Winning the Omnichannel Fulfillment Wars

4/16/2014
For retailers who want to remain competitive in this shop anytime, anywhere world, omnichannel fulfillment strategies must be done right, and done quickly. Significant new demands have been placed on retailers' supply chains. In omnichannel fulfillment, all the resources of the supply chain are focused on transparently serving a single shopper who has placed a single order.

Customer expectations have soared when it comes to product availability (I want it now!), the variety of options, and the price they are willing to pay to have goods shipped directly to their home (I want it free!).

Customers want what they want, when they want it, where they want it and at the price they want to pay. And if you don't have it, you'd better get it to their house tomorrow, or they'll buy it from Amazon who will — with free shipping.

Omnichannel retailing has been steadily growing in size in the market, especially from the e-commerce segment.  According to a Forrester study published by eMarketer.com, U.S. retail e-commerce sales are expected to reach $362 billion by 2016 and are expected to continue double-digit growth rates.  Global sales are expected to reach nearly $1 trillion dollars in 2013. By 2015, it is expected that the number of online shoppers will exceed 200 million in the U.S., representing greater than 90 percent of all Internet users. Not only is the number of shoppers increasing, the amount spent by each shopper is also expected to increase from $1,207 in 2012 to $1,738 by 2016.

Customers demand an omnichannel shopping experience that allows them to order from anywhere. Retailers who want to compete must therefore be able to fulfill orders from anywhere to anywhere, whether it's the consumer's home or the retail store. Research shows that in the next five years, the most significant shift in omnichannel fulfillment will be the in-store pickup of goods, a fulfillment option predicted to virtually double by 2017. This is good news for the customer, offering added convenience, and for the retailer, delivering additional in-store traffic. No matter what fulfillment method the customer demands, the supply chain has to be able to deliver according to the consumer's wishes. 

Past history
In the past, retailers built two types of distribution centers, one (or two) on the East and West coasts of the U.S. to handle store fulfillment, and another to handle strictly e-commerce. These distribution centers were built to handle their own specific type of fulfillment and none other. The retail stores on the East coast were fulfilled from the closest DC, while the outlets on the West coast were fulfilled from a DC located in the Western US. Fulfillment typically took one to two days, but stores in the Central U.S. had to live with 3- to 5-day fulfillment. If the retailer received an e-commerce order, regardless of the location of the buyer, that order was fulfilled out of the e-commerce-only warehouse. The consumer could be located next door to the West coast distribution center, but since he ordered his item online, it would only be shipped from the e-commerce DC, and he'd have to wait to receive it. This scenario was more customer "no satisfaction" than customer satisfaction.

So, companies that didn't want to lose a single sale opened up new sales channels without enough consideration as to how they were going to fulfill those orders. Fulfilling orders that originate directly from the online customer is a much different proposition than replenishing brick and mortar stores. Typically merchandise is sent in bulk shipments to the stores to replenish inventory. On the other hand, online order sizes are very small, often a single unit. These orders are then shipped directly to the customer rather than in bulk to the store. Say goodbye to bulk shipping rates through truckload carriers and hello to higher rates through parcel shippers. If these basic elements are not addressed in the supply chain, the resulting new business will be less than profitable.

Large retailers, because of the heavy footprint they have with physical stores and the baggage they carry in terms of real estate, have to leverage every piece of square-footage to maximize profit and revenue. Some retailers like Nordstrom and Toys ‘R' Us offer ship-from-store to customers. Macy's uses 500 stores that double as fulfillment centers, while also utilizing two (soon to be three) regional distribution centers, which they say drives incremental sales, increases inventory turn and improves gross margin.

The Men's Wearhouse saves an estimated 1,000+ orders per day by leveraging inventory from other stores to fulfill demand when a local store is out of stock. Assuming a conservative average ticket of $50, this adds $18 million of top-line revenue.

Urban Outfitters CEO Richard Hayne estimates that half of the retailer's direct-to-consumer demand would have been lost due to out-of-stock situations in DCs.

Ship-from-store leads to increased inventory turns and decreased safety stock at distribution centers. As a result of its ship-from-store program, Nordstrom's turnover spiked to 5.41 from a previous five-year high of 4.84. And one major department store saw improvements on both sides, with a 20 percent increase in same-store sales growth that led to a $200 million improvement in gross margin along with a $200 million reduction in average inventory, which drove down costs.

To build or not to build
Many larger retailers and department stores with growing e-commerce sales are using ship-from-store to defer investing capital in additional distribution centers. With increasing e-commerce business beginning to stress fulfillment capacities to the breaking point during peak season, retailers without ship-from-store capabilities are often operating at maximum capacity.

But you still have to get the merchandise to the store from somewhere. To be successful and profitable in omnichannel retailing, retailers need to be distribution centers that are flexible and offer:
  • Real-time visibility into the entire pool of inventory to reduce safety stock and inventory carrying costs.
  • Dynamic control over access and allocation of inventory in real-time.
  • Processing and shipping of individual orders at the lowest cost, either direct-to-consumer or direct-to-store.
  • Fully automated distribution processes that will increase productivity and fulfillment rates using a variety of material handling equipment.
  • Flexible fulfillment paths to meet demand, regardless of which channel it comes from.
  • Maximized efficiency in every part of the supply chain to meet customer expectations.
  • Minimum cost to serve.
Many retailers may be best able to meet omnichannel fulfillment challenges by retrofitting existing operations or adding new processes and technology. However, very few existing distribution centers of more than a few years old are set up to accommodate the needs of an omnichannel distribution strategy.

Omnichannel distribution center design
Developing an omnichannel supply chain strategy requires rethinking the number and location of distribution centers, as well as their layout and design features. The average omnichannel DC is greater than 250,000 square feet with clear ceiling heights of 36 to 40 feet to accommodate multiple mezzanine levels for processing and shipping individual orders. Typically these distribution centers are built in areas where they can reach the most consumers and stores quickly and cost-effectively, such as Chicago, Atlanta, Dallas, Philadelphia, Long Beach, and New Jersey.

Many traditional warehouse operations are not set up to efficiently accommodate a large range of orders with varying units and lines per order characteristics typical of multi-channel orders.

Omnichannel distribution centers seamlessly combine both e-commerce and traditional store distribution channels, but it requires significant capital investment in material handling, conveyor sortation and controls, optimized racking systems and lift equipment, inventory management software, and picking/packing technology.

In the store-based distribution area, automation is key. When a customer makes a store purchase, the bar code reader or point-of-sale equipment notes the transaction at checkout and it is pulled from inventory. The product picking process involves pick-to-cart, pick-to-voice, or pick-to-light of items into totes, which are then consolidated and packed into store shipments, and scheduled for delivery. Picked products are automatically backfilled in the next delivery cycle. Merchandise bought from stores one day is back on the shelf often the very next day, with little or no direct human action involved between the scanning of the sale and the restocking of the shelf by store employees.

Different processes are required for the e-commerce order fulfillment area. Products are picked from warehouse shelves at the direction of distribution workers who use automated picking technologies like pick-to-light and pick-to-voice. Pick-to-voice and pick-to-light technology allows workers to pick items for an order at astounding rates with great accuracy using both hands.

These orders are typically processed via cart zone picking or zone batch picking. For increased productivity, the single-line or single-unit orders are typically processed differently in a batched, high-speed packing operation in a separate area of the facility.

When multiple products are purchased in one order, workers must consider the size of the box and determine if any special packing requirements are needed for combining products in one shipment. Workers at the warehouse must handle gift wrapping as well.

Larger mezzanine areas for offices are needed for back-office tasks, gift-wrapping, call centers and returned merchandise.  Often ceiling heights reach 40 feet to include multiple mezzanine levels. Omnichannel distribution centers also require a larger workforce than traditional warehouses in order to fill individual orders.

Improved real-time inventory visibility enables retailers to deliver omnichannel fulfillment by quickly and accurately checking supply chain-wide availability via mobile devices used by sales clerks, saving the sale on out-of-stock items and giving consumers access to products that are not available in that particular store.

Automation required
Historically, retailers have approached automation in their distribution centers from the standpoint of "push" operations, with shipping activity based on forecasts, historical sales and production capacity. Relatively little automation was needed.

Now, with the growth of electronic commerce, retail replenishment is being tied much more closely to actual demand, with an eye toward maximizing customer service.

Material-handling systems are being embraced as a means of getting products into the hands of the consumer more quickly. Typical equipment used in omnichannel fulfillment:
  • Inventory management system that spans the entire supply chain for achieving real-time visibility
  • Distributed order management system to decide cost-effectively whether to drop orders into a DC, e-commerce fulfillment center, combination DC, or store to meet customer service levels
  • Warehouse Management System
  • Warehouse Control System to direct the flow of materials within the warehouse and communicate with all the material handling equipment
  • Conveyors for moving products around the warehouse to appropriate locations
  • Sortation units that deliver items to shipping locations
  • Picking/packing systems for directing workers what to pick, how many, where to pick or pack, etc. Some DCs are starting to use robotic picking technology, too.
  • Automatic Storage and Retrieval Systems (AS/RS)
  • Miscellaneous: Robotics, goods-to-person, transportation management systems, RFID, equipment to apply labels to cartons, etc. 
And the winner is...
The process of setting up a strong omnichannel supply chain is a major undertaking for retailers, but those that fail to pursue omnichannel retailing and fulfillment have little chance of success in the new world of consumer expectations. 

Despite the challenges, retailers can't afford not to work toward an omnichannel organization. As consumer expectations around cross-channel experience, assortment and fulfillment continue to grow, the only retailers able to meet these needs will be those supported by an organization designed with an omnichannel world in mind.

Done right, the result is a win-win for distribution and supply-chain providers, retailers and consumers.


Dave Lodwig is a systems manager at W&H Systems and an expert in omnichannel fulfillment. W&H Systems is a leading material handling systems integrator for retailers and apparel manufacturers and distributors.
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