What’s the Story? 

This report serves as the introduction for Coresight Research’s new series of roundtable discussions and research reports, entitled The New Age of Customer-First Supply Chains, to be published during the course of the second half of 2021. Each roundtable comprises a presentation on the most recent research reports, accompanied by a discussion among supply chain experts. We outline four pillars to building a resilient supply chain, built on a foundation of sustainability and profitability, all of which we will explore further through our new series.

Why It Matters

The supply chain represents the backbone of a retailer’s business, across manufacturing, warehousing, the physical store and the ultimate sale to the consumer, and thus is of paramount importance. Supply chains were previously optimized for profitability amid stable demand, but with the global Covid-19 pandemic having given rise to rapidly evolving consumer behaviors and preferences, supply chains need to be more effectively managed for retailers to operate efficiently and keep consumers satisfied. To ensure resilience and profitability in today’s supply chains, retailers need to adopt different strategies and technologies that align with the four pillars of intelligent demand forecasting, customer-centric commercial collaboration, control tower of the future and the last mile—all while enhancing sustainability and protecting the bottom line.

Four Pillars of a Resilient and Profitable Supply Chain: A Deep Dive 

Through Coresight Research’s The New Age of Customer-First Supply Chains series, we will explore four pillars to building a resilient and profitable supply chain in retail, built on a foundation of sustainability and the bottom line. We summarize these in Figure 1 and outline the importance of artificial intelligence (AI) and machine learning (ML) as enabling technologies, before discussing each pillar in further detail in subsequent sections of this report.

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Figure 1. Four Pillars of a Resilient and Profitable Supply Chain [caption id="attachment_128965" align="aligncenter" width="725"] Source: Coresight Research[/caption]   Enabling Technologies: AI and ML AI and ML solutions underpin many of the pillars by automating many manual tasks and offering several benefits that exceed human capabilities:

• Faster computational speeds
• Increased accuracy of forecasts
• Real-time updates
• Provides ability to analyze larger quantities of data
• Provides ability to locate hidden patterns in data
• Represents a robust system
• Adapts more quickly to changes
• Provides ability to handle significant complexity

In addition, AI and ML enable retailers to take an objective look at data, free of human bias. Software is also able to run 24/7 and can undergo continuous improvement. AI/ML excels at analytics, of which there are three major types:

• Descriptive—what happened?
• Predictive—what is expected to happen?
• Prescriptive—what action should we take?

Prescriptive analytics generate the best results for retailers by prescribing specific actions designed to achieve concrete, measurable results; the first two types of analytics are passive. For example, if a retailer typically sells a certain quantity of a product per hour, and sales of this product drop to zero, prescriptive-analytic software can determine that the product is indeed in inventory and send a message to an associate to check the shelf and bring inventory back from the stockroom. Prescriptive analytics can also help retailers to find hidden revenue opportunities and reduce theft and fraud.

• Read our separate report on how retailers can use prescriptive analytics/AI to improve customer satisfaction.

1.  Intelligent Demand Forecasting  Demand forecasting plays a key role in a retailer’s operations, connecting inventory, assortment, inventory allocation, pricing and discounting (see Figure 2). Accurate demand forecasting has major implications for revenues and margins; it enables retailers to enhance customer satisfaction by having the right products on the shelf at the right location and at the right time, avoiding stock-outs. This drives sales—and managing inventory and optimizing pricing also enhances profit.

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Figure 2. Interconnectedness of Demand Forecasting, Operations and Information Flow [caption id="attachment_128966" align="aligncenter" width="725"] Source: Coresight Research[/caption]   Types of Data Data available to retailers comes in many forms—internal and external, structured and unstructured—as depicted in the figure below. Incorporating external data is essential for creating accurate demand forecasts. Incorporating weather forecasts and national/local calendars into predictions, for example, enables retailers to align inventory with weather and holidays. Going further, data from product reviews and social media can help retailers sense emerging trends and support the development of new products.

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Figure 3. Types of Structured and Unstructured Data, Internal and External [caption id="attachment_128967" align="aligncenter" width="725"] Source: Institute for Business Planning and Forecasting/Coresight Research[/caption]   Financial Implications Accurate demand forecasting improves retailers’ revenues, margins, efficiency and working-capital utilization. Inventory accuracy, which follows demand forecasting, affects revenues by eliminating stock-outs that would hurt customer satisfaction and could lead to walk-outs. Having the correct amount and location of inventory also enables retailers to avoid excessive discounting and to launch effective promotions. Finally, predicting demand more accurately enables retailers to allocate the optimal amount of space and deploy the minimum amount of working capital for that inventory. 2. Customer-Centric Commercial Collaboration (the Three Cs) The rapid rate of change in retail has been further accelerated by the Covid-19 pandemic, and the combination of dynamic global supply chains and wide swings in consumer behavior has been driving changes in category management, which can be addressed through cooperation and data sharing with suppliers. Retailers are adopting a holistic view of improving merchandising tactics within category management to handle a surge in e-commerce, an ever more competitive environment and a higher penetration of private-label products. As well as adapting their organizations to meet current challenges, category managers need to take advantage of tools such as AI/ML to thrive in the current environment. The consumer shift to e-commerce has created omnichannel complexity and a surge in data. Retailers that can turn real-time data into actionable insights will be better placed to improve the customer experience and therefore improve revenues and margins. Retail category managers must master current trends and anticipate future trends that have consequences for the category and for the store as a whole.

• Read more about how retail category management has changed, with insights from a recent Coresight Research survey of global retailers and suppliers, in our separate report.

Developing an overall retail strategy encompasses retail category management responsibilities such as increasing footfall in physical stores, achieving a higher basket size and increasing sales and profitability. To achieve this, retailers must correctly execute category tactics, including improving product assortment, improving merchandising, managing promotions and managing product pricing. The development of a retail strategy is one of four imperatives that we believe can enable a retailer to overcome the primary challenges in category management today. We present these challenges and imperatives in Figure 4.

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Figure 4. Retail Category Management: Key Challenges and Imperatives [caption id="attachment_128968" align="aligncenter" width="725"] Source: Coresight Research[/caption]   We believe there are several key opportunities for retailers to enhance category management effectiveness and overcome the five underlying challenges:

• Effectively leverage advanced technology. Technologies such as AI and ML can help retailers to better interpret data.
• Insist on actionable insights. Insights obtained from large data sets must be actionable for retailers to improve execution. More accurate insights can help retailers offer more personalized experiences to shoppers (through targeted promotions), improve planning efficiency and identify market shifts.
• Transparent collaboration with suppliers can alleviate the burdens of managing data. Taking a joint approach to data interpretation and analysis enables retailers and suppliers to increase their ability to assess consumer and market trends. In the grocery sector in particular, trends can change rapidly, hurting margins and sustainability, but collaboration can ease the pressure on managing supply chains.

3. Control Tower of the Future Improving the agility and resilience of supply chains can also enhance profitability. In addition to the tangible operational and financial benefits from increased efficiency, there are external benefits to enhancing the functioning of supply chains, such as improved customer satisfaction (which enhances revenues and margins) and other corporate and societal goals, including improving sustainability and reducing food waste and spoilage. The information flow in supply chains today is bidirectional: Product flows in one direction, and information flows back into demand forecasting and placing orders to manufacturers.

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Figure 5. Product and Information Flow in Modern, Technology-Powered Supply Chain [caption id="attachment_128969" align="aligncenter" width="725"] Source: Coresight Research[/caption]   AI/ML software is a powerful tool that retailers can use to make operations more efficient, in addition to personalizing engagement with customers, communicating with them in their channel of choice, reducing friction and creating better experiences. On the operations side, AI/ML software excels at analysis and making predictions, which provide benefits related to supply chain efficiency—namely, better space utilization; lower fuel, water and electricity consumption; reduced carbon emissions; less waste and spoilage; and higher inventory turnover. This efficiency leads to direct financial benefits, including the following:

• Higher sales due to inventory availability
• Lower working capital
• Reduced warehouse space
• Better margins due to full pricing of products
• Higher revenue and margins from customer satisfaction (due to inventory availability and shorter delivery times) and positive customer reviews

Central to supply chain management is visibility, since it is difficult to optimize what one cannot visualize or measure. Supply chain control towers are software platforms that provide graphical and operational visibility across the entire supply chain, in real time, alerting the manager of emerging and urgent issues, much as an air-traffic controller manages the arrival and departure of airplanes. This use of a graphical dashboard can also be described as “visual control.” Supply chain control towers aim to offer the following benefits:

• End-to-end visibility
• Information sharing
• Warning and alert management
• Automated decision-making and control
• Improvement over time

AI and ML are key technologies in supply chain visibility and control towers, enabling the automatic processing of enormous amounts of data to find often-hidden relationships and make predictions. 4. The Last Mile With e-commerce retailers offering ever-increasing convenience for consumers, including shorter shipping times, other retailers need to step up their fulfillment services in order to remain competitive. Although faster fulfillment can be more expensive, retailers stand to reap gains from higher revenues and greater customer satisfaction. Store closures—both temporary and permanent—amid the pandemic have created retail space that is, in many cases, close to consumers, making the space suitable for use as dark stores, dark kitchens or micro-fulfillment centers. dark stores and micro-fulfillment centers can help retailers offer faster, more accurate fulfillment at lower costs. They also offer relatively contactless fulfillment and payment, since the consumer does not come face-to-face with the retailer’s employees, although they handle the items purchased. Dark Stores Dark stores have emerged alongside e-commerce growth. They are particularly prevalent in the grocery sector but can also serve the apparel and home-goods categories. Dark stores reflect the industry trend toward increased delivery speeds, sparked by Amazon, whose Prime Now service offers same-day delivery. Amazon’s flagship e-commerce service set a new standard with two-day shipping, then one-day shipping. Accelerating things further, Instacart recently began offering 30-minute delivery. Some apps, such as Turkey’s Getir, Germany’s Gorillas and Britain’s Dija are promising 10-minute grocery deliveries. There were 100 dark stores in operation in the US, compared to nearly 2,000 in China, as of October 2020, according to Tomorrow Retail Consulting. Retailers experimenting with and operating dark stores include Ahold Delhaize, Amazon, Bed Bath & Beyond, H-E-B, HyVee, Kroger, Sam’s Club, Tesco and Walmart. Increasing numbers of dark stores parallel the share of consumers purchasing groceries online—55.5% of US consumers said that they purchased groceries online for delivery in 2021, compared to 45.3% in 2019, according to Coresight Research’s online grocery survey conducted in May 2021. [caption id="attachment_128970" align="aligncenter" width="725"] Whole Foods Market dark store in Brooklyn, New York
Source: Amazon [/caption]   Dark stores offer several benefits for retailers:

• More efficient layout for picking
• Reduced labor cost from a more-targeted facility
• Shorter fulfillment times
• More efficient restocking than in a physical store
• Better inventory visibility
• Greater customer satisfaction from all of the above

They also offer the several benefits for consumers:

• Faster delivery
• Localized assortment
• Greater product breadth than in a physical store—an “endless aisle”
• Pickers not impeding consumers in physical stores

The restaurant sector has implemented its own version of dark stores—dark kitchens—which exist entirely for delivery and offer no space for dining. These kitchens can offer several kinds of cuisine that come from the same facilities, completely invisible to the consumer. There were 1,500 ghost kitchens in operation in the US, compared to more than 7,500 in China and 3,500 in India as of July 2020, according to Euromonitor International. Since 60% of the cost of a Starbucks latte derives from rent and staffing, for example, dark kitchens located in more affordable areas can improve margins for restaurant operators. Micro-Fulfillment Centers Micro-fulfillment centers combine dark stores and automation, including robots, to offer localized, accurate fulfillment within a small footprint. They typically occupy just 10,000–20,000 square feet of space and employ automated picking and distribution equipment, comprising bins and rails, within a three-dimensional matrix, along with a packing station staffed with humans. They employ a great deal of AI and other software, which orchestrates the translation of orders into picking and inventorying the desired items, putting them into the right bins and sending them to the packer. The benefits of micro-fulfillment centers include shorter fulfillment times, greater picking and inventory accuracy, and smaller, more localized footprints, leading to higher revenues per square foot. Taking picking and packing out of the physical store means fewer collisions between pickers and consumers, improving the in-store experience. The centers’ smaller footprints enable them to be located in urban or suburban areas, close to consumers, which shortens delivery times. The sector landscape includes one larger technology provider—Ocado, which is supplying its technology to grocer Kroger—in addition to established automation-technology companies such as Swisslog. Innovators include Alert Innovation, Fabric and Takeoff Technologies. Retailers using micro-fulfillment centers include grocers Albertsons, FreshDirect, H-E-B, Kroger, Walmart and non-grocer Nordstrom. [caption id="attachment_128971" align="aligncenter" width="725"] Micro-fulfillment center
Source: Fabric [/caption]   For more information, please see our report on fulfillment for US grocery e-commerce. The Bottom Line Whereas e-commerce has historically been considered as offering lower margins of even unprofitable for retailers, the introduction of automated technologies offers the promise of more-profitable operations in certain applications. For example, micro-fulfillment technology vendor Fabric claims that its customers benefit from:

• A 70% saving in labor and rent
• One-hour delivery
• 99.9% order accuracy

Although technology solutions require a sizable upfront investment and ongoing expenses for maintenance and hardware/software upgrades, automated solutions in certain targeted areas such as grocery offer the promise that the combination of customer satisfaction through faster and more accurate delivery, combined with rent savings, can offer better margin performance versus purely human-based picking, packing and delivery methods. 5. Foundation: Sustainability and the Bottom Line Enhancing sustainability can also enhance a retailer’s bottom line, enabling retailers to “do good while doing well.” Many areas of efficiency improvement are also positive for sustainability, such as reducing packaging cost, energy efficiency, and reducing waste and spoilage, and some of these categories bring additional benefits. For example, reducing waste and spoilage can protect pricing, which is positive for revenues and margins. Coresight Research developed the EnCORE Frframework to help retailers and brands frame their approach to sustainability, focusing on the triple bottom line of people, planet and profits. The framework is illustrated below.

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Figure 6. The EnCORE Framework [caption id="attachment_128972" align="aligncenter" width="725"] Source: Coresight Research[/caption]   There are several measures that brands and retailers can take under each EnCORE component to manage and improve their sustainability while protecting revenues. We outline selected examples below that are particularly prevalent to building a sustainable and profitable supply chain. Optimize operations

• In addition to monitoring carbon emissions throughout the supply chain, retailers can take measures to reduce their carbon footprint. This includes carbon emissions in shipping from the factory and to the consumer. Fully electric vehicles do not consume hydrocarbons or emit carbon dioxide (though it is generated in electricity generation). Some companies levy a carbon tax on their employees’ group budgets to consider the urgency and carbon impact of corporate travel, and other companies purchase carbon offsets to bring themselves into carbon neutrality or negativity.
• Energy efficiency offers many opportunities for cost and carbon savings. New lighting technologies such as light-emitting diode (LED) bulbs last longer than traditional incandescent bulbs and use a fraction of the electricity. Motion sensors and timers in rooms turn off the lights when rooms are unoccupied, preventing them from consuming electricity on nights and weekends. The provision of heating can be controlled using similar devices.
• Cloud computing is another method for reducing electricity consumption. Rather than purchasing a rack of servers that sit idle except on unusual events such as Good Friday, consuming electricity the entire time, cloud service providers aggregate demand from diverse industries, which realizes an enormous reduction in energy consumption as compared to each segment operating its own hardware.

Responsible supply chains

• Accurate demand forecasting reduces the potential impact of waste and spoilage. Reducing waste in manufacturing is positive for margins, and dynamic pricing of perishable grocery items as they approach their expiration dates drives incremental revenues for the retailer, offers lower-priced items to resilient consumers, and reduces the amount of food that must be discarded and sent to a landfill.
• Vendors are resigning containers and packaging to take on other functions. There is a trend in grocery of consumers bringing their own bags to purchase certain bulk items (“bring your own container”), and the beauty industry is beginning to embrace reusable containers. Brands are also beginning to reconsider the materials used in packaging, for example using sustainable materials in both containers and external packaging in an effort to eliminate single-use plastics. The amount of packaging material can be minimized, and for packaging that cannot be reused, then using recyclable materials such as metals, glass and paper reduces burdens on landfills.

Excellence in reporting and communicating

• Retailers can build consumer and investor loyalty and trust through supply chain transparency, sharing goals, achievements and setbacks. They should communicate their sustainability commitments to stakeholder and can also advocate for sustainability and demonstrate evidence of benefits to revenues or margins to encourage other retailers and brands to follow suit.

Read more about Coresight Research’s EnCORE framework for environmental sustainability in retail.

What We Think

We believe that supply chains should be a key focus for retailers to achieve sustainability goals while preserving or even enhancing profitability. Many supply chain improvements can achieve multiple goals—for example, more accurate demand forecasting can also improve allocation efficiency as well as reduce waste and carbon emissions. Since it is difficult to optimize what one cannot see, supply chain visibility is essential to the management process. Recent fulfillment technologies such as dark stores and micro-fulfillment centers improve accuracy and reduce real-estate cost while improving customer satisfaction, which leads to repeat purchases. Implications for Brands/Retailers

• Brands and retailers can see multiple benefits from more accurate demand forecasting.
• Enhancing sustainability raises the brand’s value to like-minded consumers.
• While supply chain visibility is more meaningful for private-label brands, it has a major role to play for multiband retailers.
• More efficient fulfillment is key to keeping pace with large e-commerce retailers.

Implications for Real Estate Firms

• Real estate firms can use technology to make their properties more energy efficient, which is a benefit in itself and will attract sustainability-minded tenants.
• Better supply chain management will likely require less warehousing space.
• The trend of dark stores and micro-fulfillment centers represents increased demand for small warehouse space.

Implications for Technology Vendors

• There are multiple opportunities for technology vendors in demand forecasting, supply chain visibility and assortment optimization serving all types of retailers.
• AI/ML technology continues to evolve a rapid pace, offering opportunities for developers of tools, enterprise software and applications.
• Integrating sustainability measurement and optimization represents an emerging opportunity for software vendors.
• There are also opportunities in hardware to reduce the environmental impact of stores, manufacturing and transportation.