The Retail Supply Chain hits the bricks (for clicks)

This is an excerpt of the original article. It was written for the January-February 2019 edition of Supply Chain Management Review. The full article is available to current subscribers.

January-February 2019

Truth be told, I was not a Boy Scout, or at least not a very good scout and not for very long. But I think there are some lessons for supply chain managers in the Scout motto: Be prepared. When I Wiki’d it this morning, I found the following: Be prepared, which means you are always in a state of readiness in mind and body to do your duty.

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There's a lot of extra retail store space in the United States right now that no one knows what to do with. In fact, A.T. Kearney estimates that there's 24 square feet of commercial retail space for every American, compared to five per person in the U.K., three in China, and two in South Korea. Calling the United States “dramatically over-stored” compared to nations such as the U.K., where urban planners limit the ratio of real estate to people, the consulting firm gives the situation a positive spin in its recent report on “The Future of Shopping Centers.”

“Our study suggests the industry can have a robust future provided it evolves and successfully harnesses three change drivers: the human element, technology and commercial considerations,” A.T. Kearney predicts. “We see yesterday's shopping centers and malls morphing into consumer engagement spaces (CESs)—transformed mixeduse commercial offerings designed to meet the needs of new and future generations of shoppers.”

Chris Shaw, director of product marketing at Manhattan Associates, has another idea. With so much extra space lying around—and with the bricks-and-mortar shops continuing to give way to e-commerce—which American consumers spent $453.46 billion on in 2017—why not use a portion of that valuable real estate for order fulfillment?

“The United States has 40% more shopping space per person than Canada and 10 times more than Germany; we have too much space,” says Shaw. “Retailers have a compelling reason to use some of that space to fulfill orders and/or put products closer to their customers. The question is, exactly what products should retailers put where and exactly what type of fulfillment strategy should they use?”

For customers who buy online and then pick up in the physical store, for example, retailers must consider how to enable that capability, which products consumers will be apt to order online and pick up in person, and then which items they'd rather have shipped directly to their homes. The answer will depend on the size of the product, its space requirements and cost.

“A lot of people may want to order bicycles online and then pick them up,” says Shaw, “but bicycles also take up a lot of space, so retailers need to keep that in mind when developing an e-commerce fulfillment strategy at the store level.”

The new retail

For more than a century, retailers have filled their stores by shipping goods to those locations from one of their distribution centers (DCs). Customers either purchased store inventory in person or placed orders that were fulfilled by the same DCs. “It pretty much stayed that way until about 10 years ago,” says Shaw. E-commerce would turn that model on end and force retailers to rethink the way they fulfill customer orders—a trend that would become known as omni-channel.

“Once retailers started fulfilling online orders, it unlocked all kinds of complexities that they didn't really consider before,” Shaw explains. It also opened the window of opportunity for retailers who found themselves saddled with extra real estate just as store footprints began to shrink. And while the concept of store-based e-commerce fulfillment is still in its infancy, Shaw says retailers can't afford to ignore the trend.

“We've seen a massive shift over the last three years to five years in terms of how consumers expect to interact with brands and retailers. They hold the power and they have the tools and technology to become the ‘alpha' in the relationship,” Shaw notes. “They can literally take down entire brands on social media and/or instantly switch from one brand or retailer to the next.”

This new consumer is driving a modern-day retail environment that's based on the complete integration of online, offline, logistics and technology to create a single value chain, says Michael Zakkour, vice president at Tompkins International. “In the ‘new retail,' the trick is to bring the product to the customer,” he says. “Doing that effectively is all about moving the inventory and the product as close to the consumer as possible. One way to do that is by putting inventory in the store for delivery anyway, anywhere and anytime the customer wants it.”

Zakkour says store-based e-commerce fulfillment makes sense because the closer the product is to the customer, the more cost-effective the fulfillment and delivery process is for the retailer. It also helps to blur the lines between online and offline sales, the latter of which have been declining while the former continues to thrive.

Pointing to Amazon, Target and Alibaba, Zakkour says these large companies prefer to operate as “giant ecosystems,” instead of dissecting their operations into various online and offline channels. “Retail is undergoing a metamorphosis, and supply chain managers are having to meet the demands of those customers who want different portfolio packages of inventory shipped to different parts of their ecosystems,” says Zakkour. “Ultimately, it's about getting products as close to the customer as possible; that's not going to change anytime soon.”

Creating a unified experience

As she surveys the retail environment, Karen Bomber, director, vertical marketing at Honeywell, sees an industry that's focused on creating a “unified experience” for shoppers. So, whether a consumer goes into a store, orders online or places an order from 30,000 feet in the air, he or she expects the same experience every time. This is different than the industry-centric omni-channel term, Bomber points out, in that it applies not to the fulfillment/distribution operation, but rather to the way consumers interact with the retail industry.

“The average shopper doesn't know what omni-channel is, nor do they care,” says Bomber. “Knowing this, retailers are looking at how to connect the dots between the need for a unified experience, the need for a positive shopper experience and then how to use technology to bridge that gap.” For example, she says stores are turning to technology to help “fill in” where traditional retail employees (e.g., front-end cashiers without warehousing or fulfillment experience) leave off.

“You can't just flip a switch and use your retail bricks-and-mortar as a fulfillment center because you're going to miss out on two things,” says Bomber, “and they are the ability to increase a shopper's basket size (on the sales side) and the reverse logistics needed to be able to put inventory back into the supply chain (on the distribution side).”

Going forward, Bomber expects a blending of fulfillment activities across the traditional DC and the physical store. She also predicts more store-to-store supply chain activity, including the transfer of goods from one retail store to another as a way to fulfill e-commerce orders. Retailers will also have to tackle the reverse logistics challenge—or, how to get that millions of dollars' worth of returned goods back into the supply chain. “Especially critical for expensive goods that need to be sold at full value,” says Bomber, “this is something that retailers are just starting to get a grasp on.”

Also on retailers' to-do lists right now is figuring out where the next point of customer interaction will come from, says Softeon CMO Dan Gilmore. In fact, this is one of the biggest challenges facing retailers on the fulfillment front right now. Put simply, when we get to the point where consumers can just click on their TV sets to place an order, what will retailers have to change to be able to fulfill the order quickly and efficiently? Will it flow through to a store for delivery or pick up the next day, or will it be shipped from a DC?

Gilmore sees distributed order management (DOM) as one solution that will help retailers figure out this puzzle, and then address it with their traditional or store-based fulfillment operations. “We're still early in the game on this,” says Gilmore, “but as we go forward, we're definitely going to start to see even more, different order points for retailers to address. There's no end in sight.”

Tech's role in the retail renaissance

As Bomber pointed out, you can't just flip a switch and turn a retail store into a fulfillment center overnight. However, you can use a blend of technology and human labor to transform at least a portion of that expensive real estate into some type of e-commerce fulfillment operation. “We're no longer in the days of batch-pick-store for e-commerce fulfillment, but we're still in the early stages of this transformation,” says Mike Khodl, Dematic Corp.'s vice president, Global Solutions Management. “Retailers' dynamic order fulfillment processing is having a major impact on how orders are managed and processed inside the facility.”

Dynamic order fulfillment also changes order management and the software associated with it, Khodl says, as well as the packaging process. “The trend is to reduce packaging as much as possible, and that's driving the use of more polybags and envelopes on the outbound side of the DC, including micro-fulfillment from the retail store to the end customer. This, in turn, changes the type of automation needed to fulfill orders,” says Khodl. It also changes retailers' labor and order conveyance requirements, both of which need to be retooled when fulfillment operations are pushed out to the retail store.

“More retailers are looking at doing micro-fulfillment in smaller stores to take the burden off the large DC and put the product closer to the consumer,” says Khodl, whose team has worked on several automation projects using modular, plug-and-play systems designed to fit small-scale buildings.

Going forward, Khodl expects more retailers to explore similar options in their quest to streamline and speed up the e-commerce fulfillment process. “Companies need to look at how they are going to manage the dynamics—and the continued change in the dynamics of those orders,” he says, “and how to process those orders in their facilities.”

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