Chain of Thought

How Amazon Profits from Retail's Sales/Logistics Disconnect

The Wall Street Journal proudly revealed “The Myth of the Black Friday Deal” in this morning’s edition. In working with Decide Inc., a consumer price research firm, WSJ revealed that Black Friday isn’t the only time consumers can get great holiday deals, and that the rise of online shopping “has presented a wealth of data for researchers looking to uncover retailers’ strategies and pinpoint when prices are lowest.” This helps Decide guide its member consumers on when to buy certain items.

Maybe if the sales and marketing side of retailers communicated its strategies as freely to the inventory managers in their organization, organizations like Decide might have a harder time figuring retailers out. After all, the article also states “retailers will generally look to reduce inventory levels on items they overestimated or bought too much of in the days before Christmas rather than having to resort to an even steeper discount on December 26th.”

In researching an article on the retail industry for MH&L’s December issue, a number of sources are telling me about the lack of communication between sales & marketing and logistics and how this puts retailers at a competitive disadvantage, especially with online retailers like Amazon—making pricing strategies much more volatile.

I talked to John Sidell, principal and co-founder of New Course LLC, which just announced becoming an SAP services partner. As part of the SAP PartnerEdge program, New Course will be working with customers to develop business cases based on SAP EWM, its extended warehouse management system. I asked Sidell if he thought sales & marketing people were doing a good enough job collaborating with supply chain managers who rely on their own people and WMSs to try figuring out supply chain flows. He referred me to another collaborator, Lisa Kustra, founder of Plan4Demand, a supply chain planning consulting firm specializing in helping clients manage fast moving consumer packaged goods.

“There has been and continues to be a wall between sales & marketing and supply chain managers because often they have different goals and different KPI’s [key performance indicators] and in many ways different measures of success,” she said. “Most organizations treat supply chain people like operations people when in fact they should be treated as part of the revenue generation team. Most sales/marketing people have no clue of what supply chain people actually do or the concepts behind “constraint based” planning. This comes from corporate America continuing to work in silos within their organization.”

She says sound sales & operations planning starts in the C suite, with C-level executives encouraging all of their people to move from a production mind set to a performance mind set. But how can these people move to a performance mindset if they’re all being gauged by different KPIs? Sales people are driven by revenue KPIs but are not usually held accountable for forecasting accuracy. That’s the kind of mismatch that leads to last-minute holiday deals for consumers. It’s also why sales people often shoot low—so they can beat their numbers. However, supply chain managers are held accountable for customer service fill rates and for forecast accuracy, so if sales low-balls numbers they set up a corrupt demand signal, according to Kustra. So if Kustra believes there should be common KPIs between sales and supply chain, what should they be?

“I would look at promotional activity and hold them to similar KPIs around the cost of a promotion vs. the lift of the promotion and judge forecast accuracy levels based on how well they planned for a promotion,” she said. “This is a program generated by sales/marketing teams but is expected to be managed from a KPI standpoint by the supply chain. If you do not give the supply chain team proper notice but still hold them accountable for success, it sets them up for failure. Sales and operations planning processes should work to open up these conversations so everyone has the visibility they need to prep the right way.”

Another consultant I’ve gotten to know over the years, Jim Tompkins, is also a member of MH&L’s editorial advisory board. During our roundtable a couple months ago, he said supply chain has moved from an opportunity for cost reduction to an enabler of achieving corporate strategy and thus value creation. He cited Amazon as both the model for this philosophy and as a major threat to brick and mortar retailers—especially those that don’t see Amazon as a threat. Jim’s recollection of a conversation he had with the supply chain executive from such a retailer was a highlight of the roundtable. Here it is, in case you missed it:

“I was talking to a chief supply chain officer of a very well respected retailer the other day, and I said, ‘What are you going to do about Amazon?’ He said, ‘Amazon is not a threat to us.’ I got online and typed in his category on Amazon. There were over 100,000 hits. Amazon is carrying more than 100,000 of this guy’s products—and this chief supply chain officer is saying they are not a threat!”

Obviously this executive should be in line for a KPI adjustment.

Since our roundtable, Tompkins shot a video of his own to share his philosophy about the “Amazon Effect” with others who may not have awakened to the realization that Amazon is overflowing its banks and threatening to flood their market. You can view it below. While watching, think about how Amazon could affect your KPIs, as well.

Related Articles:

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Amazon to Acquire Kiva Systems for $775 Million

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Tech Companies Have Supply Chain On Their Minds

How Do You Benchmark an Experience?

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