The Imminent Disruption in Supply Chain
Digitalization is well positioned to disrupt traditional supply chain in a variety of ways. Methods such as big data analytics, internet of things, and cloud computing are digitalization technologies that most business practitioners accept will be major drivers of change. However, only twenty seven percent of practitioners on SCM World’s annual Future of Supply Chain survey in 2016 believe that ride hailing technology, or sharing economy, will be a major supply chain disrupter. With that said, this percentage has grown by nearly 500% in 3 years as practitioners increasingly accept the role ride hailing services could play in the future of supply chain.
Nordstrom Partners with Uber
Nordstrom has been an early adopter in leveraging ride hailing technologies into its delivery network. By providing this service to its customers, Nordstrom has protected itself against potential disruption in traditional delivery methods while reaping immediate benefits for itself and its customers. However, for ride hailing technology to become a long-term solution, Nordstrom must address a few outstanding risks inherent in the current business model.
Companies such as Uber are diversifying away from their traditional ride hailing business into a B2B package delivery model. Uber is utilizing its more than 200,000 active drivers, double the size of UPS’s workforce, to offer same-day delivery for department stores such as Nordstrom. To use the service, UberRush, the user simply shops on Nordstrom’s website and during checkout, selects the same-day delivery option for a $15 fee, equal to the fee Nordstrom charges to ship packages next-day via FedEx.
These services provide tighter delivery windows, and potentially faster and cheaper delivery methods for Nordstrom’s customers. As the high cost of shipping is a key reason why customers abandon online shopping carts, ride hailing technology is a key differentiator for Nordstrom that will encourage customers to complete their purchases when shopping online. The company has provided this same-day delivery option since 2011 by partnering with other companies, and now Uber allows it to enter lucrative markets like New York, Chicago, and San Francisco. If ride hailing companies continue to lower costs and expand product offerings into next day shipping, traditional delivery companies like FedEx and UPS are at risk of major disruption. Nordstrom is mitigating this risk by integrating Uber and other technology firms into its supply chain as a first mover.
Potential Danger Ahead
Although several advantages are apparent by Nordstrom digitizing its supply chain, several risks exist as well. For this option to be a viable long-term solution, these risks must be addressed. It would be prudent for Nordstrom to address these concerns soon before they represent a significant liability to the company. For instance, UberRush only insures items up to $1,000. As a high end retailer, this limit fails to fully insure several, if not most, items that are bought from Nordstrom. Additionally, the delivery for the New York City market is bicycle.
Bicycle riders transporting expensive items could become targets for theft. At scale, the lack of insurance represents a significant liability for Nordstrom, and they should negotiate with Uber to raise the insurance limit, or find a competitor ride hailing service who is more flexible. Second, ride hailing services often rely on independent contractors who are less skilled at navigation and delivery than drivers at traditional delivery companies such as UPS. The lack of skill may translate into late deliveries as drivers struggle to navigate roadways, resulting in an unpleasant customer experience. To combat this risk, Nordstrom must insist that customers receive compensation from Uber, perhaps in the form of a discounted delivery fee or delivery credit, for late products. Finally, Nordstrom is at the risk of Uber’s real-time supply and demand constraints. As a delivery service, UberRush must charge flat fees, offering necessary transparency and predictability to the consumer. During peak shopping times, such as the holiday season, demand for delivery is likely to increase. UberRush cannot implement its effective “Surge Pricing” strategy to attract more drivers, leaving Nordstrom with a promised service that it can no longer deliver to the customer. As a solution to this dilemma, Nordstrom could offer a royalty to UberRush that is partially passed on to drivers, protecting customers from unexpected price hikes while encouraging more drivers onto the road.
Disruptor or Fad
Nordstrom is on the leading edge of diversifying its supply chain into ride hailing services, particularly in the luxury retail sector, thus mitigating risk of disruption in this part of its business. However, given the concerns outlined above, is the ride hailing delivery service a scalable and sustainable part of the company’s supply chain? Furthermore, are there enough customers willing to pay a significant premium for same-day delivery rather than opt for a less expensive next-day delivery option, which traditional delivery services dominate? [Word Count: 795 Words]
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