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How the “Amazon Effect” is Changing Manufacturing Forever

How the Amazon Effect is Changing the American Manufacturing Industry Forever

Supply Chain Digest Blog Entry: March 26, 2014 (here)

When people think of Amazon and the impact that e-commerce is having on our society, most of us view this as strictly a retail phenomenon.  Few people realize that the ‘’Amazon Effect’ has far more profound impacts that reach much further back into the supply chain.  The fact of the matter is that the American manufacturing sector is undergoing a radical transformation to speed up order turnaround time as the new competitive weapon.  The pressure to move goods to market faster has significant impacts on how manufacturing companies strategically manage their business because the definition of an acceptable order lead time is changing forever.  Say goodbye to 10 – 15 days and say hello to 1 – 3 days and oh by the way, the customer doesn't really care that it is a “C” item, they just want their order shipped complete and they want it now.

Over the past year, we have witnessed an ever increasing hue and cry from traditional American manufacturers who have been forced to deal with the pressure to speed up their order cycle time as a direct result of (or as a byproduct of) e-commerce.  Let us explain by providing three examples to illustrate what we mean by this:

  1. A manufacturer of industrial products sells to national accounts in the wholesale and retail channels. 
    1. The current order service level is to provide a tiered order turnaround time, that being: 3 days for A items; 5 days for B items; and 10 days for C items.
    2. The company's main customer account is Home Depot and for fear of losing market share, the company commits to selling a wide range of SKUs on Homedepot.com. 
    3. Supporting the dot.com channel requires that the manufacturer must provide the retailer with a daily electronic file of available inventory quantities by SKU. 
    4. Unlike traditional customers who order case lot quantities, consumers place orders for unit quantities (eaches) and also are the cause for higher levels of returns processing (also in unit quantities).  This results in the warehouse having a mix of eaches and cases of the same item to contend with which is a new challenge to the business.
    5. The retailer requires next day order fulfillment for all SKUs being sold through their web site, regardless of ABC classification. 
    6. The paperwork trail must be transparent so that the consumer does not realize the manufacturing company was ever involved in the transaction.
    7. Any cause for backorders or inaccurate shipments are unacceptable and are cause for penalties levied by the retailer.
    8. Any shipping delays result in the manufacturer paying for premium shipping instead of the customer paying for standard freight.
  2. A make to order manufacturer of industrial products sells its products domestically and internationally.  The company prides itself in minimizing inventory levels by practicing just in time production and lean manufacturing principles.
    1. Order lead times of 8 – 10 days that were previously considered to be competitive in the market place are no longer acceptable.  The sales force is in a state of panic because the competition is killing them in the field with shorter lead times.
    2. The company decides to respond by making to stock the A items that account for 80% of the order lines as a starting point.
    3. The impact is significant because instead of moving goods from the production facility to the warehouse for order staging until all SKUs for the order are produced, it is now necessary to have a warehouse with inventoried finished goods for the A items.
    4. An order fulfillment area is established within a new logistics center that is set up in a new building nearby the plant.  This is required to ensure that next day order fulfillment is enabled in response to direct competitive pressure to deliver to market faster. 
    5. This upheaval is in direct response to a competitor being the first to invoke the strategy to sell products through a new ecommerce site.
  3. A manufacturer and importer of apparel products sells merchandise to mass merchants and small mom & pop retailers.
    1. The business has always enjoyed a stable distribution environment that consists mainly of fulfilling orders for full case quantities of single SKUs and/or pre-pack assortments.
    2. The need to open a master case has traditionally been the exception rather than the rule and has primarily been a quality assurance / inspection process that takes place at inbound receiving.  Other than the occasional sample, merchandise has always been shipped out in case lot quantities.
    3. The company is now forced to radically change its distribution center to contend with less than case lot orders as a direct result of having to fulfill on-line consumer orders on behalf of mass merchant customer accounts like Walmart.com.
    4. This plays havoc with the company's warehouse as the need to fill order lines of single units escalates with each new dot.com customer account being signed up.
    5. The company is soon forced to bail out of its existing distribution facility and move to a larger building that has more space to handle the traditional line of business as well as the dot.com sales channel.
    6. On top of this, traditional mass merchant sales orders are changing because retailers are striving to carry less inventory in their distribution centers.  As such,  the bread and butter of the business is becoming more expensive to serve.  Retail orders are becoming smaller and  more frequent resulting in higher operating costs to support the same sales revenue.

Each of the above examples illustrates the profound impact that ecommerce is having on companies that may or may not have anything to do with the retail industry.  The new weapon of choice is speed and like it or not, American manufacturers are having to deal with the challenges that this introduces, without breaking the bank. 

For years, the concept of off-shoring has turned legions of traditional manufacturing companies into domestic distribution companies.  Many of these firms have shed their production operations to overseas suppliers and as a result they have learned how to develop distribution excellence by establishing optimized networks and/or by setting up advanced and efficient warehousing operations.  Make no mistake, there are still thousands of American manufacturing companies that have not gone down the path of off-shoring.  In many ways these are the firms that are most exposed to the dangers of not keeping up with changing market demands.  Quite simply, many of these companies have not yet developed distribution as a core competency despite the fact that they may be excellent at manufacturing. 

The message from the front line is loud and clear and it's called the “Amazon Effect”.  The battlefield is quickly taking shape and the war will be won or lost on the basis of speed to market.  The victors will be those companies that have engineered the fastest and most responsive logistics capabilities.

Marc Wulfraat is the President of MWPVL International Inc.  He can be reached by clicking hereMWPVL International provides supply chain / logistics network strategy consulting services. Our services include: supply chain network strategy; distribution center design; material handling and automation design;  supply chain technology consulting; product sourcing; 3PL Outsourcing; and purchasing; transportation consulting; and operational assessments.

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