Supply Chain Management: Conversations in REM with Luke Balestri
May 5, 2023
The COVID-19 pandemic has highlighted the importance of supply chain resilience. Companies that were able to quickly adapt their supply chains were able to weather the storm better than those that were caught off guard.
However, supply chain management remains a complex and challenging task for many. In this Q&A with CommerceIQ’s Director of Industry Insights, Tim Campbell, our Senior Solutions Consulting Director, Luke Balestri, dives into the world of supply chain management and shares practical tips for brands looking to improve their operations and drive growth.
Tim Campbell: Can you lay out the basic structure of relationships within a typical supply chain in your experience?
Luke Balestri: The supply chain is a chain. It has interconnected parts that start all the way back to the creation of raw materials. The typical supply chain structure involves a forecasting or planning organization leading to a manufacturing organization, followed by deployment within the organization. The process continues with the ordering and fulfillment process as a retailer places a purchase order (PO) into the system. The focus then turns to managing the delivery process and transportation logistics, which then completes the supply chain.
TC: What are some of the common problems that you dealt with day-to-day managing the supply chain?
LB: Forecasting is always an opportunity across industries. It’s also important for companies to manage labor and transportation, which can be subject to market whiplash effects, and to be vigilant in protecting their margins by staying aware of fees and fines.
TC: What are the differences between ecommerce and brick and mortar supply chains?
LB: The brick and mortar retail model is built around consistency and predictability, so an industrial size supply chain makes sense in that environment. Since ecommerce has transformed the retail landscape, the ability to have a flexible supply chain has now become a key differentiator. Unlike the relatively steady 1-5% growth seen in brick and mortar retail, ecommerce can experience growth rates of 20-40%. In managing this level of growth, predictability and consistency take a back seat to flexible fulfillment.
TC: If there’s significantly less predictability in the e-commerce supply chain, what do you manage first?
LB: It’s important to manage the assortment strategy first because it can have long-tail effects on your supply chain. For instance, if I’m forecasting 2,500 items versus 200, I am opening up my forecasting model to a significant risk, which can lead to fulfillment issues, chargebacks, fees, and fines.
After managing the assortment strategy, you can shift your focus to tightening fulfillment methods and processes. It’s important not to simply copy ecommerce supply chain strategies from brick and mortar. ecommerce demand and the nature of the digital shelf demand a different approach.
TC: How have ecommerce supply chains within the CPG industry evolved over the past 10 years?
LB: The shift towards direct-to-consumer fulfillment has created the need for a more flexible supply chain in the grocery space. Now, there are more flexible approaches such as Pick, Pack and Ship or repacking everything all under one roof.
TC: What are the typical pain points that a brand can expect to run into as they’re “going small” versus going industrial?
LB: You have to always balance the margin of getting the product out versus the impact of not doing so. Think about your journey within the supply chain as no longer making short-term fixes, but as navigating a one to three-year horizon. Third-party logistics companies can provide short-term help while you learn to become a more flexible supply chain. Then, your brand can gradually build and grow as demand warrants large changes in the supply chain network.
TC: Can you expand on the different options that brands have to become more flexible?
LB: One of my recommendations is for brands to strategically place centers of excellence within their supply chain network. These centers can handle tasks such as repacking, holding inventory for longer periods, and shipping directly to consumers. Data visibility is also critical to enable responses to drops or increases in sales. Although forecasts can also go up and down, it’s important to start building statistical models with the right subset of data in order to forecast inventory needs. Ultimately, the goal is to have the product in the right place at the right time for consumers to access.
TC: How do micro-distribution centers fit into this process of getting the product where it needs to be on time?
LB: The use of micro-fulfillment centers can offer brands flexibility and also de-risk them. By consolidating activity in a few locations around the country, brands can improve their ability to deliver orders and forecast demand. Partners like Gopuff use this strategy. Instead of having 20 distribution centers that is the typical scenario in the brick and mortar space, they have a thousand smaller distribution centers across the country. This strategy reduces the need to travel long distances or pull in large amounts of inventory. Brands can better fulfill consumer demands for their products by bringing all of this consolidated activity under one roof.
TC: You have experience with Vendor Flex at Amazon. Could you tell us more about how you used it and how effective it was in general?
LB: I was lucky enough to lead PepsiCo’s Vendor Flex program and my general recommendation is to do Vendor Flex with Amazon if you have the chance to. It changes your buyer-seller relationship with Amazon into a true partnership. It also takes your strengths and Amazon’s strengths and puts them all under one roof. Amazon manages the Pick, Pack, and Ship of orders while you deliver inventory across your distribution center. Vendor Flex allows for a more collaborative approach between manufacturer and retailer.
TC: Regarding your recommendation to master assortment first, how might that intersect with price packaging architecture, for instance, and ecommerce? How do you go about optimizing that?
LB: It varies across industries, but one important responsibility of the sales lead and the supply chain lead is protecting the margins of the business. It’s crucial to price products correctly for the ecommerce market and determine the right price pack architecture based on the average selling price. Unique products can also attract consumers, but it’s also about protecting your P&L internally.
TC: What do we have to keep in mind for the direct-to-consumer (D2C) supply chain versus that of a retailer like Amazon or Walmart.com?
LB: From a supply chain standpoint, you can think of D2C as a direct fulfillment model. It’s important to consider the unique sets of SKUs or the reasons for brands to buy from your website, as well as the reasons for consumers to come to your site versus another. Forecasting demand and flexibility become even more critical, so it’s best to work with a partner that knows how to do direct fulfillment. Using a third-party company is usually the quickest path.
TC: What should brands focus on right now to adjust their supply chain with this new concern over profitability?
LB: To have a better overall P&L, you need a combined assortment strategy with an inventory management that is defined by data. It’s important to understand market realities and to connect them to inventory management in order to prevent shortages, chargebacks, and wasted spending. Being flexible is key, but it’s equally important not to waste spend within the supply chain. For instance, it’s more profitable to send a full truck of products to a distribution center on the West Coast than to send a truck with one pallet to Amazon from New York to California just to get the product there and fulfill.
TC: Are supply chains becoming more complicated over time?
LB: Supply chains are always getting more complex due to thousands of variables that are constantly changing. This is just the nature of supply chain. It’s definitely not just about handing a piece of paper to one person in a warehouse to put a box in a truck. During Covid, there were fundamental breakdowns in the supply chain due to the unpredictability of inventory and limited transportation. The tremendous problem solvers within organizations who worked to fix these small breaks and kept the process running are the real heroes who were responsible for getting the products to the retailers and the consumers.
TC: What role does better data tracking play in supply chain management?
LB: Supply chain now gets a seat at the table. Platforms like CommerceIQ can help different parts of an organization make strategic decisions that affect advertising strategies down to inventory. When data such as forecasting and inventory levels are tracked and reported, supply chain, sales, and advertising can all communicate effectively.
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