Multitasking DCs deliver the goods for omnichannel retailers

Once upon a time, the retail industry was a safe, predictable way to make a living. Businesses simply had to take delivery of inventory, stock the shelves, and greet eager customers at the door.

Sign on for a retail job in 2016, however, and you'd better buckle up for a wild ride. This industry is one of the fastest-changing sectors of the U.S. economy, with companies hustling to adapt to trends like drone delivery, virtual reality, and mobile commerce. One change looms over all the others, however: the rush to join the omnichannel revolution.

Article Figures

[Figure 1] How do you fulfill e-commerce orders? Enlarge this image

[Figure 2] What technologies do you use to support omnichannel initiatives? Enlarge this image

[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 commerce, Supply Chain Quarterly's sister publication, DC Velocity, and the research firm ARC Advisory Group teamed up to conduct a fourth annual survey on retail fulfillment practices. Respondents answered 37 questions on their approach to meeting current challenges in omnichannel commerce and their plans for the future.

The results showed that in spite of an array of new logistics strategies and processes, most retailers have simply bolted their new omnichannel operations onto existing infrastructure, fulfilling multiple order streams in the same distribution centers (DCs) where they handle traditional store fulfillment. The survey statistics that follow tell the story of why, how, and where businesses are performing omnichannel fulfillment.

Preserving market share
When it comes to why companies embark on the omnichannel journey, the answer seems to be all about preserving their slice of the market. Asked for the top three reasons they were participating in omnichannel commerce or intended to do so, respondents said they wanted to boost sales, increase market share, and improve customer loyalty. Those responses finished far above cost-focused alternatives such as increasing margins, improving ability to rebalance inventory, decreasing markdowns, or reducing capital expenditures associated with building a new e-fulfillment warehouse.

We asked respondents which omnichannel capabilities they currently support, and they ranked the five options as follows:

• Order at store, fulfill from warehouse (67 percent)
• Return to store, even when goods are ordered online (65 percent)
• Inventory rebalancing, shipping excess inventory from one store to another (54 percent)
• Order at store, fulfill from another store (42 percent)
• Parcel return, even when goods were bought in a store (32 percent)

As for how respondents fulfill online orders, the answers were all over the map: 75 percent said orders were fulfilled through a traditional DC that also handles e-commerce, 44 percent said orders were filled from a store, 38 percent said items were shipped directly from a manufacturer or supplier, and 32 percent use an e-commerce (Web-only) DC. Respondents were allowed to select more than one response, and as the percentages indicate, a number of those companies are using multiple methods. (See Figure 1.)

With three-quarters of retailers fulfilling orders from multiple channels in a single facility, that approach is clearly a foundation of omnichannel practice. Seventy-seven percent of respondents to this year's survey said they handled e-commerce fulfillment and traditional fulfillment at the same facility, an increase from the 69 percent who answered the same way in last year's survey.

Retailers are taking orders from a diverse range of sources. In fact, when it comes to ringing up sales, it appears all doors are open: 86 percent said they took orders online (including mobile), 77 percent said from brick-and-mortar stores, and 42 percent said from call centers and catalogs. (Totals came to more than 100 percent because most businesses support multiple channels.)

Although many retailers are fulfilling orders from multiple channels in a single building, the survey also revealed that there is plenty of room for them to merge those operations more completely. When asked whether their e-fulfillment operations were segregated from traditional fulfillment, 59 percent of respondents said yes. Those that do so indicated that they use various methods to segregate inventory, including physical location within the building, managing inventory availability, and labor management.

TOOLS OF THE TRADE
Within the warehouse, retailers are using a range of sophisticated software tools to manage their operations. Respondents were asked what technologies they used to support their omnichannel initiatives; the top five answers were: warehouse management systems (WMS), demand management software, distributed order management (DOM) systems (which offer a common view of systemwide inventory), total-landed-cost analytics software, and inventory optimization software. (See Figure 2.)

Retailers are investing in those tools because they expect e-commerce revenues will continue to rise. As for where that fulfillment will take place, the situation appears to be in flux. Asked how they see e-commerce fulfillment locations changing over the next five years, 32 percent of respondents said they expected to see a rise in e-commerce orders fulfilled in traditional DCs, compared with 28 percent who expect to see more fulfillment taking place in stores and 19 percent who said Web-only DCs.

DELIVERING THE GOODS
How does all this merchandise reach consumers' doorsteps? The omnichannel approach offers a dazzling array of options, from delivery drones to the do-it-yourself alternative: pick up in store.

The survey asked how retailers handled "last mile" deliveries and found that in practice, most have stuck with tried-and-true methods. The most common answer was courier delivery service at 43 percent, followed by a third-party logistics (3PL) partner at 23 percent, and arranging for items to be drop-shipped by partners at 20 percent. (See Figure 3.)

Some retailers are also experimenting with more creative alternatives, including deliveries made by store staff at 5 percent, drones at 2 percent, and crowdsourced delivery services at 1 percent. And the future may hold even greater change. When asked which delivery methods they do not currently use but plan to use in the future, respondents' top three replies were crowdsourced delivery service with 8 percent, drop-shipped by partners also with 8 percent, and 3PL delivery partner at 7 percent.

Despite the rapid rise of omnichannel commerce, e-commerce revenue has a long way to go before it passes sales from physical stores. When asked what percentage of their direct retail revenue currently came from each channel, respondents said 67 percent came from brick-and-mortar locations, 24 percent from online sites (including mobile), and 9 percent from call center and catalog sales. Overall, the survey indicated that omnichannel fulfillment remains in a state of flux. As retailers scramble to adjust to a shifting marketplace, they continue to experiment with a wide variety of fulfillment practices and technologies.