Commentary

Magazine Archive: Creating a supply chain for profitable customer commerce – EDM01, January 2015

Shoppers have thrown down the gauntlet to supply chain professionals to re-invent the supply chain into a much more agile and responsive capability. In this feature which appeared in the first edition of eDelivery Magazine, Jason Shorrock, retail strategy director at JDA, examines the steps in the omnichannel journey.

Jason Shorrock, JDA

Jason Shorrock, JDA

Today, the retail supply chain is a far cry from the quite simple networks of 10 years ago where the job of the supply chain was to move goods from supplier through DCs to stores in bulk in the most efficient way. This change has been driven by the inexorable rise of online and the challenge of how to make the ‘last mile’ a frictionless experience for consumers.

What consumers want is an ‘anywhere, anytime’ fulfilment service that is fast, convenient and reliable. No longer are they prepared to wait at home for hours for a courier to deliver a parcel, or wait days and days before they can visit a store to collect their goods.

This simple enough sounding requirement dramatically changes the complexity of the supply chain. It must now handle many more fulfilment locations, ever increasing singles picking for customer orders and real-time operations to fulfil orders within hours or even minutes. It must also operate flawlessly through the peaks and troughs of Christmas, Black Friday and the New Year sales. This complexity represents a disruptive change to those supply chains of yesteryear, which were optimised for bulk movement from supplier through to store.

Frictionless fulfilment is becoming such an important factor in the shopping experience that fulfilment excellence is now a key strategic competitive tool. Recent figures showed that 46% of consumers would be deterred from shopping with a retailer due to inconvenient fulfilment options. This response was only eclipsed by a slow running website and the desire to experience the product before purchase. Clearly, fulfilment excellence matters to consumers.

This complexity drives additional costs into the supply chain and puts significant pressure on margins and profitability. The scale of online ordering and click & collect is now at a level where most retailers can no longer ignore this margin erosion and must find ways to stabilise costs and drive value. A recent JDA survey of Retail CEOs found that only 19% of the top 250 retailers surveyed were able to fulfil omnichannel demand profitably.

We should not forget either that consumers also reserve the right to return goods ‘anywhere, anytime’ and are doing so in significant volume. In the same CEO survey, respondents ranked managing returns from online and store orders as the largest single contributor to increasing the cost to fulfil.

INVESTMENT

In order to manage this perfect storm, retailers need to invest in a number of key capabilities: operational excellence in pick, pack and dispatch; synchronisation of all the steps in the supply chain; ensuring your inventory and fulfilment plans are executable; plan for returns; think about profitability – intelligent fulfilment.
Efficient singles picking, order collation and the packing and dispatch of customer orders has become a core competence for retailers to master. Whether it’s in the DC, dark stores, regional ‘hub’ stores or direct from the sales floor, you need to be highly accurate and able to handle very high throughput at peak times.

Orchestrating warehouse, transport, store and potentially supplier operations, to deliver on a customer promise can only work at scale and speed if all these components of the chain are synchronised to work seamlessly together. This is particularly important as delivery windows shrink from days to hours and even to minutes.

In practice, this involves two stages – firstly, synchronised planning of inventory and fulfilment plans against a shared view of fulfilment demand by channel and secondly, synchronised execution as actual store and customer orders come in.

All too often plans are developed that do not take account of real-world constraints such as space, resource and capacity. The same is true for order promising where a commitment is made that cannot be executed in the required time window due to resource constraints. During the planning stage, you need to identify bottlenecks and capacity issues and adjust the plan to handle these – either through smoothing the workload or shifting it to an alternative supply. Likewise, you need to be aware of constraints when promising an order – does the store have the staff available to pick the order? Can the stock be delivered in time from a given location?

Part of the nature of online is an increased level of customer returns – customers will habitually order more than one size to try on at home and return the unwanted item. If left unchecked and unmanaged, this can escalate into a huge cost to your business. Planning for returns – from how to minimise them in the first place, their impact on inventory and how to recycle them efficiently will help reduce this cost. The basic core competencies are first, robust returns processing at store or DC that quickly and efficiently recycles useable goods back into inventory. And second, ensuring that your inventory and fulfilment plans account for returns by considering the returns forecast by channel.

Finally, there is the challenge of escalating costs and ever increasing competition that is putting pressure on margins. Investing in the previous steps will help to reduce avoidable costs by running an efficient operation and avoiding unplanned overtime, transport expediting costs and returns inventory processing.

However, this is unlikely to be enough to swing your omnichannel fulfilment operation into the black. You will have to become much smarter at how to use your key assets of staff, stores and inventory to fulfil customer requests in an intelligent way.

Consider how to work your inventory smarter: are you holding your inventory in the best places? Are you effectively sharing inventory across channels? Are you taking every opportunity to utilise ‘stranded’ customer returns? Are you selecting the optimum inventory source and fulfilment route for every order?

Consider how you get the best out of your staff and stores: Do your staff have the right tools to upsell, cross-sell and save-the-sale when engaging with customers in-store? Do they have the right tools to reduce the chance of a return when a customer collects in-store? Can they identify habitual returners and turn them into keepers?

How do you encourage consumers to click & collect in-store as a less costly alternative to home delivery?

And finally, consider how you optimally fulfil every order. Do you understand all the cost components in fulfilling an order; the time, labour, inventory and capacity constraints; the future likely demand at each location to avoid shortages? And then, do you prioritise ‘stranded’ returns for fulfilment to avoid ‘oddments’ discount rails in-store?

Beyond these considerations, retailers in the future will start to tailor offers on a personal level based on the lifetime value of the customer – managing profitability on a per customer basis. This could be through variable delivery and returns charges, variable stock availability offers and variable price and promotions. The combination of a best-in-class fulfilment operation with deep customer insight and tailored offers will enable retailers to succeed in this new world of profitable customer commerce.

Ultimately, consumers have undoubtedly thrown down the gauntlet to supply chain professionals to re-invent the supply chain into a much more agile and responsive capability. The journey will be a difficult one requiring a much more sophisticated and complex operation, supported by robust planning and intelligent fulfilment execution. However, all the indications are that this will be the key battleground for retailers in the next five years, and those that take the journey will be the winners.

Image credits:
  • Royal Mai, Editorial use only.