Experts from the Indian Institute of Management Ahmedabad and the University of Michigan share their thoughts on the Omni-channel revolution
To quote the State of Retail Supply Chain Report (SRSCR) 2018: “This is the most dynamic era in retailing and the only constant is change.” There is no doubt that e-commerce will continue to shape retailers’ strategic and tactical decisions in the coming years. In 2018, U.S. e-commerce sales hit more than $500 billion – an increase of about 15% from the previous year – and accounted for about 14% of the total U.S. retail sales. These strong indicators have not been confined to the US only. The global e-commerce sales in 2018 were almost $3 trillion – an increase of about 18% from the prior year – and accounted for about 15% of the total global retail sales. It is projected that e-commerce sales will continue to grow and reach a 17% share of total retail sales within the next few years (in contrast, U.S. e-commerce sales a decade ago was only 6% of the total U.S. retail sales).
The message is clear: E-commerce growth is real, not just a passing fad. Since a significant portion of the growth in retail sales is expected to come from e-commerce purchases, retailers need to master a sound e-commerce strategy to remain competitive in the market. The execution, however, is not easy. Thanks to the so-called Amazon effect, consumers nowadays are used to an easy online shopping experience and a quick delivery. Alas, providing such a high level of shopping experience is extremely costly! This has motivated retailers to experiment with new approaches, collectively dubbed as the omni-channel strategies. Some failed, some survived and those who survived continued to improve and innovate.
Classic omni-channel: Strategies and challenges
Consider, for example, the challenge of satisfying consumer expectation of quick delivery. Unless you are a giant e-commerce retailer, such as Amazon, you most likely do not have either the right scale or infrastructure to operate as cost-efficiently as Amazon in the quick-delivery space. If your customer is located far from your nearest warehouse, it could take a few days for his or her package to be delivered. What’s the alternative? One way is to fulfil e-commerce orders directly from a brick-and-mortar store near to the customer, which can cut down the delivery time to at most two days.
Another option is the so-called Buy-Online-Pickup-In-Store (BOPIS, or click-and-collect), which was first introduced by John Lewis, a UK-based chain of a high-end department store, in 2007. BOPIS has since been widely adopted by many retailers worldwide and is nowadays considered a standard strategy of omni-channel fulfilment.
In addition to ship-from-store and BOPIS, there are plenty other omni-channel strategies that focus on improving the customer shopping experience such as Buy-Online-Return-In-Store (BORIS), ship from one store to another store, locker pick-up, curbside pick-up, etc.
While the idea behind many omni-channel strategies is intuitive, their implementation can be quite challenging. Consider again the ship-from-store fulfilment strategy. To implement this, retailers need to first have real-time inventory visibility across all stores. Sadly, some retailers still work with a legacy system that does not provide them with the necessary visibility. Secondly, since store inventories are now used to fulfil both in-store and online demands, retailers need to improve their forecast accuracy. The inaccurate forecast may lead to unfavourable business scenarios: either too much inventory in stock, resulting in high in-store carrying cost or too little inventory causing high stock-out rates.
In the word of one of the respondents of SRSCR 2018, “You need the right balance of inventory to support both the omni-channel experience and the in-store experience. To succeed, it would take a different way of thinking about demand forecasting than how we’ve viewed it in the past.” But, forecasting is not easy either. Some retailers need to come up with forecasts of not only a single product but at least a few hundred thousands of products and sales data is not always abundant. Finally, retailers also need to optimise their fulfilment decisions. Although fulfilment from the closest store seems intuitive, it is not always optimal because it ignores future demand forecasts and inventory distribution across all stores.
Looking into the future: The challenge of urban logistics
At the time when Amazon was born in 1994, little did the rest of the world know that retailing as we knew it will forever be changed. Today, some of the most sophisticated quantitative methods are being developed and applied to solve retail problems on a daily basis, all in the name of meeting consumer expectations. While the last decade has witnessed the transformation of many retailers into so-called omni-channel retailers, the next decade is likely to see a more intense transformation and competition closer to home.
As reported in1, in New York City alone, there are 10 million people within a 20-mile radius of the Empire State building who spend a total of about $20 billion every year on e-commerce purchases. It is also reported that 64% of online consumers expect orders placed by 5 pm to qualify for same-day delivery. Imagine the possibilities if retailers could tap into this consumer segment. But, implementing urban fulfilment is not easy. While labour availability and last-mile delivery costs are no longer issues in a big city, stores in a highly populated city have a much smaller storage space, which requires more careful inventory planning. In addition, there are many limiting city infrastructures such as limited parking area and stop times, restrictions on vehicle sizes and traffic congestion that will affect order delivery. Indeed, increasing activities in urban fulfilment could result in worse traffic congestion, which will affect city life.
So, what is the best urban fulfilment strategy to deliver a high customer shopping experience?
How can retailers work together with city officials to create as minimal disruptions to city life as possible?
These are but some of the questions that retailers and policymakers alike need to grapple with within the next decade.
1 Urban fulfilment centers: Helping to deliver on the expectation of same-day delivery. Deloitte, 2019.
Please note: This is a commercial profile