The Retail Revolution: When it comes to supply chains, it’s get ahead – or get left behind

Tuesday, October 20, 2015 - 13:51

It’s not overdone to say the retail industry is in the throes of a revolution. The race to bring to market new products that dazzle consumers is pushing supply chains to the breaking point. In the interview below, Joel T. Bines, managing director and retail expert with global consultancy AlixPartners, explains the forces at work and why no corner of the retail sector, from groceries to haute couture, is exempt from the long-term transformation unfolding worldwide.  

MCC: What are the top three things corporate counsel and other executives in the retail sector are worried about today?

Bines: First by a landslide, they’re worried about data privacy and protection. (That’s probably first, second and third for most corporate counsel.) The second thing is the changing labor laws – overtime laws, minimum wage laws, scheduling practices and the difficult patchwork of regulations generally. The third is probably global expansion. Most successful domestic retailers have looked, or are looking, at overseas markets for growth, and that presents complexities for corporate counsel and other executives.

MCC: When a large retail client engages AlixPartners on the supply chain side, what insight are you bringing to the table? How are you helping them work out their sourcing issues?

Bines: The supply chain is core for virtually any type of retailer, whether vertically integrated or selling other branded products. Recently there’s been a movement to much faster, more frequent delivery-oriented supply chains (pioneered by “fast fashion” retailers, such as H&M, Zara and Forever21). That’s put a lot of pressure on the traditional apparel players. Even in the nonapparel space – such as grocery, electronics and big-box white goods – you’re seeing innovations in packaging, delivery and assortment models that get customers very excited, and supply chains must be nimble enough to accommodate.

One way AlixPartners helps retail clients is through our proprietary global sourcing index (the Retail Global Sourcing Benchmark Index) to help companies with what we call “should cost” modeling. We help them understand what the goods they’re buying actually cost to manufacture and distribute so they can identify margin improvement opportunities. Our clients have seen 300 to 500 basis points improvement of overall gross margin as a result. But cost isn’t the only side of the equation. We help retailers think about the full range of supply chain opportunities that help them achieve their objectives. We also help them think about the emerging countries if they want to get ahead of the curve. Overlaying all of this is the need for compliance and safety, and providing expertise on how to interact with a global supply chain that is changing all the time.

MCC: We’ve been talking with several of your colleagues about compliance challenges specific to Asia. One that comes up is that you’ve got country- level compliance and province- or region-level compliance. How important is it to have boots on the ground in Asia, especially people who know the local cultures within a country?

Bines: The need for local resources really depends on the supply chain strategy. If all you’re doing is buying containers of goods and shipping them to the United States, you can typically do that from a domestic buying office, or you can have a small Asian sourcing operation. But if you’re a retailer that really wants to get into the details and the relationships, you almost have to have an Asian sourcing presence. Whether you need boots on the ground in every single province of every single country is an open debate. A lot of companies use agents – the largest and one of the best, of course, being Li & Fung – that help retailers all the way up to Kohl’s and Walmart source goods from countries where they can’t put boots on the ground in a cost-effective manner, or where an agent’s specialized expertise makes more sense. I guess the answer is that someone needs boots on the ground, and someone needs to have the relationships, but it doesn’t necessarily have to be the retailers themselves.

MCC: Sourcing for materials and manufacturing across multiple countries is becoming increasingly common. What are the challenges?

Bines: The sourcing supply chain for any retail business is a multivariable equation, and that’s why it’s critical to have real expertise in information technology and data management. Every decision you make about where you source your materials, where you’re going to consolidate the materials and manufacture your products, how and where you’re going to ship your products – every such decision – has an impact on other decisions upstream and downstream. It’s very important, therefore, to have a handle on the data and a sophisticated model to support this. Excel no longer cuts it. The best supply chains leverage the best of “big data,” and we’ve found that our clients like it when we create and leverage very technical models that have been made simple and user-friendly.

MCC: You mentioned your sourcing benchmark index. Talk a bit more about that and about product development.

Bines: For any retailer, cost of goods is typically their biggest expense. In addition, winning retailers have understood and embraced the need for speed, agility and delivery frequency.

AlixPartners has created a practice around product development and sourcing to help companies compress the timeline from design to production and delivery. That side of our business is supported by database technology associated with our global sourcing index. This index tracks which countries best manufacture which products, along with other aspects of manufacturing, including those countries having the highest level of redundancy. Therefore, if something goes wrong in a factory, you know where you can move things around. If you combine all of that know-how with the operational and consulting know-how needed to help a company compress their timeline from design to delivery, then you can help companies not only reduce the time it takes to get products to market but also the cost of getting those products to market. That can improve overall margins for the retailer.

MCC: At what point in your engagements do you begin competitive analysis? Is that one of the first steps you take with a new account?

Bines: It depends on the assignment. One of our differentiators as a firm is that we only hire consultants with deep expertise in the industries in which they’re engaged. While as a firm we serve many different industries, our retail team doesn’t work for a retailer and then take on a project for an aerospace company, for example. There are many consulting firms that successfully employ a business model that puts smart young people on varied assignments, but our model is about speed to results, and that requires deep industry and/or functional know-how.

Our retail consultants typically have a minimum of 15 years of experience, and many of them have 30-plus years. We have less need for competitive benchmarking because we already know the competitors for any retail segment. Depending on the project, there may be value in benchmarking certain functions or costs against other retailers, but there isn’t a need for the sort of competitive landscape study that a lot of other consulting firms do. We already know it as a result of our deep retail expertise, and that applies to our EMEA team and our Asian team as well. When we do get into situations where competitive dynamics are important, however, it’s fairly easy to tap into our extensive network of former clients to ask, anonymously, about a particular subject. We’re also known for putting our client executives in touch with other client executives. If a CFO or GC at a luxury department store in the U.S. wants to know how things work at a luxury department store in the UK, we can make the appropriate connections.

MCC: So you’re really bringing to bear not just your expertise but also your relationships.

Bines: That’s right. We leverage our professional networks to help our clients. It’s not networking for the sake of networking but to open doors they might not be able to open themselves.

 MCC: You mentioned the protection of customer data as a major concern of retailers. What about the intellectual property of the company?

Bines: The good news for retailers is that there isn’t a lot of risk related to their trade names. They’re not that portable. The real risks are counterfeit products more than counterfeit trade names. It’s a well-known problem in the luxury space, but it’s actually prevalent in the nonluxury space as well. Technology makes it much easier because anybody can put a product up on a website and claim that it’s your product. With the influx of third-party sellers, customers might not even know they’re buying a counterfeit product. I’m not sure exactly what companies can do about it other than be vigilant. There’s not, at least that we’ve seen, a technical solution. The solution has to be based on vigilance and cooperation with law enforcement.

On the customer information side of things, it’s more complicated. The focus needs to be firmly on protecting customer information from the bad guys, whoever they are. But that conversation gets intermixed with conversations about sharing personal data. We view this as a generational matter. My children are very open with their personal data. With the advent of geo-locators, in-mall promotions, cross promotions, cross-loyalty programs and the like, I think some of the concern over personally identifiable information may die down, but the need to protect the consumer’s ultimate security – including payment methods, addresses, Social Security numbers and that sort of information – is not going away. My concern is that retailers are losing the battle right now, and that has to change.

MCC: Let’s talk about emerging technologies. What’s the coolest stuff coming down the pike?

Bines: This will sound trite, but mobile technology is still cool, even though it’s been around for a long time. We haven’t really found the killer app for mobile shopping. Amazon, of course, is the ultimate killer app, but customers still like to drive their cars to gigantic buildings that have lots of stores in them and walk around. Operationally, retailers need to think about how to use technology to better staff their stores and make them attractive to a changing customer. The coolest technologies are going to enable consumers to do what they’re doing now more efficiently, more effectively and engender loyalty.

MCC: How is the nature of retail changing from what it was for our parents’ generation? What’s next?

Bines: Retail has been democratized. For generations, almost all of the information and pricing power was in the hands of the retailer. If you wanted to compare prices, you had to drive to a retail location, park your car, walk into the store, hold the product in your hand, then go back out to your car, drive to another location and compare that product to the one that you just examined. The retailer would decide what was for sale at what price, and consumers would decide whether to buy or not. That’s been completely flipped on its head. It’s not that retailers aren’t curators anymore. The best retailers still put the best products in their stores and online in the best way possible to attract demand, but the power is in the hands of the consumer. A blogger can make a product blow up – in a good way or a bad way. Some of the magic of being the merchant is going away. That’s not true necessarily for every retailer – we all know that gem of a local spot in our neighborhoods, but it is true for traditional retailers playing in a typical mall or big box retailers. It’s becoming more about convenience, service, being in stock, helping consumers have an ongoing relationship with you. It’s less and less about being the only place, or the most convenient place, for people to buy.

MCC: Do you see what’s happened in the music industry, with algorithms driving product recommendations, happening in consumer goods?

Bines: There already are plenty of examples. Trunk Club, which recently was acquired by Nordstrom, is probably the one most people have heard of, but that’s not exactly the way they do it. You sign up and pay a monthly fee, and every month they send you a box of clothes based on a profile you filled out online – though not entirely algorithm driven. You’re also seeing more direct-to-consumer businesses. There are a number of companies that have no stores, but they have a model – sort of like the Avon or Mary Kay model – where salespeople come to your home, fit you for a custom suit or customize your pet’s dog food. That’s taking the cost of the physical store out of the retail supply chain and investing it instead in commission-based salespeople. That’s a very interesting model that we’re watching. J. Hilburn for men’s clothes and PawTree for pets are two examples.

MCC: Do you think it’s fair to say we’re experiencing a retail revolution?

Bines: I think so. If you’re willing to accept that this will not be a three- to seven-year revolution but a 10- to 30-year revolution, then “revolution” is certainly a fine word. Different pockets of the retail space will experience it at different speeds. We’ve already seen books, music and movies revolutionized, and we’re starting to see apparel at the basic level being revolutionized. It’ll take some time, but eventually even fashion and luxury apparel will get revolutionized.

Joel T. Bines is a Dallas-based managing director in the Enterprise Improvement Group of AlixPartners. He can be reached at jbines@alixpartners.com.