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Top 6 Principles of a Modern Supply Chain

By Jason Murray (Connect with me on LinkedIn) — Updated March 20, 2020

While not the primary concern relative to the health and safety of family and colleagues, one perspective all professionals should take soon is an evaluation of how to adjust to future realities. The world will return to normal at some point soon and we will all get back to thinking about our customers, partners and businesses. Major moments of uncertainty and volatility are often the best of times to think about your business and develop plans for when normalcy returns. Focus on stepwise improvements while the going is tough, so when things turn around, the tough can get going stronger than before.

This will be different domain-by-domain. I want to lend a point of view on ecommerce supply chains, which may not be provocative to most people, but many friends and acquaintances reading this who work in operations will find interesting.

Supply chains systems are becoming an increasingly important component to business growth. In the pre-Internet era, they were mostly a cost center that served as a means to an end. In the last 15 years, however, a modern supply chain that reduces costs and focuses on customer needs—like speed, transparency, predictability, sustainability, and convenience—is becoming central to how brands and retailers succeed.

I saw this first hand at Amazon where I worked on supply chain problems for the last 19 years, most recently as VP of Retail Systems where I helped build the supply chain that powers Prime. The most powerful insight from this experience was the importance of re-designing the supply chain based on customer-centric principles. Today I want to share with you six of the principles the Shipium team has learned over the years that all ecommerce sellers should adopt in order to turn their supply chains into a strategic differentiator versus a lead weight that can sink the business.

1. Prioritize customer-centric metrics

Most operations groups still track company-centric metrics, like time-to-ship. Those metrics should still be tracked, but they should be deprioritized in favor of metrics that focus on customer experience. Operation teams exist to serve the customer, which, when done well, can help grow revenue and loyalty. Walking-the-walk begins and ends with changing which company-wide metrics matter most, and exposing visibility to those metrics to all teams.

There are several types of metrics to consider, but the most transformative one we suggest is "click-to-deliver". This simple concept tracks from the moment a customer clicks purchase on your store to the moment the package is delivered to their doorstep. In an era where consumers prioritize a premium delivery experience based on speed and predictability, defining success based on when and how a customer receives a package after purchase is fundamental to your organization keeping its customer-centric brand promise.

2. Money saved is money used to grow the business

Companies generally have one big bucket of money to spend. A portion of that budget goes toward operational expenses required to deliver products. Shaving $1 off a $5 cost to deliver a package creates an enormous pool of "found money" that can shift capital towards other competitive initiatives. Simple example: That extra dollar can go towards more aggressive advertising. Complex example: A large amount of savings can power investment in delivery promises which can have as high as a 12% increase in sales.

3. There is no point to improving the delivery experience unless marketers can promise it to customers

So you modernized enough to be able to consistently hit 3-day shipping to 90%+ of ZIP codes in America. Congratulations! But it's meaningless if that improvement can't be turned around and promised to consumers.

This touches on the heart of why supply chain modernizations matter. It's beyond making things more efficient for the sake of efficiency. Instead, it's about creating competitive advantages for your business relative to other retailers. Those advantages then become fuel for marketing teams to attract more business.

4. Consumers prioritize delivery price, then speed, then convenience

This is a simple calculus based on experience and industry data. All else being equal, consumers will prioritize free shipping unless the delivery date is outlandish, like greater than a week or so. Then they prioritize speed, like 2-day shipping over 7-day shipping. Then they prioritize convenience, like how a return process works, etc.

Use this principle to guide your supply chain investments.

5. You can only ship stuff from where it is located

It seems simple, but the nuance of this principle is fairly complex.

The most important element in a package's delivery cost and speed is the proximity of it to the customer destination. In basic terms, shipping from New Jersey to Buffalo is a lot faster than shipping from Los Angeles to Buffalo.

In practice, this means the biggest bang-for-your-buck modernization principle is to get hyper aggressive about where you place merchandise. The amount of money saved combined with the 2-day shipping coverage capabilities dramatically increases by placing merchandise closer to buyers.

There are a couple obvious points to this that supply chain experts already think about, like don't stock too many winter jackets in Miami during summer.

The modernization practice that is relatively new and controversial is the value of scaling into multiple fulfillment centers (FCs). Most DTC brands I speak with only have one FC. I was shocked when talking to a ~$1bn apparel company and discovering they only had one FC on the West Coast. Many have an internal model that believes the capital investment on a second (or third) FC is too expensive.

I'm here to tell you based on experience that it's actually the opposite. It is likely that expanding to a second (and eventually third) FC will have dramatic impacts on opex cost reduction and overall revenue increase due to faster and more convenient delivery times. All because it relates to this principle: proximity matters.

6. Interoperability is king

Lastly, fragmentation is an intolerable status quo that makes the rest of these principles hard to implement. Modern supply chains must gain visibility into customer-centric metrics, and gain greater control on optimizations. That only happens with systems that can talk to each other. Prioritize partners and vendors who can easily work with each other.

A focus on the future

The future will arrive quickly and life will return to the pressures of keeping pace with innovation and competition. As operations professionals, these principles can help you get an edge.

I plan to focus on developing more principles in the future. Please feel free to reach me at jason@shipium.com if you want to talk about these ideas.