Ocado, the British online-only supermarket, is living proof of Marc Andreessen’s adage that software is eating the world. Or as we prefer to say at diginomica, how every type of product and service is first of all being transformed by software — and then supercharged by connections.
Ocado demonstrates the radical change that new digital operations bring in, replacing traditional processes that have become entrenched over the years in every industry. The company is like no other supermarket you’ve ever seen, not only within its distribution centers but also in how it manages its supply chain and how it interacts with its customers. Here are some of the changes it has seen in its operations as a result of its digital transformation.
From retailer to technology business
Ocado has evolved since it was founded in 2000 to become a technology company as much as a supermarket, owning significant intellectual property in both software and hardware. In much the same way that Amazon is increasingly marketing its operations as services to other businesses, Ocado too sees its future as a provider of technology services to other retailers around the world, while continuing to learn from its own experiences as an online supermarket.
That strategy is not without its problems for publicly listed Ocado. Investors tend to assess it as a retailer, a sector with very different financial metrics than a digital technology innovator. This recent assessment by John Ibbotson of Retail Vision sums up the prevailing view:
Ocado’s revenues from selling groceries aren’t growing fast enough to recoup its astronomical set-up costs.
That’s hardly surprising, and demonstrates the importance either of deep pockets or high margins at volume — and preferably both — when forging a path as a digital innovator.
A warehouse built for robots
The most striking result of innovation at Ocado is its latest warehouse design, shown in the picture above. Unlike traditional warehouses, where much of the space is given over to alleys from which people can find goods on the shelves, every square metre of floorspace is devoted to storage that robots access from above. The people stay outside, around the edge, and the bots bring the goods to them.
This proprietary design has evolved from earlier versions that used trains, cranes and conveyors, but what Ocado realized was that the optimal design would distribute the most frequently requested products so that they were held close to the picking stations, while the less common products were further away. It made the boxes smaller, to ensure there were enough different paths for each box to have the shortest route through the warehouse with no traffic jams. And it stores them in three layers, with boxes that aren’t needed immediately kept on the lower layers.
The bots traverse across the top of the boxes and they have arms that will pick up a box into its middle and then carry it off to a picking station. If a product is in one of the lower layers, several bots will ‘swarm’ to remove the boxes above. The grid makes best use of the space available, explains Anne Marie Neatham, Chief Operating Officer at Ocado Technology:
We created the bots because we realized if we could store efficiently, not have people moving around too much and a minimal of movement of product, we could make a much more efficient warehouse.
The system is modular, so that customers for the technology can start with a small warehouse and expand its size over time. Ocado also expects to be able to market the system to retailers outside the grocery sector, says Neatham.
We picked, we think, the hardest thing to do first, which is groceries. A lettuce is very different from, I don’t know, a toilet roll. And also you have products that can’t be mixed [such as] cleaning products. How you treat them is very different, and how you store them in the warehouse is very different.
We’ve done it with those, there’s no reason why this couldn’t be extended to lots of items that have nothing to do with grocery.
Monitoring shows up new efficiencies
Ocado uses New Relic performance monitoring software to track what’s happening across its operations and identify opportunities for improvement. Without data, you simply don’t know what’s really happening, says Neatham.
Everything we do under the hood is event driven. If you can’t see it, you don’t know it’s happening … sometimes you don’t know what you don’t know.
While New Relic was initially deployed to monitor the performance of web application servers, Ocado has extended its use into the warehouse and elsewhere. This helped show up inefficiencies in how a crane was operating in one warehouse (this uses an older design than the bot system). This led to savings of around £100,000 ($130k) — not a huge amount in itself, says Neatham, but each small improvement adds up over time.
Building predictability into the supply chain
Ocado has an extremely low wastage rate of around 0.75% — that’s about four times lower than the industry norm. It achieves this by optimizing the flow of goods through its supply and demand chain, says Neatham.
We instantly see what you’re ordering. We know where we’re getting it from, when it’s going to arrive in the warehouse and when it’s going to leave. We will have already predicted what we were going to order from [our supplier] well in advance based on what we did last year.
The company is finding that its highly automated systems are much more efficient than those in a conventional supermarket business.
Their forecasting isn’t often quite as accurate as ours. We’ve been a little bit surprised at the number of supermarkets who almost call back to head office asking for another 50 tins of beans. We find their forecasting algorithms, because they haven’t needed to, aren’t as accurate as ours, in general.
A larger range of products
The automated warehouse system coupled with the online-only model allows Ocado to carry a much larger range of products than a conventional supermarket business — currently around 50,000, compared to around 28,000 in a typical supermarket, and perhaps half that in a smaller outlet. This means Ocado can afford to test out products that wouldn’t be viable in a traditional supermarket setup, says Neatham.
If you’ve got a craft beer company that somebody owns over here, you can give them shelf space.
Because the warehouse is very efficient in the way we store stuff, it’s very easy for us to try out some new products. It’s been an unexpected but a really lovely benefit of doing these hyper-efficient things.
It’s allowed us to go into businesses, which maybe would have been viewed as less efficient and much more niche, and have them come along to the party and benefit from this efficiency.
More detailed product information
The online model forces Ocado to record more information about the products it’s carrying, Neatham explains.
We have a lot of product information because you can’t pick up the tin of beans to look at what’s in it. It has to be online.
So we have a lot of information on sizing, on what’s in it, even where it comes from, where it’s been made. We have an awful lot to offer in that area that we were unaware of almost.
Other people didn’t. You could pick up anything and have a look at the items. We need to tell them online.
Customer centric automation
In some senses, Neatham suggests, Ocado is restoring the earlier model of grocery shopping, where a shop assistant would pick products off the shelf to fulfil a customer’s order. But with the added benefits of a fully automated supply chain direct to the customer’s door:
It’s unbroken supply chain. The stuff moves from a refrigerated van into another refrigerated unit in the warehouse. It’s refrigerated in the van and all the way to a front door before it leaves temperature. Because it does that, the life on the product is just better.
That automation means that the customer service element has to be addressed in other ways — recognizing that drivers are the only person from Ocado the customer will physically meet, for example. And harnessing AI to optimize handling of incoming customer emails.
People may wonder why it’s taken so long for the online supermarket model to evolve, says Neatham, but the reason is that there’s been much to learn. Ocado is now looking forward to taking those learnings into new markets, she concludes:
We make a profit on everything we do now. We’re lucky we launched in the UK because it’s such a tough grocery market to learn how … if you can do it here, you can do it anywhere.
Image credit - via Ocado
Disclosure - New Relic is a diginomica premier partner at time of writing.