Order Fulfillment in an Omnichannel Environment

Stephen DeAngelis

October 29, 2013

A year ago, Dan Gilmore, Editor in Chief of Supply Chain Digest, wrote, “In case you haven’t noticed, e-commerce is growing at a breakneck pace, putting a near panic in traditional brick and mortar retailers, and of course driving many of them to invest heavily in their own dot com sites and business units – even if most of them are losing money at it for now.” [“Multi-Channel Commerce and the Supply Chain,” 9 November 2012] As we approach what hopefully will be a good holiday season for retailers, order fulfillment is rising quickly to the top of concerns for many retailers — especially omnichannel order fulfillment. I previously addressed this topic in a post entitled The Impact of Omnichannel Operations on the Supply Chain, but with the holiday season upon us, I thought it might be a good time to discuss it some more. Gilmore continues:

“E-commerce … is now part of the whole ‘multi-channel commerce’ phenomenon. Multiple paths of purchase and delivery. Buy anywhere, pick up anywhere. More sales and delivery channels are coming too: your television…vending machines…what else? A senior supply chain executive from one of the country’s largest retailers told me at a dinner … that ‘multi-channel is going to create big winners and losers’ in the retail sector, depending on the decisions and investments each merchant makes. One of the weird things here is how technology driven this all is. … Of course, this is not only a retailer phenomenon. Manufacturers and wholesalers of all sorts are dealing with many of the same e-commerce/multi-channel supply chain challenges and questions. How aggressive do we go? Will we tick off our channels? Do we insource or outsource e-fulfillment operations? If we insource it, do we use an existing DC, or a separate fulfillment operation? Etc.”

Gilmore’s questions point out why omnichannel operations are so difficult to get right. He goes on to discuss three of the biggest questions involved in omnichannel operations: How do you best fulfill orders? How do you manage shipping costs? And, how do you manage inventories.

 

Omnichannel Order Fulfillment

 

Jason Denmon, a supply chain management consultant, writes, “Fulfillment can get complex as customers expect a seamless experience across all channels. One of the key decision points is whether to manage fulfillment of each channel in shared or separate distribution centers.” [“Aligning fulfillment operations with a changing channel mix,” Modern Materials Handling, 29 June 2012] Jim Barnes of enVista told Gilmore:

“We like the idea of combining the dot com and retail distribution operation if and only if the retailer has the ability to consolidate reserve inventory but logically keep it separated using a Distributed Order Management (DOM) or what I like to refer as enterprise commerce flow (ECF). In principle we like them combined, but many retailers don’t know how to do it, therefore you see a lot of physical or virtual fences separating dot com from retail order distribution. … The bigger question is regarding service and this is why there is a strong argument against combining retail and B2C. I believe to keep up with Amazon retailers are going to be required to establish more satellite or spoke locations in larger demographic areas that allow the retailers to service customer same day, at worst case next day.”

Denmon agrees that “operating out of a shared Distribution Center is most effective when the channels or segments have common order profiles (item type and quantity) that share the same inventory.” But, as Barnes notes, that isn’t always the case. As a result, Denmon claims, “Fulfillment with each channel in its own distribution center makes sense when the channels have unique requirements.” Denmon concludes:

“Choosing what type of fulfillment operation is best for your company starts with a holistic view across the business, channels and segments. Getting stakeholder alignment across channels is a critical first step. Start by asking these questions:

• Where are the synergies and differences between channels?
• Are you struggling to respond quickly to market demand? Or dealing with excessive mark-downs and out of stocks as a result of allocation problems?
• How is the performance of each channel measured?
• What are the tipping points where you are willing to sacrifice the optimization of one channel for the overall benefit of the organization? How wide is your lens?
• What are the impacts of changing business requirements in your channel mix?
• Do you have true business/stakeholder alignment between channels with an overarching strategy that drives one consensus plan?

“With an understanding of the full impact of multiple channels on your fulfillment operation, you can look for synergies and ways to deliver the seamless experience your customers expect.”

 

Shipping Costs

 

A lot more retailers are offering free shipping on orders. That makes getting a handle on shipping costs particularly critical. As Gilmore writes, “Discounted/free shipping is sapping the profits out of e-commerce.” But, as Bob Trebilcock, Executive Editor of Modern Materials Handling, notes, retailers continue to offer these shipping options because customers expect them. He writes, “Companies] are now operating in a world where cheap or free shipping dominates. Even wholesale businesses are having to guarantee next-day delivery to meet the expectations of business customers that are influenced by consumer expectations.” [“Four trends driving automation,” 22 May 2012] Jones Lang LaSalle, a global real estate services firm, asserts that the cost of new warehouses designed for omnichannel operations is significantly higher than the cost of traditional warehouses and distribution centers. “Traditional warehouses that support stores require less investment and machinery and fewer staff,” they write. “The new e-commerce distribution centers, which involves direct order fulfillment, can cost three times as much and involve three times as many employees.” [“Growing E-Commerce Forces Transformation in Distribution Networks, Report Finds,” SupplyChainBrain, 25 May 2012] All of that new cost must be absorbed or passed on. Last December, Supply Chain Digest published the following graphic to show “what a number of leading retailers and service providers are doing relative to multi-channel fulfillment strategies.”

 

 

 

As you can see, with so many fulfillment strategies in play, keeping shipping costs in check is no easy matter.

 

Inventory Management

 

Gilmore doesn’t believe than anyone has been able to master omnichannel inventory management, but, he writes, “Some of the Distributed Order Management solutions are getting close.” Kris Bjorson, head of Jones Lang LaSalle’s Retail/e-commerce Distribution Group, told the SupplyChainBrain staff, “Traditional retailers must support the delivery of merchandise and manage both in-store and online inventories and shipments at a frenetic pace against the backdrop of intense competition from pure e-commerce rivals.” Stephen Gerrard, Vice President of Marketing & Strategic Planning at Voxware, Inc., notes, “Warehouses are now on the front line of customer satisfaction, but enterprises are still downsizing the supply chain as much as possible. Logistics has to do more with less.” [“Warehouses: The New Front Line of Online Customer Satisfaction,” Supply Chain Digest, 10 May 2012] It is ironic that at a time when the supply chain is playing an increasingly important role that many executives still only see it as an area to cut costs rather than as an area that will differentiate them from their competitors. Supply chain professionals are fond of saying: The supply chain doesn’t support the business the supply chain is the business.

 

Supply chain analyst Bob Ferrari writes, “Many in the industry believe that there is no single formula for success in this new evolving multi-channel commerce world and each retailer will have to continue to ‘tune-in’ to customer needs and requirements and provide appropriate, differentiated capabilities that can best balance all physical and online assets.” [“Bricks and Clicks – The New Business Model and Supply Chain Capability for Retail Industry,” Supply Chain Management, 28 March 2012] Bill McBeath of ChainLink Research concludes, “The rising emphasis on omni-channel has reached a pitched crescendo this year, with no signs of abating. One of the reasons it is ‘taking so long’ is there are so many dimensions to really doing omni-channel well. It touches everything. Even though e-commerce has been around for well over a decade, we are really just getting started on the journey of putting in place the various dimensions of the foundation for wide spread true omni-channel integration. In reality there are currently centers of gravity—unifying the front-end (the shopper experience) vs. unifying the back-end (fulfillment). For now that is probably the enterprise’s best approach, since, especially the front-end mobile game is just discovering itself.” [“Reading the Pulse of Retail at NRF 2013: Omni-Channel Still the Big Thing,” 22 January 2013]