June 16, 2016
strategic insight | Optimizing Freight Spend

In omnichannel, matching freight spend to inventory control, fulfillment is delicate task

In omnichannel, matching freight spend to inventory control, fulfillment is delicate task

A single, integrated shipping platform needed to address multiple fulfillment scenarios, experts say.

By Mark B. Solomon

A consumer in Jacksonville, Fla., orders several products from a retailer's website. As soon as the order is received, the retailer's omnichannel platform scans inventory records for a store in Hilton Head Island, S.C., 170 miles to the north. The retailer sees the products are available at the Hilton Head store and are classified there as "excess stock."

The retailer's transportation management system (TMS), which is seamlessly integrated with its omnichannel network, compares parcel rates from the Hilton Head store and from the retailer's DC in Topeka, Kan., and finds it would be 25 percent cheaper to ship from the Hilton Head store. The order is forwarded to Hilton Head, where the merchandise is picked from inventory in the backroom, packed, labeled, and scheduled for pickup later that day.

The customer gets the products as scheduled (and gets free shipping to boot), the retailer cuts its transport spend, inventory is optimized that would otherwise be sitting idle in Hilton Head, and the laggard store gets a sales boost of sorts.

The hypothetical scenario is what omnichannel fulfillment could look like for traditional retailers. But it can't be consistently executed without the end-to-end visibility needed to fulfill from multiple locations in concert with dozens of suppliers and carrier partners. It's a code the marketplace has not been able to crack in a sustainable manner to date.

To complicate matters, the technology that helps shippers perform load planning based on mode and carrier is not linked to a retailer's inventory, according to a survey released in late May. The annual survey, conducted by the publication American Shipper, benchmarked transportation procurement attitudes and activities of 103 large companies, nearly 60 percent of them retailers and the remainder manufacturers. About 64 percent of the retailers said transportation's role was critical to their company's omnichannel strategy. However, only 41 percent said their transport procurement was "very closely" tied to their inventory strategy, the survey found.

Eric Johnson, the study's author, said the gap underscores a fundamental problem facing traditional retailers. "If a company doesn't have a handle on where it wants inventory or isn't able to throttle the pace of inventory to meet demand, it can't effectively serve multiple channels," Johnson wrote in an analysis of the results. "And if transportation procurement isn't closely tied to inventory strategy, it's hard to imagine how a company can ensure its inventory levels and placement are where they would want them to be."

A DELICATE BALANCE

Coordinating transport procurement activities, inventory placement, and unpredictable omnichannel fulfillment is a tricky proposition. As fulfilling "eaches" becomes more commonplace, parcel shipping has become the e-commerce mode of choice. But parcel is expensive compared with less-than-truckload (LTL) service, making it more important than ever to consolidate shipments into the more cost-efficient LTL loads where possible but hard to do without aligning procurement and inventory control processes.

With a procurement module embedded in a single-platform TMS that simultaneously manages multiple parcel carriers as well as other modes, businesses gain the visibility to see their entire inventory in real time. This enables them to commingle individual packages into LTL or truckload consignments if the opportunity arises. They would realize sizable transportation savings through such practices as "zone skipping," where parcels are aggregated and shipped to a nearby distribution point for final delivery, instead of shipping single items from origin to destination, according to several experts. Perhaps unsurprisingly given the increased demand, LTL carriers are rumored to be looking at expanding into parcel services.

The problem, the experts said, is that integrating parcel services into transportation management systems traditionally geared toward freight has been the IT equivalent of fitting a square peg into a round hole. "The marriage of parcel with traditional TMS systems has usually been an afterthought," said Daniel Vertachnik, chief sales officer of Kewill, a Chelmsford, Mass.-based TMS provider whose strengths in the parcel arena were augmented in early May when it acquired Holland, Mich.-based LeanLogistics, a TMS provider on the freight side, for $115 million. Vertachnik declined to comment on the transaction.

Vikram Balasubramanian, senior vice president, strategic product development for Cary, N.C.-based TMS provider MercuryGate International Inc., said parcel-centric systems typically lack the capability to consolidate parcels into larger shipments. Similarly, traditional TMS systems that effectively manage LTL, truckload, and intermodal shipments have not been designed to provide parcel consolidations, Balasubramanian said.

"Identifying and executing savings across a nationwide or global network is difficult, if not impossible, by using one or both types of these TMS platforms," he said.

Jim Hendrickson, marketing and logistics professor at the Ohio State University's Fisher College of Business, said it's important that a transport procurement system be able to provide buyers with a multitude of shipping options to support end-to-end supply chains domestically and internationally. "But there isn't an optimization software model that cuts across freight and parcel, and does it efficiently," he said.

BETTER NEWS

On the positive side, as logistics technology relentlessly improves, the cost of buying or leasing a procurement module that can be integrated with a TMS, or an entire TMS for that matter, has dropped significantly. Vertachnik recalled that in 2005, the annualized cost of a transport procurement module alone could be in the seven-figure range and could only be justified by big shippers with an equally big transport spend. Today, a smaller shipper can manage procurement in-house with cloud-based software for about $100,000 a year, he said.

Vertachnik said today's tools are more intuitive, user-friendly, and aesthetically pleasing than ever before. However, because of the changes in the way procurement will be used to support omnichannel fulfillment, there will be much more emphasis, and time spent, on that function than in the past, he added.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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