Supply Chain Planning for Direct-To-Consumer
Direct-to-Consumer (DTC) presents special supply chain planning challenges for both smaller microbrands (e.g., eyeglass brand Warby Parker or mattress seller Casper) and much larger consumer goods incumbents, but the planning challenges are different depending on which type of company you are.
Direct-to-Consumer represents a small slice of the consumer goods pie, but it is growing rapidly. For instance, The Economist reports that between 2011 and 2015 the largest 25 food and beverage incumbents accounted for nearly half (45%) of total industry revenue, but smaller companies drove nearly all (97%) of market growth. Microbrand Dollar Shave Club reached a $1 billion valuation when it was purchased by Unilever in 2016. So once seen as an outlier, this market segment has become a serious threat or opportunity, depending on your perspective.
The DTC supply chain planning (SCP) problem is similar whether you are a pure play upstart or an established company, but the perspective of each is very different and therefore the challenge is very different. Let’s start with digital innovators then look at more established companies.
From an SCP standpoint, digital natives have one big advantage. They possess a wealth of consumer data that traditional companies don’t have. They are communicating directly with their end user audience rather than getting aggregated second-hand data filtered through multiple retail channels. This data can allow them to recognize market shifts more rapidly and respond to demand variations. But the challenge is to actually take advantage of this data to leverage their business model. Most companies have the data, but many lack the tools to leverage it.
Another challenge is how to grow and scale at speed. Most of these companies concentrate first on the on-line customer experience, but at some point need to shift their focus to becoming more efficient. They have disrupted the market, but then need to compete on more classic business criteria such as profitability or return on invested capital (ROIC). They need planning competency to get efficient. They need automation and productivity to scale. And smaller, fast growing companies need smaller, faster implementations.
Consumer goods incumbents often have the opposite problem. Counting on the power of their more established brands, they have tuned their big-volume supply chains for efficiency. But when venturing into the DTC market they need to compete on the customer experience, not just customer service. And from a planning perspective, they have to make a big shift in granularity – from cases, pallets and even truckloads – to “eaches”.
Planning in a “one-at-a-time” selling environment is different. One of those differences is dealing with long tail, intermittent demand. Factors that contribute to the long tail are common in DTC.
- Product proliferation – DTC generally means a broader range of offerings. More products means splitting the demand between more buckets, so sales per SKU decrease. This translates into more intermittent demand and variability at the individual SKU level.
- More frequent replenishment – More frequent deliveries of smaller quantities mean that both replenishment and demand need to be managed in shorter time buckets, such as daily. Shorter time buckets mean much demand variability. An SKU may look like a stable “fast mover” if demand behavior is observed in monthly buckets, but will look like a “slow mover” when observed in weekly buckets, and is likely to be intermittent at the daily level.
- Extended supply chain focus – While downstream demand visibility from the end-customer offers a more reliable demand signal, it’s disaggregated, granular nature increases demand variability and slow-moving behavior.
Long tail demand calls for supply chain systems, processes and forecasting approaches with the ability to integrate, analyze and take advantage of detailed consumer data. For example, UK coffee seller Costa Express utilizes machine telemetry feeds of real-time POS data from their self-serve coffee locations to drive demand, inventory and replenishment planning, significantly reducing field inventory stock and ingredient costs. (See the full story here).
Direct-to-Consumer supply chain planning creates new challenges whether you come from a young start-up or an established competitor. The key is to overcome the limits of your firm, large or small, to address the unique capabilities required.
Click below for more on forecasting and planning long tail demand.