Through the retail lens: Efficiency versus agility in the supply chain

RSR Research’s Brian Kilcourse on fulfillment and hyper-localism

Brian Kilcourse, co-founder and managing partner of RSR Research, has an extensive background in retail and technology innovations. He was senior vice president and chief information officer at Longs Drugs Stores for more than a decade and was considered a leader in retail technology. He pioneered the use of business intelligence, analytics, price optimization, ecommerce, electronic payments and other concepts. Kilcourse also helped with the development and adoption of technology standards for in-store point-of-sale systems.

He spoke with NRF about the pandemic’s impact on the retail supply chain.

Brian Kilcourse
Brian Kilcourse,
​​​​​​​Co-founder and Managing Partner, RSR Research

Now that we’re six months into the pandemic, what are you watching in terms of supply chain?

The thing that COVID laid bare was that supply chains were engineered for efficiency but not agility. That has come at a price. Retailers knew they needed to address this beforehand, but COVID has accelerated that.

We’re looking for retailers to make changes to their supply chains, to consider more localized assortments and more holdbacks for omnichannel demand. We’re looking to see that they have the ability to change fulfillment levels to stores based on the real need as the COVID-19 pandemic rolls through a community.

This is particularly important for general merchandise and fast-moving consumer goods. The classic example is toilet paper. Supply chains are not stocked. It may be a hyper-efficient supply chain, but it doesn’t have much agility; that needs to change.

On the fashion side, it’s a whole different problem. The real problem is that many of these retailers don’t have sales to support their future buys and many of them are collapsing because of it. There’s a great consolidation of fashion brands happening and it’s heartbreaking to watch.

How do you think those deficiencies can be fixed?

That’s an interesting challenge. My generation of retail leaders focused on lowering the cost of goods. We achieved economies of scale through assortments that were standardized. This was really all about making supply chain as efficient as possible, so that lower cost of goods could be sold at the lowest price while delivering the rest to pay for operations and give some back to stockholders.

That’s classic mass merchandising. Retailers have known for 10 years now that consumers aren’t interested in slogging their way through big boxes with giant assortments. They’ve done their research online. That has caused retailers to push for more and more localized assortment and even, in some cases, localized prices or promos. But that undermines the efficiency of the mass merchandising supply chain.

Systems and processes that supported the mass merchandising model have to be changed to support the new ways. The good news, at least on the technology front, is today’s systems are capable of supporting that kind of model.

Instead of having thousands of merchandising decisions, you can have millions and a need to respond to the hyper-localized nature of demand. That’s more complicated than the old model, and if it isn’t done well it will destroy profitability. And the one thing the consumer isn’t willing to give on is price. It demands a change in process and technology that is profound. All COVID-19 has done is accelerate the change to manage at a hyper-local level.

Are there opportunities that retailers are missing out on? If so, how do they capitalize on them?

In our research, we talk about overperformers, companies that perform above average. What we’ve noticed is they don’t just do all the things other retailers do, [they do them] better. They also tend to do some different things.

What we’re seeing in the research lately is those retailers are really pushing hard to take advantage of the new data available to them and the new data insights available from AI. The new data is market data, social media, sporting events, competitive data, location data and other non-transactional, external data that can help them understand the subtle changes in demand that can have a material impact on their ability to succeed.

What they’re doing — and all retailers should consider — is figuring out how to plan at a hyper-local level. It requires the ability to see and respond to disruptions in something much closer to real time. The ability to monitor the supply chain in something approaching real time with signals generated by “digital twin” or IoT technologies and using AI analytics can help retailers respond much more quickly to disruptions when they occur.

Retail winners are attacking both sides of the operational model. On the demand side, retailers want to detect trends before they show up in transactions. They’re gaining insights by using next-generation analytics, and based on those insights, arriving at what technologists like to call “the next best action,” to not only predict what’s likely to occur but make a recommendation on what to do about it. It’s quite complex and retail winners are doing it. Others are considering it but moving quite slowly.

The longer this pandemic goes on, what supply chain issues will not return to what they once were?

The biggest thing is the highly standardized “one size fits all” assortments being pushed out into the market. I don’t think we’ll go back to that. I also don’t think the supply chain is ever going to return to a model where demand is assumed to be created and fulfilled in the same place, the store. Now demand is created in many ways and can be fulfilled in many ways. It is a many-to-many model instead of one-to-many.

Finally, when will we be able to get our favorite brands of toilet paper whenever we want?

Who knows? But when you think about the toilet paper supply chain, it’s as efficient as it can possibly be. Toilet paper is usually tied directly to the size of population. It’s as close to a “use one get one” as a supply chain can be. It was very steady, very predictable.

When I was with Longs Drugs, we used to joke that we would never put Pepto-Bismol on sale because people don’t hoard Pepto-Bismol. The same for toilet paper; the supply chain was totally unprepared for weird spikes in demand. It’s the perfect case study for the difference between efficiency and agility. It is hyper-efficient with absolutely zero agility and it always will be.

Real demand is based on the size of the population; nothing else matters. As soon as consumers get over their weird concerns about it, the supply chain will catch up.

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