CSCMP's Supply Chain Quarterly
October 19, 2018

Pursuing the promise of omnichannel retailing

Results of a recent survey show that retailers believe omnichannel commerce can increase revenue and improve customer satisfaction. But they're still trying to figure out what that means for their supply chain operations.

Omnichannel commerce is one of the most powerful trends to sweep through the retail world in recent years. More retailers than ever are getting involved in this strategy, which not only allows customers to order anywhere, any time, and on any device, but also lets them take delivery when and where they want.

But building a profitable omnichannel commerce system can challenge nearly every function in a company, from supply chain management and information technology to marketing, store operations, and order fulfillment. In search of more efficient ways to control the flow of inventory, companies in nearly every corner of the retail industry are experimenting with various distribution strategies, whether that's filling both e-commerce and store replenishment orders from a single distribution center (DC), running separate fulfillment operations, or filling online orders directly from the shelves of brick-and-mortar stores.

Article Figures
[Figure 1] How do you fulfill e-commerce orders?
[Figure 1] How do you fulfill e-commerce orders? Enlarge this image
[Figure 2] What technologies do you use to support omnichannel initiatives
[Figure 2] What technologies do you use to support omnichannel initiatives Enlarge this image
[Figure 3] How do you handle
[Figure 3] How do you handle "last mile" deliveries? Enlarge this image

To get a better understanding of how companies are meeting the challenges of omnichannel distribution, ARC Advisory Group, a research and consulting firm based in Dedham, Massachusetts, USA, has teamed up with Supply Chain Quarterly's sister publication, DC Velocity, to conduct an annual survey on retail fulfillment practices. Respondents to the 2015 survey answered some 30 questions about their approaches to meeting current challenges in omnichannel commerce and their plans for the future.

The results show that retailers are moving toward omnichannel operations with a goal of gaining customers and boosting revenue. Asked to list the top three reasons their company was participating in omnichannel commerce or building up those capabilities, survey respondents appeared to be squarely focused on revenue, saying they did it to increase sales (57 percent), increase market share (56 percent), and improve customer loyalty (55 percent).

Although the survey respondents clearly shared a common goal, that's where the commonality ended. The research results also showed that respondents are employing a wide variety of strategies and methods to omnichannel efforts.

The mechanics of omnichannel distribution
One of the biggest challenges of fulfilling orders in an omnichannel world is that picking and packing smaller, single-line-item orders that will ship directly to the consumer requires much different processes and automation than the traditional method of picking and packing pallets and cases for brick-and-mortar stores. For this reason, there has been some debate among industry experts about whether it is better to fulfill e-commerce orders from the same facility as traditional orders or through a completely separate operation. The majority of respondents to the ARC/DC Velocity study (69 percent) indicated that they were following the combined approach, with only 31 percent handling e-commerce orders separately.

Many companies are not locking themselves into one method of fulfilling omnichannel orders. Nearly two-thirds (63 percent) of respondents said they fulfilled orders through a traditional DC that also handles e-commerce. Forty-seven percent used an Internet-only DC, 43 percent fulfilled orders from the store, and 36 percent said they filled e-commerce orders directly from the manufacturer or supplier. Respondents were allowed to select more than one response, and as the percentages indicate, a number of them are using multiple methods. (See Figure 1.)

Many respondents have opted to outsource the fulfillment end of their e-commerce operations to a third-party logistics service provider (3PL). More than half—55 percent—of respondents said they relied on their own corporate (internally managed) distribution centers to perform that function, while 22 percent used sites operated by their outsourcing partners. Another 23 percent said they are using both.

Within the warehouse, workers are using a wide variety of tools and methods to select items needed to fill e-commerce orders. Survey respondents said order pickers in distribution centers were using the following technologies: warehouse management systems (WMS) combined with radio frequency technology (53 percent), voice-recognition systems (33 percent), pick-to-light technology (22 percent), paper-based WMS (35 percent), and goods-to-person automation (20 percent).

Their managers also use a range of tools to support omnichannel commerce initiatives. When asked what technologies they currently use, respondents' top three answers were high-end warehouse management systems (91 percent), demand management software (72 percent), and basic bar-code scanning on the store floor or in the backroom (61 percent). (See Figure 2.)

Delivering the goods
A crucial link in any omnichannel fulfillment operation is the final step: getting e-commerce orders into customers' hands. Here, the options range from in-store pickup to home delivery. The survey delved into current practices in this area as well as respondents' plans for the future. The responses suggest that e-commerce delivery is an area that's very much in flux.

The most popular method for handling "last mile" deliveries was delivery services such as FedEx, UPS, and the U.S. Postal Service (84 percent), followed by drop shipping directly from partners' DCs (61 percent), 3PL delivery partner (50 percent), and store fleet (40 percent).

It was a different story altogether when it came to respondents' plans for the future. When asked which shipping methods they "do not use, but plan to use," their responses pointed in some interesting directions. For instance, they showed particular interest in crowdsourced delivery services such as Deliv or Instacart: 0 percent use them today, but 28 percent plan to use them in the future. (See Figure 3.)

Meanwhile, back at the store ...
One of the more distinctive aspects of omnichannel commerce is that many purchases are never processed or shipped from warehouses or DCs at all, but are handled directly through retail stores. As previously noted, currently 43 percent of respondents use store-based fulfillment.

To better understand how retail outlets fit into the picture, we asked that group of respondents which fulfillment-related activities they carried out at their store locations. In keeping with omnichannel's focus on flexibility, respondents are taking multiple approaches. Sixty-eight percent said e-commerce orders were both picked and shipped from the store, while 64 percent said orders were picked at the store and then held for customer pickup. A smaller percentage—46 percent—said they shipped e-commerce orders from a distribution center to the store for customer pickup.

That raised another issue: whether the retailers' employees picked the items from the stockroom or the showroom. For many respondents, the answer is "both": 71 percent said they picked orders from the back of the store and 64 percent said they picked from the front.

Finally, respondents were asked what methods their stores used to communicate order information to the workers who picked those orders. The answers showed that stores lag well behind warehouses and DCs when it comes to the adoption of fulfillment technology, since the most popular reply was a paper-based method, with 56 percent. Trailing far behind were radio frequency (RF) gun with textual display (26 percent), RF gun with graphical display (also 26 percent), and some other mobile device (15 percent).

The economics of omnichannel
The survey results also revealed that despite the rapid growth of omnichannel commerce, e-commerce revenue has a long way to go before it eclipses brick-and-mortar sales income.

ARC asked survey respondents what percentage of their direct retail revenue—that is, revenue from items sold to consumers through their own sales platforms, as opposed to being moderated by a retail partner—currently came from each channel. The average for brick and mortar was 63 percent, far above online and mobile (24 percent), and call center and catalog (15 percent).

Despite the modest revenue generated through online, mobile, call center, and catalog sales, a solid majority of respondents had sales operations up and running in every channel. When asked to list all the channels in which they currently receive direct retail orders, respondents cited online (84 percent), brick and mortar (76 percent), call center and catalog (57 percent), and mobile (46 percent).

Taken together, the survey results indicate that omnichannel retailing is here to stay, but that fulfillment practices remain in flux. In particular, the study points to changes ahead in the area of parcel delivery.

These results seem to indicate that companies' fulfillment strategies are still trying to catch up with the new retailing reality. Figuring out the nuts and bolts of fulfilling the omnichannel promise remains a key issue for retailers. But these practical issues must be resolved quickly, or retailers risk losing the customers and revenues that are the very reason they are involved in omnichannel in the first place.

Ben Ames is Editor at Large and a Senior Editor at Supply Chain Quarterly’s sister publication, DC Velocity.

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