How retailers are reinventing the supply chain for an omnichannel age

Retailers are making the move from multichannel and segregated fulfilment to a truly omnichannel model, where fulfilment capacity and stock availability can be flexibly deployed into any channel as dictated by customer demand. But they find themselves challenged by the complexity these efforts pose for underlying logistics support systems.

“Retailers need to conduct periodical supply network optimisation to ensure distribution nodes are at the right locations. They also need to bring parcel shipments into enterprise transportation planning and optimisation and adopt local routing tools to efficiently plan store delivery routes,” says George Lawrie, vice president and principal analyst at Forrester Research.

“Smart retailers should adopt multi-echelon inventory optimisation tools to better position and reduce inventory. And leverage advanced analytics for inventory planning and seamlessly connect inventory and order management systems to give customers better visibility. They must also choose the right reverse logistics partner, continuously measure their performance, and push for higher service standards.”

One significant change is how the bricks and mortar store essentially acts as a warehouse, with inventory shared between online and offline channels. Traditionally, retailers moved products between distribution centres and stores or customers' homes. Now they need to transport those goods from stores to a customer's home, to third party pickup points (such as secure lockers), or even to another store. In addition, in-store returns and exchanges add more reverse flow paths, creating serious challenges for large retailers with hundreds of distribution centres and stores. Complicating matters further, transportation has become one of the most costly components of order fulfilment over the past several years, with tight carrier capacity and high rates.

Shift in power 

Another major change is the shift in power from retailers to customers, who are increasingly savvy, promiscuous, fickle, informed, impatient and demanding, says Mark Lewis, deputy CEO and CTO at Practicology. “Not only is the target hard to define, it’s a moving target. Things are changing so fast, that whatever seems the ‘ideal solution’ right now is likely to seem passé before long – often even before the previous ‘ideal’ has been implemented,” he says. “It’s not then about making ‘huge bets’ in any one direction – that is far too risky for such a fast-moving environment. It’s about making lots of small bets, but within an over-arching strategic direction, that enables the business to move swiftly to where the customer need takes them.”

While, to date, most retailers have focused on digitising and improving the direct customer touchpoints, the most forward thinking are now looking at digital transformations of their whole supply chain processes, observes Lewis. This covers 3D design, collaboration, digital range boards, and a fully digitised PLM process to speed up the time to market, while reducing inefficiencies and errors. “These are significant improvements in themselves, but the true digitally transformed business is incorporating customer insight – potentially direct customer input into the design process – to ensure the products that come to market are the ones its customers want.”

There are still challenges around legacy systems, if not legacy thinking, but these are reducing, Lewis believes. The growth of cloud-based applications and services, open APIs, micro-services and improved integration tools to manage all of these are making these solutions more accessible than ever. But this is still not a simple task.

Movers and shakers

Amazon, Ocado and Asos have first-mover advantage over traditional players, due to the fact their supply chains have been designed from scratch, without stores and other legacy issues to worry about.

“They were able to plot what they needed and launch a business model in line with that need, leaving the older retailers playing catch-up as they tack new channels onto what they already have in place,” says Lee Gill, group vice president, global retail strategy at JDA.

As for the old timers, the likes of BJ's Wholesale Club, GameStop and PetSmart are making solid progress, investing in a seamless shopping experience across multiple touchpoints. Whilst JDA recently worked with The Co-Operative Group on a supply chain overhaul – this allows The Co-Op to provide a product selection that is localised for each of its stores, and makes better use of space. It came as part of the retailer’s wider retail IT transformation project and business transformation programme.

Many of the large supermarkets continue to lead in capabilities in online fulfilment. Tesco’s recent one-hour delivery introduction for several postcodes in London as well as Sainsbury’s 30-minute Click & Collect trial are good examples of this.

Mark Ruston, principal of retail supply chain at Capgemini Consulting points to Argos’ same-day fast-track service which provides it with a competitive advantage.

“And in fashion, Next continues to lead order cut-off times with midnight cut-off for next delivery,” he says. “Finally, John Lewis deserves an honourable mention for the way they have scaled their online presence to being a significant player in the UK online market. However, the 2pm cut-off for next delivery continues to lag the market.”

Yet most retailers cannot profitably fulfill omnichannel demands, according to Forrester Research’s Lawrie. “To customers, omnichannel fulfillment means they can receive their orders wherever and however they want. To them, this might look like a mere enhancement of conventional eCommerce and in-store retail operations – the front end of operations that directly affects the customer experience. This view, however, overlooks the massive amount of investment that retailers must make in advanced logistics systems, operational changes, and infrastructure to keep pace with changing customer expectations and competitive dynamics.”

It's really about aligning technology investments with the changing market, Lawrie argues. “It's because the fundamental changes in retail are the result of changes in technology that have empowered customers and introduced new powerful competitors. Retailers are struggling to meet changing customer expectations. Empowered customers expect them to provide a seamless experience at their time of need, and they expect to be treated as individuals, not homogenous market segments. At the same time, retailers face major changes to processes and applications, given that eCommerce will amount to 1.5% of the world's GDP by 2018.”

“Retailers must evolve to accommodate new business models adapted to modern conditions. They need to preserve their brand DNA. Few, if any, retailers have the option of writing off existing processes and applications or simply ripping and replacing solutions. A radical surgery to existing applications risks damage to the encapsulated enterprise data, processes, and intellectual property that contribute to brand value and customer experience. AD&D professionals must instead work with business leaders to develop a transition plan, one that carefully prioritises changes while maintaining or improving customer experience.”

Practicology’s Lewis flags up a series of common mistakes. “The first mistake is not realising how far behind the ‘best-in-class’ you likely already are,” he comments. “The second is not appreciating the ‘front end’ customer touchpoints and internal business processes are really a single ‘organism’, where data and insight need to circulate fully, or certain organs (functions) may get starved of oxygen (information) and underperform, if not actually fail.

“The third mistake is not tackling these challenges in an agile enough manner, being too wedded to a previously agreed plan, even though new information indicates aspects have changed and moved on, with the resulting risk that the overall solution is not fit for purpose, even before it’s finally delivered.”

Key challenges

Brexit, the living wage and exchange rate fluctuations are all applying cost pressure to retailers. At the same time, the continued growth in pureplays (such as Amazon, Asos and is also applying pressure to the price retailers can offer consumers to remain competitive.

“This is inevitably leading to a squeeze on profit margins. It would be easy for retailers in this environment to resort to short-term thinking with cost cutting strategies. However, to remain competitive retailers need to ignore this urge and continue to consider long-term goals and investment plans to meet these. With the correct consideration for flexibility/agility, retailers could see significant benefits in the coming years from continuing to invest in long-term supply chain capabilities,” says Capgemini’s Ruston.

Challenges are often as much about internal cultures, budgeting processes and ROI demands, as they are about technology and the skills to use them, claims Practicology’s Lewis. “Digital transformation is absolutely not just about technology. It’s about an agile approach to all aspects of the business, empowering staff at the sharp end to make decisions and changes quickly, and being prepared to abandon initiatives that aren’t working (‘fail fast’) so you can try something else that might work better.”

He concludes: “The business needs clearly defined direction in what it’s trying to achieve, and an even clearer strategy and solution plan for the flow, collection, storage, and usage of the vast amounts of data both generated and required. Data is the lifeblood of this new paradigm, and without a handle on this, no projects, initiatives etc will deliver the desired results.”