In the hyper-competitive and ever changing retail landscape, we are at a point of inflection where digital and physical are no longer separate, but are truly becoming one.
Online giants are constantly investigating new, alternative methods to get products into the hands of customers in timeframes that are measured in hours as opposed to days. Just look to the drones debuted on “60 Minutes” if you need further proof that the industry is shifting from a ‘same day shipping’ option to an eventual ‘same day delivery’ standard. While we’re still a ways off from delivery by drone, we are seeing online retail growth continue to outpace traditional brick-and-mortar retail growth — a trend we saw both during the holiday season as well as during the “Polar Vortex” that affected much of the country in the months since.
Brick-And-Mortar Retailers Attempt To Go Head To Head With Online Retailers To Capture Customers
To provide more direct customer fulfillment during the holiday season, retailers were moving merchandise from warehouse to store, in-between stores and from the store directly to the customer (at little or no cost to the customer) to capitalize on a growing online shopping community and changing customer preferences. This is being done to provide flexibility to the customer and to either attract new sales or to ensure that the share of wallet stays put.
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The challenge here is that this model isn’t sustainable. When product movement and the amount of touches within the supply chain is a distant secondary concern to matching customer demands, the simple and obvious effect is margin erosion with each item sold. As you think about the traditional retail supply chain, moving product from distribution centers to stores, this model alone can already be fraught with inefficiencies based on ineffective inventory management and how the product is received at the store.
Imagine now, layering in additional touches within the store on the backend of that traditional supply chain model and you can quickly surmise this is not the way forward — at least not profitably. It seems here that many retailers were caught flat-footed and while the initial response might allow them to get in the game, increasing volumes will quickly put a premium on designing a more cost-conscious and productive solution.
Beyond simple labor costs associated with handling merchandise, there are real and substantive impacts to the customer experience when stores are used as hybrid order fulfillment centers. Store staff is scheduled for the purpose of keeping shelves stocked and ensuring the appropriate level of customer service. As activities associated with online sales are layered into the workday, it’s often being done with the existing store labor and consequently at the expense of in-store customer experience. This may be difficult to discern with small order volumes, but as they increase the customer impacts need to be considered. If they are not, you can envision a scenario where in-store teams are fighting even harder to ensure on-shelf availability, associates are tied up fulfilling online orders instead of servicing customers, and the shopping experience is impeded by carts and associates on the floor. Again, not a sustainable model.
The Future Of Hybrid Stores And Distribution Centers
The experiment, while not a viable business model for the long-term, highlights key learnings for brick-and-mortar retailers. First, no one denies the advantage that location affords them. Being convenient and accessible is a huge draw to consumers. Brick-and-mortar retailers are in direct proximity to larger percentages of the customer base. Historically, large distribution centers were intentionally placed in smaller cities and remote locations where land and labor are less expensive. Brick-and-mortar retailers, by way of contrast, scout locations based on population density, traffic patterns, demographic information and competitive landscape.
Retailers should leverage their location but think about stores as a pickup point only. Segregate merchandise you plan to ship into a designated area so that it is received there and stays there until a customer comes to pick it up. Don’t put it out on the floor and then retrieve it later. Use data to understand online order profiles and thus how you allocate merchandise and labor to fulfill customer demand; send staff to the floor for exceptions only. This will greatly reduce bottlenecks and inefficiencies in your retail stores. This will require some key design decisions in the near term with the total supply chain.
Should distribution centers be set up for direct to consumer fulfillment? Should an area in the backroom of the store be setup as a mini-warehouse? Should alternative pick-up points be considered? Should there be dedicated store staff to handle this process? Should the entire process be outsourced to a third-party logistics provider?
These are all critical decisions that must be dealt with a thoughtful approach. The good news is that retailers now have access to concrete data from their first run rather than industry averages or incomplete data. Many can now use data from their own stores and online orders to understand customer preferences, buying habits and demand for particular products. This must be evaluated thoroughly in order to create a highly efficient model that delivers on customers’ expectations.
Capacity Planning Is Critical
Proper inventory management is no easy feat. Today’s customers are not only demanding, they’re picky. Retailers are dealing with more and more returns — particularly from customers who purchased online but want to return to the store — not to mention the multi-billion dollar challenge with fraudulent returns. Even with sophisticated planning and forecasting tools in place, retailers are constantly challenged to balance inventory with capacity constraints. In some cases, this means building, buying or acquiring new distribution centers, or looking at opportunities to create “dark stores” that deal with direct-to-consumer demands. Retailers should carefully consider refreshing their network model analysis, understanding the overall labor impacts and analyzing their historical sales data to ensure that they are creating not just more capacity but the right capacity.
Adapting Your Operations
The daily pressures placed upon any retailer to run an efficient operation, maintain the right inventory levels and provide a high level of customer service are significant and challenging to manage. By layering in services to receive, fulfill and ship orders for individual customers, the challenge increases exponentially. All of this is dependent on both an effective design, as well as the ability to forecast and direct work to in-store associates. Retailers must rethink their processes and ensure associates are properly trained since some may be tasked with anything from interacting with customers and using technologies to access online orders to loading pallets and preparing shipments.
So more than just data associated with order volumes, retailers can and should use base level information such as daily job routines, standard operating procedures and established productivity standards to design new processes and labor models. Given that these processes can affect many operational areas, using tools like simulation can provide significant insight into dependencies and impacts in all areas.
Preparing For The Future
All retailers try to improve their in-store operations by maximizing efficiency while providing the highest possible levels of customer service. Being adaptable and flexible in response to changing customer preferences is vital for overall improvement. But, just as important, is building a sustainable business model, not one that goes out with a passing fad.
Start by studying data from your stores so you understand your customers — especially your most loyal ones. Consider the implications of those customers’ preferences on store layout, e-Commerce and product availability. Then, consider simulation and demand planning techniques that help you understand all viable changes to your physical facilities, inventory management and workforce planning before selecting and implementing the right options for your stores. You’ll be glad you did.
Sean Adkins is a Managing Director and Leader of West Monroe’s retail practice. He can be reached at sadkins@westmonroepartners.com.
