Mercado | Insights | Closing the Gap in Origin Services - An Old New Model

Insight: Closing the Gap in Origin Services – An Old New Model (Part 2)?

First Things First

Insight: Closing the Gap in Origin Services – An Old New Model (Part 2)?

May 10, 2023

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Every week, Mercado CEO Rob Garrison pens his latest learnings from the supply chain industry as part of an on-going series. Each article aims to share a little insight into what's going on that week, and to help foster discussion amongst industry professionals across levels, geographies, and companies.
In part 1 which I posted yesterday I discussed what's next for origin services, which is attached. In this post I'll present the case for why now.
Missed part one of the series?
Read the full story here.
The existing first mile model was built for a time when margins were high and global trade was stable, but with changing times, the current model has now become a potential liability.

What’s changed? There is a major re-examination of the global supply chain happening due to a variety of macro events. Global trade tensions, just-in-time vs. in stock, the effects of inflation, new technologies, the need for transparency, and the weaknesses exposed during the pandemic.

These macro events are causing companies to reevaluate their entire sourcing strategies, which have not changed significantly since the 80s.

While connecting the first mile to the Last Mile is the best defensive strategy, I’m going to flip the script in this post. Let’s focus instead on the opportunities gained by optimizing the first mile. It boils down to three things, making the procurement process more efficient, decreasing time to market, and connecting products directly to sales.

The OG of leveraging the first mile is Zara. They saw the opportunity early, and turned the first mile into a competitive weapon to reduce lead times and react more quickly to new trends. Zara turns their entire store inventory every six weeks, has almost no markdowns, and no excess inventory. This approach has been hugely successful, with Zara selling $35 billion worth of products in 2022 and earning a $4 billion profit. Their first mile is completely connected to the final mile in a digital buy / sell hyperloop.

A more recent fashion play is Shein. Very similar to Zara, they have tightly integrated their first and last miles to get products to market in six weeks, however it’s all done online versus the Zara model, which is primarily through stores.

And then there is Temu. Temu's model is more like a first mile version of Amazon's final mile model. They have created a marketplace for sellers of all types with an online store interface. Temu launched with 0 unique visitors in September of last year and by December they had 45 million.

These three companies have one thing in common. An integrated first and final mile supply chain. The benefits are weeks versus months, connected versus disconnected, proactive versus reactive, online versus offline. The outcomes are they buy better, reduce lead times, and forecast sales better. Mirroring the first and final mile processes will transform global trade. The biggest remaining challenge is change management - how to transition from the past to the future? I'll share my thoughts on how to cross that bridge in a future post.
"In an 'ideal' world, an importer would have at least one backup country, and one back up supplier for every critical product... All of this sounds good on paper, however it's actually incredibly difficult in practice."
One key reason is the dominance of China. Many importers are concerned about China as a sourcing point due to increasing tensions between the countries. However, the reality is that China dominates mfg in Asia, and they are very good at it.

As a result, quitting China is hard, as you will see in the excellent analysis below by Rita Rudnik.

A second reason is much more mundane. Most importers lack a robust database of their suppliers, and their supplier's suppliers. On the surface this sounds ridiculous, however we have gone through decades of 'predictable' supply chains where this wasn't a priority. Using the example above, most of the bike importers I spoke to were simply not aware of how reliant their suppliers were on Shimano.

My guidance to all importers is to address this database issue quickly. Beyond resiliency, knowing a lot about who makes your products, and who makes their parts, is also critical for understanding things like cost, ESG, and sales.

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About the author

Rob Garrison, Mercado CEO

Rob Garrison

A highly accomplished Global Supply Chain executive with 25 years of experience, Rob Garrison has provided strategic vision and leadership to Fortune 500 companies. Rob has an impressive history of building agile, technology-enabled supply chains, and he has an established track record of forging high-growth partnerships, positioning organizations for success and launching innovative technology solutions that significantly improve end-to-end supply chain efficiencies.

Rob is currently CEO and founder of Mercado Labs.
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