Disruptive business models require disruptive supply chain strategies

Twenty-three years after Internet retailing giant Amazon.com started selling books online, more and more companies are seeing significant growth in the direct-to-consumer market. This is true not just for young Internet-based companies, such as the meal-kit provider Blue Apron Inc. and Peloton Interactive Inc., which makes Internet-connected exercise bikes, but also for more traditional manufacturers such as the athletic footwear and apparel company Nike Inc.

Last week supply chain executives from these three companies discussed how they are adapting their supply chains to support these new models during a session titled "Disrupt or Be Disrupted" at the CSCMP EDGE Annual Conference in Atlanta, Georgia.

Blue Apron was one of the first meal-kit delivery services to be launched in the United States, and a key part of its vision is disrupting the traditional supply chain structure. The company says it cuts out the wholesaler and retailer intermediaries and instead collects ingredients directly from farmers and produces and then ships out boxes of meal ingredients and recipes to the consumer.

"We are changing the way we bring food together with the consumer," said Pablo Cussatti, senior vice president of supply chain for Blue Apron. "We are shortening the supply chain."

Since delivery is a key part of the business model, logistics plays a large role in which recipes and ingredients are included in the meal kit, especially as each kit includes a mix of frozen, fresh, and dry ingredients. Cussatti, who had a long career in the food manufacturing industry before joining Blue Apron, joked that his colleagues are often amazed at his knowledge of food; for example, he often advises against using English peas or cucumbers in recipes since they are very hard to ship, he said.

Similarly, Blue Apron sees logistics not just a backroom operation but as a key part of customer service and retention. Ensuring on-time delivery is a huge cost but a central part of the company's value proposition to consumers, Cussatti said.

Logistics is also seen as essential to ensuring a positive customer experience at Peloton, which delivers high-tech exercise bicycles that are connected to the Web and stream live spin classes directly to consumers' homes. Because of the complexity of its product, the company has experienced a bit of a learning curve with its last-mile, white-glove delivery service. For example, early on the company experienced problems with delivery-service drivers failing to properly assemble the equipment. Peloton solved that problem by having the bikes fully assembled at a local warehouse before they were delivered to the customer.

Although that solved one problem, it created another. "The feedback from the customers was not universally positive," said Jered Mellin, vice president of logistics. "They were saying, 'We are paying all this money for delivery, and then you are in and out in five to seven minutes.' There was a difference between what they expected and what they were seeing."

Peloton found that even though all installation and assembly advice could be found online, its customers still preferred to have delivery people help them onboard the equipment, connect them to their wi-fi, and explain key screens. The company is now using a combination of its own employees and delivery companies that it has certified to perform these services.

Finally, Nike is finding itself transitioning from having a traditional supply chain that focuses on wholesalers and retailers to one that supports a growing direct-to-consumer channel, said Sean Halligan, vice president of North American fulfillment for Nike.

As a result of the expansion of its direct-to-consumer business, Nike is moving away from aggregating inventory in one central warehouse in Memphis, Tennessee, to putting product in facilities closer to the customer. "If you want to innovate quicker, you cannot do that by having faster trucks, you do it by getting pins in the map in the right spots," said Halligan.

This is particularly true for Nike's two most important trend-setting markets: New York and Los Angeles. For those markets, the company has set a "moonshot" goal of getting products into consumers' hands 45 minutes after they have been ordered. Halligan says right now the company is not close to that goal and is still trying to discover what that supply chain would look like. "That type of supply chain is going to operate very differently," he said. "And it's going to operate very differently in New York than in L.A."