Logistics innovation enables merging of e-commerce, store supply chains as retailers race to implement omni-channel strategy.
By Eric Kulisch
The globalization of the Internet spawned electronic commerce and simplified shopping for consumers, but it has made life more complicated for big box retailers, department stores and other large merchandisers.
In response to market pressure from pure-play, online supermarkets like Amazon.com, eBay and New Egg, many retailers are aggressively tearing down their legacy business models to create an integrated shopping experience for consumers across all their sales channels — brick-and-mortar stores, Websites, mobile applications, online marketplaces and catalogs. Companies such as Walmart even have a number of different store formats to support, such as wholesale clubs, super stores, and small neighborhood outlets, that have various requirements for product variety, unit packaging, and delivery frequency.
A couple years ago, merchandisers were moving toward multi-channel fulfillment capability. Today, “omni-channel” supply chain — weaving together all sales, inventory and delivery methods for a seamless customer interaction — is the Holy Grail of retail — and it can’t succeed without sophisticated logistics operations behind it, experts say.
“We’re moving from talking about it as e-commerce to enterprise commerce,” Bill McComb, chief executive officer of Fifth and Pacific Cos., said in a video on the Website of shared service provider eBay Enterprise. Fifth and Pacific owns fashion brands Kate Spade New York, Kate Spade Saturday and Jack Spade.
Last year, e-commerce retail sales in the United States topped $225 billion, a 16 percent increase from 2011, according to U.S. Commerce Department figures. Research firm comScore Inc., which uses purchase data instead of merchant surveys, calculated online sales were $186.2 billion, but had a similar figure for the rate of growth. It said dot.com sales reached 10 percent of total U.S. retail sales, about double the amount five years ago. Tech watchers estimate the digital consumer could purchase a quarter of all retail sales within five years.
Amazon has been the most disruptive force for traditional retailers. It has a massive selection of online items, low prices made possible by less overhead, no sales tax collection for shoppers in many states, free delivery for orders above a certain value or for certain types of items, and Amazon Prime, a $79 annual subscription service that guarantees free two-day shipping for millions of items plus free streaming of movie and TV episodes, as well as access to digital books.
Online grocery delivery, Amazon
Fresh, has been available on an experimental basis in the Seattle area for five years with limited success, and more recently in Los Angeles.
What has really set the industry on its head, however, is Amazon’s offer of same-day delivery for certain orders, designed to provide the convenience of in-home shopping with the immediacy of an in-store purchase. The world’s largest online retailer is reportedly developing its own delivery fleet.
The way for retailers to differentiate themselves from Amazon and online merchandise commoditization, analysts and retail executives say, is to provide more convenience, better service and lower cost to serve. Experimentation is the name of the game, however, because nobody yet has quite figured out how to best respond to the digital marketplace.
“In my view, supply chains are becoming more and more important in the Internet age because the price is fixed,” Brent Beabout, vice president of supply chain for Office Depot, said in an interview. “We have to be lean and mean to preserve our margin.”
Brick-and-mortar retailers are trying to turn their stores into a competitive advantage, in essence treating them as forward outposts on the e-commerce battlefield.
Nowhere is that more apparent than at fashion outlet Kate Spade. McComb said the strategy is to use stores to drive more demand for the Web and vice versa.
With the help of eBay Enterprise this summer it set up several Kate Spade Saturday “window shops” in New York. These temporary, pop-up stores are facades with empty retail space behind the facade. The partners converted space that normally would be a window on the store front and embedded it with video and other technology to present an assortment of products to passersby that can be bought with a smart phone on the street and delivered by eBay Now in the New York market within one to two hours.
eBay Now is the online auction site’s $5, same-day delivery service using company couriers in New York and San Francisco for orders with local chain stores that are made on an iPhone app.
Kate Spade is also rolling out to all of its stores a new point-of-sale system that can collect money with PayPal. Meanwhile, it offers free shipping and free returns to all 50 states, according to the company’s Website.
Not to be out done, the Container Store has begun offering a drive-thru service for customers picking up online orders.
Terry Esper, associate professor of logistics at the University of Arkansas’ Department of Supply Chain Management, said he has talked to a retailer that wants to use GPS to send alerts to consumers driving near a store that will offer a discount if they come in to shop.
In an omni-channel world inventory is liquid — there are no internal walls separating the stock for stores and other channels. The majority of retailers virtually pools inventory to smooth out demand spikes and supply shortages, which allows them to carry less inventory overall. Segregating inventory by channel is more expensive because a company has to carry safety stock for more than one sales outlet.
Stores, in theory then, can act as mini-warehouses, filling orders more quickly if they are closer to the customer or if a distribution center is out of stock.
Other tactics gaining in popularity are to make orders placed online available for quick pickup in the store and training sales associates so they have the expertise to provide high-touch customer service that an online retailer can’t provide.
The initial retail response to Internet merchants was to give shoppers more selection by increasing the number of available products — more variety of size, color, style, and type — on a company’s Website, while stores carried the more popular items. The idea is to create a one-stop shop.
OfficeMax, for example, added 25 percent more stock-keeping units (SKUs) to its Website in 2012, according to its year-end earnings report.
Customers can tap this “endless aisle” from their home computers, mobile devices or in-store kiosks and have items delivered to their homes or the local store for pickup. In many cases, the SKU isn’t even in the retailer’s control but is linked to the virtual inventory of a supplier, who drop-ships the order directly to the buyer without first sending it to the retailer’s warehouse. The advantage of letting the supplier handle the order is that the retailer can increase variety without having to take ownership of the products.
Home Depot, for example, has such an arrangement with Char-Broil, the maker of outdoor grills.
Some retailers that have perfected their systems are offering customers the ability to view a local store’s inventory and purchase online, which enables the customer to reserve products so they are available upon arrival and increases convenience by having the product ready at a pick-up desk rather than having to search the aisles for it.
Stores can also serve as a return point for online purchases.
Forrester Research predicts sales that involve more than one channel will reach $1.1 trillion — or 38 percent of total retail sales by the end of the year, and continue to grow about 17 percent a year for the near future. More than half of sales from Walmart.com are now picked up at Walmart stores, Joel Anderson, CEO of Walmart.com, told the New York Times last summer.
IT Requirements. Merchandisers have found it relatively easy to create an e-commerce storefront that enables consumers to buy with their iPads, smartphones or computers, but developing the back-end systems and logistics integration necessary for a seamless shopping experience is a more difficult trick, experts say.
Retailers, especially large ones, face two major challenges when it comes to omni-channel fulfillment, says Brian Gibson, a professor of supply chain management at Auburn University who authors an annual report on retail logistics trends.
Companies such as Lowes, for example, sell everything from washers and dryers to light air filters and fly swatters. Shipping products that vary so much in size and weight require multiple fulfillment capabilities. Picking and packing small to midsized parcels and then using FedEx or UPS for last-mile delivery is different than moving heavyweight freight to a household. Retailers may rely on expensive less-than-truckload carriers, but most of them aren’t set up for home deliveries because tractor trailers usually don’t come with lift gates and they typically don’t make scheduled appointments. That means the retailer might have to turn to third-party logistics providers with a white-glove service, which costs even more, Gibson said.
Amazon faces the same situation when it sells things like flat screen TVs or lawn furniture.
For large items, in-store collection is preferable for traditional retailers because then they can place the order on a regular LTL run with other items from the distribution center at a much lower cost.
The other challenge confronting traditional retailers is that their inventory is spread among multiple DCs and store locations. But without the right technology it’s difficult to gain visibility to all products in the network and decide which DC or store is the optimal place to fulfill an order.
“You don’t want to be pulling inventory off your shelves and not have enough for the customer walking in the door,” Gibson said.
A growing number of retailers — Nordstrom’s, Walmart, Gap, Best Buy and Dick’s Sporting Goods, to name a few — are fulfilling orders from stores to some degree. Macy’s said in March that 500 of its 800 stores will be equipped with additional storerooms to fulfill dot.com orders by the end of the year. But experts point out that executing on such a vision is complicated. In addition to requiring the right technology and training store personnel in warehouse-type functions, companies have to determine if they have adequate space in their stock rooms to pack, label, store and ship outbound parcels, and whether such work will divert clerks from their primary focus — serving the store customer.
And from a profit and loss perspective, who gets credit for the sale, the store or the dot.com side of the business? Home Depot uses an online customer’s IP address to narrow their location and allocate the sale to a local brick-and-mortar store as a way to incentivize greater store participation in online fulfillment, according to a case study in the Harvard Business Review. The majority of the company’s merchandising is done centrally, but store managers have leeway to procure other items they think will be strong sellers in their local market. By identifying the IP address and linking the customer to the closest store, Home Depot can also offer more localized assortment. And, offering the same price online and in the store gives associates confidence they are not being undermined by their own Website.
Distributed order management is a new wave of logistics software designed to play the role of traffic cop and give retailers the ability to manage inventory in a more flexible way. These tools direct orders to the most efficient location without robbing it of all inventory, but are still early in the development curve.
Most retailers today typically transmit point-of-sales data to their central data warehouse or enterprise resource planning systems in an overnight batch, so they don’t have inventory information that reflects sales as they occur, Ben Pivar, senior vice president of supply chain technologies at CapGemini, said.
CapGemini is a large provider of management consulting, technology and outsourcing services that contributes to the annual study of the third party logistics industry conducted by John Langley of Penn State University.
In an omni-channel logistics environment, the e-commerce site needs to link to the inventory control file housed in the central system to give everyone an accurate picture of what’s available.
The inventory control system is simply a big calculator that counts up all the SKUs in the distribution centers, in transit, on order and in the stores.
“As they are monitoring the flow on a more real-time basis, it puts pressure on logistics, ordering, transportation capabilities and suppliers to be more responsive. And the tricky thing is everyone is trying to do this with less inventory rather than more,” Pivar said.
A distributed order management system helps companies decide how to allocate their far-flung inventory. In situations where demand exceeds supply, for example, the system can prioritize which channel gets the inventory.
A normal order management system, Pivar said, is dumb. It tries to replenish the network by following the same script, such as making allocations in the order stores are listed in the system.
The new tool sits on top of the order management system and applies a rule set to incoming orders, Pivar said. In a hypothetical situation in which a company has 100 widgets on hand, but demand for 120 widgets — 50 from stores and 70 from online orders — the system might instruct personnel to always fulfill Internet orders first, or, if the company can’t fulfill demand at all stores it might tell them to fulfill its high-volume stores, or only those that have fallen below their safety stock.
Companies usually prioritize based on the profitability of the sales outlet.
“So it’s a rules-based engine that can make the right decision, satisfy customers and do it in the most profitable way,” Pivar said.
Stitching all the disparate systems together requires heavy investment, he added.
Warehouse Impact. E-commerce is also changing how warehouses are configured and deployed. Online orders need to be filled one small package at a time, while orders for stores move in bulk shipments by truckload or LTL carriers. Each action requires completely different picking, packing and shipping processes, as well as manpower requirements.
Smaller retailers growing their e-commerce business tend to fill Internet orders from the same DCs used to support stores, while firms with a large Internet and store presence are slowly gravitating to fewer, larger, more capable, dedicated fulfillment centers with automated storage and retrieval instead of manual piece picking, industry analysts say.
Doing both types of fulfillment in one location adds to operational complexity, but effectively managing the flow of orders from separate DCs also requires care.
Marks & Spencer, the British multinational seller of apparel and luxury food products, early this year opened a 900,000-square-foot, fully automated distribution center in East Midlands that serves stores across the country, direct-to-consumer fulfillment, plus some international shipping. It is the largest dedicated warehouse for e-commerce in the United Kingdom, distributing about 2 million clothing and home products a week. M&S officials said the new DC will help the company become a major multi-channel retailer by 2015, and provide customers more product availability and extended delivery options.
In the spring of 2012, Amazon acquired Kiva Systems, a materials handling technology company known for its robotic fulfillment systems. Kiva’s automated guided vehicles bring the product shelves to a warehouse worker, who picks and scans the items with a barcode reader to confirm the correct item. The mobile pods then take the order box to the shipping line where someone completes the packaging. Other Kiva customers include Walgreens, Staples, Office Depot, Gap, Crate & Barrel and online shoe store Zappos.com (which Amazon bought in 2009).
Kevin O’Marah, chief content officer for SCM World, said some Kiva customers are contemplating alternative robotic systems because of concern about Amazon controlling technology they depend upon.
SCM World is a forum for education, collective research and information exchange for leading global supply chain professionals.
The retail industry is split about the need to operate megaplex DCs, with grocery companies in particular still more likely to favor smaller, local warehouses, he said. If giant, national warehouses become a trend it will mean that the warehousing sector has come full circle in the past decade after many companies changed their strategy to set up more compact DCs to be close to their customers and reduce fuel consumption by their truck fleets.
O’Marah said the declining cost of robotics and the stabilization of global oil prices increase the likelihood that large, automated, distribution centers located further apart will become the norm for companies that want to handle huge amounts of orders in different configurations.
Robots allow warehouses to be much larger because it doesn’t matter how many pick locations there are, the number of SKUs or the distances between picks, he explained. Humans get in the way of expansion. At a certain point, the pick, pack and ship options get untenable because workers get in each other’s way, confusion sets in and incremental productivity declines for each additional worker.
“So for anyone who has the wherewithal and managerial competence to handle it, they’re looking at this pretty carefully,” O’Marah told American Shipper.
Pivar said many retailers are beginning to take back control of fulfillment operations that they previously outsourced to 3PLs, or even companies like Amazon and GSI Commerce that are 3PLs in their own right.
Amazon stores products in more than 40 U.S. facilities (89 worldwide), ships out orders and gives sellers real-time access to their inventory via Amazon’s online interface, Seller Central. It provides logistics service for orders placed through the Amazon.com marketplace, a company’s own Website or third-party e-commerce platforms.
In January, Amazon announced plans to build three mammoth warehouses in Texas ranging from 1 million to 1.2 million square feet in size. Two of them will handle large items such as televisions and barbeque grills, while the third will process orders for small items such as books and DVDs.
GSI, bought by eBay in 2011 and recently renamed eBay Enterprise, is a large provider of managed e-commerce services, including hosting Web stores, order management, fulfillment, digital marketing and payment services. Clients include GNC, RadioShack, Dick’s Sporting Goods and Toys ‘R’ Us.
In June, eBay Enterprise signed a multiyear agreement for fulfillment, order management, freight and customer service in the United States and Canada for SCA, a global hygiene and forest products supplier.
The reason for the switch is that retailers want more control of the interaction with the customer and feel they can offer better service without having to spend so much effort overseeing a third party, Pivar said. When companies dip their toes in the online waters they set up arrangements with others to do fulfillment, but as business reaches a certain size they feel it is more cost effective to handle e-commerce fulfillment themselves, he explained.
Nuclear Option. Amazon’s decision to deliver orders on the same day in 10 major cities has created a huge conundrum for retail industry executives, who feel an irresistible pull to respond in some way to the most difficult of all commitments while still trying to outdo each other through deeper price discounts, more generous terms and free shipping, industry observers say.
Some are trying to match Amazon in select markets and with select products, while others are taking a-wait-and-see approach.
Walmart last fall said it was conducting a same-day delivery pilot in a few metro areas, using UPS to deliver items from its stores. Orders have to be placed before noon.
“Same-day is the atom bomb of direct-to-consumer fulfillment,” O’Marah said. Retail executives want to do it “even though the economics look terrible.”
O’Marah likened same-day delivery to the Cold War concept of mutually assured destruction that kept the peace during the nuclear age.
“You’re hoping they (Amazon) don’t actually go to serious same-day fulfillment for everybody, everywhere because you know if you try to follow you’re going to die. And you assume they won’t do it because they can’t be that crazy, yet they are.
“It’s like a big game of chicken,” he said.
Amazon, however, operates more like a growth stock than a mature one. It has the luxury of patient stockholders and a founder with a longer investment horizon than most publicly traded companies focused on the next quarter. They are willing to accept short-term losses while laying the ground work for future profits.
A Wall Street Journal investigation in 2011 determined that Amazon lost $11 per customer on its $79 Prime packaged service between free shipping and digital downloads. But the service is a winner because members tend to be more loyal and buy much more than they normally would from Amazon.
Last year, 18 years after its founding, Amazon lost $39 million on sales of $61 billion, partly a result of continued heavy investment in fulfillment centers and data centers. In 2011, it made $631 million, but its profit margin was a meager 1.3 percent. So far this year, it has made $75 million on $32 billion in sales for a margin of 0.23 percent. Yet, in the past year its stock price has climbed from about $245 per share to over $300 per share, a sign that investors think its huge market share and infrastructure will eventually turn into huge profits.
If Amazon loses money on shipping, the rest of the industry will feel pressure to bite the bullet, too.
“It’s strategically a very difficult thing for other retailers to deal with,” O’Marah said.
Amazon is throwing down the gauntlet to the retail sector, but at some point it will draw the line because same-day delivery everywhere, to everyone, for everything is impractical, O’Marah predicted.
After deeply discounting books to the point it often lost money, Amazon is beginning to raise prices for some types of books after the demise of Borders and many independent book sellers, and with Barnes & Noble struggling to survive, the New York Times recently reported.
“I believe what’s going to happen is consumers are going to get smart enough about what’s really worth (fast delivery) at the same time that retailers begin to get a better handle on their cost to serve and can differentiate between the order that is clearly a money loser, the order that is breakeven and the order that is profitable.
“And as that maturity evolves in the retail sector, I think this overaggressive commitment to do anything anyone can image through this omni-channel will gradually start to scale back into premium pricing for premium service and shipping, and regular pricing for regular service and shipping. And, in fact, the bottom end of the scale is something I anticipate also, which is very low cost configuration and shipping in return for flexible receipt — i.e. the consumer takes it whenever its convenient for the shipper,” O’Marah said.
By a margin of six to one, industry executives recently surveyed by SCM World said the consumer of the future will want variable shipping offers.
“Consumers will start to see more variable offers and pick and choose those that fit their personal lifestyle” compared to today’s norm of free shipping for orders over a certain minimal threshold, O’Marah said.
“There’s so little intelligence in the pricing right now because there’s so little precision in the cost to serve,” he explained. “Retailers don’t really know the cost to serve. What they know is the product costs us ‘X,’ the retail price is ‘X + 30 percent,’ and if they get over a certain line, shipping is free.
“That’s a very blunt instrument.”
Retailers and their 3PLs need to do a better job of data analysis to factor in the cost of transportation and volume by geographic location, the value of the items, their cube and weight, and the carriers’ routes and schedules to come up with the true home delivery cost, much like logistics companies today do for truckload and LTL shipments to distribution centers and stores, O’Marah suggested.
Then those costs have to be mapped to the item for sale and shown on the Website in the same way that many e-tailers with international sales price the customs duties, exchange rates and other cross-border shipping costs upfront to show the shopper the true landed cost.
University of Arkansas’ Esper said he’s intrigued by the possibility of retailers using store shoppers to do last-mile delivery on their behalf. Customers with a special app on their smartphone could receive notice that a shipment needs to be delivered to someone close to their residence, or on their route home. The shopper would get paid, or receive a discount, and the retailer would save money compared to using a delivery company such as FedEx or UPS.
“One of the emerging side benefits of this mobile technology, beyond just a sales channel, is that it could be leveraged to support distribution activity,” he said.
In early August, Amazon owner Jeff Bezos personally bought the Washington Post for $250 million. He told the staff that he doesn’t have any immediate plans for changes and won’t be involved in the editorial process. But he also said the paper will have to figure out how to become more relevant on the Internet. In addition to transforming retailing Bezos invented the Kindle e-reader and Amazon now lets people independently publish books for Kindle, and then distributes it to Amazon sites or for print. The Graham family that controlled the Post clearly felt Bezos, with his track record of innovation and success in the digital world, had the ability to shake things up and create a sustainable business model for the struggling newspaper.
Although Amazon is not connected in any way to the Post acquisition, the deal immediately led to speculation about how the two organizations could benefit each other.
Since nobody has fully figured out how to do same-day delivery well, perhaps Bezos will look to learn how the Post is able to deliver newspapers within hours of rolling off the presses to every customer’s doorstep by dawn.
