:

  • When will you need to add additional capacity and where?
  • Where is the optimal location for new facilities?
  • Should you lease or build new sites?
  • Which facilities should you use to fulfill orders for which customers?

Decisions and considerations this complex cannot be managed with spreadsheets or through lengthy meetings alone. Supply chain design technology enables businesses to build digital models of the end-to-end supply chain to evaluate and compare dozens of scenarios side-by-side and test them under real-world variability for better decisions around site selection and product flows.

Inventory Balancing

Multi-channel fulfillment impacts the placement of inventory and the overall replenishment process from supplier to store, or direct to customer.  If inventory can be allocated to customers at the latter stages of receipt, either at the port or DC, this can provide flexibility to serve volatile demand across channels. While variable costs at the DC may increase, the overall inventory costs may be reduced by providing more pooling across channels. Grocers must also consider demand variability based on promotions and seasonality when building inventory policies as part of an omni-channel strategy.

Transportation

There are tremendous implications for transportation policy as retailers evaluate various delivery targets, especially when considering the freshness implications of the grocery industry. These are key drivers of the cost/service analysis that will be done to understand how multi-channel strategies will impact the bottom line. These include considerations such as:

  • How do you optimize mode selection?
  • What levels of service should you offer and what are the cost trade-offs?
  • Should you use private fleet or 3PL?
  • What is the best way to utilize parcel shipping to meet service levels?
  • What inbound and outbound flow changes do you need to balance cost and service?
  • How should you adjust your sourcing strategy to account for freshness?

Transportation optimization enables users to model their entire supply chain network, incorporating alternate transportation options and key variables such as cost, time, capacity and delivery parameters. You can identify an optimal transportation plan based on the total costs and service constraints.

Service

The point of tackling an multi-channel approach is to better serve customers, but that level of service carries with it costs that you may not be accounting for today. What is the right mode mix and service mix?  And what service levels should you offer customers given their expectations and convenience requirements? There’s no way to know exactly what service option will appeal to each customer, so grocers should give customers options based on varying service levels and costs to determine the right fit for them. Businesses can confidently give customers that choice by evaluating and testing the inventory and transportation cost impact of alternate service level scenarios in advance.

Modeling enables you to identify the optimal service/cost scenarios and the array of trade-off points in-between, then utilize simulation to test performance of alternate service scenarios. In a marketplace of seemingly endless change, having the confidence in your network to adapt to changing customer preferences, while accounting for business objectives, can be the difference between winning and losing in the new grocery landscape.