This article originally appeared in the February 2018 issue of Supply Chain Quarterly's sister publication, DC Velocity.
The retail sector has been permanently disrupted by technology, and retailers of all sizes are battling to manage technology's impact on their business models. For many of them, gaining control of e-commerce, multichannel and omnichannel fulfillment, and customers' expectations of ever-faster and customized delivery is a matter of survival.
To find out how companies are responding to these and other pressures, Auburn University annually polls supply chain executives about their overall strategies as well as their experiences and plans regarding several "hot topic" areas. As in the past, this year's study was conducted by the university's Center for Supply Chain Innovation under the leadership of professor Brian Gibson, with colleagues Rafay Ishfaq, Cliff Defee, and Elizabeth Davis-Sramek. The researchers surveyed members of the Retail Industry Leaders Association, readers of Supply Chain Quarterly's sister publication, DC Velocity, and companies that collaborate with the Center for Supply Chain Innovation. To round out the picture, the research team conducted telephone interviews with supply chain executives.
Getting a grip on change
The researchers conducted 20 interviews with retail supply chain executives, most of whom were chief supply chain officers or senior vice presidents of supply chain. All work for medium-sized to very large retailers; all but a handful of those companies report annual revenues exceeding US$1 billion, and together, they account for nearly US$1 trillion in annual sales.
When asked about their overall strategy for 2018, many executives cited better management of omnichannel commerce as a top priority. Although a small "lagging" group of retailers are still rolling out basic omnichannel capabilities, companies that can be described as "leaders"—generally, the biggest brand names—are looking at refining the omnichannel strategies and practices they already have in place, such as cutting delivery times to consumers and ensuring service consistency across all channels. Those companies, the researchers say, have come a long way since their previous survey report was published. "Last year, we were still getting a lot of companies wondering how to respond to the 'Amazon effect.' Now, retail leaders have taken control of their omnichannel operations and have a game plan they're ready to execute," Defee says.
The interviews with retail supply chain executives also zeroed in on several specific areas, including urban fulfillment, relationships with third-party logistics service providers (3PLs), sustainability, and disruptive technologies. Here is the research team's take on the issues and trends the interviewees addressed.
Increasingly, retailers are using urban stores as fulfillment locations to accommodate their "BOPIS"—buy online, pick up in store—services. Some are also investing in small-footprint distribution centers in urban areas that offer same-day delivery for a limited assortment of stock-keeping units (SKUs). A third option mentioned by respondents is a "dark store"—a facility that's set up like a retail store but is used for assembling e-commerce orders, which are then delivered to consumers or to pickup locations. In Gibson's view, the benefit of the latter two options compared with in-store fulfillment is that it avoids disrupting store operations and offers quick access to backup inventory if a nearby store runs out.
The cost of meeting consumers' expectations is forcing retailers to rethink how they deliver orders in cities. Some are testing the use of employees to drop off packages on their way home from work. Others are setting up their own private fleets of local-delivery vehicles. But they're most likely to use for-hire services, such as Uber, Lyft, Shipt, and Instacart, because of their flexible capacity and variable cost structure, according to Gibson.
As customers put pressure on retailers to improve their service, the retailers, in turn, expect 3PLs to "up their game," Ishfaq says. But those expectations seem to be changing faster than the 3PLs can keep up with. "That has put pressure on them from both a cost and a performance-guarantee standpoint. It's a pressure cooker right now," he says. "We could see failures or tougher going."
The interviewees have not widely considered an issue that could have a major impact on their supply chain costs in the future: the conflict between sustainability goals and consumers' escalating demands for fast, convenient service. "We asked them, 'If you ship one item to one customer in one box, what does that do to your ability to meet sustainability goals?'" Davis-Sramek recalls. "The pretty universal response was, 'We've placed so much emphasis on fulfillment and meeting customer requests that we haven't really made that connection yet.'"
Davis-Sramek expects that at some point, retailers will come under external pressure to resolve the tension between e-commerce and sustainability. That pressure may come from nongovernmental organizations (NGOs), perhaps through a study on the impact of home delivery on the environment. Or it could come in the form of regulation, such as a carbon tax or European-style regulations on packaging waste. Nobody knows how far in the future that will happen, but Davis-Sramek expects retailers will step up when it does. "I think they'll apply the same kind of innovative thinking they used to develop omnichannel commerce," she says.
Most, though, are just beginning to investigate those and other technologies, such as robotics, blockchain, and the Internet of Things. "There's a lot of interest and there's monitoring, but not a lot of money invested," Gibson says. "There's still a healthy amount of skepticism about how these technologies will play in the supply chain area." Return on investment (ROI) is another top concern; Defee says one interviewee called articulating an ROI to justify investment "the No. 1 challenge of disruptive technology."
Not surprisingly, then, when it comes to new technology, retailers are focusing on proven winners, such as analytics and warehouse automation. E-commerce fulfillment is driving investment in those and other technologies, but retailers are also using them to improve store operations, Gibson notes. For example, some are buying automated picking and sequencing technology for their stores because the automated systems do a much better job of picking aisle-specific pallets or cartons than a human can, thus allowing for faster on-shelf replenishment.
During the course of the researchers' interviews, several common principles came to the fore. One was that retailers should ensure consistent service and product availability regardless of how they are interacting with customers. Another was that they must become true omnichannel organizations, leveraging inventory, technology, and distribution networks to get to a single pool of stock. Omnichannel success also requires the capacity to deliver orders wherever and whenever the customer wants them. "We're going to hit that tipping point where a retailer's capacity to make last-mile deliveries will either be game-changing or it will bog [the operation] down and get very expensive," Gibson says.
Finally, the researchers say, retailers are starting to understand that being involved in omnichannel does not mean they are obligated to be "all things to all people." Instead, many are taking advantage of advances in supply chain analytics to judge whether their scope of offerings and cost to serve specific channels and customers are justifiable. How they respond to the data will be driven by external competition and/or internal strategies, Gibson points out. Something may be costly from a supply chain standpoint, he says, but in an omnichannel world, retailers ultimately must make decisions based on overall strategic benefit.
Editor's note: An earlier version of this article originally said that the Retail Industry Leaders Association conducts the poll. While RILA members (among others) are polled, the survey itself is conducted by Auburn University's Center for Supply Chain Innovation.