For the past five years, the growth of online sales has significantly outpaced that of comparable-store sales for brick-and-mortar stores, a trend that is anticipated to continue. The difference is significant: According to the U.S. Census Bureau, in 2014, e-commerce grew at a rate of 14 percent versus only 2 percent for traditional retail outlets.1
This continuing growth is making it challenging for retailers to effectively manage their supply chains to profitably fulfill orders. Specifically, the increase in e-commerce transactions is forcing them to manage smaller, more frequent orders, thereby shifting the focus of retail distribution centers from pallet picking for store replenishment to single-item picking for orders shipped directly to a customer's home. This effect is compounded by the rising expectations of consumers who want their orders delivered quickly, which often requires retailers to do more work in less time. To help them meet these and other challenges associated with fulfilling e-commerce orders, retailers are adopting a variety of strategies and technologies.
One way many retailers are beginning to address these challenges is by fulfilling a subset of orders through their stores. Deloitte recently surveyed over 60 leading retailers to determine which methods they are using to fill e-commerce orders. The results, outlined in the report Retail Omni-Channel Survey, 2015 and detailed in Figure 1, show that a significant number of retailers either already offer or plan to offer consumer-direct fulfillment methods through their stores, including "pickup in store" (94 percent), "ship to store for pickup" (91 percent), and "ship from store" (82 percent).
Retailers are realizing significant benefits from these store-based fulfillment techniques. For example, by leveraging inventory across the enterprise, they may be in a position to improve margins and revenue. This allows them, for instance, to fulfill online orders using inventory that would otherwise be marked down, and thus reduce the impact of an imperfect demand forecast. In the case of constrained inventory, sales associates in the store are able to "save the sale" by tapping into inventory in other stores and having product shipped directly to customers.
Another potential benefit of store-based fulfillment is the additional capacity that brick-and-mortar stores provide. Many retailers' distribution centers are operating at maximum capacity due to large volumes of e-commerce orders, especially during peak seasons. By leveraging their stores as storage and delivery locations, some retailers have been able to defer investing capital in building additional distribution centers.
Finally, because stores may be located closer to the customer than distribution centers, store fulfillment may allow faster order-to-delivery times. Deloitte's survey, for example, found that the average time to fulfill an e-commerce order from order placement to customer delivery through a store was three and a half days versus four days through a distribution center. Delivery speed is a critical factor in online purchasing decisions, and customers increasingly are willing to pay more for premium fulfillment services such as same-day delivery. The quicker delivery times that store-based fulfillment can offer enables retailers to compete based on time without having to pay for expedited shipping services.
Capacity growth and delivery alternatives
In many respects, the continued growth of e-commerce is likely to depend on goods consistently arriving on consumers' doorsteps on time and at the right price. That may partly explain why the two largest national parcel delivery companies still account for the majority of the volume of e-commerce deliveries: They have a reputation for reliability, and there is a concern among shippers that diversification of the carriers they use would negatively affect their negotiated volume discounts. In response, these two carriers are investing heavily in keeping up with demand. One of these companies alone spent over US $1 billion in 2014 to expand its ground capability, much of that intended to meet e-commerce demand.
At the same time, customers' expectations that shipping charges for e-commerce orders should be minimal to nonexistent have driven many top retailers to offer some variation on "free shipping." But increases in shipping costs due to growing parcel volumes coupled with the largest parcel carriers' new dimensional weight freight-pricing formulas are causing these companies to explore alternative delivery options. In particular, many retailers are looking at using regional players for certain deliveries rather than simply defaulting to the traditional big carriers. Package consolidators, which utilize their own network and then hand off packages to the U.S. Postal Service for last-mile deliveries, are also filling the gap. The national parcel carriers' reliability advantage is also shrinking as tracking software becomes more pervasive and packages are scanned more times as they go through the shipping process.
Finally, some retailers are beginning to shift from a common carrier model to a hybrid model that includes a private fleet component. In a highly publicized move, one large online retailer took the step of launching its own fleet in selected cities. If this model is seen as working effectively, many other e-commerce retailers may follow suit. This trend is supported by findings from Deloitte's Retail Omni-channel Survey, which show that 30 percent of retailers already employ some form of owned fleet, with an additional 12 percent planning to add this capability in the next two years.
In order to effectively capitalize on these trends, retailers are investing in new capabilities, many of them based on technologies that are designed to improve how supply chain data are collected, analyzed, and shared within and beyond the enterprise. Here are four that are emerging as "building blocks" that enable effective management of e-commerce logistics and distribution:
Adapt now to store-based fulfillment
From a supply chain perspective, one of the most important trends in e-commerce today is the shift toward store-based fulfillment. While this shift often provides many advantages for retailers that sell online, including lower inventory requirements, lower costs, and better customer service, store-based fulfillment is complex to execute. For many retailers it is resulting in a significant business transformation—affecting everything from how they physically ship products to the technology required to manage order fulfillment processes. These changes are drastic and take time to fully implement. Retailers that adapt to this trend now will likely be in a better position to profitably serve their online and in-store customers while remaining relevant in a fast-changing, competitive retail environment.