CSCR Resource
OMNICHANNEL RETAILING : TRENDS , OUTLOOKS , AND STRATEGIES Prepare by Kusumal Ruamsook, August 21, 2016
About the Document This document is prepared as background for CSCR speakers on omnichannel retailing at the 2016 Parcel Forum. In this document, highlights of omnichannel retailing trends, outlook, and current strategies are presented. Data are based on a review of literature published within an approximately three-year time frame (up to July 2016), including managerial journals, industry reports, and relevant web resources. The review looks at the three elements of omnichannel retailing—point of interaction, point of fulfillment, and point of return. Considering the audience of the 2016 Parcel Forum, particular focus is on the point-of- fulfillment component, and secondarily on the point-of-return.
TABLE OF CONTENTS
Retail Sales Trends and Outlooks by Channel ...... 4 Retail Sales by Channel ...... 4 Retail Sales Forecast by Channel...... 6 Projections up to 2018 ...... 6 Projections up to 2020 ...... 8 Omnichannel Retailing Overview...... 11 Retail Evolution: Single-, Multi-, Cross-, and Omni-channel ...... 11 Drivers for Retail Evolution ...... 13 Opportunities for Omnichannel Retailers ...... 14 Illustration of Omnichannel Purchasing Journey ...... 15 Key Supply Chain Challenges of Omnichannel Retailing ...... 17 Demand Planning and Forecasting Challenges ...... 17 “Endless Aisle” Assortment and Inventory Challenges ...... 18 Cost of Order Fulfillment Challenges ...... 19 Product Returns Challenges ...... 21 Point of Interaction Strategies ...... 22 Point of Interaction: Discovery (Awareness & Research) and Post-Purchase ...... 22 Personalized Marketing and On-the-Go Promotion Trends ...... 23 Social Media Retailing Trends: Influence during Discovery and Post-Purchase ...... 24
Page 1 of 69
CSCR Resource
Point of Interaction: Evaluation and Purchasing ...... 25 Pure-Play E-retailer Strategies: Developing Physical Presence...... 25 Brick-and-Mortar Retailer Strategies: Developing Online Presence ...... 26 Innovations in Evaluation of Alternative and Purchasing ...... 27 Point of Fulfillment Strategies ...... 28 Fulfillment Network Configurations ...... 28 Internally Managed vs. Outsourced Fulfillment Facilities: In-house Dominated ...... 28 Multi-tier Fulfillment Network Design ...... 29 Fulfillment Node and Link Operations: Delivery Locations, Fulfillment Operations, and Last- mile Delivery ...... 31 Delivery Locations: Click-and-Deliver and Click-and-Collect ...... 31 Fulfillment Operations: Store-based and DC-based Models ...... 32 Store-based Fulfillment Models ...... 32 DC-based Fulfillment Models: Multi-channel DCs Dominated ...... 39 Last-Mile Delivery ...... 45 Illustration of Multi-Echelon Fulfillment Network with Dynamic Flows ...... 49 Omnichannel Inventory Management ...... 50 Omnichannel Inventory Management Evolution ...... 50 Store-Level Inventory Management: Key Enabler for Store-based Fulfillment ...... 51 Point of Return Strategies ...... 51 Online Order Returns Policy Trends: Free Return Shipping and BORIS ...... 51 Importance of Strategic Return Management ...... 53 Returned Product Operations and Strategies ...... 55 Returned Product Facility Operations Models ...... 55 Strategies to Reducing Cost and Maximizing Income Recovery of Returned Products ...... 57 Key Takeaways: Best Practice Features ...... 61 References ...... 66
List of Figures
Figure 1/ Ecommerce as a Percentage of Total Retail Sales ...... 4 Figure 2/ Ecommerce versus In-store Retail Quarterly Sales Growth ...... 5 Figure 3/ Ecommerce Sales Share by Product Category ...... 5 Figure 4/ US Online Retail Sales and Share by Channel (2012–2017) ...... 6 Figure 5/ US Retail M-commerce Sales via Smartphones and Tablets 2014–2018 ...... 7 Figure 6/ US E-Commerce Sales (in Billions) 2014–2018 ...... 8 Figure 7/ US Online Retail Sales (2016–2020) ...... 9 Figure 8/ US Online Retail Sales (2013–2019) ...... 10 Figure 9/ Retail Evolution toward Omnichannel ...... 11 Figure 10/ Channel Agnostic Shoppers ...... 16 Figure 11/ Nonlinear Purchasing Journey ...... 16 Figure 12/ Profitability Challenges for Typical Retailer with 30 Percent Gross Margin ...... 19
Page 2 of 69
CSCR Resource
Figure 13/ Changes in Order Profiles ...... 21 Figure 14/ Fulfillment Methods Used by Leading Retailers (Deloitte Omnichannel Survey) ...... 35 Figure 15 / Commonwealth Supply Chain Advisors survey ...... 39 Figure 16 / Logistics Management’s Annual Warehouse and Distribution Center (DC) Operations Survey ...... 40 Figure 17 / 2015 Annual Survey On Retail Fulfillment Practices ...... 41 Figure 18/ Shipwire Online Marketplace for Fulfillment and Logistics ...... 42 Figure 19/ Technologies Employed for Omnichannel Order Fulfillment ...... 44 Figure 20/ Last-Mile Delivery Method Trends ...... 45 Figure 21/ Example of Returned Product Process Flows ...... 57 Figure 22/ Returned Inventory Disposition Options ...... 60 Figure 23/ Retail Example of Returned Product Flows to Secondary Markets ...... 61 Figure 24/ Examples of POIs and POFs Mapping ...... 64
List of Tables
Table 1/ Drivers for Retail Evolution ...... 13 Table 2/ Top 10 Retailers by US Retail Sales ...... 14 Table 3/ Fulfillment Service Options and Corresponding Store Fulfillment Operations ...... 33 Table 4/ Summary of Store-based Fulfillment Advantages and Challenges ...... 36 Table 5/ Reverse Logistics Costs of Returned Products ...... 55
Page 3 of 69
RETAIL SALES TRENDS AND OUTLOOKS BY CHANNEL
Retail Sales by Channel
Ecommerce as percentage of total retail sales & growth rate. As shown in Figures Figure 1 and Figure 2, while ecommerce sales are smaller compared to the in-store counterparts, the share of the ecommerce sales has been increasing steadily. In fact, ecommerce sales have been growing noticeably faster than in-store sales since the turn of the century. Top ecommerce product category. In terms of product category (see Figure 3), computer hardware, software and supplies, along with TVs, DVD players and related items, comprise the largest product group sold online (18.4% of the total ecommerce industry revenue). Clothing, footwear, accessories and jewelry are also popular goods to buy online (18.2% of industry revenue). Despite comparable shares, the quantity purchased in the latter group is significantly larger than that of TVs and computers (Carter 2016).
Figure 1/ Ecommerce as a Percentage of Total Retail Sales
1,200,000 9 8 1,000,000 7 800,000 6 5 600,000 4 400,000 3 PERCENT 2
MILLIONS DOLLARS OFMILLIONS 200,000 1 - 0 1st quarter 1st 2000 quarter 1st 2001 quarter 1st 2002 quarter 1st 2003 quarter 1st 2004 quarter 1st 2005 quarter 1st 2006 quarter 1st 2007 quarter 1st 2008 quarter 1st 2009 quarter 1st 2010 quarter 1st 2011 quarter 1st 2012 quarter 1st 2013 quarter 1st 2014 quarter 1st 2015 3rd 3rd quarter 2000 3rd quarter 2001 3rd quarter 2002 3rd quarter 2003 3rd quarter 2004 3rd quarter 2005 3rd quarter 2006 3rd quarter 2007 3rd quarter 2008 3rd quarter 2009 3rd quarter 2010 3rd quarter 2011 3rd quarter 2012 3rd quarter 2013 3rd quarter 2014 3rd quarter 2015 1st quarter 1st 2016(p)
eCommerce sales Store sales eCommerce as pecentage of total
Source: US Census Bureau “Estimated Quarterly US Retail Sales (Adjusted): Total and E- commerce,” Revised May 17, 2016
Page 4 of 69
Figure 2/ Ecommerce versus In-store Retail Quarterly Sales Growth
35
30
25
20
15
10
5 PERCENT
0
-5
-10
1st quarter 1st 2000 quarter 1st 2001 quarter 1st 2002 quarter 1st 2003 quarter 1st 2004 quarter 1st 2005 quarter 1st 2006 quarter 1st 2007 quarter 1st 2008 quarter 1st 2009 quarter 1st 2010 quarter 1st 2011 quarter 1st 2012 quarter 1st 2013 quarter 1st 2014 quarter 1st 2015 -15 3rd 3rd quarter 2000 3rd quarter 2001 3rd quarter 2002 3rd quarter 2003 3rd quarter 2004 3rd quarter 2005 3rd quarter 2006 3rd quarter 2007 3rd quarter 2008 3rd quarter 2009 3rd quarter 2010 3rd quarter 2011 3rd quarter 2012 3rd quarter 2013 3rd quarter 2014 3rd quarter 2015 1st quarter 1st 2016(p) eCommerce sales growth Store sales growth
Source: US Census Bureau “Estimated Quarterly US Retail Sales (Adjusted): Total and E- commerce,” Revised May 17, 2016
Figure 3/ Ecommerce Sales Share by Product Category
Source: IBISWorld Industry Report: E-Commerce & Online Auctions in the US (Carter 2016)
Page 5 of 69
Retail Sales Forecast by Channel
NOTE: Forrester Research and eMarketer are two most frequently cited sources. So, data from both sources (where available) are highlighted here for comparison .
Projections up to 2018
Online sales projection by Forrester Research 2012–2017. According to a report from Forrester Research titled US Online Retail Forecast, 2012 To 2017 , the growth of ecommerce is expected to outpace sales growth at bricks-and-mortar stores to reach $370 billion in sales by 2017. By that time, ecommerce is expected to account for a full tenth of all US retail sales (see Figure 4). 1 The categories that will be most influenced by Internet research in five years [2017] will be grocery, apparel and accessories, home improvement and consumer electronics, in particular through mobile activity like reading customer reviews while in the aisle, according to the Forrester Research. Together, those categories will account for $1.1 trillion of the $1.8 trillion total web-influenced retail sales predicted for 2017. 2
Figure 4/ US Online Retail Sales and Share by Channel (2012–2017)
Image courtesy of Mashable (2013) 3
1 Forrester Research. 2013. “US Online Retail Forecast, 2012 To 2017.” Forrester Research, March 13. 2 Henry, Monty. 2014. “Total Offline Retail Sales VS Internet Sales.” LinkedIn Pulse, September 16. 3 Indvik, Lauren. 2013. “Forrester: US Online Retail Sales to Hit $370 Billion by 2017.” Mashable, March 12. http://mashable.com/2013/03/12/forrester-u-s-ecommerce-forecast-2017/#8TN_k5pL6sqh
Page 6 of 69
US m-commerce sales as percentage of web sales 2014–2018. Looking at US mobile commerce sales, eMarketer projects that mobile sales will account for 26 percent of total web sales in 2017 (see Figure 5).4
Figure 5/ US Retail M-commerce Sales via Smartphones and Tablets 2014–2018
Image courtesy of Internet Retailer (citing source: eMarketer, September 2013) 5
Ecommerce sales projections: Forrester Research vs. eMarketer 2014–2018. E-commerce sales are projected to grow to more than $400 billion, with Forrester Research estimating $414.0 billion in sales in 2018 and eMarketer estimating $491.5 billion in 2018 (see Figure 6).
4 Internet Retailer. 2013. “Charts & Data: Mobile Commerce.” https://www.internetretailer.com/trends/mobile-commerce/us-retail-m-commerce-sales-via- smartphones-tablets/ 5 Internet Retailer. 2013. “Charts & Data: Mobile Commerce.” https://www.internetretailer.com/trends/mobile-commerce/us-retail-m-commerce-sales-via- smartphones-tablets/
Page 7 of 69
Figure 6/ US E-Commerce Sales (in Billions) 2014–2018
Image courtesy of Internet Retailer (citing eMarketer and Forrester Research n.d.) 6
Projections up to 2020
Online sales projection: Forrester Research (2016–2020) vs. eMarketer (2013–2019). In a more recent report from Forrester Research titled US Cross-Channel Retail Forecast, 2015 To 2020, online sales is predicted to grow by an average annual rate of 9.32 percent over the five years 2015–2020. Online sales in the United States are expected to reach $523 billion in 2020, up 56 percent from $335 billion in 2015 (see Figure 7). [NOTE: No data on projected sales by channel for 2015–2020 from the source.] In another projection, eMarketer forecasts US ecommerce sales to reach $534.95 billion in 2019 (see Figure 8).
6 Internet Retailer. 2013. “Charts & Data: Mobile Commerce.” https://www.internetretailer.com/trends/mobile-commerce/us-retail-m-commerce-sales-via- smartphones-tablets/
Page 8 of 69
Figure 7/ US Online Retail Sales (2016–2020)
Image courtesy of Internet Retailer (2016) 7
7 Linder, Matt. 2016. “US Online Sales Will Surpass $530 Billion by 2020.” Internet Retailer, May 2.
Page 9 of 69
Figure 8/ US Online Retail Sales (2013–2019)
Image courtesy of Statista (2016) 8
8 Statista. 2016. “United States: Retail E-Commerce Sales 2013–2019.” Key Figures of E-Commerce. http://www.statista.com/statistics/272391/us-retail-e-commerce-sales-forecast/
Page 10 of 69
OMNICHANNEL RETAILING OVERVIEW
Retail Evolution: Single-, Multi-, Cross-, and Omni-channel
Figure 9/ Retail Evolution toward Omnichannel
Source: Strang (2013)
Page 11 of 69
Single-channel model. Most traditional single-channel model is that of brick-and-mortar retailers selling products solely via physical retail stores. A more modern form is that of pure-play e-retailers selling products solely online. [NOTE: No specific citations; discerned from overall literature review content]
Multi-channel model. Currently most businesses employ a multichannel approach, seeking to optimize the consumer experience in each channel (DHL 2015). Multi-channel is characterized by “working in silos” – the channels exist side-by-side without interacting (Kourimsky and van den Berk 2014). Key features are: Product offerings. There was often little in common between what was available in the store, in a catalogue, or online (Strang 2013). Touch points. Each channel offered multiple independent touch points to the consumer—many times selling different items under separate brands (Strang 2013). Customers cannot buy across different channels, such as making an online order and picking the item up in the store. (Kourimsky and van den Berk 2014). Order fulfillments. Just as often, orders were satisfied through separate supply chains. Inventory for store replenishment and wholesale orders was managed from one distribution center while inventory for online and catalog orders was managed from another facility or a third-party logistics provider (Strang 2013).
Cross-channel model. Multi-channel evolved into the cross-channel model, as retailers started offering common branding and messaging. However, they continued to operate in separate functional silos with various touch points to consumers (Strang 2013). Omnichannel model. Omnichannel retailing is a direct to consumer (D2C) business model where all sales channels ranging from online, mobile, telephonic, mail order, self-service, and physical retail establishments are aligned and fulfillment processes integrated to provide consumers with a seamless shopping experience in alignment with the company’s brand proposition (Cascone et al. 2015). Key features are: Point of interaction. Omnichannel model focuses on satisfying omnichannel consumer’s desire for a seamless customer experience across all touch points (Strang 2013). Many different sales channels are involved in the seamless commerce process. Customer can buy across all channels, and all the information about the buying process is available on all channels, ideally in real time (Kourimsky and van den Berk 2014). Points of fulfillment and return. Omnichannel model focuses on retailers’ capabilities to satisfy demand from anywhere—a retail store, a distribution center, a third-party distributor, or a manufacturer—both for forward and reverse flows (Strang 2013).
Page 12 of 69
Drivers for Retail Evolution
Table 1/ Drivers for Retail Evolution
DRIVERS Multichannel and Cross-channel Models Omnichannel Model Increase sales and market share as key Shift in consumer shopping drivers. Traditional brick-and-mortar preference as key driver. Enabled by retailers’ evolution to multi-channel and consumer technologies (e.g. the web, cross-channel retailing model were “smart” mobile devices, apps, and driven by their attempt to counter the social media), new shopper behaviors competition from pure e-tailers (Krebs and expectations of a single, 2015; Strang 2013). integrated, and seamless shopping Showrooming impacts. Traditional experience, no matter which device or retailers who only operate physical store “channel” consumers use are driving channel are especially vulnerable to the increased push into omnichannel consumers “showrooming” — examining (Baird and Kilcourse 2013; Cascone et merchandise onsite but purchasing at a al. 2015; Westenberg, Popat, and Stine lower price online. Showrooming, by 2012). some industry estimates, is thought to Empowered consumers. Today’s cost US retailers more than $200 billion digitally connected customers are [in 2013] (Bell, Gallino, and Moreno 2014). empowered in multiple aspects and Amazon growing threats. While they are clearly signaling that overall US ecommerce sales are companies’ successes and failures rest growing at about 15% each quarter, on high expectations of price, Amazon’s own merchandise sales selection, convenience, and continue to grow even faster than that experience (Baird and Kilcourse 2013; – Amazon’s North American Tompkins International 2014; Geddes, merchandise sales were up an Williams, and Guthmann 2014): amazing 28.5% in 2014. That growth Information. Consumers can is obviously coming out of someone compare product details, prices and else’s market share fulfillment options. (SupplyChainDigest 2015). Amazon Choice. Consumers can access a wider now joins the rank of top retailers as range of retailers and products. shown in Table 2 . Convenience. Consumers can research, purchase and receive products anytime, anywhere on their terms and with more visibility than many retailers have into their own operations.
Page 13 of 69
Table 2/ Top 10 Retailers by US Retail Sales
2000 2010 2015
1. Wal-Mart 1. Wal-Mart 1. Wal-Mart 2. Kroger 2. Kroger 2. Kroger
3. The Home Depot 3. Target 3. Costco
4. Sears, Roebuck & Company 4. Walgreen 4. The Home Depot
5. Kmart 5. The Home Depot 5. Walgreens Boots Alliance 6. Albertson’s 6. Costco 6. Target 7. Target 7. CVS Caremark 7. CVS Health
8. JC Penny 8. Lowe’s 8. Amazon.com 9. Costco 9. Best Buy 9. Albertsons
10. Safeway 10. Sears Holdings 10. Lowe’s Source: National Retail Federation (NRF) 9 Note: (1) All retail sales estimates are excluding wholesale and non-retail services (not sold at store) but include online retail sales. (2) Walgreens acquisition of Rite Aid pending approval, to be reflected in FY2016.
Opportunities for Omnichannel Retailers
Omnichannel features that are initially perceived as “nice add-ons” are becoming “must- haves” for surviving and thriving (Bell, Gallino, and Moreno 2014; Cascone et al. 2015). Among expected benefits of omnichannel retailing are: Increase sales/revenue. Omnichannel retailing can increase sales/revenue (Ames 2015; Cascone et al. 2015; EY 2015) through: Expand consumer base by accessing customers across all segments and levels of technological sophistication (Cascone et al. 2015; EY 2015). Provide shoppers with wider selection, e.g. products that would not have been available in local stores (Geddes, Williams, and Guthmann 2014). Uplift e-commerce sales with the presence of stores and vice versa. The value of a retail strategy that operates multiple channels has been demonstrated by studies that found 23 percent of consumers purchase more items when picking up an online order from stores. Retailers also report that up to 20 percent of consumers who
9 https://nrf.com/resources/annual-retailer-lists/top-100-retailers
Page 14 of 69
return an online purchase in store make an additional purchase (Brown, Moriarty, and Mendoza-Pena 2014). Create opportunities to exploit rapid sales growth through emerging channels such as mobile, and to capture lucrative markets (Geddes, Williams, and Guthmann 2014). Build brand awareness. Retailers can use new channels to build brand awareness. Factors such as a broad online presence and a higher share of searches can all raise brand awareness and increase sales across channels (Geddes, Williams, and Guthmann 2014). Improve customer satisfaction/experience (Ames 2015). Improve consumer insight (EY 2015). Strengthened consumer loyalty (EY 2015). Create competitive difference (EY 2015)
Illustration of Omnichannel Purchasing Journey
Key features of omnichannel purchasing journey. In today’s omnichannel world, the journey has more stages than ever, with the customer deciding not only where, when, and what to buy, but which channels to use and the role each will play (Bellaïche, Chassaing, and Kapadia 2013). Channel agnostic shoppers. As shown in Figure 10, omnichannel consumers are “channel agnostic.” That means they don’t “pick” a channel within which to conduct their business. Instead, they tend to use a mix of different channels, including the physical store, online, mobile, and social media, as they move through the purchasing process (Chugani et al. 2013; DHL 2015). Nonlinear journey. As illustrated in Figure 11, omnichannel purchasing journey is shifting from the linear route or a sequence of actions in a single channel to a dynamic continuum of action across multiple channels, starting and ending at different points based on individual preferences (Bellaïche, Chassaing, and Kapadia 2013; DHL 2015).
Page 15 of 69
Figure 10/ Channel Agnostic Shoppers
Source: Geddes, Williams, and Guthmann (2014) Note: Purchase channels range from call center, tablet/mobile, website, brick-and-mortar stores, and catalog. Fulfillment channels range from retail DCs, ecommerce DCs, outlet locations, brick-and-mortar stores, pop up stores, and kiosk (Kourimsky and van den Berk 2014).
Figure 11/ Nonlinear Purchasing Journey
Source: Bellaïche, Chassaing, and Kapadia (2013)
Page 16 of 69
KEY SUPPLY CHAIN CHALLENGES OF OMNICHANNEL RETAILING
NOTE: Deloitte (2015) identified three key areas of omnichannel retailing challenges, including return on marketing spend, the ever changing payment solution landscape, and increased supply chain complexity. This literature review focuses on “supply chain” areas. It is noted that supply chain challenges are compelled primarily by shifts in customer preference and are manifested itself in various supply chain areas.
Demand Planning and Forecasting Challenges
Lack of understanding of purchase journey. Most retailers still do not fully understand the omnichannel purchase journey and consumer’s different routes to purchase. For example, data limitations make it difficult to track consumer behavior across channels (Geddes, Williams, and Guthmann 2014). Difficulties in obtaining real-time demand signals across channels. In a world where the store is the only destination, retailers built their demand assumptions around the idea that the store transaction is a fair signal of demand. In omnichannel retailing, however, the store is no longer the only buying destination that can capture demand (Baird and Kilcourse 2013). Omnichannel retailing complicates demand planning and forecasting due to difficulties in obtaining real-time demand signals across all channels (Cascone et al. 2015).
Difficulties in data management and analysis. Omnichannel retailing complicates demand planning and forecasting due to difficulties in synchronizing data that are captured across all channels and at various points in the journey to account for timing differences, and holistically analyze impacts on planning (Cascone et al. 2015). Cracking the code of early demand signals. Consumers’ activities in the digital space have the potential to signal demand intent long before a customer ever pushed the “buy” button. It is more important than ever that demand planning needs to look much earlier into the buying process to understand customer buying intentions. While retailers may not have yet cracked the code on interpreting the role that online searches, ratings and reviews, and page visits may mean to demand forecasts, the retailer who figures it out first will have a significant advantage over peers – especially if they can respond to those signals proactively to best position inventory to meet that incipient demand (Baird and Kilcourse 2013). Online vs. offline performance metrics. Also vital is the capability to track and use the data captured for performance measurements. A recent survey showed that many
Page 17 of 69
European retailers continue to look at such output metrics as net sales and average order value, even in their online operations, rather than the input metrics that truly influence success, such as customer retention rates, Web and mobile traffic volume, time spent on site, and customer conversion (Bellaïche, Chassaing, and Kapadia 2013).
“Endless Aisle” Assortment and Inventory Challenges
Right assortment for the right channel complexities. As consumers increasingly cross channels on their way to a purchase, retailers must be able to enable an “endless aisle” assortment to consumers (Baird and Kilcourse 2013). Making one’s full in-store assortment available through e-commerce might seem desirable, but it can easily undermine profitability. However, getting the right assortment for the right channel is highly complex. Some products may simply not be suitable for offering online – either because the consumers that frequent that channel will not buy it, or because the fulfillment challenges will erode margins beyond an acceptable point (Bellaïche, Chassaing, and Kapadia 2013; EY 2015). Many retailers are starting to realize that they need to think much more strategically about the right assortment for the right channel. Considering each product’s potential growth, margin potential, and fit with the company strategy, smart retailers make decisions, for instance, whether the same assortments should be offered online and offline, how much overlap to include among channels, and what kind of exclusives work best in each channel (Bellaïche, Chassaing, and Kapadia 2013; EY 2015). Inventory management complexities: Visibility and Integration. Endless aisle may well imply endless inventory models and associated complexities of managing inventory (Baird and Kilcourse 2013; Cascone et al. 2015). Primarily, retails must develop a 360° inventory visibility – on-hand, on-order, and in-transit – as it becomes a prerequisite to the omnichannel retailing model (Baird and Kilcourse 2013). Integrate inventory across channels also requires significant technology investment and may also require a review of the existing inventory allocation across channels, inventory positioning in the supply and distribution network, and inventory ownership model (Baird and Kilcourse 2013; DHL 2015). Retailers that operate in an omnichannel environment without effective cross- channel inventory management may encounter one of several scenarios (Cascone et al. 2015): Orders go unfulfilled (stock outs), leading to lost sales, customer dissatisfaction, and lost market share. Expedited freight charges to reposition inventory. Inventory is excessive as each channel holds inventory in silo for fear of not meeting customer demand within its own channel. Suppliers reduce the amount of product allocated or manufactured due to lack of confidence in sales plans and fear of financial losses (e.g., inventory obsolescence).
Page 18 of 69
Cost of Order Fulfillment Challenges
High fulfillment costs a key contributor to profitability challenges. As shown in Figure 12, profitability challenges are more acute in omnichannel retailing (a varying degree, depending on fulfillment options made available to shoppers) than in traditional brick- and-mortar retailing. According to 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity, the average revenue for brick and mortar was 63 percent, far above online and mobile (24 percent), and call center and catalog (15 percent) (Ames 2015). A number of factors contribute to these cost and profitability challenges.
Figure 12/ Profitability Challenges for Typical Retailer with 30 Percent Gross Margin
Source: Thomas (2015)
Anywhere-anytime fulfillment expectation. Prior to omni-channel, many companies placed their focus on building large DC whereby suppliers shipped directly to each DC within a customer’s network. In a single-channel DC to store environment, investing in large DCs was a viable strategy as retailers could consistently replenish store shelves with scheduled deliveries. However, as channels increase and customers are seeking immediate gratification from their purchases, with continued pressure to offer free or very low cost shipping for online purchases. More time-sensitive options are required above and beyond traditional DC to store (or consumer) logistics (Cascone et al. 2015; SupplyChainDigest 2015). Complex digital order profiles: High cost of piece picking in DC operations. E- commerce orders have a different profile from store orders as depicted in Figure 13.
Page 19 of 69
Digital commerce orders are characterized by relatively smaller, more frequent orders with varying units and lines per order characteristics, and to operate single-item picking (or each picking, piece picking) for orders shipped directly to a customer’s home (Ames 2015; Baird and Kilcourse 2013; Griffin-Cryan and Wall 2015; Mercier, Jacobsen, and Veitch 2012; Michel 2015; Napolitano 2013). Therefore, fulfillment operations for these types of orders require more touches in the DCs, making it more costly and labor intensive, affecting labor costs which is often the single biggest cost within the four walls (Napolitano 2013; Krebs 2015). The overall effect is compounded by the rising expectations of consumers who want their orders delivered quickly, which often requires retailers to do more work in less time (Griffin-Cryan and Wall 2015; Krebs 2015). A case in point, Amazon’s fulfillment costs in 2014 – not including transportation – were a whopping 17.7 percent of merchandise sales ( SupplyChainDigest 2015). Investment in different DC set up and equipment requirements. DCs that so far operate with a straightforward focus on shipping full pallets and larger units to retail stores are neither set up, nor equipped to efficiently handle and ship digital-ordered goods. The processes and automation required for single-item picking (each picking) for orders shipped directly to a customer’s home are much different from the traditional method of picking and packing pallets and cases for store replenishment. (Ames 2015; Baird and Kilcourse 2013; Griffin-Cryan and Wall 2015; Mercier, Jacobsen, and Veitch 2012; Michel 2015; Napolitano 2013). In the face of these complexities, DC operators recognize that not only will better systems be needed, but they will also need a more tech-savvy workforce (Michel 2015). High costs of delivery transportation. Omnichannel retail shipping destinations are multiplying. While shipments from traditional DCs must reach dozens or hundreds of stores for replenishment, those from ecommerce orders must reach thousands or tens of thousands of end customers for order deliveries ( Inbound Logistics 2013). Ecommerce orders also require filling a truck with boxes holding only one to five items, and many thousands of boxes a day, thus increasing the number of deliveries exponentially. In contrast, shipments for retail store replenishments often consist of multiple full cases or pallets prepared for shipment via truckload (TL) or less-than- truckload (LTL) carriers to a retail store (Kourimsky and van den Berk 2014).
Page 20 of 69
Figure 13/ Changes in Order Profiles
Source: Kourimsky and van den Berk (2014) Note: A different number suggests that ecommerce order profile is typically 1.2 lines per order, with about 30 percent to 60 percent one-line orders (Napolitano 2013).
Product Returns Challenges
Increased returns driven by online purchases. While product returns have always been part of the traditional retail landscape, the Internet channel has taken the challenge of returns to a completely new level. Purchases on-line are returned three times more often than merchandise bought in stores, accelerating the pressure for a strategic returns process (Rampant Returns Plague E-Retailers, WSJ, December 2013 cited in O’Brien 2015)— particularly for apparel, home goods, furniture, and other items best experienced in- person. Some customers buy several similar items with the intention of keeping only the one they like best (Terry 2014). Consumers return 9 of every 100 in-store purchases and 30 of every 100 on-line purchases (Rampant Returns Plague E-Retailers, WSJ, December 2013 cited in O’Brien 2015). In another report, more than 60 percent of digital shoppers returned or exchanged at least one item in 2013, up from about 51 percent in 2012, according to Endicia, an electronic postage solution provider (Roggio 2013). Returns are costly for e- tailers in terms of transportation, handling and warehousing costs and account for up to 40 percent of all goods in some industries (Deloitte 2015). In fact, an ill devised returns process results in returned goods piling up at stores, DCs, and inhibiting positive cash flow. Instead of retaining margins through restocking or liquidation, returned goods are heavily marked down, donated, or destroyed (O’Brien 2015).
Page 21 of 69
POINT OF INTERACTION STRATEGIES
Point of interaction stages: Discovery, Evaluation, Purchase, and Post-purchase feedback. Key points of interaction stages are as follows: Discovery: Awareness and Research. During this stage: (1) Awareness – learning about new brands and products, through advertising on TV or online, and (2) Research – finding additional information on product details in stores, or increasingly online and through dedicated apps (Geddes, Williams, and Guthmann 2014). Trial & Test / Evaluation of alternatives. Evaluating the different alternatives. The level of consumer involvement and effort varies, depending on the importance of the purchase and number of alternatives (e.g. low for an everyday product or a regular purchase) (Geddes, Williams, and Guthmann 2014; Johnston 2016). Purchase. Completing the purchase whether in a store, online or through mobile (Geddes, Williams, and Guthmann 2014). Post-purchase feedback. It is common for customers to distribute their positive or negative feedback about the product they purchased. This may be through reviews on website, social media networks or word of mouth (Johnston 2016).
Point of Interaction: Discovery (Awareness & Research) and Post- Purchase
Product information sources: Online and offline access/delivery channels. With access to a range of new technologies and a wide variety of online resources, digitally connected consumers are using multiple sources of product information when shopping, including in-store displays, retailer websites, online review sites, online marketplaces (e.g. eBay), and social media (Bell, Gallino, and Moreno 2014; Geddes, Williams, and Guthmann 2014). Online remote access: Best for products with limited nondigital attributes. When retailers operate in online channels, this dictates that they give customers information about the products through some remote means, such as a catalog or a website. This form of information delivery is most suited to products containing few, if any, “nondigital” attributes. A nondigital attribute — for example, the fit and feel of apparel and related categories or the taste and texture of products — is difficult to fully observe and assess without a physical inspection. Uncertainty about nondigital attributes is a key barrier to consumers’ willingness to buy online and is an especially important deterrent for first-time online purchases. Once a consumer has experience with a brand or product, he or she may be willing to rely on purely online information for subsequent online purchases (Bell, Gallino, and Moreno 2014).
Page 22 of 69
Offline direct access: Best for products with significant “high-touch” elements, important service requirements or significant nondigital attributes. When companies operate in the “offline” physical-store channel, they give customers direct access to product information via physical access to products. This method of information delivery is especially well-suited to retailing products that have significant “high-touch” elements , important service requirements or significant nondigital attributes (Bell, Gallino, and Moreno 2014).
Personalized Marketing and On-the-Go Promotion Trends
Omnichannel marketing and promotion: Relevance, customization, and personalization are key. The myriad channels available to retailers require that they develop new customer-relationship-management, marketing, and promotion capabilities. While retailers differ in their approaches and channels used to marketing and promotions, they agree that relevance of the offering, customization, and personalization are important in the new connected environment (Geddes, Williams, and Guthmann 2014).
Targeted promotions and loyalty program based on well-defined target customer segments. Companies with great customer experiences have a clear focus on specific and well-defined target customer segments , whose members share the same values as the brand and are aligned with the brand’s marketing goals (Bjørnland et al. 2015). Targeted promotions and effective loyalty program are established accordingly to drive traffic and margin among a the most profitable customers, and build relationships with them (Chugani et al. 2013). The following are a few examples of targeted promotions and loyalty programs in practices. On-the-go promotions. “On-the-go” promotions are incentivized coupons that can be redeemed in store via a phone or tablet and are targeted to the location when people come in close proximity to the store. Adopting this promotion approach, leading retailers are using location recognition with customers that have enabled it, and are retaining purchase history across mobile, web, apps and loyalty cards, for customers that have signed up with the retailer functionality. This customer insights database allows the retailers to inform of services/offers of potential interest to the customer and triggers targeted offers when the customer enters specific geo-fencing codes (pre- defined locations near or in store). This enable personalized promotions that increase the chance of getting the customer to visit the store (DHL 2015; Geddes, Williams, and Guthmann 2014). Viral marketing. A specialty retailer using mobile apps targeted at dedicated consumers in its category as a way of developing community and viral marketing —a
Page 23 of 69
program that has generated a six-figure membership base with more than half of its members visiting the company’s site multiple times each week (Bellaïche, Chassaing, and Kapadia 2013). Real-time social-media promotions. Even more sophisticated forms of targeting will likely soon emerge, including those that use new mobile technologies to reach out to users in real time. Imagine, for example, receiving a message, or even coupons, for an energy drink from Twitter moments after tweeting, “just finished 10-mile run” (Bellaïche, Chassaing, and Kapadia 2013).
Social Media Retailing Trends: Influence during Discovery and Post-Purchase
Retailers’ uses of social media: Trends and development Provide information and drive business to other shopping venues. Retailers often used social media to promote new products, and to enable consumers to find additional information or videos with advice and suggestions (Geddes, Williams, and Guthmann 2014). Thus, social-media sites can be used to provide near continuous input from multiple sources as consumers move from becoming aware of a brand or product, to gathering information, to making a purchase, and, ultimately, to providing feedback to others through those same social networks. Currently, the biggest benefit of social media, especially in the near term, is likely to be its ability to drive business to other shopping venues —the most important of which is a company’s own e-commerce site or sites (Sayre 2013). Track customer sentiment. Many companies now use social media to monitor customer sentiment and, where possible, take corrective action to recover any negative customer experience. Example: Tesco has formed a separate social media business unit and hired experienced customer service agents with social media skills. Tesco uses a sentiment tracker to monitor positive and negative comments, and leverages social media to proactively respond to customers and foster better customer relationships (DHL 2015). Social commerce development. This new phenomenon of social commerce – the convergence of social media and e-commerce – is set to accelerate. Facebook recently announced the use of payment platforms and functionality to talk to customers via its Messenger platform. Google is working towards establishing a payment channel which will save customers having to go to a different site to purchase products located with the Google search engine (DHL 2015).
Page 24 of 69
Point of Interaction: Evaluation and Purchasing
Online store limitations during evaluation of alternatives and purchasing. When it comes to product trial and testing, there is a clear preference for and benefit of physical stores over online counterparts. Immediacy, ease, and accuracy of testing are all cited as reasons for preferring in-store trial (Brown, Moriarty, and Mendoza-Pena 2014). When it comes to purchasing, the Internet cannot provide the immediate gratification of instant ownership (Bellaïche, Chassaing, and Kapadia 2013). These advantages are especially the case as search costs decline when the price difference is minimal and products are in stock (Brynjolfsson, Hu, and Rahman 2013).
Pure-Play E-retailer Strategies: Developing Physical Presence
Pure-play e-retailer strategies: Developing physical presence. Recognizing the limitations of online stores (described above), many pure-play dot-com retailers are beginning to invest heavily in the physical space. Examples are eBay opens kiosks in San Francisco and New York; Athleta, Boston Proper, and Amazon.com has experimented with pop-up stores; and Kiddicare and Screwfix in the UK and Bonobos in the US opened physical stores (Bellaïche, Chassaing, and Kapadia 2013). In fact, offline presence comes in various forms as follows: Inventory-only showrooms. Pure-play e-retailers without physical stores are experimenting with inventory-only showrooms that are third-party locations where customers can visit just like regular retail stores and then have the product fulfilled via delivery just as if they had ordered online. Consumers can touch and feel the merchandise before committing to a purchase. Benefits are increased website sales that had their origin in the showroom, and lower rates of returned products. Example: Warby Parker.com (Bell, Gallino, and Moreno 2014). Guideshops. Offline “guideshops” are relatively small (typically about 1,200 square feet), high-service locations that provide sufficient inventory for the customer to try on, but not to buy at the store and take home immediately. That is, they utilize online fulfillment in the same way as inventory-only showrooms. Example: Bonobos.com (Bell, Gallino, and Moreno 2014). Temporary or “pop-up” or movable stores. Short-term pop-up retail store is evolving rapidly and provide benefits for retailers starting as pure-play e-retailers similar to using fixed inventory-only showrooms. Warby Parker, for example, has a retrofitted school bus that traveled throughout the United States for several months, making stops in numerous cities and towns. It is found that in locations where the bus stopped, sales increased, both in total and through the website, implying that pop-up stores boost both
Page 25 of 69
sales and awareness. Example: Warby Parker.com (Bell, Gallino, and Moreno 2014), Amazon.com (Brown, Moriarty, and Mendoza-Pena 2014).
Brick-and-Mortar Retailer Strategies: Developing Online Presence
Traditional retailer strategies: Developing online presence. Traditional retailers’ strategies in this stage include achieve broad presence across own and third-party online sites (e.g. websites, online marketplace, and social media) to maximize opportunities to showcase the brand through consumers’ purchase journey (Geddes, Williams, and Guthmann 2014). Standard retail websites. Many traditional retailers have established websites to develop an online presence, offer an expanded merchandise selection not available in stores to match the online retailer’s depth of assortment (Amazon lists more than 2,800 SKUs of facial moisturizer, for example) (Chugani et al. 2013). For some retailers for whom the store remains at the core of their strategy, they indicated a preference for employing websites and apps with a “catalogue” function , used to raise awareness of the brand and product range, with the ultimate objective of driving more customers into their stores (Geddes, Williams, and Guthmann 2014). This approach, ROPO (research online, purchase offline) or reverse showrooming, helps traditional retailers increase traffic and sales in their physical stores (Bell, Gallino, and Moreno 2014). Others use retail websites to display merchandise and allow consumers to buy products online. An increasing number of retailers use the Internet to develop targeted email lists, sell merchandise, deliver special promotions, and support customer service. Companies may refer consumers to retail websites through other advertising vehicles, such as catalogs, social media, direct mail, or mass media (Hoover’s 2016). 10 Online marketplace. While the concept of the marketplace has been around for decades in vehicles like the “classified ads” in the Sunday newspaper, only recently has their digital counterpart become a critical retailing channel. Amazon’s marketplace saw 25 percent compound annual growth rate (CAGR) while eBay and FlipKart are growing in emerging markets. Marketplaces can be a significant compliment to standard e-commerce sales used by many US and European retailers to expand in emerging markets; however, marketplaces can be risky if they negatively affect the quality of product, customer presentation, accuracy, and service (Kumar and Hu 2015). Mobile websites. According to CrossView’s 2013 Cross-Channel Readiness Study , mobile sites are becoming more full featured reflecting an understanding that customers are increasingly shopping from their mobile devices. Features that saw the biggest increases across the retailers surveyed include: (1) Access a pending order via mobile –
10 Hoover’s. 2016. “Retail Sector.” Hoover’s.com
Page 26 of 69
up 49%, (2) In-store pickup – up 48%, (3) View of whether product is in stock at a local store – up 38%, (4) Mobile marketing and promotions – up 30%, and (5) Make a purchase – up 21% (Meacham 2013).
Innovations in Evaluation of Alternative and Purchasing
Digitally enhanced in-store shopping experience. From a customer engagement perspective, stores are evolving to providing a digitally enhanced shopping experience . Leading retailers are already developing a variety of strategies in order to embrace the opportunities created by omnichannel retailing. These strategies include the use of the store in new ways, such as (Geddes, Williams, and Guthmann 2014): Real-time in-store communication. Many retailers are looking at leveraging mobile phones for real-time in-store communication with customers. Increasingly, retailers are using beacons to recognize customers as they enter the store; these detect nearby smartphones and give the sales staff relevant information (e.g., data on the customer’s purchasing behavior). Advertisements, coupons, and other supplementary product information can be transmitted to in-store screens located near the customer, and may also be used in point-of-sale systems. Retailers also gain vital in-store customer information, particularly on how shoppers maneuver through the store (DHL 2015). In-store robot. Lowe’s in-store robot pilot project installed robots to greet consumers at the door, field product inquiries, and escort shoppers to the exact in-store location of the merchandise. They provide product and real-time inventory information and instruct video screen interfaces. The robots speak multiple languages, and supplement the role of store employees. The technology helps to improve customer experience while ensuring the cost-effective and consistent delivery of personalized assistance services in large stores (DHL 2015). As another example: Denim apparel shop Hointer in the United States has its “Whoosh” fitting room powered by robots and the stores’ mobile app. By downloading the Hointer’s app on the shopper’s android or iPhone, the shopper can try on clothes and place them in a virtual shopping cart. The clothes in the shopping cart arrive in the dressing room within 30 seconds. If the clothes don’t fit, the shopper can place the clothes in a particular section and request a different pair on their phone. The clothes that don’t fit are simultaneously removed from the shoppers’ virtual shopping cart. The apparel can be purchased while the shopper is still in the fitting room by swiping a credit/debit card on the tablet kiosk’s attached card reader. There is also a similar tablet within the store (DHL 2015; Retail Innovation 2015 11 ).
11 Retail Innovation. 2015. “US retailer Hointer uses robots to deliver your selections to the fitting room.” http://retail-innovation.com/us-retailer-hointer-uses-robots-to-deliver-your-selections-to-the- fitting-room/
Page 27 of 69
Virtual reality store (augmented reality and virtualization). UK retailer Tesco opened a virtual grocery store in a South Korean subway station. Commuters can shop by scanning QR codes on their smartphones from a huge digital display that looks like a series of supermarket shelves. After the web-based shopping-cart transaction and payment are completed, the products are delivered to the user’s home within the day (Kourimsky and van den Berk 2014). Tesco’s vision for the future is its prototype of a virtual reality supermarket in which customers can browse using Oculus Rift virtual reality eye gear. Although customers cannot pick anything off the shelves, they are able to travel through the store and look at the brands and products offered. Tesco sees this kind of augmented reality and virtualization as an aid to online purchasing (DHL 2015). Virtual fitting rooms on websites. “Fitting rooms” placed on websites are technologies that provide online customers with accurate fit information and size recommendations in advance of any buying decision (Bell, Gallino, and Moreno 2014). Examples: Ikea bridges the gap between the real and virtual worlds by offering apps that let users visualize furniture in their own rooms. United Arrows, another Japanese retailer, launched a website called UA Style Share. Shoppers can dress their personal “avatars” in outfits and share them with friends through Facebook and Twitter (Mercier, Jacobsen, and Veitch 2012).
POINT OF FULFILLMENT STRATEGIES
NOTE: Based on literature content analysis, three key areas of omnichannel fulfillment are coded and highlighted in this section, including the followings: Fulfillment network configuration. These focus on network design. Fulfillment node and link operations. These include three elements, namely delivery or collection points, fulfillment locations, and last-mile transportation. Inventory management. This focuses on inventory management practices.
Fulfillment Network Configurations
Internally Managed vs. Outsourced Fulfillment Facilities: In-house Dominated
Ecommerce fulfillment facilities: In-house dominated. According to 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity, more than half (55%) of respondents said they relied on their own corporate (internally managed) distribution
Page 28 of 69
centers to perform the fulfillment end of their e-commerce operations. For others, 22 percent used sites operated by third-party logistics service providers (3PLs), while another 23 percent said they are using both (Ames 2015). Similar results are found in Commonwealth Supply Chain Advisors survey of 18 of the world’s top retailers. Majority of responding omni-channel companies (78%) managed their ecommerce distribution internally, while 22 percent outsourced to third-party logistics providers (3PLs) as partners in e-commerce (Hobkirk 2015). Ecommerce volume key factor: Low in-house, High outsource. For traditional DCs servicing their own stores, adding e-commerce to the fold can be a daunting undertaking. The decision to outsource will depend on online sales volumes. When volume is low , it makes sense to keep it in-house —one inventory, lower costs. As volume increases , however, outsourcing to a third-party logistics provider (3PL) becomes more attractive . Specialized 3PLs focused on e-commerce often have the material handling equipment, systems, experience, and expertise to more efficiently process e-commerce orders than many of their own clients can do in-house (Napolitano 2013).
Multi-tier Fulfillment Network Design
Network tiers: Factoring online orders into the store replenishment flow. There are five levels that need to be considered when creating a network plan. How retailers employ them to support store operations is dependent upon the retailer type. A big box retailer should be expected to employ its background differently than a mall-based fashion chain store (Tompkins International 2014). Level 1: Fulfillment Centers (FCs). FCs have all stock-keeping units (SKUs) that the retailer wishes to stock. It also fulfills customer orders, ships directly to the customers, and ships to stores for the stores to ship to customers or for click-and-collect. These networks often only have one or two FCs (i.e., the lowest cost network) but a significant number of customers will require shipping of 3 to 5 days or more (Tompkins International 2014). Level 2: Regional Fulfillment Centers (RFC). RFCs are facilities that usually carry a subset of the total SKUs that a retailer wishes to carry. This subset usually has high volume SKUs or SKUs that may be regional in nature. Each RFC would fulfill orders for customers in its service region, as well as ship to stores for store shipment to customers or click-and-collect. Orders for SKUs that are not stocked in the RFC would be fulfilled by the FC (or from a vendor) and shipped directly to the customer or shipped to the RFC for consolidation with other SKUs for a particular customer. Adding RFCs to the network will require more inventory but many more customers can have their orders delivered in 1 to 3 days, plus outbound transportation costs will be less (Tompkins International 2014).
Page 29 of 69
Level 3: Local Fulfillment Centers (LFC) with or without customer pick-up. LFCs take the regional concept to the local level. LFCs would have an even smaller subset of high volume SKUs. Orders for local customers would be fulfilled by the LFC and delivered to the customer by local carriers. If a customer orders SKUs that are not stocked in the LFC, then the FC, RFC, or vendor would fulfill those SKUs and ship directly to the customer or to the LFC for consolidation with the rest of the order. Using LFCs provides significantly faster customer delivery for much of the customer demand (usually next day) and outbound costs will be less, while overall fixed costs and operating costs are typically higher. Some LFCs also include customer pick-up . Allowing customers to pick up orders will require additional capabilities such as parking, a front counter, payment processing, etc. (Tompkins International 2014). Dark store concept. A dark store is a large facility that resembles a conventional supermarket or store but is not open to the public, housing goods used to fulfill orders placed online. It is a place where supermarket employees only – called ‘pickers’ – collect the items for people’s online grocery shopping and load them into delivery vans. Members of the public never see inside (Baraniuk 2015). The dark store concept has developed significantly in the UK and France, and is also present in Germany and the Netherlands, among other countries. Typical UK dark stores carry a full or extended supermarket product range, and most retailers’ first dark store was effectively a larger version of a store picking operation with familiar product layout and systems. The level of sophistication of dark stores varies across the UK retailers, but the progression towards automation is well demonstrated by Tesco which has increasingly automated each new dark store it has opened. In addition to offering increased order processing capacity, dark stores can offer additional benefits including: (1) Improved availability due to lack of competition from in-store customers, (2) Improved efficiency through use of specialist equipment, bespoke layouts, picking technology and potentially mechanisation/automation, (3) Range extension due to increased storage capacity, (4) Improved transport efficiency due to consolidated demand (Treasure 2014). Level 4: Stores (large vs small stores). Many progressive retailers are beginning to use their stores to fulfill online orders. Using stores for fulfillment often results in the fastest customer delivery (same-day or next-day at the latest), however, it may require modifications to the stores, especially the backroom. It will also require additional systems and people to handle fulfillment (Tompkins International 2014).
Page 30 of 69
Fulfillment Node and Link Operations: Delivery Locations, Fulfillment Operations, and Last-mile Delivery
Delivery Locations: Click-and-Deliver and Click-and-Collect
NOTE: For clarification, CLICK-AND-DELIVER model does not involve customer picking up the orders. Rather, the orders are delivered to the destination as indicated by the customer. CLICK- AND-COLLECT model, on the other hand, requires that customer perform the task of picking up orders from pick-up/collection points as chosen by the customer.
Click-and-deliver variations Delivery to home. Home delivery is the most typical method of delivery for online purchases (DHL 2015). Delivery to drop box. Innovation beyond the parcel/delivery locker concept (see click- and-collect variations below) has achieved a more personalized solution, the Parcel Box or Drop Box . Located next to the consumer’s home, this drop box provides a convenient location for parcel delivery and pick-up (DHL 2015). Delivery to car trunk. A recent innovation is to deliver parcels into a car trunk. Via a smart mobile application, the delivery agent receives the exact location of the car along with an access code to its trunk. CarDrops.sg already offers this service in Singapore, and DHL, Amazon, and Audi are piloting car trunk delivery in Germany. This requires the installation of Internet of Things-enabled doors and locks (DHL 2015).
Click-and-collect variations. The emergence and growth of click-and-collect retail—which allows shoppers to order an item online and then go get it at a nearby store location or pick- up point—is evidence of the power of convenience in the omnichannel world (Mercier, Welch, and Crétenot 2014). For many shoppers, the click-and-collect experience offers a more convenient mix of speed, quality, and flexibility than either traditional shopping or standard home delivery. Retailers are exploring variations on “click and collect” formats for items purchased through non-store channels (Bellaïche, Chassaing, and Kapadia 2013; Geddes, Williams, and Guthmann 2014) as follows: Warehouses/fulfilment facilities as pick-up location. Warehouses can be used as a pick-up location for online orders. Reports indicate that Amazon may launch pick-up points for Prime Now orders at its fulfillment facilities. Walmart is also piloting this model as a free service to its customers (particularly senior citizens, people with disabilities, and parents with young children). Walmart customers can place their orders online anytime from two hours to three weeks in advance, and then drive up to the warehouse kiosk ; a Walmart associate brings their order out to the car. As well as
Page 31 of 69
providing added customer convenience, this encourages customers to use Walmart’s digital platform, and the company gathers valuable information from customer searches and shopping habits (DHL 2015). Retail store as pick-up location. The customer purchases items online and then has the option to pick them up at the retailer’s physical location of the customer’s choice. Checkout may occur before (click-and-collect) or after (reserve-and-collect) the customer views the item(s) in person. In the latter case, the customer reserves an item online and picks it up later and pays for it at a physical store. This model gives customers flexibility and control over their purchase because they are able to choose a convenient location from which to pick up their item. The main challenge is to make the process a seamless solution, both for the retailer and the customer. A strategy must be developed around the product assortment . Will the customer for example be able to choose from the total assortment or only specific bricks-and-mortars assortments to keep down delivery costs to the retail location? (Deloitte 2015). Delivery lockers as pick-up location. Delivery lockers are placed in convenient locations such as train stations and grocery stores and are only possible to open using a code given to the customer in connection with a purchase online. Benefits of delivery lockers are that they automate and simplify the process of item collection and drop-off on a 24/7 basis. It is also convenient for the customers as they are also able to return items using the lockers. The downside of lockers is that they are not very dynamic and this may be a challenge during periods of high sales (Deloitte 2015; DHL 2015; Geddes, Williams, and Guthmann 2014).
Fulfillment Operations: Store-based and DC-based Models
NOTE: Store-based and Warehouse/DC-based fulfillment locations. Retailers are taking one of two broad approaches to online fulfillment: Store-based fulfillment locations where orders are fulfilled at physical retail stores, and Warehouse/DC-based fulfillment locations where orders are fulfilled at warehouses/DCs. Variations of these two approaches are highlighted in this section.
Store-based Fulfillment Models
Network optimization for store-based fulfillment. Physical stores have emerged as nodes for close-to-demand fulfillment for online orders, with Macy’s, Walmart, Belk’s and many other retailers moving aggressively to build out such capabilities (Kumar and Hu 2015; SupplyChainDigest 2015). As a result, planning and designing the right retail distribution network has changed as backrooms are viewed as key parts of the retail distribution network (among DCs, fulfillment centers, parcel consolidation centers, and other facilities),
Page 32 of 69
not part of the store network (Tompkins International 2014). Network optimization is required to determine the right number of hubs and stores for the network, where those should be located, and how inventory should be positioned to meet both cost and customer service expectations (Strang 2013). Store selection: Size and fulfillment capability factors. Store fulfillment can vary by store type. Low end stores may process 10 to 15 orders a day with minimal technology support and small backroom capacity. At the other end, larger stores could have the large backroom capacity to stock mixes of SKUs with high volume of ecommerce items and ship hundreds of orders. Large format store acts as a “localized” DC for smaller store, taking the role of forward replenishment facilities in store replenishment. These larger stores require a mini-fulfillment center in the store’s backroom and forward- shipping systems that deploy full warehouse management capabilities. They may even leverage parcel manifesting technology , pushing the order down to the store where store employees can go out with a paper ticket to pick items off the store shelves and immediately prepare them for shipment (Napolitano 2013; Tompkins International 2014). Big box retailers are looking to leverage large supercenters as forward replenishment facilities for smaller stores within a geographic area. This will necessitate cross-dock capabilities within the backroom of large supercenters, as well as cross-store replenishments . Store backroom can be attached or offsite the stores (Tompkins International 2014). Thus, store capabilities vary, depending on fulfillment- related activities performed for different fulfillment options offered to customers (see Table 3). Sear store-facing DC network example. Sears installed a paperless picking system in all its stores and worked with UPS to systemically select optimal store fulfillment locations. If one Sears store did not have a specific product for immediate delivery, the system can now pull from another store’s inventory to ensure consistent service. Store- facing DC network can expand dynamically to keep pace with local customer demand and support on-line customer fulfillment (Burnson 2015).
Store-based fulfillment advantages and challenges. Summary of general store-based fulfillment advantages and challenges are provided in Table 4.
Table 3/ Fulfillment Service Options and Corresponding Store Fulfillment Operations
STORE-BASED FULFILLMENT CAPABILITIES Options to Customers Variations of Store Fulfillment Operations Buy online, pick up in - Buy online, ship to store (BOSS) : Picked at DC . Centrali zed store (BOPS) click-and-collect fulfillment in distribution centers involves order being picked at DC and shipped to store for customer
Page 33 of 69
STORE-BASED FULFILLMENT CAPABILITIES Options to Customers Variations of Store Fulfillment Operations pickup. Pros: Store not required picking and shipping capabilities; Concentrates and simplifies the inventory management challenges. Cons: Adds the order-to-pick-up cycle time; Legacy DCs typically designed to pick large orders for stores ill equipped to fulfill customer online orders; Adjustments to the website and order management system necessary to allow the consumer to select the desired store (Mercier, Welch, and Crétenot 2014; Strang 2013). Picked at store and held for customer pickup. Pros: Store not required shipping capabilities; Shorter order-to-pick-up cycle time than BOSS (Bell, Gallino, and Moreno 2014). Cons: Store require picking capabilities; Work processes must be created to help associates separate merchandise for customer pickup from items sold in-store; Adjustments to the website and order management system necessary to allow the consumer to select the desired store (Strang 2013). Buy online, ship to Pick and ship from store (standard service). Many customers retailers have decided to expand store fulfillment to include ship-to customers and are basing this on their NOTE: According to internal store pick-up processes. These online orders Deloitte survey (see Figure can be picked from the back of the store (storeroom) or 14 ), ship from store from the front/on-floor (showroom). Picking from the activities are currently not store floor appears to be a common theme in store fully offered by most fulfillment. However, continued growth in store leading retailers. fulfilled customer-direct orders will result in larger backrooms with a clearer boundary line between floor and back stock (Ames 2015; Tompkins International 2014). Pros: Shorten the order-to-delivery cycle time; Possible inter-store (hot run) replenishment. Cons: Store required both picking and shipping capabilities; adoption of fulfillment technology required to improve efficiency and costs; Order management system must have the correct “ship-to” address; Changes in outbound shipping processes to leverage the existing store replenishment network may be required; Shared inventory visibility critical (shared inventory as items in DCs and across all stores are now visible and available to be ship directly to a customer’s home (Ames 2015; Kumar and Hu 2015; Strang 2013). High velocity pick and ship from store (next-day or same-day service). More advanced options of pick and ship from store (Strang 2013), requiring that the item
Page 34 of 69
STORE-BASED FULFILLMENT CAPABILITIES Options to Customers Variations of Store Fulfillment Operations ordered is in stock in a bricks-and-mortar store and is delivered the same day to the customer (Deloitte 2015). Strong candidates for same day delivery are grocery, mobile devices, specialty products, and high margin products (Kumar and Hu 2015). Cons: Stores required necessary high- velocity picking technologies, channel agnostic inventory, broad visibility into consumer profiles, and order management capabilities to fulfill same day and next day online orders (Kumar and Hu 2015; Strang 2013). Buy online, pick up Picked at store and held for customer pickup curbside. curbside Another emerging technology is geo-fencing . This technology creates a virtual perimeter around the store and knows when smartphones enter or leave the area. Sears is now experimenting with curbside fulfillment , where people can drive to an assigned parking spot and store personnel will come to their vehicle to deliver product bought on-line (Bentz 2015).
Figure 14/ Fulfillment Methods Used by Leading Retailers (Deloitte Omnichannel Survey)
Source: Griffin-Cryan and Wall (2015)
Page 35 of 69
Table 4/ Summary of Store-based Fulfillment Advantages and Challenges
STORE -BASED FULFILLMENT PROS AND CONS Advantages Challenges Increase inventory turnover. Ship-from- Higher cost of fulfillment. Higher cost of in-store fulfillment store program leverages store merchandise compared to that of the DC (Strang 2013). Belk’s department stores, to fulfill online orders help increase for example, has found that store fulfillment costs around $1.00 per inventory turnover. Example: The US order, versus just 48 cents when performed in the DC retailer Nordstrom saw annual inventory (SupplyChainDigest 2015). This is due to various challenges listed in turnover rise to 5.41 from 4.8 with ship- this table. from-store program (DHL 2015). In-store fulfillment technology investment required. Methods Reduce lost sale. When a distribution stores used to communicate order information to the workers center serving the eCommerce channel who picked orders are largely paper-based method, suggesting incurred an out of stock of an item, that stores lag well behind warehouses and DCs when it comes normally that meant a period of lost sales to the adoption of fulfillment technology (Strang 2013). until the SKU was back in the DC. But when However, a growing number of retailers have implemented in-store store inventory can now be tapped, the technologies to provide capabilities such as maintaining inventory percentage of stock outs and orders that locations and quantities, creating optimized “pick paths,” cannot be filled often drops dramatically supporting picking instructions on wireless or voice-based systems, (SupplyChainDigest 2015). and other capabilities ( SupplyChainDigest 2015). Reduce markdown. By fulfilling online Backroom space challenges. Every store that is eligible for ship- orders from stores with merchandise from-store needs processing space to pack and ship orders (NRF and sitting in stores (stagnant inventory) or FitForCommerce 2015). Traditional stores typically have limited out-of-season that would otherwise be backroom space (it is usually devoted to merchandise and store marked down, retailers benefit from being supplies) (Cascone et al. 2015). Using an off-site backroom can add able to move products on markdown at a space and lower facility costs (e.g. outside city locations) but much higher gross margin rate (DHL 2015; introduces additional transportation and handling costs (Tompkins Griffin-Cryan and Wall 2015; Strang 2013). International 2014). The markdown avoidance strategies are It is becoming such a margin driver that even Store-level inventory balance on hand accuracy issues. the cost of shipping from stores furthest inherently more difficult to manage inventory accuracy at stores away is becoming seen as comparatively than at DCs due to regular movement and handling of merchandise within a store (Fenwick 2013; Griffin-Cryan and Wall 2015). Store- negligible (Fenwick 2013). level inventory accuracy commonly ranges between 50% and 80% Increase in-store sales. Most retailers with (Fenwick 2013), in line with estimate by BCG at 60 percent (Mercier, pick-up in store capabilities report that a Page 36 of 69
STORE-BASED FULFILLMENT PROS AND CONS Advantages Challenges high percentage of the time those Welch, and Crétenot 2014). Store -level inventories include customers purchase additional items from backroom stocks as well as on-floor or shelf items. Cycle counting the store shelves to go with the on-line balances (i.e., the net of the previous balance with the recent order ( SupplyChainDigest 2015). receipts, sales, and returns) are not typically maintained separately Lower capital requirement than for the backroom and shelves, so shelf replenishment depends on warehouses/DCs. The store-based the store personnel’s memories, guesswork, and hunting for stock approach requires limited capital (EY 2015), that is not there (Tompkins International 2014). Omnichannel although this depends on capabilities and fulfillment only complicates this issue as the inventory must cover functionalities of the stores as described both traditional store demand and online fulfillment (EY 2015; earlier. Fenwick 2013). Allow scalability. The store-based Inventory visibility challenges. Implementing in-store fulfillment approach is scalable. Store backrooms or pickup requires accurate real-time cross-channel inventory data. could be organized as microwarehouses , However, traditional stores typically lack good inventory visibility particularly to stock smaller items, then (Cascone et al. 2015). Significant investment is required in evolve into a showroom , displaying just one merchandising systems to provide a single view of inventory kind of each product with variants stored (merging web, mobile and in-store SKUs) to customers and in an automated storage area nearby, or associates alike (NRF and FitForCommerce 2015). evolve into a dark store (DHL 2015; EY 2015). In-store fulfillment process design. In-store fulfillment of orders Increase speed to customer. Because requires smooth processes (NRF and FitForCommerce 2015). Store stores are generally located closer to the fulfillment process mapping and time studies are vital for retailers customer than DCs, store fulfillment allow to create a detailed chart of the steps required, or distance traveled, to fill orders in the store; how long the picking process takes; and faster order-to-delivery times and/or how much time is spent walking. That can identify areas for process reduce costs for online orders by shipping improvement. Retailers that have undertaken this process in their from the nearest store to the consumer. ship from store operations have identified as many as 180,000 Advanced operations can enable next-day hours of labor savings and $2.5 million in annual cost savings. They or same-day delivery (Fenwick 2013; are also able to re-deploy some labor used to pick orders back to the Griffin-Cryan and Wall 2015; Napolitano sales floor (Strang 2013). [NOTE: See typical store fulfillment 2013; Strang 2013). processes in footnote below.]12
12 Typical store fulfillment processes Customer orders generated. Customer orders can be generated in-store or online and routed to a specific store for order fulfillment (Tompkins International 2014). Page 37 of 69
STORE-BASED FULFILLMENT PROS AND CONS Advantages Challenges Provide a dditional fulfillment capacity. Store employee training and incentive requirements . In-store Another potential benefit of store-based fulfillment of orders requires store employee training and smooth fulfillment is the additional capacity that processes to help employees set aside and pack inventory for brick-and-mortar stores provide as storage customers who buy online (NRF and FitForCommerce 2015). It also and delivery locations. Ship-from-store can requires the right incentives as store employees are not motivated as be used as a relief valve to siphon orders warehouse workers to fulfill online orders slated for customer pick- from the fulfillment center, particularly up or shipping (Cascone et al. 2015; DHL 2015). Rather, time spent during peak processing , deferring or fulfilling orders is often initially viewed as time away from reducing capital investment in building servicing customers (Fenwick 2013). additional DCs required to meet the defined Impacts on in-store customer services. The amount of store labor service-level agreement (Fenwick 2013; required to pick, pack and ship an order cannot be overlooked; it’s Griffin-Cryan and Wall 2015). not uncommon to overwhelm a store’s labor pool (Fenwick 2013). Enable save-the-return concept. For Customer satisfaction in the store may suffer at the expense of stores with pick-and-ship from store online customers unless dedicated store employees are designated to capabilities that also allow order on-line fulfill online orders (Cascone et al. 2015). and return in store, they can ship that returned item to the next customer that orders it from the web ( SupplyChainDigest 2015).
Order picking. The order is picked via a wireless handheld terminal by store associates and can be picked from the floor or the backroom (Tompkins International 2014). Picked order staging for customer pick up. Once picked, the items are brought to a backroom area where they are staged in a specific holding location for customer pick up (Tompkins International 2014). Picked order staging for shipping. Many retailers have decided to expand store fulfillment to include ship-to customers. Items are picked using the same process, and once all the items for an order have been picked and staged in the backroom, the order is downloaded to a WMS or TMS for shipping. Using a wireless device, an associate is directed by the shipping software to pull and pack the staged order. The packed order is then weighed and a combination invoice and shipping label is printed. A packing list and shipping label prints in the backroom where there are special packing workstations designed specifically for customer direct orders. Packed orders are subsequently manifested within the shipping application. Typically, the WMS is not used to manage backroom inventory or support floor replenishment. It is merely utilized to pack, manifest, and ship pick orders (Tompkins International 2014). Page 38 of 69
DC-based Fulfillment Models: Multi-channel DCs Dominated
Types of DC Facilities: Multi-channel DCs Dominated. There are several basic distribution and fulfillment facility types for servicing retail, wholesale, and direct-to-consumer customers, including the followings. Integrated/Multi-channel DCs. Filling ecommerce, store, and wholesale replenishment orders from a single distribution center (Ames 2015; McCrea 2015; Michel 2015). This type of facilities dominates current practices according to three recent surveys. Commonwealth Supply Chain Advisors survey of 18 of the world’s top retailers show that multi-channel DC are practiced by the majority (61%) (see Figure 15) (Hobkirk 2015). Logistics Management’s Annual Warehouse and Distribution Center (DC) Operations Survey shows that the leading strategy for fulfilling multiple channels remains self- distributed from one main DC (see Figure 16) (Michel 2015). 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity show that majority (63%) of respondents fulfill ecommerce orders through a traditional distribution center that also handles ecommerce (see Figure 17) (Ames 2015).
Figure 15 / Commonwealth Supply Chain Advisors survey
Source: Commonwealth Supply Chain Advisors survey of 18 of the world’s top retailers (Hobkirk 2015)
Page 39 of 69
Figure 16 / Logistics Management’s Annual Warehouse and Distribution Center (DC) Operations Survey
Source: Logistics Management’s Annual Warehouse and Distribution Center (DC) Operations Survey (Michel 2015)
Page 40 of 69
Figure 17 / 2015 Annual Survey on Retail Fulfillment Practices
Source: 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity (Ames 2015)
Dedicated/Single-channel DCs. Running separate fulfillment facilities for stores, wholesale, and on-line customers. This can be configured as single or multiple facilities for each channel (Ames 2015; Gibson and Defee 2014; Hobkirk 2015; McCrea 2015; Michel 2015). Third-party DCs: Shipping consolidators & Online marketplace. Fulfilling ecommerce, store, and/or wholesale replenishment orders from outsourced third-party DCs (Gibson and Defee 2014; Michel 2015). Package/shipping consolidators. Package/shipping consolidators combine packages from many different shippers using their own network of consolidation centers into one load that is shipped as a unit to the destinations’ local Post Office. From there, the packages enter the local mail stream and are delivered to their final destination. Using shipping consolidators can help retailers get shipping discounts that they would not otherwise qualify for (e.g. small retailer’s shipping volume). Consolidators can also save time by sorting, picking up, and manifesting packages, as well as offering extra services such as insurance and USPS Tracking. However, packages sent via shipping consolidators do risk longer transit times than shipping with the traditional carriers. Examples of package consolidators are APC, Asendia, DHL eCommerce (domestic and international), Globegistics, iAccessGlobalMail, International Bonded Couriers, International Delivery Solutions, International Mail Service, Inc., Newgistics, Inc., OnTrac International Mail, and UPS Mail Innovations (Weiss 2015). Online marketplace for fulfillment and logistics. Today companies can already access end-to-end orchestration and fulfillment capabilities on web-based enterprise fulfillment platforms . An Expedia-like platform for freight providing instant, online real-time quoting for all legs of shipment. Shippers can generate and book instant,
Page 41 of 69
door-to-door quotes directly online. Shipwire (see Figure 18) is one among many others that provides this type of marketplace. In the future, we could see more and more retailers, manufacturers, and online marketplaces such as Alibaba and Amazon incorporate a logistics marketplace approach as part of the B2B and B2C ordering process. Customers (e.g. retailers, manufacturers) can choose their preferred transportation option and this is factored into the total cost of the product (DHL 2015).
Figure 18/ Shipwire Online Marketplace for Fulfillment and Logistics
Source: DHL (2015)
Online marketplace for warehouse space. The omnichannel business approach requires capacity to be managed across multiple locations with space traded as a virtual asset. It will become the norm to share warehouse space between multiple organizations. Example: Seattle-based Flexe is a first-of-its-kind ‘shared economy’ online marketplace for warehousing space . It connects organizations in need of flexible warehousing capacity with warehouse owners that have available space. A cloud-based software platform enables Flexe customers (goods owners, retailers, and manufacturers) to locate warehouse space (in 20 markets across North America) that best meet their specific needs, and then manage their inventory 24/7, across all facilities, from their desktop. This provides immediate access to warehouse space without committing to a long-term lease (DHL 2015).
Page 42 of 69
Manufacturer/Supplier DCs: Dropship fulfillment. Store and/or online orders are fulfilled directly from manufacturers’ DCs or suppliers’ DCs (Ames 2015; Gibson and Defee 2014; Michel 2015). Hybrid. Combination of the above strategies based on geography and SKU segment (type or velocity) (McCrea 2015; Michel 2015).
Integrated/Multi-channel DC operation trends. Omni-channel trends are driving investments to optimize warehouses and distribution centers as single facilities designed to serve both online and offline, B2B and B2C channels, and are managed as part of a flexible fulfillment network that can easily respond to changing demand (DHL 2015; Krebs 2015). Separated DC space, same inventory pool. Separate channel spaces within the same warehouse and different automation solutions are used to fulfill the varying supply chain requirements of B2B and B2C channels. For increased productivity, the single-line or single-unit orders typical for ecommerce order are processed differently in a batched, high-speed packing operation in a separate area of the facility. Yet, replenishments are from a common inventory shared across channels (DHL 2015; Napolitano 2013). Modernized DCs: Intelligent warehouse system (IWS). Retailers and industrial distributors alike have been making significant targeted investments in automation solutions , especially in mobile computing and data capture technologies. The catalyst behind these modernization efforts is the pressure to meet customer demands for faster order delivery, the associated cost of errors, and high DC labor costs, respectively (Krebs 2015). In fact, an intelligent warehouse system (IWS) handles the entire fulfillment process today. This system comprises two automated storage and retrieval systems (ASRS), three delivery halls, and one distribution center. The IWS covers automated storage, batch picking, automated sorting, delivery and returns processing. As well as ASRS, it includes voice picking, case conveyors, spiral conveyor systems, and cross belt and pop-up wheel sortation systems. A unique barcode identifies each item, enabling accurate storage, distribution, and sales processes. Automation helps to increase fulfillment capacity and shortens lead times (DHL 2015). Various warehouse tools and technologies are employed for omnichannel order fulfillment as shown in
Figure 19 (Ames 2015).
Page 43 of 69
Figure 19/ Technologies Employed for Omnichannel Order Fulfillment
Source: 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity (Ames 2015)
Integrated/Multi-channel DCs pros and cons Pros Labor cost savings. Because e-commerce and brick-and-mortar have different “holiday” seasons, omni-channel retailers must push to get product into their stores in October and November. Then, the e-commerce holiday rush finds them picking, packing, and shipping a high volume of orders for events like Cyber Monday, which occur later in the season (after the goods have been shipped to the brick-and-mortar stores). Additionally, the popularity of gift cards has led many consumers to redeem their presents in January, creating yet a third surge that must be accounted for in the retail and e-commerce channels. Managing these three surges separately requires a lot of labor (Hobkirk 2015). By combining B2B and B2C volumes with fulfillment operations consolidated under one roof, the order profile becomes more evenly distributed (with fewer peaks and troughs), making it easier to spread the
Page 44 of 69
labor pool across different peak periods. The same employees can be used to fill orders as volumes ebb and flow for each particular channel, achieving labor management savings (DHL 2015; Hobkirk 2015). Economies of scale and technology investment. Single fulfillment centers have the greatest concentration of volume to leverage both economies of scale and technology investment (McCrea 2015). This is particularly the case, given that the high costs of labor, mezzanine infrastructure, picking automation, value-added services, HVAC and even parking space are driving up the investment required to in- source and expand e-commerce fulfillment (Fenwick 2013). Simplified inventory management. In terms of inventory management, the shared facility offers simplicity because there is only one stock base. But companies must take decisions about the level of stock that is sent to stores versus being held back for online availability (EY 2015). Cons: Longer times to customers. Single fulfillment centers generally result in longer cycle times to customers (McCrea 2015).
Last-Mile Delivery
Last-mile delivery strategy trends. According to 2015 Omnichannel Retail Index findings, the “last mile” is an as-yet evolving – even nascent – area for retailers where there is much room for improvement (NRF and FitForCommerce 2015). According to 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity, the most popular method for handling “last mile” deliveries was delivery services such as FedEx, UPS, and the US Postal Service (84 percent), followed by drop shipping directly from partners’ DCs (61 percent), 3PL delivery partner (50 percent), and store fleet (40 percent). Not currently in use, crowdsourced delivery services such as Deliv or Instacart, top the list of practice that retailers plan to use in the future (28 percent) (see Figure 20) (Ames 2015).
Figure 20/ Last-Mile Delivery Method Trends
Page 45 of 69
Source: 2015 annual survey on retail fulfillment practices by ARC Advisory Group and DC Velocity (Ames 2015) National courier delivery carriers: Most popular method. National courier delivery services, such as FedEx, UPS, and the US Postal Service, are the most popular method used for last-mile delivery of ecommerce order. Of these, the two largest national parcel delivery companies, FedEx and UPS, account for the majority of the volume of ecommerce deliveries (Griffin-Cryan and Wall 2015; Tompkins International 2014). Package consolidators, which utilize their own network and then hand off packages to the US Postal Service for last-mile deliveries are filling the gap (Griffin-Cryan and Wall 2015). Regional parcel carriers: Growing market. Increases in shipping costs due to growing parcel volumes coupled with the largest parcel carriers’ new dimensional weight freight-pricing formulas are causing many retailers to explore alternative delivery options for certain deliveries rather than simply defaulting to the traditional big carriers (Griffin-Cryan and Wall 2015). Regional parcel carriers —including hundreds of small, independent businesses serving regional areas, and a small number of multi- location regional or national operators—are growing. About 7,000 regional carriers are providing final delivery services. They generally offer lower prices than nationals, and as a result of software companies such as CXT, Vendornet, Datatrac, and others, regional players can offer the same product tracking and capabilities of UPS or FedEx. The evolution of the “regional/local courier industry” and its association, the Messenger Courier Association of America (MCAA), into “regional/local carriers” and its Customized Logistics and Delivery Association (CLDA) illustrates the evolution of the final delivery industry (Tompkins International 2014). Common carrier & Private fleet hybrid. Some retailers are beginning to shift from a common carrier model to a hybrid model that includes a private fleet component (Griffin-Cryan and Wall 2015). Example: This alternative to typical parcel deliveries is in use by Amazon. To control the last mile, and to utilize its massive distribution
Page 46 of 69
centers, Amazon has rolled out its own private fleet of trucks to make deliveries. For Amazon, it creates more flexibility in delivery timeframes and reduces overall shipping costs (as Amazon is no longer paying UPS, FedEx, or the Postal Service for deliveries) (Cunnane 2015). Direct-to-store and Direct-to-customer drop ship deliveries. Direct-to-store and especially direct-to-customer drop-ship deliveries, which enable retailers to offer a broader range of merchandise, have become increasingly beneficial. To help manage these activities, many retailers have started jointly planning inventory deployments with key vendors. They are able to do this by using collaborative inventory planning platforms that give all parties real-time or near real-time access to planning information, such as current inventory levels, expected demand, and expected shipments (Griffin-Cryan and Wall 2015). Crowd-sourced delivery: 3PL crowd sourced, Marketplace crowd sourced, and Retailer crowd sourced. This market is a highly fragmented and evolving supply base, providing ‘on-demand delivery’ services that leverage the existing movement of cars and taxis to deliver parcels. Orders are delivered by drivers either within the next hour or during a customer-selected timeframe (DHL 2015). Players in this market include 3PL crowd sourced (e.g. shutl, deliv), marketplace crowd sourced (e.g. Google Express) (Kumar and Hu 2015), and retailer crowd sourced (e.g. Amazon, Wal-Mart) [NOTE: This last category is discerned from the examples that follow] . Other players are Uber, Lyft, Zipments, LaserShip, Postmates, Instacart, Genco, Newgistics, and Etc. (Tompkins International 2014). Example details below: Deliv uses a smartphone app to alert pre-qualified drivers of a pending delivery. The driver picks up the merchandise from the retailer and delivers it to the customer (Cunnane 2015). Instacart , based in San Francisco, connects personal shoppers with customers to deliver local groceries (Cunnane 2015). Shutl, a British start-up that connects retailers to local same-day courier companies. Online shoppers can receive packages within 90 minutes or choose a one-hour window for delivery. GPS tracking allows consumers to track the progress of their orders on a mobile device (Strang 2013). Amazon is said to be testing a crowd-sourced delivery solution that uses individuals to deliver packages and existing retailers to store them, all powered by a Uber-like mobile app (Heller 2015; Supply Chain 24/7 2015). Postmates, founded in 2011, has been expanding rapidly across the US, delivering anything from prepared foods to Starbucks coffee and lingerie for Valentine’s Day (Supply Chain 24/7 2015).
Page 47 of 69
Uber has been testing a service to deliver items through its fleet of 200,000 active drivers (Supply Chain 24/7 2015) Google has been testing originally dubbed Google Shopping Express and now shortened to just Google Express for months in northern California and parts of Los Angeles, New York City, Boston, Chicago, and Washington, D.C. promises same-day shipping. Google Express allows shoppers to place orders online or via mobile device with partner retailers such as Walgreens, Costco, Staples, Barnes & Noble, and Sports Authority ( Supply Chain 24/7 2015). Wal-Mart is using “Wal-Mart to Go” where Wal-Mart customers sign up to deliver packages from the Wal-Mart stores to other customers living along their way home. As a return, these customers get discounts on Wal-Mart products, effectively covering their cost of petrol. This is not seen as a solution for all company stores or products, but most probably for metropolitan areas and high-priced products (Halatsis 2013). Drones. Companies like Amazon, Google, and DHL are piloting the use of drones, delivering at this early stage to remote or dangerous regions. In future, drones may be deployed in the first- and last-mile of parcel movement (DHL 2015). Anticipatory logistics/delivery. Predictive analytics allows companies to look into future demand patterns, and locate products closer to the customer to enable speedy and cost-effective delivery. Taking this one step further, it may even be possible to ship to the customer ahead of the order. This approach is called anticipatory logistics. Example: Amazon’s patent for anticipatory delivery of parcels. It aims to ship high- demand products (e.g., newly published books) close to expected customers, and plans to go one step further by sending goods directly to customers who haven’t yet ordered the item (DHL 2015).
Page 48 of 69
Illustration of Multi-Echelon Fulfillment Network with Dynamic Flows
Source: Kumar and Hu (2015) Note: The entire network will be multi-tiered. These reconfigured fulfillment assets will be powered by one-view inventory and smart replenishment and channel decision systems to enable flexible, dynamic flows. Trucks making milk runs from DCs to stores will be able to reroute their order drop-off points. Slow moving SKUs will be picked up from stores and returned to the regional DCs and other stores for improved turns. Demand shaping logic will allow shoppers to choose between higher-priced fast delivery or free-shipping slower delivery options (Kumar and Hu 2015).
Page 49 of 69
Omnichannel Inventory Management
Omnichannel Inventory Management Evolution
Omnichannel inventory management evolution: From dedicated, to shared, and to predictive inventory strategy Phase 1: Dedicated inventory. At the advent of e-commerce a decade ago, many retailers chose to support customer demand with separate inventories (dedicated inventories ). This was the most expeditious method for supporting the new channel given the retailers’ legacy system capabilities (Gibson and Defee 2014). Phase II: Shared “Single” inventory – Emerging best practices. As online sales have grown some retailers find that their inventory investment has grown. A solution is to share store retail and online inventories for common SKUs . SKU availability by channel is an important omnichannel consideration since most companies offer a greater variety of SKUs online than in stores (Gibson and Defee 2014). Single inventory strategy allows access to all common SKUs by all channels. This practice eliminates the need for redundant safety stock of inventory and frees up working capital (Hobkirk 2015). According to the 4th State of the Retail Supply Chain (SRSC) Report , many of the retailers that have migrated to a single inventory strategy have done so because their model has inherent overlap between store replenishment and customer direct order requirements, including (Gibson and Defee 2014): Ship to stores in less than full case quantities. Retailers that ship to stores in less than full case quantities can more easily fit customer direct orders into existing order picking routines in the DC (Gibson and Defee 2014). Large percentage of store replenishment from a single DC or few DCs. Retailers that that handle a large percentage of store replenishment from a single DC, or few DCs, have found it easier to combine retail replenishment and customer direct orders within the same operation (Gibson and Defee 2014). Phase III: Predictive inventory management. Enhanced inventory and inbound supply planning processes incorporate the shipment from stores to online consumers into store replenishment. This involves anticipating store traffic and online demand to accurately plan store and distribution center inventory levels . Careful consideration of the business rules for how online orders are allocated to multiple stores in the network is important in this process (Strang 2013).
Page 50 of 69
Store-Level Inventory Management: Key Enabler for Store-based Fulfillment
Store-level inventory management tools. Companies seeking to implement in-store fulfillment or pickup must have a solid plan to address in-store inventory accuracy and visibility. Improving inventory accuracy in the store clearly becomes an enabler for store order fulfillment, but also has the added benefits of improving sales, reducing out of stocks, and improving store replenishment efficiencies (Fenwick 2013). Various tools are now available, including: Scan-based receiving. Armed with an effective tool, stores can perform scan-based receiving to improve the accuracy of inbound movement of goods. This reduces the notion of “false shrink” that often occurs when inventory cannot be located at the store because it never truly arrived (Fenwick 2013). Periodic cycle counts. Stores can also implement periodic cycle counts to support the annual physical counts that most stores execute today. Cycle counts become an invaluable tool for verifying accuracy before key promotional events occur or for simply ensuring that key high-margin items are accurately reflected in the perpetual inventory. Users can also perform ad hoc inventory adjustments to account for damages, known theft and in-store usage (Fenwick 2013). In-store cameras. In-store cameras are a promising alternative for monitoring store stock, but they will require further developments in high-quality processing and image recognition if they are to make a difference (Mercier, Welch, and Crétenot 2014). Item-level radio frequency identification (RFID). To better track inventory within the store, many retailers are starting to implement item-level RFID, especially for categories like shoes where inventory is commonly split between the front of the store and the backroom (Griffin-Cryan and Wall 2015). Unfortunately, the ability to tag individual items economically and to scale up the technology to the needs of large retailers is still several years away (Mercier, Welch, and Crétenot 2014).
POINT OF RETURN STRATEGIES
Online Order Returns Policy Trends: Free Return Shipping and BORIS
Online order returns policy trends: Free return shipping and Return in store. The cost of shipping and the cost of lost sales will be the driver of retail returns policies. According to 2015 NRF-FitForCommerce Omnichannel Retail Index findings, 13 returns management is
13 Based on 120 retailers, including 100 bricks-and-mortar and 20 pure-play (NRF and FitForCommerce 2015).
Page 51 of 69
strong in-store with – while free shipping as a usual course of business is still growing (NRF and FitForCommerce 2015). It can be safe to say that items with low shipping costs, such as high-end apparel/footwear, will gravitate to free return shipping policies . For goods that are costly to ship (e.g. large furniture), involve regulatory requirements for reverse stream (e.g. electronics), or are high-value categories the policies will drive returns to local operations , either stores or physical returns centers (Brill 2015; O’Brien 2015). Free return shipping: Benefits of preprinted, prepaid return labels. Customers value free returns shipping as they are reassured that they can order with confidence. UPS and comScore found 67% of shoppers review an online retailer’s return policy before purchasing. According to 2015 NRF-FitForCommerce Omnichannel Retail Index findings, many retailers have begun offering free returns whereby the retailer pays the return postage for unwanted items, but sometimes only in certain categories. In reviewing a number of return policies, we found examples such as Amazon, Bloomingdale’s, Gap, Macy’s, Neiman Marcus, Nordstrom and Saks Fifth Avenue. To remain competitive, we expect this will significantly increase over the next year (NRF and FitForCommerce 2015). Most e-commerce retailers offer returns via parcel, often including a preprinted, prepaid return shipping labels in the box. Best-in-class retailers also provide an online method to generate labels (Brill 2015; Terry 2014). The preprinted return label makes it simple and is a considerable selling point to consumers who may be on the fence about ordering online. It takes the headache out of returning merchandise, avoiding ambiguity as customers are left to figure out where to send merchandise, and which carriers to use. These labels also benefit retailers by enabling them to call up transaction data immediately, by scanning barcodes on them and getting them back into inventory quickly. It also cuts the risk of misdirection by the carrier due to illegible handwriting (Goldman 2016). Buy online, return in store (BORIS): Pros and cons Pros. For online pure-plays, returns are a dead-net cost; for a brick-and-mortar store, a return is a potential new sale with BORIS (Brown, Moriarty, and Mendoza- Pena 2014). Improve customer satisfaction. A.T. Kearney survey shows that across all product categories, physical stores are vital centers for product returns, even for purchases made online. This clear preference for in-store returns is a product of the desire for accessibility, time efficiency (e.g. returns to nearest store), and immediacy (e.g. immediate refunds or instant exchanges) (Brill 2015; Brown, Moriarty, and Mendoza-Pena 2014; O’Brien 2015). Efficient way to get merchandise back on the shelf. For common products sold both in store and online, having the product brought back to a store is the most efficient way to get merchandise back on the shelf for purchase (O’Brien 2015).
Page 52 of 69
Reduce potential net loss in sales from the returns. Multichannel retailers who offer the “buy online, return in store” (BORIS) service reduce their potential net loss in sales by leveraging the customer’s return trip to the store to make exchanges or substitutions, as well as possible additional or impulse purchases while in the store (NRF and FitForCommerce 2015; O’Brien 2015). Cons Impacts on store personnel. As growth of on-line sales continues to outpace growth of in-store sales, the impact of internet purchases returned to stores will exasperate store personnel. In addition, store associates will need to be trained to handle in-store returns of products originally purchased via web or mobile (NRF and FitForCommerce 2015; Strang 2013). Impacts on inventory management. Merchandise that is not in the store’s assortment will create confusion and a waste stream of neglected merchandise, time, and cost (O’Brien 2015). This requires that inventory management strategy be product-specific to ensure that online-only products that cannot be resold in store don’t sit on store shelves only to collect dust (Fenwick 2013). Often, online fulfillment centers can be leveraged to handle this online-only inventory; however, transportation methods will need to be established (Strang 2013). Emerging returns policies. In addition to free returns shipping and BORIS, emerging methods include using any of various drop-off methods for returns (e.g. parcel lockers, parcel boxes, and car trunks) (DHL 2015). Example: Invented in Germany, the DHL Packstation solution, or parcel lockers, is now available in more than 2,000 locations countrywide for online order drop-offs. This network could be used to enable consumer returns (DHL 2015).
Importance of Strategic Return Management
Dilemma of product returns: Bottom line and Top line impacts. A generous return policy has become a key competitive advantage and a critical component of the customer offering. It is clear that a generous return policy drives sales, however, it is also a major cost driver (Deloitte 2015). Top line impacts: Hassle free returns as potential revenue driver. According to Comscore 2012 Online Shopping Customer Experience Study , the top reason in-store- only shoppers refuse to buy online is the inconvenient and expensive return process (Foth 2014). For digital shoppers who buy online, about 95 percent of whom intend to return for future purchases to the online merchants that have offered a good exchange or return experience in the past; while about 85 percent refuse to return after a poor experience, according to Endicia (Roggio 2013). In addition, UPS consumer surveys
Page 53 of 69
indicate that 88 percent of shoppers review a retailer’s return policy throughout their online shopping experiences, with 66 percent doing so before purchasing. Also, 15 percent abandon a cart when the returns policy is unclear. This implies that returns policies could affect conversion rates and the top line of the online retailer (Brill 2015). Thus, differentiating the consumer experience during the return process is increasingly viewed as a potential revenue driver. Ensuring that returns are hassle-free, convenient, and seamless will attract online customers, keep them happy, bring the shopping back, and build loyalty (DHL 2015; Fenwick 2013; Goldman 2016; O’Brien 2015; TRE and NRF 2015). In addition, when executed properly, the store returns of online orders process can be a way to increase sales (Fenwick 2013). Bottom line impacts: Increased online order returns driving up costs. Studies on the impact of returns processing show that the expense to an organization can range from 20 to 65 percent of the cost of goods sold (COGS) (Brill 2015). Purchases on-line are returned three times more often than merchandise bought in stores, accelerating the pressure for a strategic returns process (Rampant Returns Plague E-Retailers, WSJ, December 2013 cited in O’Brien 2015). In fact, the impact of returns on the bottom line of all online retailers is becoming more pronounced (Bell, Gallino, and Moreno 2014). Lost sales. According to 2015 Consumer Returns in the Retail Industry by TRE and NRF, retail industry sales is $3,256 billions, and returns as a percent of total sales is 8 percent. Total merchandise returns account for over $260.5 billion in lost sales for US retailers. This size is overwhelming; if merchandise returns were a corporation it would rank #3 on the Fortune 500 list (TRE and NRF 2015). 14 Few companies measure the percentage of returns that sell at full retail price once back in stock. For those that do, 48% of returned merchandise selling at full price is the current North American market benchmark (Multichannel Retail and Consumer Product Companies Must Reinvent Their Processes to Boost Profits and Gain a Competitive Edge [Gartner, January 22, 2015] cited in O’Brien 2015). Reverse logistics costs: Transportation, handling, and warehousing. Reverse logistics can represent a significant chunk of supply chain cost, and it’s typically not very well managed. Estimates range from 1 percent of overall supply chain costs (pretty well managed) to almost 10 percent (not very well managed) (Bentz 2015). Product returns is a major aspect of reverse logistics, the term that encompasses returns as well as a number of other activities related to items moving “backwards” in the supply chain. See summary of reverse logistics costs of returned products in Table 5.
14 The National Retail Federation’s US retail industry sales figure includes most traditional retail categories including non-store, auto parts and accessories stores, discounters, department stores, grocery stores, and specialty stores, and exclude sales at automotive dealers, gas stations, and restaurants. Sales and returns are reported in billions of dollars. Retail sales (in billions) estimated by NRF (TRE and NRF 2015).
Page 54 of 69
Table 5/ Reverse Logistics Costs of Returned Products
Cost Elements Descriptions Transportation costs Transportation costs for returns represent a large expense as of returns both outbound and inbound transportation costs increase as a result of returns (Deloitte 2015). The cost of transporting returned merchandise to final disposition can represent 40– 60% of the total reverse logistics costs (Vehec 2015). Thus, managing these costs should have equal attention in omnichannel strategies as delivering the goods to the consumer (O’Brien 2015). Handling costs of Returns handlings are the third largest cost (per unit) of a returns distribution center. Processing is complex and labor intensive (i.e. to process, receive, inspect, authorize, put away, or dispose of the returns) (Deloitte 2015; O’Brien 2015). Warehouse costs of Returns are often received, inspected, and put away in a returns separate flow and thus not mixed with supplier deliveries. Significant space in the warehouse is allocated to returns. Areas allocated to returns tend to be less organized with poor control over inventory. With fewer returns, this area could be optimized and used for value-added activities (Deloitte 2015).
Returned Product Operations and Strategies
Returned Product Facility Operations Models
Three types of returned product facilities. Three types of returned product facilities that can be configured in omnichannel supply chain are discerned from literature, including: (1) Centralized, dedicated returns center, (2) Integrated fulfillment and return center, and (3) 3PL returns center. Example of process flows in network including centralized returns center and 3PL returns center is shown in Figure 21. Standalone centralized, dedicated returns center: From separate channel to all channel. A centralized, dedicated returns center allows consolidation of returned merchandise for economies of scale in sortation, processing and shipping to final disposition (vendor, liquidation, recycling, destroy). The economies of scale reduce transportation costs, reduce labor costs, and improve throughput and returns recovery (e.g. improved resell value in the secondary retail market) (O’Brien 2015). Under this model, while stores may engage in some light sorting and documentation, most returns
Page 55 of 69
are processed at a handful of centralized facilities dedicated to the task. It is estimated that by reducing administrative and transportation costs, consolidation cuts reverse logistics costs by 40 percent on average (Terry 2014). More recent trend among retailers with long-established consolidation centers that are separated by channel is a shift toward merging those facilities ( omnichannel returns center ). Example: Home Depot’s centralized returns processes are only a few years old, so it is well-positioned to effectively unify into a centralized returns process (Terry 2014). Integrated fulfillment-returns center: Recent development for returned and restocked. Some reverse logistics operations are now being co-located with forward logistics facilities to easily move resalable goods back into stores. Performing fulfillment from a consolidation center into the forward supply chain is a capability that did not exist years ago (Terry 2014). If a returned item (in pristine condition) matches an ordered item, cross belt sorters take the unit directly to order fulfillment (returned and re-stocked ) (O’Brien 2015). Additional benefits when fulfillment centers are located close to the customers (e.g. multiple, decentralized fulfillment network) are possibility of implementing return policy that allows customer to return items at nearby processing centers, thus return transportation cost is covered by customers (NOTE: No specific citations; discerned from overall literature content analysis) . Dedicated returns operations required. Returns will require different process, work stations, and technology from those of forward, fulfillment. Unless the DC is designed with a dedicated area, work process and system to handle returns, it is likely to add two weeks to a month in processing time. The longer a product sits and is not available for sale, the costs of the product increase and the potential selling price decreases. In contrast, dedicated returns operations managed by an experienced staff can provide a 10 to 15 percent reduction in costs related to excess inventory, returns processing, and asset liquidation by using a systematic, automated and proven returns process (Vehec 2015). Improve returns operation with automation. When returns are handled in fulfillment center (rather than centralized, dedicated returns center), automation of the returns process in the fulfillment center that use systems and data to link returned merchandise to new active customer orders provides operational efficiencies (O’Brien 2015). 3PL returns center. Many retailers, particularly larger chains, consider reverse logistics outside their core competency, so they outsource part or all of the function to third- party service providers (3PLs) and specialists (Terry 2014). The advantage of outsourcing returns is that 3PLs can offer flexible capacity, expertise in the regulatory environment, and the technology support to take on the complexity of handling multi- SKU reverse logistics (Bentz 2015). It also provides a dedicated focus with time and cost efficiencies. When a fulfillment center is responsible for returns, resources are often diverted to the primary function of filling new customer orders when sales volume
Page 56 of 69
spikes (O’Brien 2015). It is also suitable for hazardous materials that require special handlings and disposal, as well as recalls that require fast action, detailed reporting, and processes that ensure recalled product doesn't enter the secondary market (Terry 2014). Federal and state legislation is elevating its oversight into hazardous waste handling and disposal . Regulation requires compliance to approved disposal with certification. Cosmetics, personal care, electronics, and over-the-counter medicines are being scrutinized for how they are handled at retail, and in particular, how they enter the waste stream. Partnering with a supply chain vendor with a dedicated compliance staff to manage these issues is a cost-saver in fines and legal actions (Vehec 2015). Additional benefits when 3PL returns center are located close to the customers are possibility of implementing return policy that allows customer to return items at nearby processing centers, thus return transportation cost is covered by customers (NOTE: No specific citations; discerned from overall literature content analysis) . Examples: Rite Aid uses Inmar as a third party, Dell and Sears both use Genco in North America to handle the process (Bentz 2015).
Figure 21/ Example of Returned Product Process Flows
Source: Bentz (2015)
Strategies to Reducing Cost and Maximizing Income Recovery of Returned Products
Root-cause analysis of return. The first step to improve returns management is the critical “detective work” associated with learning what went wrong and why and turning
Page 57 of 69
those learnings into data and information for further analysis and improvement. The goal is to get to a root-cause analysis of why there are returns in the first place. Example: Rite Aid collects substantial causal data through a number of channels in order to enhance the discovery process, with a goal of continuous improvement and reducing the overall commerce “waste stream” (Bentz 2015).
Returns cost savings strategies. Significant cost savings can be achieved by decreasing the amount of returns. Depending on the cause of returns, strategies at various points of omnichannel supply chain may include: Points of interaction Improved information and pictures online. Retailers can take steps to avoid consumer returns by helping them understand the product (form, fit, function), provide high-quality pictures, and offer assistance (assembly and usage instructions) to minimize returns (Brill 2015; Deloitte 2015). Virtual fitting rooms to reduce return. “Fitting rooms” placed on websites are one potential antidote to the returns problem as these technologies provide online customers with accurate fit information and size recommendations in advance of any buying decision. Study shows that customers with access to the virtual fitting tool had lower return rates than those customers without access to it. Example of tool providers: Metail, headquartered in London, allows female shoppers to create a 3-D model of themselves and evaluate how products would fit them prior to making an online purchase. Other companies providing similar tools to apparel and footwear retailers include: PhiSix Fashion Labs, which eBay acquired in February 2014, and Pittsburgh-based Shoefitr (Bell, Gallino, and Moreno 2014). Points of fulfillment (including transportation) Improved delivery service quality. Significant cost savings can be achieved by decreasing the amount of returns caused by: inaccurate counting during loading, mis-loading (wrong product, right truck, or right product, wrong truck), damage to product as it’s loaded or in transit, delays or misroutes, or other quality issues (Bentz 2015; Deloitte 2015). Working with suppliers on new online-friendly packaging that emphasizes sturdiness and protection rather than attention-grabbing graphics can reduce damages (Bellaïche, Chassaing, and Kapadia 2013). Reduced transportation of returns: Consolidation, Contract negotiation, Automated routing Consolidation of returns at store. Consolidation of returns at the store to add to other shipments or to reach less-than-truckload (LTL) quantity reduces transportation costs at this stage of the process (Vehec 2015). Carrier contract negotiation. Transportation cost of returns can be managed by including the returns volume in carrier contracts. Suppliers’ pre-negotiated
Page 58 of 69
agreements for returns are often similar to those of the outbound shipping agreement – the organization pays similar rates for the return as they do for the outgoing shipment (Deloitte 2015; O’Brien 2015). Automated routing for free return shipping. If the returns policy directs the consumer to ship the item back, a pre-paid shipping label controls the method and cost of returns. An on-line registration process verifies the purchase data (reducing fraud) and captures product level detail to route the product to the nearest demand point. A data driven returns decision tool makes it easier for the shipper, and moves the product directly to the appropriate fulfillment center or store (O’Brien 2015). Shipping direct to a returns or liquidation center, bypassing the retailer’s DC, can help achieve transportation cost savings (Vehec 2015).
Income recovery maximization strategies: Returns disposition and 3PL services. Leading retailers are devoting more attention and resources to reverse logistics as they seek to extract as much value as possible from returned goods. However, the variability of properties and terms surrounding each item creates many potential dispositions: return to manufacturer, transfer to another store, refurbish, repackage/re-kit, liquidate, disassemble and reuse, recycle, donate, or just plain throw away (Terry 2014). Returns disposition options: Time is money. Developing an inventory management strategy that defines how to disposition returned inventory is critical to maximizing income recovery. The goal is optimizing profitability and income recovery by maximizing the value of these assets (Bentz 2015). Various disposition options have a varying degree of income recovery as shown in Figure 22. This variation is largely a factor of time – the longer the time and points of handling diminish the recovery value to the products returned. Return to stock protects original selling price, less handling cost and markdowns. Return to vendor saves value to the retailer, but not the manufacturer. And if retailers are unable to return damaged product to vendors for credit, liquidating the product to the secondary market represents an opportunity for gross margin recovery – either liquidated as is or for some products, refurbishment can bring a higher market value (O’Brien 2015; Vehec 2015). The best liquidation programs offer robust returns management software to sort merchandise into the liquidation/secondary market channel that maximizes net recovery. These secondary market channels —including bulk liquidation, B2B pallet auctions, B2C item sales, outlets, and salvage centers—has blossomed to a $400-billion industry (O’Brien 2015). The movement away from landfill brings an opportunity to recoup value of recycled materials that can compensate for the costs associated with transportation to landfill (Vehec 2015). To wit, retailers typically recoup 12 to 25 percent of an item's original cost through secondary markets, versus less than two percent from recycling (Terry 2014). Retail example of returned product flows to secondary markets is depicted in
Page 59 of 69
Figure 23 . 3PLs value-added services. While some original equipment manufacturers (OEMs) still take product back, in most cases retailers and third-party logistics (3PL) providers manage returned product. This strategy puts a surprising array of companies in the refurbishment business . Retailers including Best Buy and Home Depot, and even 3PLs such as UPS and Ryder employ technicians to repair returned electronics, through allowances from the OEMs (Terry 2014). Alternatively, logistics providers’ expertise can be leveraged as they now extend beyond basic warehousing services to provide onsite or in-warehouse evaluation of returns and advise the retailer or manufacturer on the best course of action (DHL 2015).
Figure 22/ Returned Inventory Disposition Options
Page 60 of 69
Source: O’Brien (2015)
Figure 23/ Retail Example of Returned Product Flows to Secondary Markets
Source: Rogers, Lembke, and Benardino (2013)
Page 61 of 69
KEY TAKEAWAYS : BEST PRACTICE FEATURES
Advanced omnichannel strategy features. Advanced omnichannel retailing strategy focuses on delivering a brand-differentiating experience by integrating bricks, clicks, mobile, and social networking, and optimizing all processes, capabilities, and data (customer, inventory, and product) to operate in a way that enables customers to engage and shop using the channel of their choice. Some key features include (Chugani et al. 2013; Westenberg, Popat, and Stine 2012): Consumer-centric concierge model. Successful omnichannel strategy starts with understanding what consumers want, how their needs and expectations are changing, how they make shopping journey, and what drives consumer choices (DHL 2015; EY 2015). Successful retailers understand how each customer touch point adds value (as defined by the customer) and develop omnichannel strategies that maximize customer satisfaction and profitability. The shift is towards concierge model geared toward helping consumers based on their needs, expectations, and preferences (Brynjolfsson, Hu, and Rahman 2013; Cascone et al. 2015). Make use of the strengths of each channel. Not only are consumers engaging multiple channels throughout the journey, they also use more than one channel simultaneously at any given stage in the journey. Progressive retailers are devising innovative strategies for maximizing channel value, with each channel making a clear contribution to the major sources of value in the customer relationship (Bjørnland et al. 2015; Brown, Moriarty, and Mendoza-Pena 2014; Westenberg, Popat, and Stine 2012). For example, online channel has the ability to display an unlimited amount of stock, and reach customer unconstrained by physical location; while the physical store channel provides the opportunity to try, touch, and feel the products, as well as to obtain purchases immediately (Geddes, Williams, and Guthmann 2014). In fact, a strategy based on leveraging the appeal of the physical store supported by digital is the best formula for capturing the maximum number of sales, building sustainable customer loyalty, and creating opportunities for cross-channel sales (Brown, Moriarty, and Mendoza-Pena 2014). Ambidextrous stores. Stores roles are changing as they operate not only as nodes for customer engagement but also as nodes for close-to-demand fulfillment. From order fulfillment perspective, stores are used as a collection point for online and mobile orders (click & collect; drive through click & collect), and returns of online purchases (Geddes, Williams, and Guthmann 2014). From a customer engagement perspective, stores will evolve from their traditional point-of-purchase role to providing a digitally enhanced shopping experience. In fact, leading retailers are already developing a variety of
Page 62 of 69
strategies that include the use of their stores in new ways, such as (Geddes, Williams, and Guthmann 2014): In-store Wi-Fi kiosks and user and staff tablets . Wi-Fi kiosks and user and staff tablets are installed in-store to enable shoppers to browse the retailer’s catalogue and alternative offers conveniently, and place orders (Geddes, Williams, and Guthmann 2014). Mobile and beacons. Retailers are using beacons/store security cameras to recognize customers as they enter the store; these detect nearby smartphones and give the sales staff relevant information (e.g., data on the customer’s purchasing behavior). Advertisements, coupons, and other supplementary product information can be transmitted to in-store screens located near the customer, and may also be used in point-of-sale systems. Retailers also gain vital in-store customer information, particularly on how shoppers maneuver through the store (DHL 2015). For instance, American Apparel analyzes footage of store security cameras and intercepted mobile phone and Wi-Fi signals to understand customer visiting patterns per store and the movement behaviors of customers and employees within each store (Brynjolfsson, Hu, and Rahman 2013). Virtual reality and augmented reality. Physical stores are designed to create new, unique experiences with 3-D, virtual reality, and augmented reality (Westenberg, Popat, and Stine 2012). Harness the power of data and analytics Consumer data and analytics. Part of the promise of omnichannel retailing is an explosion of new data from social, mobile and local channels. This provides an unprecedented opportunity to understand not just customer transactions but also customer interactions such as visits to the store, likes on Facebook, searches on websites, and check-ins at nearby establishments. Many companies begin by using digital capabilities to improve their end-customer knowledge : collecting, consolidating and using insights about their customers (Westenberg, Popat, and Stine 2012). Deep knowledge of your end customers includes their names and addresses, demographics, IP addresses, purchase histories with your company and with other companies, and most importantly, their life events (such as upcoming weddings or births or, for businesses, planned mergers or expansions) (Weill and Woerner 2015). Increasingly, mash ups of data from multiple sources will give savvy retailers an ability to do predictive analytics to make location- and time-specific offers and recommendations to each of their potential and existing customers (Brynjolfsson, Hu, and Rahman 2013). Move beyond traditional sales forecasting to sense and shape demand. As consumers migrate towards digital channels, they are yielding increasingly rich data about their purchasing behavior and preferences. Companies that can
Page 63 of 69
capitalize on this data will derive significant benefits. Forecast accuracy can be improved by exploiting POI and POF-specific data, using final customer location as the true source of demand (Cascone et al. 2015; SupplyChainDigest 2015). Also, the use of advanced analytics for how consumers shop online and in-store will increasingly provide critical visibility to enable companies to sense real-time shifts in demand, personalize the shopping experience and identify those products that will be of highest value to the consumer. Where inventory must be available can be recommended, and demand can be shaped by pushing product marketing notifications in real time to the shopper as they browse online or are in-store (EY 2015). Flexible supply chain with clearly-defined POIs, POFs, and PORs. Design supply chain network for flexible fulfillment and returns (Cascone et al. 2015; Westenberg, Popat, and Stine 2012). Defining and mapping POIs, POFs and PORs is vital to developing a clear roadmap for which combinations of POIs, POFs, and PORs need to be managed and technically enabled (see example in Figure 24 ) ( SupplyChainDigest 2015). Figure 24/ Examples of POIs and POFs Mapping
Source: SupplyChainDigest (2015)
Leverage seamless IT solutions. Emerging key system components which must work seamlessly together as a core commerce technology to ensure that customers have the ability to shop in the manner they wish to shop, buy in the way most convenient for them and, ultimately, give retailers the flexibility to fulfill that demand from virtually
Page 64 of 69
any available inventory in their network are: Omnichannel order management and network inventory availability, Store fulfillment, Store inventory management, Channel-agnostic returns management systems, and Omnichannel workforce management (Fenwick 2013). Omnichannel order management and network inventory availability. The standard requirements of order sourcing technology are to provide a single view of inventory across channels and rules-based processing that determines the best fulfillment source across DCs and stores (Fenwick 2013). The role of the order management system (OMS) now spans not only processing orders, but also providing intelligence and visibility surrounding inventory, delivery options, as well as customer information. If configured optimally, the OMS can include inventory information about store inventory, drop-ship vendors, internal delivery centers, in-transit inventory and allocated stock (Deloitte 2015). With such network inventory availability systems, a robust order management solution will also intelligently determine the optimal source for a customer order based on highly configurable rules that allow retailers to control and tap into any inventory within the network across channels, thus enable flexible, dynamic fulfillment (Cascone et al. 2015; Fenwick 2013). Store fulfillment and store inventory management solutions. Store fulfillment solutions offered by top tier vendors like Manhattan and IBM are integrated with store inventory management that supports backroom functions (Tompkins International 2014). One of the biggest benefits of store order fulfillment is that it provides notification and schedules orders to be filled from stores to help organize store labor. An effective store fulfillment solution allows associates to fulfill when possible, whether scheduled or during down time in the store, and is architected to ensure service-level agreements are not missed. Confirmation once orders have been picked, to update inventory levels, and packed, to send shipment notifications, are also major benefits. Best-in-class store order fulfillment solutions leverage direct integration with leading parcel carriers to enable rating, shipping, manifesting, tracking and proof of delivery, all while masking the complexity of parcel integration from the store associates. To the associates in the store, they are simply shipping a package and applying a label (Fenwick 2013). Channel-agnostic returns management systems. By tightly integrating returns with order management, leading-edge omnichannel returns systems can take full advantage of a network-wide view of customer transactions and inventory when managing a return. This includes augmenting the retailer’s consumer touchpoints with a single set of business rules to verify the return, setting expectations for disposition and, finally, creating the return merchandise authorization (RMA). This allows the retailer to leverage any consumer-facing technology they choose (Web store, mobile, kiosk, etc.). Once an RMA is generated, a corresponding ASN can also be
Page 65 of 69
sent to the system receiving the return, e.g., the warehouse management or point-of- sale system. When the associate in the DC or store indicates the condition and quantity of the return, the system will issue the corresponding credit or release an exchange order for processing (Fenwick 2013). Omnichannel workforce management. Traditional labor forecasting and scheduling looks only at POS activity or store traffic counters and non-service-based activities in the store (such as corporate-initiated merchandise-related projects) to determine the optimal amount of staff needed to complete the tasks at hand. Adjustments need to be made to account for the labor required for ship-from-store capabilities. In an omnichannel environment, software solutions can be a source of valuable labor drivers to ensure the labor forecasting and scheduling solution is well aware of all expected store labor needs (not just direct sales activities) (Fenwick 2013).
Page 66 of 69
REFERENCES
Ames, Ben. 2015. “Pursuing the Promise of Omnichannel Retailing.” Supply Chain Quarterly , Quarter 4. Baird, Nikki, and Brian Kilcourse. 2013. “The Customer-Centric Supply Chain.” Prospective View: October 2013, Retail Systems Research. Baraniuk, Chris. 2015. “Shop but Don’t Enter: The Strange World of Dark Stores.” BBC.com, August 5. Bell, David R., Santiago Gallino, and Antonio Moreno. 2014. “How to Win in an Omnichannel World.” MIT Sloan Management Review 56 (1): 45–53. Bellaïche, Jean-Marc, Thierry Chassaing, and Sunil Kapadia. 2013. “The Omnichannel Opportunity for Retailers.” BCG Perspectives. Bentz, Brooks. 2015. “Reverse Logistics: Time to Clean up the Mess.” Logistics Management, February 1. Bjørnland, Dag Fredrik, Cyrus Ditzel, Pedro Esquivias, Jody Visser, Steve Knox, and Victor Sánchez-Rodríguez. 2015. “What Really Shapes the Customer Experience.” BCG Perspectives, September 10. Brill, Jim. 2015. “Rethinking Online Returns.” A UPS Study, Executive Summary, July. Brown, Michael, Mike Moriarty, and Andres Mendoza-Pena. 2014. “On Solid Ground: Brick-and- Mortar Is the Foundation of Omnichannel Retailing.” A.T. Kearney Omnichannel Shopping Preferences Study Report. Brynjolfsson, Erik, Yu Jeffrey Hu, and Mohammad S. Rahman. 2013. “Competing in the Age of Omnichannel Retailing.” MIT Sloan Management Review 54 (4): 23–29.
Burnson, Patrick. 2015. “Omni-channel’s Impact on Logistics: Sears Plays It Cool.” Logistics Management, February 1:24–26. Carter, Britanny. 2016. “E-Commerce & Online Auctions in the US.” IBISWorld Industry Report 45411a, February. Cascone, James, Britt Dayton, Brittain Ladd, Aviel Hillman, and Meg Alderman. 2015. “Achieving Assurance of Supply in an Omni-Channel World.” Deloitte Whitepaper. Chugani, Sandeep, Rune Jacobsen, Gavin Parker, Mai-Britt Poulsen, and Bill Urda. 2013. “Staying Ahead of the Customer: Retail Transformation and Reinvention.” BCG Perspectives, September 30.
Cunnane, Chris. 2015. “E-Commerce Growth Brings Last Mile Headaches.” Logistics Viewpoints, April 1. Deloitte. 2015. “Omni-Channel Retail: A Deloitte Point of View.” Deloitte e-commerce Point of View, February.
Page 67 of 69
DHL. 2015. “Omni-channel Logistics: A DHL Perspective on Implications and Use Cases for the Logistics Industry.” DHL Trend Research. Ebeltoft Group. 2012. “Global Cross Channel Retailing Report: The (Un)Connected Store. Benchmarking Report. EY. 2015. “Re-engineering the Supply Chain for the Omni-Channel of Tomorrow.” Ernst & Young, Global Consumer Goods and Retail Omni-Channel Supply Chain Survey Report, February. Fenwick, Scott. 2013. “The Core of Omnichannel Retailing: Five Commerce Technologies Every Innovative Retail Chain Needs.” Whitepaper, Kurt Salmon and Manhattan Associates. Geddes, Ian, Chris Williams, and Till Guthmann. 2014. “The Omnichannel Opportunity: Unlocking the Power of the Connected Consumer.” Deloitte report for eBay, February. Gibson, Brian J., and C. Clifford Defee. 2014. “The State of the Retail Supply Chain: Essential Findings of the Fourth Annual Report.” January. Goldman, Ian. 2016. “Managing Returns in a Complex Omnichannel Environment.” Retail TouchPoints, Executive ViewPoints, February 2. Griffin-Cryan, Belinda, and Kristin Wall. 2015. “The Rising Relevance of Brick-and-Mortar Stores.” Supply Chain Quarterly, Quarter 5. Halatsis, Aristos. 2013. “Crowdsourcing for the Last Mile.” Logistics Arena, Blog posted on October 4. http://www.logisticsarena.eu/crowdsourcing-for-the-last-mile/ Heller, Laura. 2015. “Amazon's Uber-Like Delivery Service Could Be Coming Soon.” Forbes, June 16.
Hobkirk, Ian. 2015. “Key Distribution Strategies of TOP Omni-channel Retailers.” Supply Chain Management Review 19 (7): 16–21.
Johnston, Euan. 2016. “5 Steps to Understanding Your Customer’s Buying Process.” B2B Marketing, May 18. Krebs, David. 2015. “Supply Chain Agility: New Levels of Visibility through Mobile & Wireless Investments.” Supply Chain Management Review 19 (3): 40–46. Kumar, Raj, and Michael Hu. 2015. “Is Your Supply Chain Ready for the Omni-channel Revolution?” Supply Chain Management Review 19 (5): 76–78. Kourimsky, Hans, and Marc van den Berk. 2014. “The Impact of Omni-Channel Commerce on Supply Chains.” itelligence AG whitepaper. McCrea, Bridget. 2015. “2014 Virtual Conference Supply Chain Transformation: Meeting the Omni-channel Fulfillment Challenge.” A Special Supplement to Supply Chain Management Review 19 (1): S52, S54, S56, S58. Meacham, Doug. 2013. “2013 Cross-Channel Readiness Study.” CrossView Whitepaper, April. Mercier, Pierre, Rune Jacobsen, and Andy Veitch. 2012. “Retail 2020: Competing in a Changing Industry.” BCG Perspectives, August 9.
Page 68 of 69
Mercier, Pierre, David Welch, and Guillaume Crétenot. 2014. “In Omnichannel Retail, It’s Still About Detail.” BCG Perspectives, August 26. Michel, Roberto. 2015. “2015 Warehouse/DC Operations Survey: Industry Tackles Omni- channel and Growth Dynamics.” A Special Supplement to Logistics Management and Supply Chain Management Review, Supply Chain Management Review 19 (6): S61–S64.
Napolitano, Maida. 2013. “Omni-channel Distribution: Moving at the Speed of Now.” Logistics Management 52 (6): 42–46. NRF and FitForCommerce. 2015. “2015 NRF-FirtForCommerce Omnichannel Retail Index.” National Retail Federation (NRF) and FirtForCommerce, Findings Report. O’Brien, Will. 2015. “The Omni-Returns Experience: Anywhere, Any time – The Consumer Is in Charge.” Sedlak Whitepaper, June. Rogers, Dale S., Ron Lembke, and John Benardino. 2013. “Why Reverse Logistics Needs to Become a Core Competency Inside Your Supply Chain.” Supply Chain 24/7, May 20.
Sayre, Katharine. 2013. “How to Approach Social-Media Commerce.” BCG Perspectives, January 29. Skorupa, Joe. 2013. “Omnichannel Readiness.” RIS News Custom Research.
Strang, Randy. 2013. “Retail without Boundaries.” Supply Chain Management Review 17 (6): 32– 39. Supply Chain 24/7 . 2015. “New Crowdsourced Delivery Models Pose Serious Challenges to UPS, FedEx, and USPS Monopolies.” Supply Chain 24/7 , June 23.
SupplyChainDigest . 2015. “Conquering the Omnichannel Challenge – Today and for the Long Term.” SupplyChainDigest, Thought Leadership Series.
Terry, Lisa. 2014. “Managing Retail Returns: The Good, the Bad, and the Ugly.” Inbound Logistics, February.
Thomas, Kelly. 2015. “10 Steps on the Path to Profitable Omnichannel Growth.” Supply Chain Quarterly, Quarter 4. Tompkins International. 2014. “Retail Backrooms: A Revolution in Roles and Business Value.” Tompkins International Whitepaper.
Treasure, Will. 2014. “Comment: The Rise of the Dark Store.” Essential Retail, February 7. TRE, and NRF. 2015. “2015 Consumer Returns in the Retail Industry.” The Retail Equation (TRE) and the National Retail Federation (NRF) Report, December. Vehec, Dave. 2015. “About Face—Reversal of Fortune.” Supply and Demand Chain Executive, January 21. Weill, Peter, and Stephanie L. Woerner. 2015. “Thriving in an Increasingly Digital Ecosystem.” MIT Sloan Management Review 56 (4): 27–34.
Page 69 of 70
Weiss, Nancy. 2015. “What Are Freight Consolidators, and Can They Help Online Businesses Save Money On Shipping?” The Endicia Blog, July 13. http://online-shipping- blog.endicia.com/freight-consolidators-cheap-shipping-costs-online-businesses/ Westenberg, Edward, Bharat Popat, and Jon Stine. 2012. “The Operational Implications of Omnichannel Retailing: How Creating a Balanced Retail Strategy Can Increase Basket Size, Grow Conversion Rates, and Reduce Inventory Losses.” Cisco Point of View. Westerman, George, Maël Tannou, Didier Bonnet, Patrick Ferraris, and Andrew McAfee. 2012. “The Digital Advantage: How Digital Leaders Outperform their Peers in Every Industry.” Capgemini Consulting Report.
Page 70 of 70