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A supply chain perspective: the dilemma with customer choice
A supply chain perspective: the dilemma with customer choice
Hatmill’s Toby Farrance and Liam Lindley discuss the impact of increasing customer choice and the perhaps surprising consequences it has on the supply chain.
The Museum of Crisps states there have been more than 1,300 flavours generated over the years. Most people will struggle to name 20, and likely eat no more than 5 on a recurring basis. What has been the cost and benefits of providing the 1,280 additional flavours? It’s not something that is quantifiable, but we can all see easily how this adds complexity to the supply chain.
New product development
As businesses strive for incremental revenue, they often do so by launching new products. New products could be genuinely new and revolutionary. They could be an adaptation of something already in existence like a change in pack size or branding, or something that a competitor already provides, but is new to your business. In all instances they create additional cost and effort through everything associated with a new stock keeping unit (SKU).
Some new products come with the hope that they’ll be the next big thing, think the iPhone. However, a lot of new products are simply there as a promotional exercise to target a new customer segment or enter a new market. Most companies aren’t innovators like Apple though, many new product developments are marginal and most markets are already saturated with generic products. It’s worth asking how much value will a new offering really add to the world, or the profitability of a business?
Whilst such initiatives often set out with the aim to improve revenue, they can be resource and capital heavy. There will always be incremental costs in logistics, marketing, packaging, and sourcing.
The impact on planning and warehousing
Demand and supply planners will furiously try to combat any impact to service and working capital by reforecasting sales, transferring demand from predecessor to successor and calculating potential risks caused by cannibalisation. Once released to the market, if the reality is slower than anticipated sales the hype diminishes, and any added operational complexity is brushed over.Optimal flow through the warehouse is critical and is often compromised by the introduction of new SKUs which consume space and impact pick sequencing. All industries are different, but we have seen countless examples where new product launches cause an imbalanced flow of inbound and outbound activity. This can impact the hours required just to maintain the status quo. How do you fund that requirement, for example with overtime or temporary recruitment?The configuration of automation and machinery may also need to be adjusted where production lines are altered. The operational teams need to remain agile throughout and yet the best we can often hope for is a 0-0 draw.
The environmental impact
Industries such as clothing and fashion that are susceptible to returns pose additional challenges when offering so much choice. In 2021 £7bn of internet purchases in UK were returned. The environmental impact of this is significant. Consumers often buy more options to consider, sometimes just to hit a free shipping order level, but often this does not translate into increased revenue and profit. The significant financial and environmental cost of returns is linked to the increased level of choice offered to customers. As sustainability moves further up both the business agenda in the form of ESG reporting and more consumers choose to spend with companies that have values that mirror their own, businesses will need to increase their awareness of customer choice and its impacts on their profitability and sustainability. In our experience, it's not uncommon for businesses to hold inventory for five years in the hope that one day it will sell, with limited activity to improve traction. The stock continues to consume valuable warehouse space and drive inefficiency through the operation. Then what, landfill?In our experience, it's not uncommon for businesses to hold inventory for five years in the hope that one day it will sell, with limited activity to improve traction. The stock continues to consume valuable warehouse space and drive inefficiency through the operation.
Summary
All of this adds complexity to the operation, and something that was once shiny and new can quickly become irrelevant to the people who launched it and unfortunately even less so to the people you wanted to buy it. Having the right KPIs and incentivising the decision-makers can mitigate the risks, however, the accountancy rules around excess stock reserves will never be as glamorous or enticing as sales and margin.
We understand that businesses need to remain relevant and new products can be an enabler to this. The next time you’re contemplating launching something new, think about the opportunity cost internally on your resources and capital, and externally on the environment. Would you get a better ROI from investing in product life cycle processes, warehouse infrastructure and optimised picking processes, automation, or software to better forecast and plan?
Time assessing the impact of providing such choice for your customers would be well spent.
If you’d like to discuss any of the points raised, please do get in touch.
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