When it comes to their omnichannel distribution strategy, retailers, especially in the United States, are drawn to the concept of a "common pool of inventory." What that means is they want to have the flexibility to fill online orders from any available stock no matter where it's held: in a store, in a distribution center, or in a supplier's warehouse. And that creates huge challenges for distribution center operations.
One of those challenges is figuring out how to handle online order fulfillment in DCs that were designed to ship cases or split cases to stores. Compared with case picking, the picking and shipping of individual items or "eaches" for online orders is a complex and labor-intensive operation—one that requires its own equipment and workflows. As a result, DCs often end up running parallel operations. One section of the warehouse is dedicated to resupplying the stores, with its own processes and equipment, and another section takes care of e-commerce, using separate processes and equipment. Surely, there must be a better way.
That's why the approach taken by the British retailer The John Lewis Partnership is worth consideration. The retailer has 41 department stores in England, Scotland, and Wales and also owns the grocer Waitrose. It pioneered a service called "Click & Collect" that allows consumers to order online and pick up the items at a John Lewis store or Waitrose supermarket. It also ships orders directly to the consumer's door. And it's been quite successful where others have foundered.
But that success didn't happen overnight. Early on, the company struggled to find the right distribution strategy. When it first got involved with e-commerce, John Lewis operated separate distribution networks for each channel, using one set of fulfillment centers to handle online sales and running a separate network of DCs for store replenishment. The distribution system turned out to be convoluted. For instance, if an online order was intended for the Click & Collect program, the e-commerce fulfillment center would have to truck the items over to the DC so the product could be delivered to the store for customer pickup.
The U.K. department store decided to restructure its entire DC network, setting up "hybrid" facilities that could handle both online and store fulfillment. The concept of hybrid facilities is not new in omnichannel commerce, but Lewis's approach was. Instead of shipping cases or pallets to stores, Lewis moved to a replenishment model of "buy one, replace one"—which means it only ships individual items to the stores. Among other benefits, the move has eliminated the need for retail locations to store full cases in their backrooms—a change that has allowed them to convert stockroom space to floor selling space.
The hybrid distribution centers are set up for a single task: the picking, packing, and shipping of individual items. The automated systems and workflow processes are designed to support "each" picking whether the order will be shipped directly to a consumer or sent to a store. Although all of the hybrid DCs are dedicated to "each" fulfillment, there's not much overlap among the operations. John Lewis maintains discrete facilities for product types, with separate hybrid DCs for fashion apparel, furniture and appliances, and consumable products. The retailer plans to shut down most of its old DCs when the network restructuring is completed in 2016.
In short, unlike U.S. retailers, John Lewis does not look to its store inventory to fill online orders.
It should be noted that when it comes to restocking its stores, John Lewis has an advantage over most U.S. retailers—the size of its service territory. The company, which replenishes its stores overnight, says its longest resupply run extends from metro London to Scotland—a trip of under 12 hours. In a vast country like the United States, U.S. merchants using this model would have to adopt a regional approach for daily store replenishment. Despite the need for adaptation, the Lewis model makes more sense for retailers than going with a "common pool of inventory" and having stores fill online orders from their limited stock.
Editor's note: To read more about John Lewis's network redesign, see "A supply chain redesign for omnichannel success" in the Quarter 2 2014 issue of CSCMP's Supply Chain Quarterly.