Why the internet is forcing retailers to rethink their supply chains

The growth of internet shopping is causing retailers to radically rethink the way they manage their supply chains

The idea of multi-channel retail is not new. Retailers have been dealing with the complexities of selling to consumers through online channels and traditional bricks and mortar stores for over 15 years now. Multi-channel retail adds a significant amount of complexity to retailer operations and that complexity just keeps on rising as more consumers use smartphones and tablets for their online shopping.

To support this added complexity many retailers have undertaken process re-engineering and technology initiatives.  The goal of these efforts was to achieve consistency of customer experience and information across multiple channels. One example of this is that items purchased online should be able to be returned, replaced or exchanged at any of a retailer's stores nationwide.

Shoppers won't wait longer than a day for their orders to be delivered

But as the percentage of online sales continues to grow the investment focus is shifting beyond customer service and sales into functions such as supply chain and logistics. Forrester Research predicts that the UK online retail market will grow by 10% per year from £40bn in 2012 to £64bn in 2016. And, as the percentage of online sales has grown, so has the level of competition. 

One of the key factors that influence online shopping behaviour is delivery times. In the early days of e-commerce, consumers were conditioned to wait for days for an online order to arrive via Royal Mail. However, now most shoppers don’t want to wait longer than a day, ideally no more than a few hours, to receive their purchase.  

Retailers are re-engineering their logistics systems 

Therefore it follows that the retailer that can offer the fastest delivery speeds is going to be best positioned to win the most business. In the hope of gaining competitive advantage, many retailers have begun to re-engineer their order fulfilment and logistics processes to accelerate shipping timeframes.

Some retailers are pursuing mergers and acquisitions with hopes of leapfrogging the competition. For example, Amazon.com acquired a maker of robotics systems, Kiva Systems, for its distribution centres. These robots speed through giant warehouses moving inventory from shelves to workers to accelerate order flow.  

Google acquired BufferBox, a Canadian operator of lockers in major metropolitan areas throughout North America. Services such as Google's enable retailers to reduce shipping times by delivering to lockers located in convenient spots throughout major cities in the US, ready for customers to pick up.

The competition to offer more aggressive delivery schedules or pricing options is fierce. For example, Argos now offers a 90-minute delivery via a shuttle service. Next offers delivery the following day for orders placed by 10pm. Ocado offers shoppers to specify grocery delivery windows of within one hour. Amazon.com offers unlimited shipping to its Prime customers for £49 per year.

It's no longer necessary for retailers to stock goods themselves

In the early days of e-commerce, retailers would carry inventory for each product listed on their website. However, in today's model many retailers never physically touch the products they sell online. Instead, online orders for these products are routed to a third party for fulfilment. Both third-party logistics providers and niche e-commerce fulfilment houses offer services in which they will pack and ship items on behalf of retailers.

Another popular option is “drop shipping”. When a consumer places an order with an online store, the retailer splits the contents of their shopping cart into multiple separate orders. Each order is relayed via electronic data interchange (EDI) to the supplier of the product. The supplier then ships the item directly to the consumer's address using packaging materials supplied by the retailer. Orders fulfilled via drop ship are usually processed more quickly as there are no concerns about out-of-stocks and back-orders at the retailer.

The internet is making supply chains more complex

While drop ship models simplify the order fulfilment process for retailers, these approaches introduce quite a bit of complexity for the supplier. Suppliers have traditionally concerned themselves with shipping full truckloads of goods to their retail customers' distribution centres.  

A typical truckload for a particular item might contain 5,000 units. When shipped to a distribution centre there is one truck to manage, one purchase order and one invoice to issue. But if, say, 10% of these 5,000 units are now sold online, there are now 501 (500 online + 1 store) shipments to track, 501 purchase orders to receive, and 501 invoices to be created. The shift from tracking one shipment to 501 is an exponential increase in complexity for the supplier.

Retailers are still responsible for tracking deliveries

Retailers are not absolved of responsibility for tracking deliveries even when they outsource fulfilment to a supplier or other third party. Retailers continue to own the consumer relationship, so any errors or delays in the shipment will affect the retailer’s relationship with the consumer, potentially affecting loyalty. 

Retailers must therefore be able to track the status of each order sent for drop ship (or third-party fulfilment). More importantly, they need to be able to identify orders which are delayed or only partially shipped. Retailers also need to know which merchandise was returned so that the appropriate credits can be applied. 

An innovative approach to the online retail supply chain involves leveraging a network of physical stores. These real estate assets were once viewed as a liability during the dot com era. But now having a large footprint of stores across the country can offer a competitive advantage. 

For example, many traditional retailers offer a click-and-collect service that allows consumers to place orders online to be shipped to their preferred store location, often available for collection within hours of an order being placed. More than half of all UK consumers indicate that they have already tried a click-and-collect model for online purchases.

Drop shipping is lowering costs for retailers

The third-party fulfilment, drop ship and ship-from-the-store models described above can each lower costs for the retailers. With these models the retailer does not need to hold buffer stocks in its distribution centres to respond to demand and as a result can offer lower prices.

The race for faster delivery timeframes is introducing significant amounts of complexity for retailers. They must be able to sell products in a store, over the phone, on a website, via a smartphone or a tablet device. They must be able to have the products delivered to the customer's home, office, nearby store or locker facility.  

They must be able to ship products from their own distribution centre, their own store, a supplier's warehouse or a third-party fulfilment centre. And they must to be able to provide customer service in person or via phone, email, chat, website or various social media sites. No wonder it’s becoming ever more complex.

Steve Keifer is the vice-president of global marketing for GXS and the author of the book Herding Geese – The Story of the Information Supply Chain. You can follow Steve on Twitter @HerdingGeese.

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