Comment: How to re-engineer the supply chain for multichannel retailing

Over the last decade, the retail industry has changed dramatically, and so have the expectations of consumers. Shoppers have come to expect to be able to browse, purchase and return goods seamlessly across a variety of channels. The lines between in-store and online shopping continue to blur, with click & collect growing in popularity. Practices such as show-rooming and web-rooming, where shoppers browse in store, but buy from cheaper competitors online, and vice versa, are becoming more prevalent as well.

These changes have placed supply chain firmly on the front line. Many of today’s retail supply chains were set up decades ago as a cost centre to deliver goods to stores. But, in a multichannel world, the supply chain now has to reach beyond the store to the consumer’s home and dedicated pick-up point. It becomes the consumer-facing front office and a key determinant of whether shoppers have a good or bad experience. If you get fulfilment right across the full range of channels, consumers will be satisfied. But if you get it wrong, they will look elsewhere.  

Creating a multi-channel supply chain strategy – what to consider? 

Creating a supply chain that is fit for purpose in this new multi-channel environment is a complex task. This is due to the starkly different objectives and priorities of traditional and online retail supply chains. 

For example, in the traditional bricks-and-mortar retail environment, supply chains are designed to keep the products that consumers want most on store shelves, with rapid replenishment from regional distribution centres. This requires strong inventory management, consumer demand forecasting, and order-planning capabilities to keep costs low, while ensuring that products are available on shelves when customers want to buy them.  

For online channels, on the other hand, customer value is driven by the ability to offer a much wider range of products, and the ability to deliver these products quickly to consumers wherever they are. This requires the rigid order processing, picking, and parcel shipping accuracy aligned with first-class customer service. 

There’s a big difference in logistics costs too. For bricks-and-mortar retailers, transportation costs are kept low by moving truckloads of products through a network of regional distribution centres. But in the online channels, logistics costs are often substantial, as most products are shipped individually directly to peoples' homes by parcel carriers.

Separate online/offline supply chains 

Given the differences between the online and offline environment, integrating  supply chains for each channel into one is not easy. An integrated online/offline supply chain might not be the best option for certain types of retailers either.  

As a result, many of the traditional retailers, when expanding to online, decide to separate the operations of traditional and online supply chains. With this approach, the supply chains that serve the online and physical parts of the business are maintained separately, to meet the distinct operational requirements of each channel. 

This approach makes sense for traditional retailers that are not familiar with the nuances of online retailing and dare not risk compromising a well-functioning in-store supply chain with the additional complexity of fulfilling the online channel through it. It is also preferable when certain functions such as customer service, is more important for some channels than others.  

However, this approach makes economic sense only if both the physical and online sides of the business are sizeable enough to operate on an efficient scale and if the savings from combining the channels would  be significant? 

Another disadvantage of this model is poor cross-channel coordination. This tends to cause higher out of stocks and markdowns in a given channel, especially during peak seasons.  

Integrated online/offline supply chain

To improve cross-channel coordination and reduce costs, a number of retailers who used to run separate supply chains for each of their channels are now experimenting with an integrated model.  

Take supermarkets for example. Many have successfully set up a system in which online orders are routed to one of a select number of stores based on customers’ locations. At these sites, inventory for online and retail purchases is shared. Employees filling online orders pick from the same shelves as retail customers, and the supermarket’s trucks deliver orders to consumer homes. The supermarket includes online purchases when determining in-store inventory to make sure that the shelves are stocked with sufficient items for both online and physical store orders. 

This model makes sense when the physical and online sides of the business share many of the same characteristics relating to meeting customer needs and logistics requirements. Other cases when this model would be preferable are when online orders account for a very small share of sales. Building a separate distribution network for its minimal online business would have been an expensive undertaking in this case.  

Both models have their own strengths and weaknesses. Whether separate or integrated, the choice will very much depend on each retailer’s business proposition, its customers’ expectations, and its existing capabilities. Retailers will need to consider these factors, along with changes in the external retailing environment in order to make a choice about which one is the right one for them to adopt. With recent news emerging that retailers are struggling to move away from a physical retail presence, it is more important than ever that greater efforts are made to function in this new world.