Ocado, where’s my Avocado?

Can Ocado’s warehouse teach oil and gas a trick or two?

Today the BBC carried a story regarding a visit to the semi-automated Ocado warehouse in Andover http://www.bbc.co.uk/news/technology-43968495 . It made me think about what their basis of competition was and how this might apply to oil and gas.

Ocado is a company that embraced digitalisation early on, without perhaps realising that they were a leading light in the 4^th Industrial Revolution.  What Ocado do is not conceptually difficult to understand. They deliver groceries. The value they deliver to the customer is very like that available from Tesco, Sainsbury and other on-line retailers. So what’s the difference?

There are four elements required to make this business system work:

1. Establishing a source of supply (things to sell)
2. A way to get customers to place and pay for orders
3. Methods for grouping the contents of the warehouse into packages
4. Efficient delivery from warehouse to end customer

All four areas are ripe for digitalisation to make them more operationally efficient and increase the return on fixed assets.
At first the innovation that Ocado brought was to digitalise the shopping experience. As others have caught up, I think that Ocado has understood that their business model is going to have to compete on efficient order-fulfilment.  Customers don’t care about how that’s done (so long as it is) but other retailers might, and they might be prepared to pay for the service.

To be successful (in the traditional sense) means maximising retained profit in the face of competition. Each of Ocado’s four parts of their operation can be disaggregated and sell services to different customers. This is the classic “value engineering” popularised by Tom Peters and his peers in the 1990s.

Consider one scenario for a moment.  Maybe Ocado should consider if more value for the warehouse comes from the exclusive use by them (because they can charge a premium for their excellent picking), or perhaps they supply capacity to others and capture value by fulfilling orders more cheaply than their “competitors” can. Charging their competitors a fee above their cost.

When they brain-storm their options for this part of their value chain, some things they may consider include:

• Would making their competitors more reliable hurt their revenue coming from the Ocado website?
• Would increasing the volume of orders handled increase error rates?
• If their service suffered and took-down Tesco deliveries, whose reputation would suffer?
• Would more volume lead to economies of scale and reduced costs, and more profit?
• Is the way that they develop and use technology in their warehouse patentable? Is it a trade secret, can they license the method to others and help them set up their warehouses?
• What if someone else offered this service, would they use it or choose to compete?

When the four elements are combined, competition comes from the likes of Sainsbury Online and the Tesco Website and Substitution from a traditional Supermarket. Each of the four main parts of the operation faces different competitors such as: Walmart for efficient sourcing; Ebay for customer experience; Amazon for warehouse management; and FedEx for customer package routing and delivery.

What I find interesting is that the basis for innovation and efficiency is all driven by different aspects of Digitalisation and I4.0, but the opportunity for innovation comes from the vertical integration of the four elements together. One day, the new model will have consolidated around new “digital design patterns” and the window will open for value creation through consolidation, outsourcing and specialisation within the value-chain.

This is a lead-in to my next post which I’m writing where I will consider if the move in the 1990’s to outsource everything “non-core” in oil and gas operators has left the previous generation of leading companies unable to digitally innovate across their value chain. This is because they no longer have the end-to-end knowledge to combine with emerging digital ways of working. If I am right, then future innovation may be driven by new players who have not outsourced their operations to a myriad of subcontractors. Interesting times.

Image credit: https://vivitherapy.com/product/avocado-oil-organic-virgin-1-litre/