The retail industry is in the midst of a cataclysmic shift fueled by omnichannel activity, competitive realities, and changing shopper demands. Disruptors like Amazon, Netflix, and Google are at the center of this retail sector upheaval. They have significantly upped the stakes in the battle for shoppers' wallets and are gaining traction. Online sales represented just 7.5 percent of total U.S. retail sales for the quarter ending December 31, 2015, yet they accounted for 66.4 percent of total retail sales growth for the year.1
Industry pundits point to this data and sound the death knell for traditional retailers. However, battle-tested traditional retailers are not giving up. Reminiscent of the famous scene in the film Monty Python and the Holy Grail, the retailers are responding, "I'm not dead" and "I'm getting better" to the naysayers who claim, "you'll be stone dead in a moment."
How can retailers make good on their assertions that they will not only survive but will also thrive in this hypercompetitive environment? The ability to profitably compete across channels with the right mix of product, price, and service is paramount. As these channels grow more complex and time-sensitive, highly capable and agile supply chains are essential. Thus, it should be no surprise that major retailers—Amazon included—are giving supply chain leaders a prime seat at the strategic planning table as well as significant capital for improving fulfillment capabilities.
"Most of us have run supply chains before, but we didn't need this level of agility—real-time, hour-by-hour decision-making kind of stuff. It's a new world in which most of us are having to compete."
The theme of greater dependence on supply chain management as a success driver permeated our conversations with retail executives for the "6th Annual State of the Retail Supply Chain Report." This year's study, conducted in conjunction with our partners at the Retail Industry Leaders Association (RILA), the software firm Checkpoint Systems, and Supply Chain Quarterly's sister publication, DC Velocity, highlights the retail supply chain strategies, spending, and best-in-class capabilities that underpin customer satisfaction and retention.
For that research, we conducted an online survey of RILA's members, DC Velocity's readers, and customers of Checkpoint Systems. To gain meaningful insights from the major players in retailing, we sought participation from organizations with: (1) annual revenues above US$1 billion; (2) omnichannel capabilities; and (3) broad geographic activity. Eighty-eight percent of respondents were at the director level or above, with an average of 23.5 years of supply chain experience.
To round out the picture, we also conducted telephone interviews with retail supply chain executives, in which we asked them to discuss their longer-range plans and go-forward priorities. (Verbatim quotes from those interviews appear throughout this article.)
Those conversations provide clues about the future focus and structure of retail supply chains. Collectively, the supply chain executives identified four major opportunities that are capturing their attention, driving their decisions, and influencing their spending. Two of the priorities are strategic in nature, while two are more tactical. They are highlighted in Figure 1 and are discussed below.
1. Drive company growth through SCM
A key reason why supply chain management (SCM) has a seat at the strategic planning table is that it is positioned squarely at the crossroads of omnichannel retailing success. Revenue growth is largely being driven by e-commerce sales, and flawless e-commerce execution requires exceptional supply chain capabilities. Hence, savvy senior executives are taking an active interest in SCM.
This level of engagement and focus on supply chain management as a growth catalyst is a far cry from the days when SCM was viewed as a necessary evil. No longer are retail executives adopting a cost-centric approach to SCM with a relentless pursuit of expense reduction. Instead, a more sensible perspective has emerged among the retailers in our study: they are shifting away from logistics-cost optimization to customer-value creation, with the goal of driving sales.
"I've been in supply chain for many decades, and it is pretty exciting to participate in discussions about how the supply chain could drive sales, That's not typically a conversation that you have in the supply chain."
In our survey, fewer than 20 percent of the respondents indicated that their SCM strategy for 2016 centers on the traditional cost-control issue. Far more popular were strategies that focused on cost-service balance or customer service enhancement. In this vein, an executive vice president of supply chain noted, "Our challenge next year and for the foreseeable future will be to lay in capabilities that allow us to respond to and grow with the customer."
As the executive intimated, these growth-generating strategies are easy to articulate but difficult to execute. Significant challenges await retailers that seek to fuel growth through SCM. First, current supply chain processes, metrics, and incentives must be recalibrated to promote growth and customer service. Next, customer choice creates supply chain complexity. Just as a wide inventory assortment is difficult to manage, omnichannel fulfillment is more demanding and costly than store-only fulfillment. Finally, customer expectations will escalate in tandem with competitors' supply chain innovations. One SCM executive succinctly noted, "The differentiator is no longer price. It is the experience, speed of delivery, and convenience for the customer."
Overcoming these challenges to become more growth-oriented mandates that retailers retool their traditional, store-based supply chains. No longer is a one-way flow to the store adequate. What retailers need instead are customer-centric supply chains that can consistently serve demand from virtually anywhere in the network. However, these expanded supply chain services must not significantly undermine profit margins.
In response to these needs, major retailers are making massive investments in their supply chain capabilities. For example, Target will spend up to US$2.5 billion annually to upgrade its supply chain and technology infrastructure as it races to reduce stock shortages and pushes for online growth.2 The purpose of such investments, according to one of our interviewees, is simple: "We are building capabilities that will allow customers to get, within our assortment, what they want, when and how they want it."
The retailers in our 2016 study indicated that they are also working to embrace change management, align inventory with demand, and elevate omnichannel fulfillment capabilities. Each of these growth-promoting priorities is discussed below.
2. Support effective SCM change management
To successfully serve omnichannel demand now and in the future, an integrated and nimble network of resources and processes must replace the traditional sequential activities and flows. All elements of the organization must recognize and accept that changing market dynamics necessitates adjustments to the old ways of doing things. Achieving such a dramatic shift is, however, a difficult task, according to a senior supply chain executive, who told us, "The challenge is getting an organization to think differently about what they need to do, and then to connect that to existing processes and take the risk to change those processes."
Change is nothing new for retail supply chain professionals. Over the last 20 years, rapid change has become the norm in their industry, and they have responded to the promise of e-commerce by routinely modifying their supply chain processes to meet evolving requirements. For example, many retailers have made the transition from the use of third-party fulfillment for their online business to handling online fulfillment internally in dedicated e-commerce facilities, eventually moving toward a unified internal process that integrates fulfillment of online orders with store-based processes. Accompanying upgrades to technology and logistics processes have also taken place.
Building omnichannel-capable supply chains can be chaotic, however, and these changes have not always gone smoothly or been successful. They do take a toll on people if not appropriately enacted, so it is essential to take measured approaches to transitioning individuals, teams, and the organization to the new norms. Assisting them through the learning and acceptance curves is the essence of a successful change management program. That can be frustrating and slow, but it is the only way to achieve the lasting benefits of supply chain change.
"There continues to be a human element of change management. Buy-in is critical, with everybody signing up for and utilizing the new technology and processes that you've invested in, but we're still finding our way through this."
To create the customer-centric supply chains discussed above, retailers must go beyond better alignment of demand planning, inventory management, order fulfillment, store replenishment, and returns management. Engagement between the supply chain organization and other retail entities must also become more comprehensive. Interactions must be more frequent and more information-rich, expertise must be shared, and traditional roles must be redistributed to those with the relevant core competencies.
The most visible change in this area to date has been the way supply chain and store operations are interacting in a more cohesive fashion. No longer do supply chain responsibilities end at the back door of the retail store. Instead, supply chain and store leadership are collaborating to establish store-based fulfillment capabilities. Supply chain professionals can lend their "pick, pack, and ship" knowledge and returns management process expertise to store personnel who are neophytes in these critical areas. Training on in-store order picking, backroom fulfillment-module layout, and inventory-accuracy improvement are three such opportunities. One respondent's company is doing this by building cross-functional store teams to support omnichannel efforts. As the role of stores continues to evolve toward serving both in-store and online customers, this collaboration must become stronger.
Another essential relationship change must occur between SCM and merchandising groups. The traditional "buy versus move" responsibilities must be broken down to create better communication between the groups and to develop channel-agnostic demand plans. Leading retailers in our study indicated that they are either moving demand-planning activities completely into the supply chain area, or they are embedding supply chain staff in the merchant group to improve forecasting and allocation. Figure 2 highlights the engagement of supply chain professionals in demand planning.
Retailers' relationships with vendors and carriers must also change. Customers are no longer limited to what is on the store shelf. They have "endless aisle" access to a brand's full catalog of stock-keeping units (SKUs) via in-store kiosks, mobile devices, and websites that link to retailer and vendor stock across the supply chain. As that customer access expands, vendors become an extension of the retail enterprise and are required to meet the commitments the retailer has made to its customers. The same holds true for parcel carriers, because delivery excellence is a proxy for a retailer's performance. The supply chain group must work closely with both vendor types to ensure that requirements are understood, order visibility is maintained, and compliance is consistent.
Changing these relationships and the accompanying processes must be approached with caution. Too often, the mad dash to omnichannel capabilities has resulted in ill-planned and poorly communicated changes that may appear irrational to those tasked with implementing them. Executive leadership must recognize that gaining buy-in to a more supply chain-centric focus will require time, their explicit support, and tactful engagement of the affected areas. It will also be necessary to embed supply chain competency into each element of the organizational structure and invest in the development and retention of capable supply chain professionals so they are able to handle their expanded roles.
3. Align inventory placement with demand
In an omnichannel environment, getting inventory into the right place in the network is a key priority. Another priority for retailers, therefore, is leveraging investments in building omnichannel infrastructure and order management technology for optimal inventory management.
Although positioning inventory in the right place at the right time has always been a fundamental responsibility of logistics, it is very difficult to get this right in an omnichannel environment. One reason is that the need to quickly fill omnichannel orders has superseded the objective of filling the order efficiently from the best location. Reactive "save the sale" efforts that move inventory among facilities or fulfill an order from a node with little thought about total cost will satisfy customers but will not protect margins.
Moreover, it is not sufficient to simply know which products customers demand in an aggregate sense; it's becoming equally important to know where and when to place the inventory in advance of that demand. As one senior supply chain executive in this year's study noted, "In this whole notion of omnichannel, it really matters where you put inventory the first time. It may even matter more now than it did before omnichannel."
To achieve that goal requires point-of-sale systems with demand data, but they must be supplemented by such information as order origination point, customer contact information, and delivery addresses. Hence, more powerful order management systems are needed to synchronize inventory, order status, and location with customer demand.
Some retailers are developing more effective capabilities for aligning this type of information and have undertaken a number of initiatives to synchronize demand and inventory. One approach is to establish highly detailed demand plans. For example, some are prioritizing the ability to generate item-level forecasts with geographic demand information to support inventory availability, wherever and whenever customer demand occurs.
"We are increasingly moving toward a more granular level of demand assessment, rather than a high-level unit forecast."
Another approach is to view inventory as a singular enterprise resource that can be accessed to meet demand from any channel. With online sales growing rapidly, retailers are finding that they need to utilize all available inventory, including that stored in distribution facilities as well as in stores. To meet this growing need, they are linking inventory across the entire network to function as a single pool of inventory that is available to support multiple demand streams. This one-inventory strategy must be supported by fulfillment agility if customers are to be effectively served. An agile fulfillment process can dynamically review and allocate inventory across the network, on a per-order basis, to fill online demand in a way that is efficient and cost-effective.
The ease of purchasing items online and dynamically selecting home delivery or store pickup further complicates retailers' inventory forecasting and positioning efforts. Supply chain organizations are trying to solve this demand-inventory coordination puzzle using a variety of methods. Some retailers put more emphasis on centralizing orders, and thus inventories, while other retailers are striving to push as many e-commerce orders to stores as possible. Time will tell, but we anticipate that it will take multiple attempts by retailers to reach some level of optimal inventory positioning.
4. Improve omnichannel velocity and value
The goal of omnichannel fulfillment is to have product readily available whenever and wherever the customer wants. Remaining competitive requires omnichannel retailers to move product more quickly to the point of sale, often in small quantities, while keeping logistics costs under control.
The longstanding focus of retail supply chain professionals has been to ensure that stores were fully stocked with their merchant-defined product assortment. On-shelf availability was the priority that drove the development of high-volume, case-pick distribution centers and truckload deliveries to stores. This bulk-oriented, limited-location fulfillment network generated low operating costs in support of low-price strategies.
While this store-based replenishment network will endure, supply chains must adapt to the realities of omnichannel retailing. Mobile apps and websites allow customers to order product from anywhere for delivery to anywhere in single-unit quantities at customer-defined transit times. Such highly fragmented buyers with dynamic service requirements can be tremendously difficult to serve at a profit.
This fulfillment challenge is not new. Some retailers have dealt with direct customer orders for more than a century via catalog shopping. However, omnichannel retailing has exponentially expanded order volumes and the number and type of organizations involved in direct fulfillment. These retailers have experimented with a wide variety of fulfillment processes to meet omnichannel demand. The goal of these experiments has consistently been to identify the process(es) that provide the best, most rapid service for the customer at an effective cost.
Lower-volume retailers expedited their e-commerce initiatives by outsourcing fulfillment to third parties. Larger-scale retailers like Wal-Mart Stores and The Home Depot have invested in dedicated e-commerce fulfillment centers to accommodate their volume and expand their online offerings. Both options offer advantages but may miss the opportunity to leverage inventories across channels. Inventory duplication generates higher carrying costs.
Another option is to establish integrated fulfillment centers that support both store replenishment and e-commerce orders. Integrated fulfillment leverages a single inventory for both demand streams and avoids facility duplication. This option is best suited to retailers that support extensive break-pack fulfillment of store orders. Leveraging a single inventory to fulfill customer-direct orders alongside store replenishment orders allows retailers to save on their overall inventory investment.
The latest trend is fulfillment of customer orders at the store. Stores maintain the desired inventory in customer-proximate locations. Delivery costs can be reduced through local delivery or eliminated with store pickup. The challenge is to accurately conduct fulfillment operations without rapidly depleting inventory levels. That may require more frequent store replenishment. To minimize the impact on store operations and customer service levels, a "hub store" concept may be deployed. Under this strategy, a single store acts as a fulfillment center for a densely populated region to minimize disruption of activities at other stores in the area.
Among our study participants, the current practice is to leverage multiple fulfillment strategies to meet speed and cost goals. On average, they deploy three methods. Figure 3 reveals that store pickup, deliver from store, and integrated fulfillment are the most widely used options. The use of these options is anticipated to grow over the next three years.
"There's a place for shipping from stores, and there's a place for central fulfillment. I think you have to do both."
Clearly, there is no single fulfillment strategy that is best for all retailers. Each offers advantages and disadvantages based on a retailer's SKU assortment, sales volume, store sizes, and distribution network. Strategy selection and deployment should be based on the ability to simultaneously meet service commitments and contain fulfillment costs for a given set of customer order characteristics. If those characteristics trend toward same-day fulfillment and delivery-fee avoidance, excellence in store-based fulfillment must become an even greater priority for retailers.
Four steps to long-term success
Retailing has been forever changed by the rapid evolution of e-commerce. Customers have readily embraced technology in their product search, analysis, and purchase activities for everything from perishable groceries to durable furniture. Savvy retailers are responding with creative solutions to protect and expand their markets. And that means looking beyond the buying offices and stores for success. Supply chain management must be a cornerstone of these initiatives to keep the competition at bay.
As revealed by our research, robust supply chains will help retailers seize the omnichannel growth opportunity. It starts with elevating supply chain management to a boardroom focus. Next, change management is needed to facilitate buy-in to the expanded role of SCM. Then, execution on the promise is required, with better alignment of inventory with demand and simultaneous achievement of fulfillment velocity and value.
Delivering on these supply chain priorities will drive future success and allow retailers to rightfully claim, "No need to call the doctor, because I'm not yet dead!"
1. Stefany Zaroban, "U.S. E-Commerce Grows 14.6% in 2015," Internet Retailer, February 17, 2016.
2. Nandita Bose, "Target to Invest Billions to Improve Supply Chain, Ramp Up Online Growth," Reuters, March 2, 2016.