Posted by on 07.12.16
What to Do in the Next Three Years
This three-part series explores a number of near-term and long-term moves retailers can make to eliminate or minimize holiday season fulfillment headaches and ensure their supply chain is up to the task.
As noted in the previous posts in this series, retailers often face several operative challenges during the holiday season. In Part 2, we discussed immediate actions to help retailers prepare for what’s coming later this year and next. In this final section of the series, we detail the additional, and more substantial, steps needed to build stronger operational capabilities to improve holiday season performance in future years.
Put in Place the Right Network Design
The most important thing a retailer can do is to ensure it has the distribution capacities and infrastructure needed over the long term to support its growth goals and accommodate shifts in consumer demand and buying behavior. This involves taking a deep look at its network design to determine what changes it must make, and when, to be successful (see figure below).
Figure: High-level supply chain network design process
The process begins with collecting the data required to forge a deep understanding of the company’s existing supply chain network along two dimensions. One involves higher-level issues—such as the markets the retailer serves, the types of customers it sells to, and key competitors it must fight for business. The other is more tactical, concerned with such things as product flow and transportation costs. This data provide insights into:
While it’s collecting this data, the retailer also should discuss exactly what it will investigate from a network design perspective. For instance, the company could be projecting 12 percent compounded annual growth over the next five years driven predominantly by a significant expansion of its presence on the west coast. It could be contemplating a strategic shift to generate a much greater percentage of sales from its online store and turn its physical stores into showrooms. Or it could determine that it could tap into unmet consumer needs by launching a new store format in geographic areas outside of where the retailer has historically operated. Such conversations are critical to have at the outset of the process. They help define the scope of the effort which, in turn, ensures the retailer collects the right data and makes the right assumptions.
With relevant data in hand, it’s time for modeling and validation to ensure the data reflect reality—in other words, that the data are as complete and accurate as possible. The output of this initial modeling is the base case—the existing network environment. With the base case established, a retailer can then begin to create possible scenarios to illustrate the resulting impact on network design. By adjusting various constraints—including level and type of demand, merchandise mix, target customers, geographic location of customers, capacity, desired average cost, and service requirements—the retailer can determine which types and sizes of DCs and fulfillment nodes it would need, and where, to deliver the best business results.
After a retailer develops a number of prospective scenarios, a handful will typically rise to the top as the most desirable—the “finalists.” The retailer further vets these finalists through additional sensitivity analysis, eventually determining the one that will best help the company achieve its business goals.
In the final step of the process, the retailer refines the chosen scenario to ensure it aligns with the overall business and its technology, operations, vendors and customers. Key elements of this exercise include
Addressing these factors enables the retailer to shape the final recommendation for a multi-year implementation plan designed to acquire the capacity (whether built or leased) to support the retailer’s projected growth over a 10-year horizon. It also provides formal objectives for key performance metrics, including revenue, service level, inventory, and transportation and fulfillment costs.
Implement Distributed Order Management Technology
Another important step retailers can take is embracing emerging Distributed Order Management (DOM) technology that can help them route orders more efficiently.
With more customers wanting to shop online, retailers increasingly are adopting an omnichannel focus to meet customer demands. In fact, according to Forrester Research, omnichannel will account for $1.8 trillion, or nearly 60 percent, of U.S. retail sales by 2018. But along with omnichannel comes an explosion in order replenishment complexity. A recent survey found that retailers maintain an average of four different selling channels to reach their customers. Yet, only 38 percent of them actually have the software to manage these channels, which helps explain their lackluster delivery performance last season.
Enter DOM. DOM software is designed to give retailers with complex order management processes a real-time view of inventory, order status, and location across their enterprise. It helps a retailer, particularly one with a significant direct-to-customer business, choose the best fulfillment option for each order—whether it’s a DC in Ohio, a store in Texas, or a third-party fulfillment provider in Atlanta.
Being able to choose from multiple fulfillment options not only enables a retailer to effectively balance service levels and cost, it also can help take the strain off a DC during times of peak demand. In other words, DOM provides another measure of flexibility and speed for the supply chain that can minimize disruptions that could disappoint customers.
However, to fully leverage DOM, a retailer’s stores must be capable of shipping orders to customers or enabling customers to pick up items they ordered online—something not all are set up to do. For example, a recent study found that nearly 40 percent of customers who chose to use a retailer’s "buy online, pickup in store" option have had challenges with store employees. The most commonly stated problem was that workers took a long time to find an order in the store or system, or couldn’t find it at all.
This study highlights a common challenge for retailers: Stores must have appropriate staffing to execute shipping from stores or have product picked and available for pick-up by customers. This can be tricky: Ideally, store associates are on the floor providing great customer service and increasing sales, so the store manager has to balance who does the picking and fulfillment, and when, to avoid compromising front-of-the-house performance. Furthermore, there are implications for the skill sets needed in store employees and advanced planning and scheduling of store labor to execute. Some of these issues can be mitigated by concentrating this fulfillment into a subset of well-prepared stores or adjusting the fulfillment promised time to reflect what can actually be executed.
DOM also is a major IT project. It requires replacing or augmenting the existing order management system, carefully thinking through how to set up the order routing and processing rules, and ensuring accurate inventory at the SKU-store level.
Deployment of DOM tools is currently not widespread. However, because of its substantial promise to help tackle complex omnichannel fulfillment, that’s likely to change in the near future.
Manage Other Flow Options
Finally, retailers should take steps to aggressively manage other flow options that can take stress off the distribution network.
One option is exploring origin-based logistics—i.e., value-added services that could be done at the factory and make downstream distribution easier. Store-ready pre-packs are one example. A pre-pack is an assortment of items that reflect different sizes and colors for a particular style. The pre-pack can be assembled so that the store or market receives an assortment that reflects what it needs instead of having to do this processing when the product arrives at the store. Pre-packs make it easier to move the received product from the “back of house” to the “front of house” (the store sales area); reduce costs by having offshore factory-based resources do the assembling instead of more expensive store employees; and, perhaps, most important, give store employees more time to service customers.
One caveat with this approach: Creating pre-packs may require merchandise planning and allocation professionals to make their decisions earlier in the process. This runs counter to their preference to delay those decisions as long as possible so they can get the most accurate read on market demand—something the supply chain team typically wants to avoid so they’re not forced to scramble late in the game to change their distribution plans. The key, again, is striking the right balance between efficiency, responsiveness, and capacity.
Another value-added service that could be performed at the factory instead of the DC is polybagging and tagging (including price, RFID, and loss-prevention tags). Applying polybags and tags at the factory not only improves product flow by eliminating a step at the DC but, similar to pre-packs, also reduces labor costs and gives store associates more time to provide customer service, which helps boost sales.
In addition to origin-based logistics, retailers could employ DC bypass, in which all inventory of certain items needed for a store is consolidated at a separate facility and shipped directly to the store. Fashion retailers, for instance, can use DC bypass to handle their seasonal products while dedicating their DCs to their mainstream goods. In this way, the consolidation point acts as a “release valve” that can relieve some pressure when the network is in danger of bogging down.
There’s no doubt the retail world has become much more complex, especially as customers increasingly demand omnichannel access to their favorite goods. The expanded “Black Holiday” selling season has only added to the challenges today’s retailers must effectively manage to keep customers happy and still grow profitably.
Retailers, of course, aren’t blind to their plight. In fact, leading retailers continue to find ways to add greater flexibility to their network and relieve bottlenecks that have impeded system performance. American Eagle Outfitters, for instance, made the bold move in early 2015 to equip its two DCs to handle both store and direct-to-consumer fulfillment. And it’s a good thing: Despite experiencing much higher online sales than it expected during last year’s holiday season, the company was able to take it in stride. "We ended up using about 220,000 units of inventory that we had originally set aside for our stores for direct-to-consumer fulfillment,” noted Christine Miller, director of operations.5
American Eagle’s experience is a great illustration of how forward thinking is critical to retailers’ ability to generate strong performance during the most stressful time of the year. By taking the appropriate short- and long-term steps to identify and remove potential supply chain bottlenecks, retailers can make upcoming holiday seasons “blacker,” and less likely to be revisited by those unwelcome old ghosts.
This series is available as a whitepaper. Download here.
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