Streamlining the supply chain: Strategies for optimal grocery retail operations

If the chaos and uncertainty of the past few years has taught supply chain leaders in the grocery retail chain sector anything, it’s that leveraging the capabilities of artificial intelligence (AI) and advanced analytics in the cloud can help them to maintain a competitive advantage in the global market, and remain resilient through turbulent times. When AI, automation, big data, the cloud, and other technologies work together, on-the-ground physical operations are powered far more efficiently, and supply chain leaders have access to a more connected and reliable network to meet consumer demands.

When it comes to strategizing for supply chain efficiency in 2023, a few critical elements include improving supply chain agility and resilience with integrated best-in-class inventory, sourcing and distribution optimization solutions, followed by increased automation, AI and ML for process efficiency, speed, and risk prevention.

💡Check out the Grid Dynamics Supply Chain and Inventory Solution Brief for details on optimized supply chain resilience, inventory management and order fulfillment with cloud-native services, application modernization, and advanced analytics.

Let’s take a deeper look at the demand for supply chain optimization in the grocery retail sector and its many advantages.

The growing need for supply chain optimization in the retail grocery industry is driven by increasing competition, growing consumer demand for convenience, rising costs, complex supply chain networks, and changing consumer behavior. By optimizing their supply chain, grocery retailers can reduce costs, improve efficiency, and meet the evolving needs of their customers.

1. Increasing competition: With the rise of e-commerce, traditional grocery retailers are facing increased competition from online retailers who can offer a wider range of products and faster delivery times. In order to remain competitive, grocery retailers need to optimize their supply chain to ensure they can get products to their customers quickly and efficiently.
2. Growing consumer demand: Today’s consumers expect a seamless and convenient shopping experience, both in-store and online. They want to be able to order products from their smartphones and have them delivered to their doorstep the same day. This places significant pressure on retailers to have a well-optimized supply chain that can deliver products quickly and accurately.
3. Rising costs: The cost of transportation, warehousing, and labor is increasing, and retailers need to find ways to manage these costs in order to remain profitable. By optimizing their supply chain, retailers can reduce costs, minimize waste, and increase efficiency.
4. Complex supply chain networks: The grocery supply chain is complex, with multiple suppliers, distributors, and retailers involved in getting products from the farm to the store. By optimizing the supply chain, retailers can improve visibility and control over the entire process, reducing the risk of disruptions and delays.
5. Changing consumer behavior: The COVID-19 pandemic has significantly changed consumer behavior, with many people switching to online grocery shopping and home delivery. This has put further strain on the supply chain, and retailers need to optimize their operations to meet this new demand.

Now that we’ve established why supply chain optimization is more important than ever, the question of how to make it happen remains. The answer to that question lies in harnessing the capabilities of:

• Consolidated data and tools in the cloud;
• The Internet of Things (IoT); and
• Predictive analytics with AI and ML.

💡Grid Dynamics has a range of Google Cloud Platform and Amazon Web Services solution starter kits aimed at accelerating the implementation and optimizing the efficiency of these supply chain tools:

Because supply chain management includes multiple stages, the creation of an efficient and resilient solution requires establishing the advanced capabilities mentioned above in each of them.

Some of the points on the supply chain optimization journey include:

• Supply risk analysis: supplier pricing, supplier changes;
• Procurement and replenishment optimization;
• Inventory allocation by facilities;
• Cross-facility rebalancing, ship-from-store reservations; and
• Customer order sourcing and routing.

Intelligent supply chain management tools use predictive analytics, combinatorial optimization, demand forecasting, and simulation algorithms for optimal and cost-effective order replenishment and safety stock levels, distribution and facility operations, fleet management, and store and delivery management.

Demand forecasts in the grocery retail sector can be based not just on historical sales data but also on other influencing parameters: internal factors such as promotions and store operating times, and external factors such as local weather, potential disruptions, events, and public holidays. Giant grocery retail chains can use advanced algorithms to analyze 50+ parameters at a granular level to determine the effect of each parameter on each SKU in each store (and in each distribution center, where relevant) on a daily basis.

Sales and promotions can have a significant impact on the supply chain and pricing strategy for grocery retailers. Supply chain managers need to carefully manage inventory levels, adjust demand forecasting and pricing strategy, and optimize supply chain processes to ensure that they can meet the increased demand during the sale period while remaining competitive and profitable. To prepare for this impact, grocery retailers can:

1. Improve demand forecasting: Demand forecasting can be optimized for promotions with advanced analytics and machine learning algorithms to analyze historical sales data and identify patterns and trends in customer behavior to better anticipate demand and adjust inventory levels accordingly. They can also anticipate last-minute changes by individual store management that may impact the holistic supply chain.
2. Implement agile inventory management: Agile inventory management processes enable quick adjustments to inventory levels in response to changing demand. This involves using real-time data to monitor inventory levels, optimizing replenishment processes, and implementing flexible supply chain processes.
3. Optimize pricing strategies: Retailers can optimize their pricing strategies by using dynamic pricing algorithms that adjust prices based on internal and external factors such as demand, inventory levels, and competitor pricing. This can help retailers remain competitive while still maintaining profitability.
4. Price exploration for new products: Retailers can get in-depth insights on a product’s price elasticity, even with minimal data, using AI-powered predictive analytics to forecast demand for a new product, and identify the optimal price point based on factors such as customer preferences, competitor prices, and market trends.
5. Confidence intervals and business-friendly pricing strategies: Pricing optimization models can take into account price thresholds to ensure that product pricing is set at well-understood intervals such as 0.1/0.2/0.3 cents, and not random pricing like 0.17 cents. Such a pricing strategy, which has monotonic constraints with regard to demand, makes it easy for the business to understand and work with the decision-making process of the models.

💡Grid Dynamics, in collaboration with Google Cloud Platform and Microsoft Azure, have created pricing and promotion optimization starter kits to accelerate the implementation of full-fledged, cloud-native, AI-powered pricing optimization platforms.

An optimized supply chain can be distinguished from its competition by several key features:

Customer-centricity

Offer a user-friendly experience to your customers with the best prices, real-time inventory views, multiple fulfillment options, and the ability to track orders through preferred channels.

Predictive intelligence

Predict future demand and risk with big data, AI and ML.

360° visibility

Gain a greater understanding of your productions, suppliers, inventory and logistics across the supply chain.

Real-time insights

Embrace the full potential of supply chain data for real-time insights.

Without a doubt, the driving force behind supply chain resilience for grocery retailers is supply chain visibility. 360° supply chain visibility enables rapid detection, response and recovery from changing conditions. With a comprehensive view of your suppliers, partners, assets and operations, you can more effectively deal with product replenishment cycles, customer expectations, predict and plan for disruptions, and prevent risk across the board.

A truly intelligent supply chain requires visibility into every aspect of the supply chain process – from the supplier’s floor to the customer’s door. Here are some of the different types of supply chain visibility for grocery retail.

If we begin to dissect supply chain visibility, we can identify two core areas of capability: one from a structural point of view in the form of operational and network visibility, and the other from a more dynamic point of view in the form of real-time visibility.

Operational visibility is achieved by using technology to harmonize the operations of your supply chain. This kind of visibility provides grocery retailers with insight on matters such as:

• Where their suppliers are;
• What logistics routes they use, including those of their partners;
• Interrelationships across the broader supply chain network;
• Potential supply chain risks and weaknesses.

There are three types of operational visibility:

Supplier network
visibility

A basic view of all the business-owned assets, partners and suppliers, including information on their locations and the relationships between them.

Service and cost
performance visibility

Using digital twins to measure performance across multiple scenarios, including stress testing the extended supply chain against disruptive scenarios.

Risk management
visibility

Internal operations risk (part of company-wide risk management, financial stability, ESG performance etc), supplier risk and location-based risk (geopolitical, environment, weather, etc.)

Real-time visibility shows you what’s happening across the supply chain right now. Real-time visibility helps grocery retailers understand:

• Where products are across the supply chain;
• How plants and warehouses are running;
• When and where disruptions are occurring;
• What disruptions are affecting, and how.

There are three types of real-time visibility:

Supplier and logistics process visibility

Monitoring real-time data from key partners like suppliers and logistics providers.

Predictive/demand forecasting visibility

Using real-time supply chain signals like weather, geopolitical events, marketing events, market-wide demands, and so on, to generate predictions, for example, about potential delivery issues, stock-outs, inventory turns, underbuy and overbuy risks, or increased demand for particular products.

Next best action visibility

Based on real-time supply chain signals, an optimized supply chain system can have capabilities to recommend next best actions to capitalize on opportunities or respond efficiently to issues or disruptions.

In order to implement such a sophisticated system, however, means that grocery retailers need to compose a modernized supply chain solution with best-in-class technology for each of these features. How can this be achieved? Read on to find out.

Although many standalone supply chain solutions are available, grocery retailers that want to achieve sustainable technology innovation and competitive advantage are creating composable architectures that combine products, custom microservices, and machine learning models to improve flexibility and avoid product limitations. Migrating from legacy systems to a microservices architecture in the cloud allows for a single, centralized inventory service that reduces licensing costs and improves efficiency.

Microservices architecture patterns enable the “divide-and-conquer” strategy of dealing with the complexity of enterprise IT. By enabling service-oriented collaboration, small cross-functional teams can deliver business value from requirements through to production.

In modernizing monolithic fulfillment systems, microservices make it easier to develop, deploy, operate, and scale the autonomous component service without affecting the functioning of other services. With this type of service independence, an application’s resistance to failure is increased. In contrast, in a monolithic architecture, if a single component fails, it can cause the entire application to fail. With microservices, applications handle total service failure by degrading functionality and not crashing the entire application.

💡Our Google Cloud Platform or Amazon Web Services partnerships facilitate the implementation of full-fledged supply chain optimization and order and inventory management solutions with a 10X speed-to-market boost, and a significant reduction in operating costs.

Using a composable supply chain management system on a microservices architecture, retail grocers are enabled to optimize hundreds of supply chain and pricing parameters using artificial intelligence, predictive models, and simulations. You can simplify demand planning and inventory planning and reduce lead times and stock-outs.

Now let’s look at a few of these components in more detail.

Safety stock management and its efficiency directly impact supply chain performance, customer experience, and turnover KPIs. Solutions for demand forecasting quantify uncertainties, account for underbuy and overbuy costs, and find optimal inventory levels that reduce costs and maximize profits. These capabilities create a solid foundation for safety stock risk management and help to improve the effectiveness of supply chain management for consumer goods, which is greatly influenced by the levels of safety stock.

Read more: Safety stock optimization for Ship from Store

Managing dozens of suppliers and distribution centers is a challenging problem that requires advanced predictive analytics and demand forecasting to prevent disruptions related to unreliable suppliers, the impacts of bad weather, geo-political events, high demand for certain products, and a number of other factors. Using machine learning and optimization algorithms to identify the most efficient sourcing and logistics options in real time helps to improve the quality of decisions, and minimize transportation costs and delivery times.

Read more: Optimization of order and inventory sourcing decisions in supply chains with multiple nodes, carriers, shipment options, and products

Significant business value can be achieved by modernizing applications and systems to expose APIs and to provide access to internal data – in a batch or real-time streaming mode – by adopting event-sourcing patterns. Such APIs will provide enough transparency and agility to optimize supply chain and fulfillment decisions in real time. AI-driven decision engines can then be created to augment traditional, manual analytics. Some AI use cases of computer vision can be implemented on the side by installing cameras in warehouses and stores and implementing an IoT infrastructure to support analytics and decision-making at the edge.

An API layer on top of supply chain-related systems and data sources improves transparency and facilitates the development of decision-making and optimization components.

There are numerous cost-saving benefits associated with supply chain optimization, especially considering that the utilization of big data makes it much easier to predict and respond to costly risks.

Transforming big data into fast data also leads to shorter lead times and higher inventory turnover. Connecting all stakeholder activities (i.e., suppliers, distributors, delivery fleets etc) on one platform with 360° supply chain visibility also leads to greater efficiency, improved customer experience, retention, and churn prevention, resulting in a significant return on investment.

Putting all of the pieces discussed in this whitepaper together means you can also sustainably reap the following benefits:

Insular management systems make it difficult to retrieve insight from supply chain data because they lack 360° supply chain visibility. That means it’s a lot harder for retail grocers to use consumer data productively. With harmonized data and 360° supply chain visibility on an automated, centralized cloud platform allows you to avoid data silos and supply chain inefficiencies.

These days customers expect businesses to engage with them in a highly personalized and efficient manner. In order to stay ahead of the competition and avoid customer churn, supply chain optimization enables a streamlined customer experience, utilizing smart data to make the discovery, order, delivery, and after-service journey as seamless and user-friendly as possible.

By embracing the power of the cloud, predictive analytics, automation, and 360° supply chain visibility, retail grocers have the tools to outplay their competitors in terms of speed-to-market, customer experience, risk prevention, product availability, and overall resilience to changing conditions.

An optimized supply chain on a microservices architecture allows you to respond to major changes quickly, and to experiment and innovate at scale without disrupting the entire ecosystem.

Supply chains conscious of their ecological and social footprints point to a business ethic which many customers have come to expect these days. Production and logistics optimization can help you adopt sustainable practices that are kinder to the environment.

The ultimate test of an optimized supply chain is its ability to prepare you for uncertainties. Using predictive analytics, digital twin simulations, operational and real-time insights, next best action recommendations, and 360° supply chain visibility on a connected, modernized platform in the cloud, you are set for whatever the future holds.

The past few years have put supply chain logistics to the ultimate test. Whether it’s pandemic, war, or climate change – there have been and will continue to be crises that impact retail grocers, and their consumers around the world. And while no industry can predict when such crises will happen, they can be prepared for whatever comes their way.

Increased automation, AI and ML for supply chain process efficiency, speed, risk prevention, customer experience and sustainability are key to supply chain resilience. Grid Dynamics has years of experience helping Fortune 1000 companies improve supply chain agility and resilience with integrated best-in-class inventory, sourcing, and distribution optimization solutions.
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