LBS logo London experience. World impact.

Welcome Home - Innovating the Forward Supply Chain

Most retailers have moved relentlessly towards the low price, low customer contact, big box experience over the past three decades.

By Kenneth K Boyer and G Tomas M Hult 01 June 2005

Most retailers have moved relentlessly towards the low price, low customer contact, big box experience over the past three decades.
Welcome Home  Innovating the Forward Supply ChainBut, as Kenneth K Boyer and G Tomas M Hult show, good service is coming back into style. Reinventing home shopping, as part of a new forward supply chain mindset, could make the retail shopping experience more enjoyable and more convenient. Customers will value it – and pay for it.


We live in a cash-rich, time-poor world. While customers want to get their supermarket shopping out of the way quickly and painlessly, most FMCG and high volume retail shops have increased price reductions at the expense of good service. The result is a pile it high, sell it cheap mentality that fails to address a customer desire – quick, painless shopping.

Home grocery delivery supplies a great answer to this problem. Yet what is essentially a great idea has been devalued by the fact that most of its practitioners are perceived to deliver low quality produce. Once a familiar staple of product supply, home shopping has virtually disappeared in the last thirty years. There is something strange about this fact – and the time is right for a resurgence.

But this won’t be achieved in the way that home delivery first became popular in the 1950s. Increased technology and better management techniques mean that companies wanting to embark on the renaissance of home delivery have a golden opportunity to address the time pressures that weigh on the majority of consumers.

The combination of automated ordering systems (primarily internet, but also telephone and fax) and new supply chain management techniques allow companies to serve customers in new ways that add convenience, quality, customisation and enjoyable experiences. But the business world seems to prefer an emphasis on low price at the expense of service. The past few decades have seen a huge increase in price-oriented retailers. According to a National Retail Federation study, just eight per cent of US retail sales were based on discount pricing in 1971. By 2002, the figure was a staggering 78 per cent.

But the pendulum is beginning to swing back to service – and a forward supply chain mindset could facilitate a huge sea change in the way products and services are sold. You want to find out how to beat Tesco? Then read on.


The rebirth of an old technique


There are two ways to compete in business. You can offer low prices or you can differentiate – with improved quality, better service or more choice. We all want to pay less, so offering low prices is a no- brainer. But running a business to provide low costs that allow a profit is a bit more challenging. In the US, Wal-Mart is the king of retail. It has achieved this position by a two-pronged attack – lowering retail prices to knock out competitors, and ruthlessly forcing its suppliers to higher and higher discounts. The technique is circular – the low prices means its turnover becomes massive, and the massive turnover means the suppliers are forced to agree to the discounts – because Wal-Mart ends up as their dominant buyer.

Techniques Wal-Mart has used to cut supplier costs include making the suppliers manage the inventory, real time tracking of inventory and sales in individual stores and cross-docking of fast moving items in distribution centres. To compete, many companies are implementing everyday low pricing. But unlike Wal-Mart, the competitors do not have the power to get lowered unit prices from the supplier. So the net result is reduced margins. This, as a strategy to combat Wal-Mart, is like attacking an elephant with a fly swatter. Companies in this position need to find a new strategy to differentiate themselves.

A similar thing happens in the UK with Tesco. Tesco is steamrolling its opposition on prices and its success is exponential. Frankly, there’s no point competing with Tesco on price.

So let’s look at the alternative – differentiation. If price was all that mattered, why would anyone buy a Rolex when a Swatch tells the same time? Why would a BMW appeal when a second-hand Ford Fiesta gets you from A to B just as effectively?

The answer’s obvious – people recognise a product or service that offers better quality, more convenience, or more customisation. The challenge – and this is where a canny competitor can create the most value – is determining exactly how much more customers are willing to pay. Is a Rolex worth twice as much as a Swatch? Three times as much? Ten times as much? Quantifying the value of a product or service’s differentiating feature is more an art than a science.

Continue Reading in PDF Format . . .

Comments (0)