In an earlier post, we raised the topic of how ‘non-unified‘ many retailers’ critical functional capabilities are when setting out on a unified commerce strategy; we emphasized how tight collaboration between these functional areas is critical—with the supply chain often being de-prioritized, while the latest digital commerce bells and whistles are implemented.
Let’s discuss how the supply chain is impacted by unified commerce and some of the key challenges that any retailer must address early in the transformation process. The ultimate goal, of course, is to effectively build a unified commerce foundation that addresses important customer needs and differentiates the brand—but moreover, one that sits on an infrastructure positioned to support the new business strategy long term without disruptive operational challenges that impact the program profitability and the total cost to operate.
Supply Chain Network Quite simply, how do you ensure that your current network can support the new customer demands and the associated supply chain impacts that result? Is the logistics network optimized for multi-channel routing, distribution, and returns management? Since the onset of the omnichannel movement, retailers have seen exponential growth in not just small parcel but less-than-truckload (LTL)—with optimized consolidation demands growing as well. The result is that retailer networks have in some cases doubled in size, type, and reach when you include their proprietary facilities and associated third party hubs. Parker Avery has found that many networks required assessment or re-engineering and were at risk as many retailers quickly realized they needed more flexible nodes (shipping/receiving/flow-through origins) that could support the click-to-ship demand, while still hitting the same day, next day, or two day service they promote online or in store.
Besides identifying how many (and what type of) nodes are needed, leaders must consider if the current, various merchandise planning and operational systems are set up to dynamically manage a constantly changing inventory network. Are the in-house supply chain skillsets prepared for this new operating model, or do the retailers partner with providers or non-compete vendors to solve for this? Unified commerce brings with it enormous change management implications that touch all facets of the organization—and retail supply chain operations are not immune to this.
Additional considerations include:
When was the last network rationalization study completed and what is the expected future cadence?
Are there alternative channels that retailers should be participating in (think Amazon and Kohl’s recent partnership)—if at all?
Does adequate information synchronization exist across the entire supply chain that supports visibility and status changes from suppliers to customers?
Are order routes and/or returns optimized to match desired corporate unified commerce goals like profitability, cost containment, speed, or inventory efficiency?
Distribution Center/Warehousing Within the four walls of the distribution centers there are also important factors to consider when starting down a unified commerce path. The primary question that needs to be answered is: Is the distribution infrastructure flexible enough to handle the expected operational changes that come with unified commerce? Software, hardware, and process impacts are numerous as inbound receipts, DC flow-through, picking, packing, and outbound processing are all influenced by unified commerce strategies. It can translate into increased small parcel deliveries, less pallet-based bulk loading, different shipping carton requirements, new waving or pick strategies targeted at speed and efficiency, new requirements for case/inner packs and/or end-consumer based fulfillment requirements focused on ‘eaches’ which are very different than typical weekly carton-based store backroom delivery. Additionally, all of these new commerce options will force supply chain leaders to fundamentally rethink and plan for new skills, training, and development for their supply chain teams to effectively manage the business differently than in the past.
Transportation Once the goods have left the building on route to the desired points of consumption, the needs of supporting unified commerce does not stop. The mode of transportation has a significant swing from the traditional view of buy big, hold, and ship in small quantities to buy just-in-time and ship and deliver in small quantities quickly. As a result, the growth of small parcel demand has increased by hundreds of basis point over the last few decades.
Transportation considerations include what the mode of transportation should look like based on new unit level purchases that now potentially need to be at the customer’s doorstep vs. the retailer’s backroom. Parker Avery has found that retailers can typically expect a dramatic decrease in full trucks, along with a growth in LTL, and a massive spike in small parcel as shipping destinations multiply and average shipment size decreases. With this, shipping cost per piece will continue to grow which pressures cost control in this new digital-led age. Additionally, the service level expected by consumers in unified commerce continues to evolve with speed demands becoming more urgent but remaining diverse (same day, next day, second day, in-store, etc.). Determining the relevant service demands and resulting volume by service level and allocating the budget appropriately becomes an even bigger challenge as unified commerce options grow and budgets remain flat in the best cases. The need to “do more with less” has never been more evident than with unified commerce transportation.
Reverse Logistics An often overlooked yet critically important retail supply chain focus area within unified commerce is the management of returns and reverse logistics management. Unified commerce (when executed correctly) certainly helps make the consumer ‘buy’ decision easier and can act as an incentive to buy more than they may need with the justification that extra purchases can be easily returned in a store. Couple this dynamic with free shipping and return incentives that are quickly becoming the norm, we will see return volumes continue to rise for the foreseeable future. In fact, according to the National Retail Federation, returns reached 10% of total retail sales in 2017 and 2018—a major change after years of stagnation in the high single digits. How a retailer’s supply chain is set up to handle this increased returns volume, while efficiently turning inventory, minimizing costs, and avoiding needless markdowns can become a competitive differentiator that helps the bottom line. The adoption of markdown optimization and returns optimization software, coupled with flexible logistics networks can help turn a negative profitability impact into a positive unified story.
We’ve discussed how BOPIS, BORIS, BOSTS, and other unified commerce capabilities are all perceived to be a great consumer value-add, however, they can create a rather large and cumbersome side effect. If a retailer has successfully planned and executed their geographic specific product assortment, leveraging some of the new assortment planning and store clustering software that is available, not all stores will have the same baseline product assortment. This creates what is sometimes called a non-congruent product assortment, and when returns are added into the formula, it presents a potentially costly challenge. What does a retail location do when it takes ownership of an item that was never in its original assortment? Having a unified commerce strategy that prepares the supply chain for the influx of returns and stranded assortments, as well as considers returns optimization solutions is an excellent way to leverage a sub-optimal situation and turn it into a margin salvaging, profitable competitive advantage.
Clearly the age of unified commerce is here to stay and will continue to evolve with new strategies, approaches, and technology targeted at extending the connection with consumers and satisfying their changing needs regarding consumption. Retailers must look beyond the slick digital front ends and tantalizing free shipping offers and fundamentally consider if their supply chain is prepared for the increased flexibility, speed, and capabilities necessitated by unified commerce strategies.
The overall supply chain network, including distribution, transportation, as well as forward and reverse logistics functions are all impacted by this new paradigm and cannot be overlooked. What worked for the traditional way of selling to consumers will most likely not continue to work in today’s new environment profitably. Parker Avery has worked with many retailers to help them identify gaps in their functional areas, build processes and/or systems to address these gaps, as well as prepare the organization for the change required to successfully implement and operate these new strategies in a profitable way. It is clear that an updated, flexible, and nimble supply chain is critical to a successful unified commerce strategy.
If you are experiencing supply chain issues or have questions as you move toward a true unified commerce environment, please don’t hesitate to contact us.