SAP S/4HANA Grocery Retail Blog part 3

Dmitry Melnik this blog post was a joint work with Dirk Dreisbach

Part 3: Digital reality – Omnichannel and supply chain management as key success factors

This three-blog series focuses on grocery retail and the main challenges the industry is facing today. Based on concrete customer examples we describe key success factors like customer loyalty, offering an attractive assortment, optimizing the supply chain and the digitalization of customer interaction. With the help of SAP S/4HANA and further SAP solutions modern grocery retailers can handle Big Data volumes, make the right decisions regarding the size and selection of their assortment and to streamline the most relevant end-to-end processes. Or to sum it up – to do everything to satisfy customer needs!

We composed these article series (blogs) from the standpoint of the end consumer and organized in the logical sequence: customer loyalty and assortment, differentiation from other retailers, evolution of the omnichannel for retailers.

Situation

Mia continued rolling her cart through the aisles, picking items from the shelves, and checking them against the shopping list that her husband, Benjamin, had composed earlier. It was a tedious process: Which specific yogurt did he want for the kids? Was that yogurt on sale? What drinks did they prefer for the upcoming family Thanksgiving dinner? What kind of fruits and vegetables are available at this time of the year? Did Jennifer have an allergy to the rice Mia cooked last time, and is it now important to switch to another brand? As Mia was approaching the meat section, her phone vibrated with a text message. She instinctively picked up, expecting a note from Benjamin, but saw a message suggesting a shopping app that would expedite the ordering process by creating a consumer-specific basket. Mia paused, digesting the message, and then double-clicked the button on the side of her phone to install the app.

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Emergence of e-tailing is a big topic by itself and is outside the immediate scope of our discussion. Many retailers invest in e-commerce; consider, for example, Carrefour, which aims to triple its e-commerce Gross Merchandise Value (GMV) by 2026, to reach €10bn: link. SAP Commerce Cloud and SAP Customer Data Cloud solutions are some of the tools supporting its transition to ‘One Carrefour’: link.

Let us consider one specific aspect of retail shopping: proliferation of retailer apps for an easy ordering process. One may question this focus on the apps for e-tailing. After all, many customers still prefer to shop their weekly food in person, in the retail stores. However, the very fact that more people have become comfortable with online purchasing – including buying perishable goods such as milk, meats, fruits, and vegetables – is indicative of where retailers may go in the future: online ordering with physical delivery in the store or curbside pickup. This is where the physical and traditional world of retail meets the new and emerging world of online shopping. And for retailers, a few subthemes become crucial:

  • How do we ensure availability and no stock-outs for the customers ordering through an app?
  • What are fresh produce considerations?
  • How do we organize order fulfillment and delivery?

Strategic benefits of such apps are hard to overestimate. Consumers can create and manage their shopping baskets, research products in the comfort of their home, place orders for subsequent pickup, and thereby save time not walking the store aisles. Certainly, not everyone is ready yet to procure fresh produce through an app: many people still need to touch and smell their food before buying it, especially fresh produce. But a growing number of people trust their retailers, and therefore, such apps are becoming more ubiquitous.

What is the relationship to SAP? Simple: how can such app display available fresh produce or other grocery items? By connecting to the ERP – e.g., SAP S/4HANA – which contains information on all SKUs, price, and availability (including at a particular store vs. distribution center). Also, if the customer such as Mia uses such retailer app to order their food items, the app initiates relevant processes within SAP S/4HANA to complete the transaction, update inventory, create requisitions for replenishment and so on; and all of that has be fast and accurate! In other words, such apps are valuable both to the end user and for the operations of the retailer itself. SAP customers such as food retailer SuperQ in Mexico experience 70% increase in transaction processing performance and accuracy across 200 point-of-sale locations with the SAP S/4HANA Retail: link.

Supply chain management as fundamental end-to-end process

Let’s put aside the topic of how prolific online apps for grocery retail will become and which share of the current shoppers will continue buying in the store versus online. One of the key differentiators for retailers seems to center on the availability of items and fresh produce and perishable goods. We have all experienced periodic stock-outs related to the recent supply chain disruptions as a result of the COVID-19 pandemic. Such situations often come with complications, right? Well, these supply chain disruptions aren’t over yet. Coupled with rising prices and declining disposable income on the consumer side, they created real dilemmas, especially considering the challenges connected with the “last-mile-delivery” respectively the “handover” of fresh products:

  • How do we deal with fresh produce? How can consumers find fresh produce and efficiently navigate their choices?
  • How do we ensure availability of items in the store or the distribution center, for quick delivery to the customer?
  • How do we ensure smooth, expedient, yet cost-effective delivery, both into the store and to the customer who orders delivery?
  • What do we do if a customer is not at home to receive the order?
  • Are cooled pick-up stations for fresh products an option?
  • How do we handle returns if a customer is not satisfied with the delivered (fresh) products?

Consider typical harvest times for an item within the fresh produce category, let’s say, grapes. This is an actual U.S. retailer example (go clock-wise from January):

Source: SAP internal research

As the year progresses, the retailer needs to source its grapes from different locations since grapes ripe at different times. For example, Peru can supply grapes early in the year, while Mexico supplies them in mid-Summer. Sourcing from different supplies has become a standard practice for most retailers; what is interesting for us is the myriad of intricate operational and logistical details underlying such uninterrupted sourcing and inbound logistics. This is where the SAP Guided Buying solution for SAP S/4HANA, SAP S/4HANA Retail for merchandise management, as well as SAP Ariba and other solutions, play a pivotal role in cost-efficient and customer-friendly sourcing, procurement, and display of the fresh produce.

Integration between SAP S/4HANA and SAP Digital Supply Chain solutions further strengthens the capacity to effectively yet compliantly select suppliers, execute contracts, manage the inbound logistics and ultimately offer consumers the best grocery selection.

Compliance and ethics become especially important as consumers not only want affordability but also increasingly demand that their retailers and CPG brand owners conduct business fairly and sustainably. We covered part of this topic in the first blog where we talked about product labeling. In addition, many retailers and their CPG suppliers face issues of fair trade and environmental, social, and corporate governance. We’re not going to dive into these topics here; suffice it to say that for a typical retailer, ethical sourcing and procurement are among the major drivers for success with consumers. Make a mistake and your reputation is tarnished, and much effort and expense are required to restore customer trust.

Must-haves – Avoiding stocks-outs

Let’s continue with the complicating factor for a typical retailer: availability. This becomes a similarly challenging area of operations for retailer suppliers – from large CPG companies to local fresh produce farms. Uninterrupted supply and full shelves are keys to financial performance (not to mention customer satisfaction and loyalty). Yet various campaigns that retailers run regularly exhibit a strong need to balance demand and supply. So, what does SAP S/4HANA help ensure in this respect?

First, there are sets of capabilities that allow CPG suppliers and retailers to manage their commercial relations effectively. One such capability has been developed in SAP S/4HANA under the umbrella of commercial settlement, or rebate management. Literally, billions of dollars change hands between a CPG company and its retailer on rebates, discounts, and similar promotions. It is not uncommon for up to 6% of a CPG company’s revenue (for example, money earned from the retailer) to go back to the retailer in the form of rebates. Just perusing the annual reports of the largest CPG companies such as Unilever, P&G, Pepsico provides insights into the significant amounts of money these CPG companies pay to their retail customers. The absolute amounts are mind-boggling: Unilever plc and the Procter & Gamble Company, among the world’s largest CPG companies, pay between $3.5 billion and $3.9 billion to their retailers in the form of rebates and incentives. Let’s repeat this point: retailers receive significant amounts of money from their CPG vendors.

SAP S/4HANA takes this functionality to a new level, allowing much more expedient settlement, lower revenue leakage, and a much lower IT footprint. The last point may warrant an explanation since the magnitude of the gains may sometimes escape attention. SAP estimated, that for some customers up to a fifth of a typical SAP ERP Central Component can be consumed by just one table – the one containing all interim calculations for rebates and discounts. SAP S/4HANA does away with such a table, therefore significantly increasing speed while reducing IT costs.

Second, the order commitment and order fulfillment capabilities are on a new level in SAP S/4HANA. Consider, for example, how a retailer places an order with its CPG supplier: a call in the morning with a question requiring a clear-cut answer such as this: “Can you deliver X tons of Y by 5:00 tonight?” Such order commitment and delivery become especially critical in certain times, such as holiday seasons, social and sporting events, end-of-school year celebrations, and so on. Remember that Mia, in our example, is shopping around Thanksgiving time, while millions of other consumers do the same. While such demand is positive for the retailer’s overall revenue, the spike in demand creates operational challenges. Transaction systems on both sides – the retailer and its suppliers – become overwhelmed, and armies of experts spend an enormous time in an extraordinary effort to “make it happen,” often in manual mode: Do we have enough product to ship? Can we deliver by such and such time? Can we package differently, reflecting the specific campaign details?

SAP S/4HANA significantly simplifies and streamlines this process with its advanced available-to-promise, order fulfillment, and similar capabilities, an increasing number of which also involve machine learning (ML). That is, the capabilities can preempt, predict, and recommend the best course of action ahead of time. Consider walking yourself through the following example where SAP S/4HANA is compared with the former SAP ECC solution. Here you can see that SAP S/4HANA is superior in the area of order commitment, meaning e.g. that orders of more strategic important customers can be prioritized automatically:

Note the following information:

  • This illustration can apply to the retailer with various retail locations, such as various store formats of the largest retailers, e.g. supercenters versus regular stores of the same retail brand. It can also apply to the CPG companies (affiliated with the retailer or independent) for the allocation of available product to multiple retailers or different retail stores.
  • Multiply this problem by the number of products sold by a typical retailer: we cited earlier the range between 3,500 and 140,000 items
  • How do you prioritize such order commitments and delivery? What factors can be automated to avoid human error? How can you automate certain “exceptions” such as overriding earlier orders to smaller customers or stores by later orders placed by more strategically important customers or locations?
  • These considerations are even further complicated by logistical topics: for example, if we send that truck with bananas to our store in location A, what does it mean for the whole route optimization for our fleet and deliveries to locations B and C?
  • The logic of prioritization applies not only between CPGs and retailers or within retailer’s own stores, but even on the end consumer side: let’s imagine that Mia spends annually $4,800 on food at grocery retailers or $400 per month (see Table A in the US Bureau of Labor Statistics survey on consumer expenditures).
    • Let’s further imagine, that Mia shops at one retailer, call it Retailer A. On the other hand, Janeth, a similar mom of two from another family, shops at multiple retailers and spend only $1000 per year at Retailer A.
    • Given this, is Mia’s next order for Retailer A is more important than the order from Janeth? Clearly, yes.
    • This is exactly what SAP S/4HANA Advanced Available To Promise incorporates as the automated algorithm for prioritizing customer orders, overriding the less strategic orders (even if they had come earlier), allocating products among customers and so on.

You can see how the topic of prioritizing the way retailers stock their shelves snowballs quickly into a myriad of related operational challenges, including warehouse and transport operations. The Machine Learning (ML) capability of stock in transit is a great illustration of how SAP S/4HANA can learn and predict delivery times, therefore enabling various aspects of customer service at retail locations.

Consumers are expecting fast and reliable delivery

We started this section with Mia’s shopping list and shopping experience. Let’s think of traditional in-store shopping versus the emerging shopping online with curbside pickup or customer delivery. We will call the latter “alternative deliveries.” So, how do these scenarios work for the retailer? On one hand, delivering groceries has traditionally been outside typical retailer differentiators: our current retail industry has been built around the notion of the customer arriving to the mall, shopping themselves, and leaving with their purchases. However, various factors, including e-tailing competition and the COVID-19 pandemic, have changed this traditional world, requiring retailers to increasingly consider delivery of groceries. But does the delivery undermine the very business model of retailers, or does it enrich such models? What needs to be rethought? For example, can retail personnel pack each individual order for customer pickup? How many packers are needed and at what times? If retailers go all the way to ensure the “last-mile” delivery to the consumer, how many delivery personnel are required and how cost-effective can such a delivery be? Should delivery be from in-house personnel or outsourced to a third party? There are many other similar challenges that emerge with the proliferation of online and app ordering and alternative delivery scenarios.

SAP customers benefit from a host of SAP S/4HANA software solutions that address these very challenges. Order fulfillment, transportation and warehouse management, demand-driven replenishment and Material Requirements Planning (MRP live) functionality (see this blog, for example), exception-based handling, and others are just a few examples.

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Epilogue

Mia approached a customer service representative and handed him her shopping list. Two items on that list did not appear in Mia’s cart: they simply were not present on the respective supermarket shelves. The representative typed something on his mobile device and then looked at Mia, his face brightening with a friendly smile. He said, “Ma’am, we just placed an order for these items; they will be delivered straight to your home. Let me double-check your address.” Mia smiled back and confirmed it. All the items from the shopping list were in the cart or on their way to her house. She again enjoyed the exciting smell of fresh produce and thought how lucky their family was to have the retailer in the neighborhood. By her side. At all times. Empowered by SAP solutions.