Global e-commerce sales will reach $3.5 trillion within the next five years. This is great news for retailers.

But there’s a catch.

Traditional retailers are struggling to adapt to the new realities of e-commerce, and these realities are being driven by pure-play online retailers. With their massive and still growing e-commerce infrastructure, these pure-plays are raising the bar on service – relentlessly. As a result, customers are more demanding than ever. They are now accustomed to getting what they want, when, where and how they want it. They are used to paying little or nothing for delivery. If a retailer fails on the service end of the sale, it risks losing the customer.

This is ratcheting up customer expectations in every industry segment – a bleed-over effect. Non-consumer industries like automotive and aerospace now face the same sets of service expectations as omni-channel retailers. This puts tremendous pressure on supply chains not just to perform, but to do so cost efficiently.

The latter is no easy feat. In the retail sector, 86 percent of retailers believe that “current supply chains are not fit for purpose to deliver a successful omni-channel offering,” according to a recent EY study. The main reason lies in the fact that omni-channel fulfillment is expensive. It can cost up to four times more than traditional bricks-and-mortar fulfillment. With most retailers operating at a five percent profit margin, the high cost of e-commerce fulfillment can easily push companies into the red.

The expectations revolution

How has this expectations revolution happened? In retail, it started some 10 years ago, when pure-play e-commerce retailer Amazon rolled out its Prime membership service, which now has more than 54 million members. The service made two-day delivery the standard, shrinking the delivery window from a previous expectation of five to seven days.

Retailers followed suit, so consumers now see two-day delivery as the norm – as standard practice. Pure-play retailers next added same-day service to the mix in select urban markets, for those customers that need it now and don’t mind paying a fee in most cases.

Omni-channel retailers scrambled to keep up with this rising service expectation. Leading retailers realized they had a potential advantage over pure-play online retailers – their store network. If they could effectively leverage that network, with its physical proximity to customers, they could offer something online retailers couldn’t – in-store fulfillment for rapid delivery or ‘click and collect’, where the consumer picks up the order at a nearby store.

US department store Macy’s, among others, has been aggressive in pursuing this omni-channel strategy. To compete with same-day delivery offerings of online retailers, for instance, Macy’s set up same-day delivery in 17 US markets for a base fee of $14.95. The retailer uses Deliv, an Uber-like delivery company with contracted drivers, to pick up orders from a store, and then drop them off at the customer’s address. In this case, Macy’s has a fulfillment advantage because it is physically close to its customers. It can draw merchandise from its network of 900-plus stores.

The mastery of - and innovation in - e-commerce supply chain management has shattered almost every customer service assumption, and done so at a break-neck pace. “Even companies that have tried to adjust their business models to the new reality have been caught out by the speed of this transition,” says Aled Smith of UK-based M&G Investments.

Service – but at what cost?

Not to be outdone by their pure-play e-commerce competitors, omni-channel retailers have gone on the offensive. They are pouring money into their supply chains, striving to create omni-channel networks that meet customer expectations at a profit. Forty-nine percent of participants in a 2016 study by the Retail Industry Leaders Association (RILA) say their companies are increasing their investments in omni-channel fulfillment to support faster, more efficient ‘click-to-delivery’ capabilities.

At the same time, retailers have made supply chain process improvement a top priority. Fifty-six percent of the RILA study respondents indicated their company will increase spending on supply chain process improvement this year. In particular, they are investing in integrated demand planning capabilities to better expose store and distribution center inventory to customers.

Competing in this new order puts immense pressure on omni-channel retailers’ costs, and getting these costs under control is fueling these investments in the supply chain. “There is vast concern that competing with service will be cost prohibitive and drive [companies] out of business,” says Lisa Anderson of LMA Consulting Group.

Toward the smarter omni-channel supply chain

We are at the epicenter of a massive transformation in omni-channel retailing – that much is clear. Brian Gibson, Executive Director of the Center for Supply Chain Innovation at Auburn University and an author of the RILA study notes. “You can’t have a conversation with a retail executive today without it coming back to the omni-channel topic — how you’re trying to monetize it and make it profitable.”

Getting the omni-channel supply chain right is essential. “It’s easy to meet customer service expectations by throwing money at the problem and creating custom supply chains to deliver what customers want,” says Ann Vervecken, VP, Head of Business Development Consumer and Retail MLEMEA “That’s what many retailers did when they first dived into omni-channel retail. And their margins suffered.

“But now we’re entering the next phase of omni-channel retailing, where retailers are building smarter supply chains that don’t just serve the customer well at any cost,” notes Vervecken. “They use optimized processes and networks, combined with technology and supply chain capability to serve the customer at a profit. They are working toward a standardized, not a one-off omni-channel supply chain. That’s a huge difference.”

Published: October 2016

Source: Supply Chain Insights
Image: DHL