November 8, 2016
special report | Omnichannel Distribution

Three ways to make omnichannel affordable

Three ways to make omnichannel affordable

Retailers strive to meet customer expectations in the age of Amazon without breaking the bank on omnichannel fulfillment.

By Ben Ames

It's a rare retailer these days that relies on a single channel to generate sales. By now, many, if not most, have embraced the omnichannel model, selling everything from groceries to consumer goods to apparel via brick-and-mortar stores, websites, and catalogs and call centers. But in the rush to meet customer demand for swift delivery, some retailers forget about their own bottom lines.

"People are shooting themselves in the foot because they're so eager to sell the product. They think they have to keep up with Amazon to the point where they erode their profit," said Zach Zalowitz, practice lead for omnichannel supply chain at the Boulder, Colo., consulting firm SCApath LLC.

Many retailers like the idea of fulfilling online orders from their brick-and-mortar stores but are dismayed to find the practice can be very expensive. "The second you start fulfilling from more than one store for the same order, your profitability is shot, because there are twice as many hands touching it, twice as many boxes to pack, twice as many internal invoices to track," Zalowitz said.

While customers may love it, there's no denying that omnichannel is expensive. Whether a retailer is mailing online orders from retail storefronts, arranging to have orders drop-shipped directly from suppliers, or holding online orders in stores for pickup, those services cost money to provide. Converting a conventional retail operation to an omnichannel one can require investments in new software or material handling equipment, corporate realignment, specialized consultants, changes in transportation routes, DC redesigns, and retraining for store staff.

The pain is real: Many retailers are seeking to offset their rising fulfillment costs by raising prices elsewhere in their operations, according to a recent survey of retail and consumer goods CEOs conducted by PwC on behalf of JDA Software. As for specifics, the PwC study, CEO Viewpoint 2016: The Journey to Profitable Omni-Channel Commerce, found that commonly used strategies included raising the minimum order value for free home delivery, raising the minimum order value for free click-and-collect orders, raising product prices, increasing the cost of home delivery, charging for click-and-collect orders, differentially charging based on customer profile, and charging for returns.

Those strategies can help cap the expense of fulfillment, but some experts say there's a risk inherent in shifting costs to fickle consumers. Another approach for keeping omnichannel operations affordable is to seek out and leverage the hidden benefits and eliminate inefficiencies. Here are three approaches for squeezing the most from your investment in omnichannel operations.

1. SEGMENT YOUR INVENTORY

One way to keep a lid on spiraling fulfillment costs is to avoid omnichannel entirely ... for certain products, that is. Retailers that keep a close eye on their costs know that there are some items that can never be profitably shipped to the consumer from a retail store. By the time a heavy tent or bulky flatscreen TV reaches that store, it has already accrued so much shipping and handling cost that a retailer could never recoup those fees at a reasonable sales price, SCApath's Zalowitz argues.

"Historically with fulfillment in the store, you put the product in the store for a consumer to pull off the shelf and buy it there," he said. "But if you put the product in a DC and then a store, you've moved it twice. Those labor and transportation costs add up. Each time you touch it, it's eroding margin, to the point where it's almost better if you didn't expose it to the store in the first place."

Smart retailers simply exclude those items from their omnichannel operations. Businesses can use distributed order management (DOM) or store inventory management system (SIMS) software to track those accumulated costs on each product, he said. If the software shows an item wouldn't retain its profit margin after being shipped from a store, the retailer could ship it from a more cost-effective location instead, placating the customer by offering him or her a discount or coupon to make up for any delay in delivery.

"I get it that everyone's trying to keep up with two-day shipping from Amazon, but people are a little loose in their logic when they [offer] everything in their inventory to be shipped from a store," Zalowitz said.

2. TIGHTEN UP INTERNAL PROCESSES TO ALLOW MORE TIME FOR DELIVERY

Another way to rein in fulfillment costs is to tighten up internal order fulfillment processes, thus buying more time for shipping. Whisk that order out the DC door and you may be able to send it via low-cost ground transportation instead of premium-priced express service, and still reach the buyer on time.

Destination Maternity Corp. discovered that benefit after it moved into a 406,000-square-foot omnichannel distribution center in Florence, N.J., that feeds its 1,800 retail locations in addition to handling e-commerce orders, wholesale shipments, and returns.

To build the new DC, the maternity apparel designer and retailer had to bite the bullet and invest in equipment such as an automated storage and retrieval system (AS/RS), an outbound unit sorter, a light-directed display put wall, extensive routing and sorting conveyor systems, and wearable radio-frequency identification technology, all directed by a warehouse execution system (WES).

But that investment is paying off in a variety of ways, said Jay Moris, president of Conshohocken, Pa.-based Invata Intralogistics Inc., which designed the system.

For instance, running at full bore, the waveless fulfillment system can process 15,000 pieces per hour regardless of the destination, Moris said. That speed allows Destination Maternity to ship 99 percent of its e-commerce orders within an eight-hour period, accomplishing tasks in one shift that used to require three days, according to Invata.

The accelerated fulfillment process has helped cut shipping costs by giving Destination Maternity more time to reach customers. "If someone wants second-day delivery, UPS may be able to get it there with standard ground," because the shipment gets out the warehouse door so fast, Moris said. "If you're going to wait two or three days to get it out of your facility, you're going to have to use premium express."

3. LEVERAGE YOUR FULFILLMENT PROWESS

Swift fulfillment is a good way to keep customers happy, but it can also generate "likes" and "tweets" that resound far beyond a single sale. In the age of social media, well-executed fulfillment can elicit the kind of customer feedback that's pure gold from a marketing and public relations standpoint.

"Customers want to have immediate visibility on their order-everybody wants that instant gratification-and those end-consumers are giving our clients immediate feedback online," said Tom Patterson, senior vice president of warehouse operations at Saddle Creek Logistics Services, a third-party logistics service provider (3PL) that provides omnichannel fulfillment services for its clients.

Retailers often face a challenge in holding down omnichannel fulfillment costs while still providing the kind of service that generates positive customer feedback on social media. The key is to focus on the customer experience, Patterson said. When it's done right, omnichannel fulfillment can pay off by generating good publicity for the company.

"You don't get a week's leadtime to ship a truckload; you get an hour's leadtime to ship a bracelet," Patterson said. "And by noon the next day, the customer will [let you know] over social media whether you did a good job."

Retailers are paying close attention. During a recent visit to a client in the beverage industry, Patterson noticed that the traditional stack of annual reports in the waiting room had been replaced by a screen showing the continuous chirps of customer chatter about the brand, displayed in a digital flow of Twitter, Facebook, and Instagram updates.

Keeping up with consumer expectations at that pace can be difficult, he admitted. "But it's fun stuff. We wouldn't want to be in any other business."

Read the other part of our special report on omnichannel distribution, "Study: Multitasking DCs deliver the goods for omnichannel retailers."

About the Author

Ben Ames
Senior Editor
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

More articles by Ben Ames

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