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Omni-channel Strategies: Customer-Controlled Supply Chains

Jan. 14, 2015
Customer expectations are increasingly important in how retail supply chains operate.

Omni-channel distribution strategies aren't as unique as fingerprints, but they are distinct. They reflect shopping and buying behavior and are a response to customer needs and demands. 

Perhaps one of the most perplexing issues in developing an omni-channel strategy is getting inside the head of the customer in order to determine where to focus efforts to develop or improve delivery infrastructure—and this applies to both retail and business customers.

"Traditional brick-and-mortar retailers need to radically overhaul the way they develop, present and distribute their products, providing new innovative technology-led ways for customers to browse and ultimately pay for their purchases," says Dan Wagner, CEO and founder of Powa Technologies. With years of experience developing Web commerce solutions, the chairman of Powa Technologies adds, "It is clear that most consumers, while they appreciate the convenience of shopping online, still rely on their traditional brick-and-mortar suppliers for most of their needs."

To resolve this seeming contradiction, 
Wagner notes that a high-quality omni-channel offering that provides mobile commerce and fast deliveries is essential. But, he points out, even the largest retailers face a daunting financial decision when investing in the technology to support an omni-channel strategy.

Enter consulting firm CapGemini, which surveyed over 18,000 digital shoppers from 18 countries. CapGemini concluded, "While the Internet is now the preferred channel to inform purchasing decisions, brick-and-mortar stores still reign when it comes to actually making a purchase." 

This is set to change, with the majority of shoppers saying that in the future they expect to spend more money online than in-store. Specifically, 72% of shoppers see the store as important or very important when it comes to carrying out retail transactions, compared to 67% for the Internet. Only 14% of shoppers strongly indicate that physical stores have become less important for them, says CapGemini.

With just over half of respondents to the CapGemini survey indicating they expect to spend more online than in-store, this doesn't necessarily equate to the volume of their spending. Even the larger retailers are seeing online purchases accounting for just 10% of sales. One reason is the split among the types of shoppers. CapGemini identified four types in the mature markets covered by its survey:

  • Reluctant Digital Shoppers—11% of the sample
  • Value-Conscious Digital Shoppers—29% of the sample
  • Socially Engaged Digital Shoppers—41% of the sample
  • True Digital Shoppers—19% of the total sample.

Price sensitivity is one element that shines through nearly every discussion of the influence on online shopping, and with that, 65% of the survey respondents ex-pect to see options to order direct from the manufacturer to increase.

Channeling Change

Well-informed omni-channel consumers are comfortable in any channel, says Rick DiMaio, VP of distribution, North America for Office Depot. Office Depot is a traditional brick-and-mortar retailer, but it also has a strong business-to-business (B2B) customer base.

Rick DiMaio

DiMaio describes part of the challenge as coming from online marketplaces where "anyone can deliver a screen that has the product on it. They haven't bought it yet, but it's there." Office Depot concentrated on solutions and services to change the customer experience. As he describes the shift in attitude, "We have to give up control to the customer and ask flat out, ‘What do you want? What are the terms you're willing to live with? When do you want it?'"

That sounds like the traditional logistics challenge of "right thing, right place, right time…." The "new shopper" is more informed and has more access to information, says Terry Esper, a professor at the University of Arkansas. That's not much of a surprise, but he points out that this shopper is more of a standard today—it's not generational. Office Depot, and other retailers who operate in both the consumer and B2B markets, might also add that this is also the case for their B2B customers.

Esper points out that this new shopper has higher expectations of product availability and delivery performance. He describes "showrooming," where the shopper in a brick-and-mortar store will scan the bar code of a product to price shop and even order online. 

There is a growing intolerance of out-of-stocks, adds Esper. The rate of out-of-stocks has remained relatively constant at about 9%. A lift of about 2% in on-shelf availability will increase revenue about 1%, he points out.

Responses to out-of-stocks have changed, says Esper. In the past, there were three responses: switch, delay, or leave. In the omni-channel environment, there are new responses, he points out. These include buying in the store and having the goods delivered—usually with the expectation of no extra charge for delivery. If the shopper exercises that option from a smartphone, it may not be clear the person was ordering from the store. That transaction could look like any other online order. And, if the shopper experiences a stock-out at a brick-and-mortar store, that online order could switch to a different retailer or channel.

A growing problem for retailers is what Esper describes as the last 100 feet. Goods that show as part of the store inventory aren't necessarily on the shelf and available to purchase. Store execution becomes an increasingly important factor in omni-channel distribution networks.

Adding to the challenge of store execution is a process Powa's Wagner describes as click-and-collect. This is where an online shopper places an order and then picks it up at the brick-and-mortar storefront. On top of that is a developing strategy to use the brick-and-mortar stores as forward stocking locations where backroom inventory might be allocated for click-and-collect or store-to-door delivery. In the latter case, the local delivery is fulfilled from store inventory.

Underlying Challenges

There are a multitude of fulfillment challenges in an omni-channel environment, and many go deep into the organization structure. One is the need for a strong technology base to support the rapid flow of accurate information on both inven-tory and demand—to name just two. 

Office Depot's DiMaio generalizes about the inherent conflict when it comes to balancing cost and service. In the past in operations, DiMaio notes, he might have been able to deliver some savings without a lot of concern for inventory—that was someone else's problem. The inventory team, he continues, might be just as quick to point out they could deliver significant savings by taking inventory out—"it would only cost us permanent expense in our supply chain in either transportation or distribution," he points out.

That attitude no longer works, and you have to be ready to "take one for the team," DiMaio notes. Everyone has to come to the table talking cost and working capital, he continues. There must be a commitment to change that includes the willingness to make sacrifices for the greater good of the supply chain. Using DiMaio's example of inventory and transportation, the compromise might be a smaller inventory reduction with a slight increase in transportation cost. When the changes are being identified and implemented, there will be more trade-offs. "We can't always be investing in the material handling. Sometimes there is a scenario where a manual solution is good enough in that market, for that volume, for that service need." 

In the case of Office Depot, there was plenty of change. It moved from single-use facilities for retail, commercial and e-commerce where each maintained different facilities, different inventory and different transportation to multi-purpose facilities that were geographic in nature. (It was also facing the integration of OfficeMax and Office Depot—which had distinctly different operations.)

On the service side, the stores were getting a different level of service from the B2B side. By definition, B2B got next-day service while retail stores got a truck once a week. The current system is much more in line with omni-channel distribution.

In 2007, says DiMaio, Office Depot's network had 33 buildings; today it has 15. Its transportation was two networks; now it is a 3PL network with shared over-the-road fleets. Inventory moved from shared B2B and retail, and is now an optimized push/pull system. For any SKU that's stocked, says DiMaio, "if a customer wants to buy one from a case of 12, we'll give it to them, and if a store wants a case of 12, we're going to give it to them from the same pile of inventory."

DiMaio continues, "While that doesn't sound like a big deal, it's what stops most organizations from putting that inventory together. You sell one from a case of 12 online and what you have in retail is a ‘damage,'" he quips.

The changes didn't stop with shifting from retail distribution and order fulfillment being separated—often under the same roof but different operations—to combining inventory. Now, retailers are moving towards not only combining inventory where possible but picking from stores and shipping to customers right out of retail stores, notes DiMaio.

In classic understatement, DiMaio observes, "The past 10 years have seen quite an evolution in retail."

Perry A. Trunick is a supply chain industry journalist and consultant, as well as a member of the adjunct faculty of the Operations and Supply Management Department of the Monte Ahuja School of Business at Cleveland State University.

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