A ROADMAP FOR RESHAPING THE RETAIL SUPPLY CHAIN

Much has been written about the demise of traditional retailers, but it’s premature to write that obituary. The ones that succeed will do so by finding ways to meet the rising expectations of customers efficiently. To get there, they will need a foundation that will help them stay nimble and flexible in the years ahead.

Tim Vaio
Veteran Supply Chain Executive, , Section 3
Supply chain operators are under pressure like never before. The lines between traditional retail and eCommerce are blurring—customers expect faster and more convenient shopping experiences, regardless of how they make a purchase. And the changes are happening so fast that we’re not exactly sure where it all will end up.

Just a few years ago, customers engaged retailers through one channel at a time. Some would go to a store, and if the store had what they needed, they could buy it. Or they could buy online and wait for delivery, which cost more money. Today, shoppers are merging those channels. They may do research online, and then go to a store to buy something. When they get there, that item better be in stock—same size, color, and style that they’re expecting.

Customers expect faster and more convenient shopping experiences, regardless of how they make a purchase.

Some customers might not find everything they want at the store, but they still want their order fulfilled. It’s not acceptable to say: you can go get this at our store five miles down the road. Now, you need to say: we have it at the store five miles down the road, and by the time you get home, it’ll be at your house.

A significant challenge for retailers is to reshape the traditional supply chain into a single fulfillment channel, shipping products rapidly and efficiently to customers regardless of how they’ve engaged you. This is not an easy task. Big retailers have invested big money in their existing supply chain, and spent decades refining it to serve a world that no longer exists.

Dismantling and rebuilding that system may be painful, but those who don’t participate won’t survive. How do you develop, manage, and maintain a global supply chain spanning product design, sourcing, manufacturing, and all the way to fulfillment, while also staying nimble enough to compete locally? And can you risk locking into major new investments that could be obsolete in two years?

Companies are trying to hit a moving target, they need to preserve as much flexibility as they can. From a fulfillment perspective, that means striking a balance between buying and building capacity.

A lot of companies would love to build out their own logistics networks, so they can serve customers directly, with their own people, and control their customer experience. This could be a more cost-viable option. But since companies are trying to hit a moving target, they need to preserve as much flexibility as they can. From a fulfillment perspective, that means striking a balance between buying and building capacity.

Companies are really struggling to find the right answer here, and there might not be one. Building delivery mechanisms ties up a lot of capital and other resources that might be better deployed elsewhere. But outsourcing can be complicated and risky. Can you count on partners to serve your customers as carefully as you would? Where is the balance that preserves flexibility to maneuver as things change, and lets you ramp up and ramp down seamlessly
and cost-effectively?

While it’s still early in the game, there are four things that can be done now while waiting for the future to arrive.

1. Distributed order management
Algorithms can show you the best way to fulfill an order, based on variables such as lifetime customer value, product margin, and transportation lead times. Each company has its own key criteria, which can be measured against their logistics network to quickly decide the best way to fill an order.

In some cases, the closest distribution center might only have part of an order in stock. It might be more cost-effective to ship the items from a secondary distribution center, or to split the delivery between two locations. Transportation markups are quite small, so finding the best option helps protect margins and avoid losing money on shipping. A strong distributed order management capability is a requirement for today’s retailers.

It’s not acceptable to say: you can go get this at our store five miles down the road. Now, you need to say: we have it at the store five miles down the road, and by the time you get home, it’ll be at your house.

2. Strong deals with transportation partners
To fulfill orders efficiently, to and from every node in your network, requires cooperation and support from your transportation partners. Your distributed order management system might direct you to ship something to New York City from a store in Boise, Idaho, because your algorithms say that’s best for the business; for example, that store in Boise may have excess inventory. Rather than mark it down, it makes sense to spend a little more on transportation and sell it at full price. Flexible and versatile transportation options are essential to ship goods with maximum efficiency.

3. Real-time inventory informatics
Modern technology provides real-time information to help steer inventory to the best possible location. Traditionally, retail businesses pushed products out of distribution centers as fast as possible to stores, where they could be sold. Today, that strategy could leave inventory sitting in the wrong place. If you can fulfill orders directly from the distribution center, you can eliminate the cost of an extra transportation leg. With tools to forecast customer demand and monitor inventory positioning, you can move products at the optimal time, much like how just-in-time management helped make manufacturing more efficient decades ago.

4. Flexible fulfillment options
Fulfilling orders from both distribution facilities and from a store network—without any delays—is challenging. Traditionally, a store’s core competency was selling products, not picking, packing, and then shipping orders. And warehouses were designed to move and store huge quantities of goods, not individual items. Investments in modern fulfillment upgrades are necessary, but
come with risks.

Successful companies will need to build their logistics capacity out to a certain level, and then use third-party logistics (3PL) providers to flex up or down as needed, say, during volatile holiday shopping seasons. Finding the right mix will help manage capital costs while still meeting customer expectations.

Companies are experimenting with concepts that add flexibility, including forward-fulfillment centers in major metropolitan markets to support eCommerce orders and lightly stocked retail sites. As many store spaces shrink, more inventory will be located a few miles away in other facilities, which may have a small showroom, but will primarily house goods for delivery. The demise of many traditional retailers will leave ample downtown real estate that can be remodeled into fulfillment centers. In theory, a customer within a 10-mile radius of that store could order a product online and have it delivered by an Uber or Lyft driver in a matter of hours.

Much has been written about the demise of traditional retailers, but it’s premature to write that obituary. The ones that succeed will do so by finding a way to meet the rising expectations of customers in the most efficient way. To get there, they will need strong warehouse management, world-class transportation networks, and leading-edge technology to implement distributed order management.

That foundation will help them stay nimble and flexible, and prepared for the continuing disruption coming in the years ahead.