Consumer expectations in retail are changing more rapidly than ever. As e-commerce takes ever-larger shares of retail and redefines customer expectations, retailers are hard at work developing stronger online presences, seamless links between their online and brick-and-mortar offerings, and faster and cheaper delivery to meet rising customer demands.
Faced with this changing landscape, they should also examine their distribution operations and ensure they are ready for a market very different from the one they were built to serve. A recent AlixPartners study revealed that 75% of customers say free shipping greatly impacts ordering decisions, and 18% indicate that they will not wait more than two days for delivery — a rate that has tripled in just four years. Second-day delivery is becoming the norm for online delivery, and next-day and same-day delivery are now commonplace.
These trends are putting pressure on retailers to broaden fulfillment options. Retailers now have to offer options like buy online/pickup in store or buy online/return in store. Larger retailers have already embraced these options, and as customer expectations continue to rise, smaller players may find that omnichannel economics make sense for them too. Below we examine some changes and opportunities that this new environment presents.
Some traditional distribution models will struggle. Many networks were designed with distribution centers (DCs) that service a large store network. This worked for two-to-three-day delivery, but faster delivery often requires a hybrid approach: more DCs, store-based distribution, drop-shipping, and partnering with third-party logistics companies (3PLs). Although retailers increasingly use their stores for e-fulfilment, opening new DCs is still their primary strategy.
"Second-day delivery is becoming the norm for online delivery, and next-day and same-day delivery are now commonplace”Many retailers, however, cannot afford to build a homegrown omnichannel operation. Some have outsourced fulfillment to meet omnichannel demands. Overall, e-commerce requires expanding distribution footprints and demands innovative solutions to control costs while meeting customer requirements.
Shorter delivery lead times also increase DC complexity. DCs designed to meet past expectations face significant operational challenges and cost pressures. For companies that handle direct fulfillment in-house, two key challenges emerge:
1. Multichannel fulfilment: Many retailers initially launched e-commerce fulfilment with either a separate DC or a 3PL. Moving forward, companies can save by in-sourcing e-commerce under the same roof as store replenishment. They should also decide whether to combine store and online fulfillment within a single facility.
A retailer that ships full cases of a sweater to stores but an individual sweater to a consumer may find it best to fulfill separately. On the other hand, retailers with slow-moving inventory like fine jewelry might consolidate, as most “picks” are for one unit regardless of destination.
2. Changing expectations: Whether it’s a direct customer who expects delivery in two days, or a high-volume store that has empty shelves after a sale, DC turnaround time is more compressed than ever. To reduce turnaround time, retailers can better slot inventory, dynamically plan orders, improve communication, and improve labor flexibility.
Dynamic transportation options
It’s increasingly important to optimize the mix of transportation modes and service levels. Five years ago, a retailer might simply use traditional package express providers. Today those options may not work, both from a service (need for same-day delivery, etc.) and a cost (opportunity to reduce costs by consolidating shipments) perspective.
Retailers should optimize transportation cost and service levels based on segment. Low-volume, non-time-sensitive deliveries can likely use traditional package express. But as volumes increase, retailers can lower costs by partnering with 3PLs or building a network of truckload deliveries to destination regions.
Expanding the DC footprint brings goods closer to customers, yet delivering directly to the consumer constitutes the most important consumer touch point. This “last mile” is generally the least efficient and most expensive part of delivery.
Retailers can use stores as a home delivery hub instead. They can deploy the ship-from-store option using package express providers, local delivery services, or some emerging players. Although traditional delivery companies continue to dominate the last mile, several new competitors – such as Deliv, Instacart, and UberRush – have emerged to meet the demand for inexpensive and flexible delivery.
Changing consumer preferences also impact store operations, often requiring updated staffing models. Reduced foot traffic yet increased omnichannel activity (fulfilling orders or processing returns) require more flexible roles for associates and smarter utilization of square footage.
Consumers now expect that retailers will gladly accept returns in store or pay for shipping costs. It’s a cost of doing business online, especially in apparel. Returns volume is rising and often considered the most inefficient area of a distribution center.
There are multiple ways to manage returns from the point of receipt through final disposition. Brick-and-mortar retailers can use stores to help manage returns, reducing processing and shipping costs. However, for returns processed at the store, it’s important to have clearly defined processes across the store network, effective forecasting, and an efficient use of store labor. Retailers can improve efficiency by focusing returns on a targeted set of stores in one area.
What will it take to succeed in this rapidly changing distribution environment?
This changing environment means that retailers will have to transform their distribution operations not only to meet existing needs, but also to anticipate market changes in the next 5-10 years.
We recommend taking six steps now to build a competitive operation moving forward:
1. Establish effective inventory visibility and forecasting.
2. Integrate systems and processes across your supply chain.
3. Be prepared to give up or get help with aspects of distribution that you aren’t good at providing (i.e., same-day delivery).
4. Develop a range of transportation options – today’s low-cost provider isn’t necessarily tomorrow’s.
5. Do the pre-work now to determine what combination of distribution channels makes most sense (i.e., which brick and mortar stores should be fulfillment hubs).
6. Become sophisticated in managing returns.
About the authors: Peter Appel and Russ Dillion are directors at AlixPartners, a New York-based consulting firm.