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Optimising for an omni-channel world

Andrew Munro, 13th November 2015

UK online sales exceeded £100 billion in 2014. Ecommerce penetration is 15 per cent: the highest in the world. Retailers compete feverishly to offer ever faster delivery times. And yet, 2014 saw a record 221 insolvencies in the logistics industry. Over the Black Friday period, Yodel suspended collections and Amazon stopped next-day delivery unable to cope with demand. Whistl has since announed it is ending its home delivery service.
Over a short space of time, supply chain has evolved from a necessary, back-office evil to a potential source of competitive advantage. It has also become vastly more complicated.

“Delivery is now a network, not a flow-line.”

Are retailers chasing omni-channel success at the expense of profit? Or does supply chain’s new profile represent a genuine opportunity for differentiation?
Recently, Jason Rommer, Partner for Consumer Markets at Wilton & Bain Management Solutions, convened a WBMS Insights panel to discuss the challenges of optimising supply chains for profitability in the fast-evolving omni-channel world. A wide-ranging discussion covered three broad areas:
• The Boardroom
• The Warehouse
• The Store

The Boardroom

“Suddenly, supply chain is sexy and customer-facing.”

Retail businesses are rushing to embrace omni-channel business models. Some feel in the forefront, while others feel driven by competition: “First, they think that online will simply cannibalise existing sales. Then, they think that online and omni will cost more. Finally, they find that their sales are eaten anyway; by other players.”
Either way, the panel felt that too many boardrooms failed to think deeply enough about the implications of an omni-channel model. What happens when the distinction between warehouse and store start to blur? What does that mean for systems, for data or for people?

“Often, transparency on cost to serve is lost.”

But, where does the value really lie? Do consumers really value next day (or same day) delivery? Or is the effect more subtle, an indicator of service quality rather than a desired outcome in itself?
“Most people would prefer ‘Saturday, between 10 and 12’ rather than ‘today’.” Generally, customers favour predictability and reliability over speed. But, speed is sexier.
“Too narrow a view of supply chain is dangerous.” Cost can be narrow, but the benefits are broad.
Promises of ever faster delivery may be loss-making …
“I question whether any grocery stores are making money from delivery.”
… but competitively necessary. The challenge is how to create competitive advantage.
Supply chain now has a seat at the boardroom table, but it must work closely with marketing.

The Warehouse
Warehouse operations are changing. Product ranges are proliferating: “A few years ago, Stella was just a beer. Now, there’s cidre, too. In apple and raspberry and peach and elderflower. I can buy 15 colours of case for my iPhone.”
Product lifecycles are shortening too, increasing the problems of obsolescent stock. Fast Fashion has introduced four or five seasons a year where once there were only two. But, this can also be an advantage: “Where you lose in obsolescence, you gain in operations, eliminating peaks and troughs.”
The convergence of warehouse and store brings its own challenges. An infrastructure optimised for pallets quickly breaks down dealing with “eaches”.
What happens when the warehouse management system needs to interoperate with the retail system? What happens to the business’s master data?

“Data is the killer thing that nobody looks at. It’s one of the most under-estimated and ‘boring’ topics in the boardroom.”

“What is ‘one’?” Is it a pallet, a dozen, or a single tin? In the retail system, it might mean one tin; in the warehouse system, it’s probably one pallet.
“Inventory integrity suffers and then you begin to compromise your level of service.”
Designing and implementing warehouse systems and infrastructure is a four or five year task, but the world of supply chains has become extremely dynamic. Too much automation today could limit flexibility in the future.
“A four year IT project is doomed to fail. The data changes. Requirements change. You need agile development: a road-map, not a fixed plan.”
Some businesses consolidate their operations in a single distribution centre, benefiting from economies of scale. However, a single point of failure increases business risk.
There remains huge potential for collaboration between major brands and those whose businesses are counter-cyclical and together can achieve higher asset utilisation. Some shy away from collaboration to protect their brand equity, but: “The customer doesn’t care who picked the product.”

The Store
Is Click and Collect effective? It was originally thought to drive incremental, in-store sales, but the collection point is often at the front of the store, or even in the car-park. And, the process is largely manual:
“Stores are effectively in-sourcing their picking and placing, adding cost to their business.”
Worse, “back of store hasn’t changed in 25 years. 75 per cent of goods out-of-stock on the shelves are actually in the back.”
For delivery, “last mile logistics determine what you can offer.”
“Everyone is outsourcing the final mile, but that is the customer touch-point.” And, the resulting customer experience can be very varied.
Managing returns is a challenge. For many firms, offering free returns is a price of entry issue. Returns, however, are often a firm’s “biggest supplier”. Return rates have increased dramatically with online ordering and what was once a zero cost function of bricks-and-mortar stores, is now a logistical headache for omni-channel organisations.

Cultural change
“Currently, retailers assume that the logistics service provider will solve the problems for them.”
But boardrooms need to think long-term, to be agile and consider where their competitive advantage truly lies: “be clear about what you are not going to do.”
The most successful players are looking at other sectors, too.
“An awful lot of these challenges have already been solved in other sectors. Manufacturing knows all about control charts and fishbone diagrams. But, in retail, everything is a one-off event and a point solution. It’s too often about what happened yesterday.”
Perhaps, the reason is cultural: “Retailers are trader-led, rather than process-led.”
“We supply chain people need to broaden our minds and become more marketing oriented.”
“We need to attract talent and a broad range of experience into supply chain, as it becomes increasingly strategic.”

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