Before the Memorial Day weekend, I had the pleasure of spending the week with Manhattan Associates and its customers at Manhattan Momentum in Las Vegas. I have two major take-aways from the event. One begins with a question I fielded from a reporter at the beginning of the year: “Isn’t supply chain dead?” she asked. Her theory was that we’ve solved all the problems that supply chain has, and it’s just down to execution to make those solutions a reality. “It’s just math,” was her thought.

I was aghast at the question. Literally so shocked that I had to take a moment to catch my breath. Her assumption couldn’t be farther from the truth. While I could agree that the retail industry has effectively optimized its supply chains as much as humanly possible, all that optimization is designed to solve a problem that is rapidly becoming irrelevant.

Take warehouse design as one easy example. Fortna, one of Manhattan’s partners, presented on the current state of warehouse design to a standing-room only crowd. If there was any part of supply chain that you could assume is “done”, it would be warehouse design — talk about a well-understood problem with some fairly straight-forward math and modeling required to solve the problem. So why was the room packed full? Because omni-channel changes everything.

In talking with Fortna executives after the presentation, we came to the conclusion that distribution network redesign these days is an exercise in optimization where 99% of the constraints we used to use in planning out a distribution network design have been blown up. In trying to address the shift in product distribution brought about by either enabling cross-channel fulfillment or more holistically trying to make every piece of inventory available to be sold in any channel, retailers have to almost literally start with a blank piece of paper. Everything that they knew about slow movers vs. fast movers, dedicated eCommerce and retail distribution vs. mixed fulfillment — it’s been thrown out the window by the shopper. In fact, Manhattan put together a video that underscores the point — one of the few I’ve seen during conference season so far that is both entertaining and on point with a real message and not just marketing fluff.

And omni-channel isn’t the only force already in motion to disrupt the retail supply chain. Dr. Chris Caplice of MIT identified four trends that are already reshaping today’s supply chains — with most of the impact being felt on the retail side of the equation, though all industries will ultimately be affected. They sound a little sci-fi (I’m starting to think my April Fool’s RPW post may not be so far off the mark), but he had real-life examples that support each of his points:

• Product densification — example: Tide. “More ingredients, less water.” As products get more dense, shipping costs for those products fall. Electronics have long followed Moore’s law and gotten smaller and smaller for the same functionality, but even toys, thanks to Walmart’s effort around supply chain-smart packaging initiative, are getting more “dense”. Caplice’s best example: between 1973 and 1999, the number of ton-miles it took to ship an hour of music fell by 65%. But this trend isn’t a step-level change — this is just scratching the surface of change.
• Virtualization of sales — example: omni-channel fulfillment. When the sale and the fulfillment can be decoupled, it opens up all new opportunities in distribution. Caplice believes that omni-channel is in an innovation phase, where there is yet to be a dominant design defined. Retailers don’t like to hear those kinds of things, because it means they have to make asset-intensive investment decisions during a time of high uncertainty, but if they don’t try, they may never discover the right way to address fulfillment and inventory management for omni-channel.
• Decentralization of production — example: Keurig. It costs a heck of a lot less to make a pot of cofee than to brew the equivalent number of cups using a Keurig machine. However, the trade-off is choice — you don’t have to drink an entire pot of the same coffee, so even if the unit cost is more expensive, the unit more closely matches the desired unit of consumption. You could argue that if you had to brew an entire pot of coffee just to get two cups, the actual cost of those two cups might be more expensive the Mr. Coffee way than just using two K-cups. The component prices get more expensive, but the cost to manufacture gets much cheaper — so that you can, for example, own your own photo printer, instead of having to use the in-store version and wait a week for the results. The unit price is higher, but there’s less waste — you only print the pictures you want. We may well reach a tipping point in supply chain where local manufacturing becomes more cost-effective — decentralization of production effectively means the end of mass economies of scale. And that could have a massive impact on supply chains that have been optimized for mass production overseas.
• Virtualization of products — the extreme of decentralization of production is virtualization of products, and 3D printers make a perfect example. Too far out, you say? Some manufacturers are already using them in production, making thins as simple as O-rings to as complex as replacement knees. And there’s even a company that has figured out how to print beef (shudder). What if instead of buying that Kate Spade purse, I could just buy the design and print it at home? The important thing to remember is that the components still need to get to me. But that’s a very different supply chain than the one that exists today.

All that was just take-away #1: The supply chain ain’t dead. It’s alive and kicking, and it may just kick the heck out of anyone who isn’t paying attention to the disruptions that are poised to transform it.

Take-away #2 is that the more supply chain changes, the more it will impact merchandising. I know this isn’t the kind of perspective that someone coming from merchandising will much relate to, but as more and more retailers open up their supply chains to omni-channel fulfillment, they’re finding that within about a year they have to seriously reconsider how they plan.

Why? By opening up all inventory across all channels, retailers are starting to get a much better understanding of the real “depth of demand”. And when they start tracking — really tracking — the missed opportunities that occur because of mismatched demand and supply, they find that they’re missing way more than they thought they were. It impacts both overall buy as well as where to place that buy to best meet demand. And it definitely means a return to the arm-wrestling that occurs between planning bigots and execution bigots.

Right now, in retailers that have virtual pools of inventory available to every channel, execution is saving planning’s bacon — the misses are bigger than they realized, and it’s only by being able to tap other channels’ inventory that retailers are able to close the gaps. Will planning get smart enough to incorporate these misses to plan better next time? Or should they even bother — if they get close, execution can take it the rest of the way.

Let the arm-wrestling begin! I can’t wait to see who wins — and I have a feeling Manhattan’s customers will be among the first to know the answer.