New Year’s Resolution: Solve Store Fulfillment

As apparel retailers and brands dig out from another holiday season and begin to take stock, familiar issues such as inventory misallocation, the growth of pure-play e-commerce retailers and the challenges faced by brick-and-mortar retailers, and margin and costly markdown hits are likely to take center stage.

Enter store fulfillment. More and more retailers are developing ways to fulfill orders from their store inventory, including ship-from-store (SFS); buy online, pick up in store (BOPUS); and reserve in store. In fact, BOPUS and reserve-in-store rates have skyrocketed — from roughly 38 percent of retailers surveyed in 2014 to more than 50 percent in 2015.

That’s not surprising, given that store fulfillment has been leveraged successfully by retailers to improve customer experience, drive incremental revenue and margin growth, and delay large capital expenditures. In specialty, retailers have consistently found 0.5 to 1.5 basis point increases in total brand sales and 6 percent to 12 percent incremental growth in their e-commerce channel as a result of SFS alone (see sidebar for case studies).

Not only does store fulfillment fuel these impressive short-term benefits, it is essential for many retailers’ strategic omnichannel and digital initiatives over the next two to five years. From in-store technology and personalization to next-level localization, forward-deployed inventory and customized promotions — the ability to use stores as an asset in an increasingly online world — all require seamless access to store inventory and effective store fulfillment processes.

But while many retailers have jumped onto the store fulfillment bandwagon, far fewer are doing it well. In fact, Kurt Salmon’s annual holiday study of 60+ retailers’ BOPUS and SFS processes has shown an increase in split packages, which erode profitability, each year for the past three years. Additionally, in 2015, of the 20+ BOPUS orders placed as part of the study, fewer than 50 percent of them were error free. These costly errors not only erode profitability, they also tarnish the brand’s image and impact customer loyalty and experience.

So since 2016 is a chance to start fresh, here’s how to develop a best-in-class store fulfillment system or bring your existing program up to speed.

1 Setting up for success
This part of the store fulfillment journey is critical: Without the right setup, it will be impossible to reap the rewards later. This includes developing the business case — defining strategy and identifying needs, capabilities and gaps — and using all that to develop a roadmap for the rest of the way forward.

Every strategic decision made here will have huge ramifications for the rest of the path forward. For example, inventory accuracy and visibility are huge considerations, especially for specialty retailers, who often have high levels of inventory uncertainty. Setting the right watermark, or safety stock, will mean the difference between being able to execute BOPUS or not.

Another big issue: sales credit and effective incentives. To ensure fulfillment without eroding profitability, stores must be incented to participate in fulfillment. This leads to challenging questions: how to distinguish ship-from-store sales in terms of inventory planning, who receives sales credit and how P&Ls are impacted.

One of the most complicated — and consequential — early strategic decisions revolves around in-store execution. For example, some retailers are very open about the fact that their employees are picking store-fulfilled orders from the aisles, while others fulfill from their cash wrap or tightly control store fulfillment capacities in an attempt to prevent in-store shoppers from seeing associates picking product to fulfill online orders. These decisions have direct revenue consequences — the less capacity, the fewer orders stores can process.

2 Putting the program out there
Once the business case, strategy and other foundational elements are in place, it’s time to test them out by enabling and testing the functionality — even if it’s not fully baked yet — developing best practices and validating the business case. An order management system (OMS) will be critical here to set and test rules for how, when and where inventory is fulfilled.

The pilot needs to be large enough so you can accurately draw conclusions from it, but small enough that it won’t negatively impact your business while you’re working out the kinks. It’s also important to consider the store types you’ll need to test — strategy and process will vary based on store type.

The pilot can be ramped up over multiple phases, and it’s usually best to execute separate pilots for SFS and BOPUS. Be sure to test how much volume each store can handle, how long it takes to get up and running, and what to do when you run into inventory issues that are specific to one store and SKU. All these will likely be different for SFS and BOPUS.

3 Bringing it to the masses
Once the pilot is complete, it’s time to keep moving and roll out the capabilities across the store base. Ensuring metrics and reporting are already built in is critical to success in this stage — without it, margin erosion is likely even if revenues are skyrocketing.

A retailer’s appetite for risk will also play a big role in the rollout strategy — the faster the rollout, the bigger the risk. Either way, timing is important — give stores plenty of time to reach full capacity and develop an action plan for volumes exceeding expectations before peak season hits. This stage is risky, especially with BOPUS, because customers will see every glitch along the way.
4 Taking it to the next level
Once the rollout is well underway, retailers can perfect their store fulfillment strategies and processes to really achieve the benefits that will not only drive sales and margin improvement, but long-term success.

The inventory placement strategy decided at the beginning of the store fulfillment journey is critical here and deserves a second look now that you’re armed with real customer data and knowledge of the process. Specifically, what does new demand tell you about your customers, and what’s the potential impact to marketing, open to buy, in-season responsiveness and inventory placement going forward?

Beyond inventory placement, it’s also essential to have a best-in-class strategy for fulfilling orders. For example, many retailers new to the store fulfillment game have extremely high levels of split shipments, which can erode margins quickly. Processes and systems that can help optimize fulfillment rules to fix costly issues like these can mean the difference between red and black. That’s where fulfillment optimization or distributed order management (DOM) optimization comes in. With increasingly complex combinations of orders and inventory availability, a system that helps establish and maintain fulfillment logic and business rules is critical, especially for SFS.

These are complicated issues, but as the cases in the sidebar show, the end results of store fulfillment are well worth it. And just like any large organizational change, store fulfillment is a marathon, not a sprint. Even leading retailers in this space are still learning and refining. That’s good news for retailers who have yet to start the store fulfillment journey and for those who are ready to take it to the next level this year. 

Steve Osburn and Holden Bale are retail strategists at Kurt Salmon, a global consulting firm. Together, they have more than 20 years of experience advising the world’s leading retailers and brands on their supply chain strategy. Contact Steve at [email protected].

Making the Case for Store Fulfillment

Multibillion-dollar department store
Solution: Optimized DOM and OMS rules to improve a pre-existing SFS program.
Results: A 6 percent reduction in split packages, 5 percent reduction in average distance to customer for fulfillment and 40¢ saved per package. Eleven percent of store orders moved from FedEx Zone 3, 4 or 5 to a closer zone.

$4+ billion multibrand specialty retailer
Solution: Developed business case, ROI model, governance, process and DOM to enable SFS in 700+ doors.
Results: A $25 million-$35 million increase in incremental revenue due to significant reduction in direct-to-consumer out-of-stocks and backorders, plus future capital expenditure avoidance, improved service levels and reduced end-of-season clearance.

$2+ billion multibrand specialty retailer
Solution: Designed and implemented SFS for 250+ stores and a standalone OMS to manage the order aging and exception process between the retailer’s stores and call center.
Results: A 1.5 percent top-line sales lift, 8 percent direct sales lift and a $50 million profit increase in the first year by selling distressed store inventory online at full price. After DOM/OMS optimization, the retailer experienced a
6 percent reduction in split shipments.
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