Over the last decade, eCommerce has grown in popularity with businesses and consumers alike. BCG is at the center of it all, helping clients build strategies and implement technology to achieve transformational results. The below is a recent podcast I did with my fellow BCG Platinion colleague Jamie Hammond.
Jamie Hammond: One of the biggest pain points of eCommerce for consumer packaged goods (CPG) companies is related to supply chain, and COVID-19 only amplified the importance of this area. More people stuck at home online shopping meant backend systems couldn’t cope, and for many firms, that meant a less than desirable customer experience. Today’s stakes are higher than ever with major retailers threatening to give less shelf space to companies that can’t deliver their products. What are executives looking at now? What realizations are they having, given the new normal of eCommerce and supply chain?
Michael Hu: If you think about the impact of COVID-19, five years of growth were essentially compressed into one year, and that trend is sustained beyond the initial COVID-19 wave. This means that supply chain is at a breaking point and is a burning platform for the C-suite. If you talked to a CEO five years ago, supply chain often came up in the context of, “Hey, I need to save $50 million. What can supply chain do?”
But now, if you listen to the C-suite talk supply chain, it’s much more strategic. It’s “Amazon or Walmart are going to de-list me or give me less shelf space because of my poor availability. I’m trying to grow my direct-to-consumer business and falling short because I can’t deliver against the speed, cost and effectiveness that we promise consumers.” So, supply chain is now becoming a performance gap, and ultimately poses a growth barrier and bottleneck to a lot of our clients in both the consumer and retail CPG space.
Jamie Hammond: We field several requests to look at order management or warehouse systems and how they’re set up and to make them more effective. There still seems to be a heavy reliance on antiquated technologies or manual processes like Excel spreadsheets to manage the supply chain, despite the increasing capacity to make these processes more automated and digital.
Michael Hu: Yes, absolutely. Just put your consumer hat on and think back to the past year and how you shopped. You’d buy something at Target or Macy’s marketplace. You go to the store, and they won’t let you return it because it’s not their 1P product. You buy something online at Walmart, and when you go pick it up, 10 of the 50 items you bought have been substituted because the inventory wasn’t in fact there when they promised to have it. Or you order something online, and they tell you it’s going to arrive to your home in two days, and it turns out only one of the five items you ordered is delivered on time, and the other two things are delayed and in different packages being delivered on different days. This is all because of systemic inability for supply chain to deliver against the promise that companies have made to the consumers, and that’s the gap we’re seeing.
Jamie Hammond: It’s interesting to think about this evolution. In years past, the focus was primarily on the customer experience, and now, especially with the acceleration from COVID-19, we’re finding a lot of time and effort spent and shifting towards the supply chain or order management systems — these backend, less apparent mechanisms that we sometimes take for granted.
Michael Hu: Exactly. In our experience, when a company is less than $300 million in eCommerce omni-channel revenue, you can get away with not having the right supply chain. But once you get to around the $300 million mark, the amount of orders, volume, and transactions and experience points you’re having with the consumer or the customer is significant enough that if you fall short on those experiences the supply chain is driving, that really hurts your growth and drives a higher cost to serve.
Recently, we spoke to a top-three retailer client, and they observed 20% or 30% more new consumers placing orders online, picking up in-store because of COVID-19, and they’re staying. They’re not just using their services and then leaving. That’s great, but what isn’t great is that they aren’t having a wholly positive experience because a large percentage of those buying online and picking up in-store aren’t actually getting the product that they said they would have for the consumer at pick-up. There’s quite a bit of substitution, and this type of challenge happens all the time where supply chain is directly driving a negative experience and compromising strategic growth aspirations.
Jamie Hammond: Yes, we are all shoppers and go online to shop. This area of eCommerce and supply chain is very relevant. There’s a lot of hand shaking that needs to happen to get that supply chain linked up to the digital experience and then ultimately to the person it’s being fulfilled for.
Michael Hu: It’s also important to cast a broad net. When we say supply chain, there are many elements within it, but I think if we want to link the strategy to delivering a great consumer promise and do it profitably, we should think about supply chain in the broadest sense.
Maybe the best way to do this is in two separate but very interconnected stacks. You’ve got the hardware stack, which is really warehouses and stores. Where are they? How big are they? What capacity do they have? What do the associates within there do? What kind of automation do you have? It’s all the physical assets required to deliver great consumer experience — the hardware side of it.
And then there’s the software stack, which is all the intelligence and analytics required to power the hardware end-to-end, starting from predicting what product is going to sell in which location, to when a product needs to be sent where, to when shelf inventory will run out and replenishment is necessary to even returns.
If the consumer doesn’t like something, they bring it back. So, how do I effectively bring it back? Often, the hardware stack isn’t configured properly. I’ll give you an example. When we worked with a beauty and cosmetic company, they basically said they wouldn’t use the store to offer product pick-up or home delivery, even though it’s the fastest way to do so, because it could compromise store associates’ incentives.
This is the ability to deliver experience, because people want to be an experienced provider and not a glorified warehouse worker in-store, but now processing returns is such a big part of it. So, like it or not, the interaction of that hardware and software stack is critical. Most of our clients are not really being thoughtful about it and certainly don’t have the capabilities needed to deliver the kind of experience their aspiration is targeting against.
Jamie Hammond: I’m hard pressed to think of an industry more affected by COVID-19 than CPG and that is now really looking at eCommerce in terms of a viable business — a growth engine.
Michael Hu: I would agree. CPG for short, and then depending how you define CPG, the fashion and apparel industry.
And then retail having thought they had more time available to figure things out. The approach was something like, “We’re good in some areas. Amazon is better in other areas, but we’ve got time, and in 10 years, we can figure out who’s going to dominate which categories.” But now, the acceleration of people moving online is creating significant compression in the urgency. This is also a factor.
Jamie Hammond: You can tell in the headlines, too, in Tech Crunch or other websites, a lot of up-and-coming startups are focused more around data analytics or supply chain or order management — these backend things. Firms that are helping figure out the backend are getting the attention and getting the funding, it seems.
Michael Hu: Even the pure play, I would say. The good ones are thoughtful about how they organize their operations at day one. When they scale, they don’t get themselves into some of the problems we talked about earlier. If you think about Stitch Fix, they’re a hot startup in the apparel space, and they knew from day one their business model was to send the consumer a selection of products based on a recommendation personalized shopping engine. They knew that for every 10 products sent, the consumer will return 9, and they have to be profitable, on average. If every consumer, for every 10 things sent, keeps one, this means they must configure supply chain from day zero. That’s efficient at getting products returned and it’s a customized way of saying, “If a garment was returned through seven or eight transactions, can I still sell a new one? And how do I manage the inventory?” All these reverse logistics processes needed to be built and optimized to support the business model.
Jamie Hammond: That reminded me of variant full worms of complexity that some firms face. They have to figure out how that stuff is returned and then taken care of on the backend. There’s a battle for how best to sell to the Walmarts, Targets and others, and make sure shelves are stocked. Now, they’re selling from a digital standpoint through marketplaces like Amazon. So, how are we optimized there? Many of these CPGs are also saying, “We should go direct to consumer.”
The concern used to be solely about price, and now it’s not only price, but also supply and demand. “You better have the stuff here when we need it, or we will penalize you.” What does BCG bring to the table and what’s our value add when we’re having these discussions companies facing issues like this?
Michael Hu: We can help get the supply chain right through collaboration and iteration between the supply chain function, the finance function, and the merchandising function, and those three functions typically are fairly siloed within our clients.
We also help with analytic horsepower, especially on the software side, and the execution. It can all look good on paper, but the implementation can become an entirely different process — behavior changes; defining the process; helping define and change ways of working; inspiring them to do things differently.
Michael Hu is a Managing Director and Partner at BCG and serves as a core member of the Consumer and Operations practices.