Bringing It Home:

The Omni-Channel Supply Chain's Fulfillment Opportunity

ProspectiveViewBrian Kilcourse, Managing Partner

May 2018

Sponsored By:

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Overview

Omni-Channel's Relentless Progression The traditional retail operating model is based on a time-honored concept: consumers begin and end their shopping experiences in one place, usually the store. In the 1990’s, retailers built their e-commerce sites to emulate stores with the assumption that consumers would begin and end their shopping trip in that channel, just as they did in the store. But by the early 2000’s, consumers began exhibiting a new behavior, using the e-commerce channel to investigate solutions for their lifestyle needs even when they intended to complete their purchases in a store. Retailers barely noticed at first, and were mystified that “same store sales” for the e-commerce channel were almost too small to measure.

All that changed with the explosive consumer adoption of “smart” mobile phones, starting with the introduction of the Apple iPhone in 2007. Now consumers could carry “the store” around in their pockets and purses. The focus changed from what the retailer wanted to sell to what the consumer wanted to buy, and retailers began to consider the changes needed to their processes and supporting technologies. “Omni-channel” shopping proved to be more than a passing phenomenon, and by 2010 retailers knew that they needed to pivot their businesses to become customer-, not product-, centric in order to meet the demands of information-empowered consumers.

Since 2010, retailers have progressed from developing an omni-channel strategy to executing one. Companies have worked hard to present “one face to the customer" by aligning the digital and physical selling environments with consistent brand and product information, and offering consumers flexible fulfillment options. Now they must address the much more difficult task of systemizing all those unified brand promises with a supply chain that is aligned well with the new selling environment.

Until recently, the most protected area of the business has been supply chain. Many retailers have built eCommerce distribution centers (DC's) and worked to enable direct-to-consumer shipping, and many have turned to the stores for buy-online-pickup-instore order fulfillment. But as “digital” continues to evolve, there’s increasing urgency to address the changes that omni-channel is bringing to the supply chain. While retailers remain focused on customer expectations and delivering a consistent brand experience across all channels, they also are facing a world where customer demand comes at them from every angle, and must be satisfied no matter where the inventory currently resides. And competitors are only increasing the pressure with same day deliveries and endless aisle capabilities (Figure 1, below).

These combined pressures are forcing retailers to crack open the supply chain, turning what once were end-points in a very well-established chain into nodes where inventory moves in all directions. Retail supply chains that once assumed that customers would travel to stores and acquire whatever inventory happened to be there are now obsolete.

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Figure 1: The Supply Chain Shift

Source: RSR Research, December 2017

The Omni-Channel Fulfillment Opportunity

Retailers understand they need to change, and that they can no longer isolate their supply chains from the biggest changes headed their way. As early as 2012, retailers were telling RSR that they understood they had to increase supply chain flexibility in order to meet demand across channels – and that they were willing to take a short-term reduction in efficiency in order to get there.

As retailers open up their supply chain, turning what once were endpoints into nodes and vice versa, three key areas of opportunity become apparent. They focus on dropship, new distribution models, and new expectations for the store.

The Dropship Opportunity Dropship here is defined a little differently than the traditional meaning, focusing more on vendor dropship direct to consumer, rather than direct to store, although to be true to the fulfillment flexibility mantra, it could conceivably mean shipping to a store for consumer pick-up, depending on the customer’s desires.

Four key capabilities are required to fully take advantage of the dropship opportunity. First, retailers need to use dropship as a way to more carefully curate and localize the store assortment. Dropship enables retailers to offer a fully expansive assortment, but it means that the in-store inventory needs to better reflect what will both show off the full assortment to the best advantage (one piece to represent a range of colors, for example), and will best sell in that unique location. In order to gain these benefits, retailers must be able to provide full assortment visibility both online and in stores, alongside the second key capability: inventory visibility.

35%

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Competitors’ endless assortment / marketplaces challenge the depth of our assortment

The pattern of consumer demand and how we fulfill it has changed

Consumers expect retailers to provide a more seamless omni-channel experience

The increasingly competitive environment has caused us to run more promotions

Pressure from competitors to achieve same-day fulfillment to consumers

What Are The TOP THREE (3) Business Challenges Your Company Faces Around Supply Chain Execution

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In order to best meet shopper expectations, retailers also need to make sure they carefully negotiate service levels with their vendors to ensure that the customer gets the best experience from both retailer and vendor, with no finger-pointing between the two if customer expectations are not met. Finally, a key prerequisite for that kind of trust is process visibility – providing insight into milestones and monitored checkpoints to ensure that customer orders don't go awry.

The DC Opportunity Today, enabling direct to consumer fulfillment from distribution centers is critical to Omnichannel success. However, retailers have not always been so certain of its value. In the early days of eCommerce, retailers tried to stake out a corner of their store DC's in order to meet online demand, but found they quickly needed a lot more space, and were challenged to maintain inventory discipline between

online and store inventory.

Those barriers between online and the store are coming down, in response to the need to be able to tap into and fulfill inventory to meet any demand no matter where it may reside. This applies as much to inventory sitting in store-bound DC's as inventory in stores themselves.

In order to make DC fulfillment to consumer a reality, retailers need to consider a range of decisions. They must be committed to setting up eaches fulfillment, even if it must feature a constantly shifting mix of product. They must consider a potential future where they may even offer consumers the option to pick-up from DC, much like they might pick up from stores. Retailers also need to think hard about enabling virtual pools of inventory, so that unexpected demand in one channel doesn't starve the other channels of inventory.

But the future of the DC may move far beyond outbound considerations, to encompass two key capabilities that are enjoying a new level of scrutiny within retail operations. The first is as a content management checkpoint, to verify that the product received matches the images in digital channels. Some retailers are co-locating their photo studios to shoot or re-shoot product images based on actual product received, to reduce the impact on customer service calls or returns. Second, retailers are revisiting their returns processes to enable greater visibility into how much inventory is in returns processing, and what the status of that inventory is – with an eye towards getting inventory back into selling shape sooner. This is especially important for apparel retailers, who see very high return rates, particularly from online shoppers.

The Store's New Expectations The biggest opportunity for stores is to consider them more as nodes in the supply chain, instead of merely being a destination endpoint. This means using store inventory to fulfill demand from other locations, whether other channels or stores.

In order to take advantage of this opportunity, retailers need to think through several fulfillment options, from reserving in-store inventory for pick-up all the way through to ship from store. For some retailers, the larger opportunity will come from editing the in-store assortment by offering endless aisle. For other retailers, the primary opportunity will stem from ship-from-store, particularly where color/size combinations make it critical to identify the right inventory no matter where it might reside. And for still other retailers, home delivery may be the biggest opportunity, turning the store into a mini fulfillment center in its own right.

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The type of inventory a retailer sells will have the biggest impact on each retailer's opportunity, based on the value to weight ratio of the product sold, the cost to ship those items, and the overall product margin involved. Retailers with high margin items that are light relative to their value have the biggest opportunity from ship from store, where retailers with bulky, low value items that are expensive to ship will benefit more from in-store inventory reservation for customer pick-up, for example.

The Road Ahead: Enabling Profitable Fulfillment

While retailers are currently (and rightly so) focused on flexibility, the road ahead will turn towards enabling flexibility in the most efficient way possible. So while retailers need to explore their options for increasing their fulfillment flexibility, they would be wise to do so knowing what's around the next corner: being able to identify the most profitable inventory to meet consumer demand irrespective of where the inventory is located or the channel where the demand was expressed.

So as retailers explore fulfillment flexibility, here are three things to keep in mind:

It Starts With The Forecast Retailers today are challenged by the increasing unpredictability of consumer demand as well as its inevitable side effects – too much of the wrong inventory and too little of the right inventory in the wrong places. That concern has caused forecasting and replenishment to bubble near the top of retailers’ list of ‘very important’ technologies. New data for forecasting often comes from external sources, outside of the operational databases that retailers have queried in the past (competitive data, trade area data, consumer sentiment data, weather data).

By integratingnewdemandsignalsacrosschannels (suchasweather, localeventcalendars,socialbuzz,etc.) retailerscouldnotonly improveflexibility in fulfillment,butalsoadda levelofprecisiontooveralldemandforecastaccuracythatlegacytoolswerenotoriginallydesignedtoincorporate.

Today’s faster and more powerful analytics can improve the base demand forecast. But the new technology can also help retailers respond more nimbly to external factors that ultimately affect where inventory is positioned.

Identifying Demand's Originating Channel When reaching across channels to meet unexpected demand, it is critical to track those cross-channel fulfillment activities. The first question that merchants will ask after enabling omni-channel fulfillment will be, "Why didn't we put that inventory in that location to begin with?" While retailers struggle with how to account for the sales credit, the fact that a store or online did not have the right inventory to begin with often gets lost. Forecasting solutions have long added in missed sales opportunities, which are typically derived and estimated. Actually tracking those missed opportunities become easier in an omni-channel fulfillment model – and the results are almost guaranteed to be eye-opening.

Improving Visibility Retailers continually cite inventory-related issues from inaccuracy to lack of visibility as the biggest challenges they face in trying to meet growing customer expectations. Without the ability

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to “see” inventory wherever it is and whatever state it’s in, the only way to ensure high service levels to consumers is to over-inventory – an option which is particularly unattractive. The best performers are already using improved inventtory visibility as a competitive wedge to further separate themselves from average and under-performers.

Visibility extends far beyond the ability to see on-hand inventories in the stores, DCs, and fulfillment centers, to include on-order, inbound, outbound for delivery, and returns. New technologies such as “big data” analytics and IoT can help improve supply chain visibility, enable ‘real-time’ decision making (e.g. in-flight route optimization, re-planning) and customer order delivery confirmation.\

Defining the "Most Profitable Location" When retailers first start examining scenarios that involve increasing the amount of handling that inventory receives – for example, ship from store, which tacks on an additional shipping and handling cost to inventory that has already been shipped and handled into the retailer's most expensive location – they typically focus almost exclusively on those shipping and handling costs. However, very soon their focus will turn to considering things like whether an item is facing an imminent markdown in one location but not in another.

So whether a retailer acts on all of that information in the beginning or not, they must be sure to define the "most profitable location" as widely as possible to include things like imminent markdowns, the probability of stocking out the potential source location, and the efficiency of the workforce handling the product.

Accounting for Store Labor Just because employees happen to already be staffed in a store doesn't mean they are available or properly trained to pick, pack, and ship. Store employees are theoretically in stores primarily to serve walk-in customers. But store staff has often been drastically reduced to cope with the economic downturn, and have not returned to pre-downturn levels. So as retailers look at scenarios that involve leveraging store staff, they must account for the additional labor requirements, both to be sure that store sales don't suffer, but also to understand the real handling costs associated with fulfilling extra-store demand. Without that understanding, retailers will be challenged to ensure that onmi-channel fulfillment is profitable.

Navigating Supply Chain Change

Supply chain and fulfillment have begun their transformation in response to omni-channel shifts. However, while it is a disruptive transformation, and retailers often face more questions than answers, it is also an exciting time for fulfillment. Retailers have real opportunities for differentiation – opportunities that promise substantial rewards not just in terms of customer satisfaction, but in real return on investment, at least for the retailers willing to embrace the change.

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Appendix A: About Our Sponsor

Hortonworks is a leading innovator in the industry, creating, distributing and supporting enterprise-ready open data platforms and modern data applications. Our mission is to manage the world’s data. We have a single-minded focus on driving innovation in open source communities such as Apache Hadoop, NiFi, and Spark. We along with our 1600+ partners provide the expertise, training and services that allow our customers to unlock transformational value for their organizations across any line of business. Our connected data platforms powers modern data applications that deliver actionable intelligence from all data: data-in-motion and data-at-rest. We are Powering the Future of Data™. http://hortonworks.com/solutions/retail/

Appendix B: About RSR Research

Retail Systems Research (“RSR”) is the only research company run by retailers for the retail industry. RSR provides insight into business and technology challenges facing the extended retail industry, providing thought leadership and advice on navigating these challenges for specific companies and the industry at large. We do this by:

• Identifying information that helps retailers and their trading partners to build more efficient and profitable businesses;

• Identifying industry issues that solutions providers must address to be relevant in the extended retail industry;

• Providing insight and analysis about a broad spectrum of issues and trends in the Extended Retail Industry.

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