Once upon a time, the retail industry was a safe, predictable way to make a living. Businesses simply had to take delivery of inventory, stock the shelves, and greet eager customers at the door.
Sign on for a retail job in 2016, however, and you'd better buckle up for a wild ride. This industry is one of the fastest-changing sectors of the U.S. economy, with companies hustling to adapt to trends like drone delivery, virtual reality, and mobile commerce. One change looms over all the others, however: the rush to join the omnichannel revolution.
To get a better understanding of how companies are meeting the challenges of omnichannel commerce, DC Velocity and ARC Advisory Group, a Dedham, Mass., management consulting firm, teamed up to conduct our fourth annual survey on retail fulfillment practices. Respondents answered 37 questions on their approach to meeting current challenges in omnichannel commerce and their plans for the future.
The results showed that in spite of an array of new logistics strategies and processes, most retailers have simply bolted their new omnichannel operations onto existing infrastructure, fulfilling multiple order streams in the same DCs where they handle traditional store fulfillment. The survey statistics that follow tell the story of why, how, and where businesses are performing omnichannel fulfillment.PRESERVE MARKET SHARE
When it comes to why companies embark on the omnichannel journey, the answer seems to be all about preserving their slice of the market. Asked for the top three reasons they were participating in omnichannel commerce or intended to do so, respondents said they wanted to boost sales, increase market share, and improve customer loyalty. Those responses finished far above cost-focused alternatives such as increasing margins, improving ability to rebalance inventory, decreasing markdowns, or reducing capital expenditures associated with building a new e-fulfillment warehouse.
We asked respondents which omnichannel capabilities they currently support, and they ranked the five options as follows:
As for how respondents fulfill online orders, the answers were all over the map: 75 percent said orders were fulfilled through a traditional DC that also handles e-commerce, 44 percent said orders were filled from a store, 38 percent said items were shipped directly from a manufacturer or supplier, and 32 percent use a Web-only DC. It should be noted that respondents were allowed to select more than one response, and as the percentages indicate, a number of those companies are using multiple methods. (See Exhibit 1.)
With three-quarters of retailers fulfilling orders from multiple channels in a single facility, that approach is clearly a foundation of omnichannel practice. And as our survey made clear, they're not backing off from that practice. Seventy-seven percent of respondents to this year's survey said they handled e-commerce fulfillment and traditional fulfillment at the same facility, an increase from the 69 percent who answered the same way in last year's survey. (See Exhibit 2.)
Retailers are taking orders from a diverse range of sources. In fact, when it comes to ringing up sales, it appears all doors are open: 86 percent said they took orders online (including mobile), 77 percent said brick and mortar, and 42 percent said call center and catalog. (Totals came to more than 100 percent because most businesses support multiple channels.)
Although many retailers are fulfilling orders from multiple channels in a single building, our survey also revealed that there is plenty of room for them to merge those operations more completely. When we asked whether respondents' e-fulfillment operations were segregated from traditional fulfillment, 59 percent of respondents said yes. That indicates that retailers run their e-commerce and traditional fulfillment streams in a single building, but use separate operations, employees, and inventory.TOOLS OF THE TRADE
Within the warehouse, retailers are using a range of sophisticated software tools to manage their operations. When we asked respondents what technologies they used to support their omnichannel initiatives, the top seven answers were: warehouse management systems (WMS), demand management software, distributed order management (DOM) systems, total-landed-cost analytics software, inventory optimization software, transportation management systems (TMS), and labor/work force management systems (LMS). (See Exhibit 3.)
Retailers are investing in those tools because they expect e-commerce revenues will continue to rise, no matter where the fulfillment happens. As for where that fulfillment will happen, the situation appears to be in flux. Asked how they see e-commerce fulfillment locations changing over the next five years, 32 percent of respondents said they expected to see a rise in e-commerce orders fulfilled in traditional DCs, compared with 28 percent who expect to see more fulfillment taking place in stores and 19 percent who said Web-only DCs.DELIVERING THE GOODS
So that's how the orders are sorted and picked, but how does the actual merchandise reach consumers' doorsteps? The omnichannel approach offers practitioners a dazzling array of options, from the latest high-tech drones to the do-it-yourself alternative: pick up in store.
We asked how retailers handled "last mile" deliveries and found that in practice, most retailers stuck with tried-and-true methods. The most common answer was courier delivery service (FedEx, UPS, etc.) at 43 percent, followed by a third-party logistics (3PL) partner at 23 percent, and arranging for items to be drop-shipped by partners at 20 percent. (See Exhibit 4.)
Some retailers are also experimenting with more creative alternatives, including deliveries made by store staff (via car, bicycle, foot, etc.) at 5 percent, drones at 2 percent, and crowdsourced delivery services (Deliv, Instacart, etc.) at 1 percent. And the future may hold even greater change. When we asked which delivery methods our respondents do not currently use but plan to use, the top three replies were crowdsourced delivery service with 8 percent, drop-shipped by partners also with 8 percent, and 3PL delivery partner at 7 percent.
Despite the rapid rise of omnichannel commerce, our survey revealed that e-commerce revenue has a long way to go before it passes sales from physical stores. When asked what percentage of their direct retail revenue currently came from each channel, respondents said 67 percent came from brick-and-mortar locations, 24 percent from online sites (including mobile), and 9 percent from call center and catalog sales. (See Exhibit 5.)
Overall, the survey indicated that omnichannel fulfillment remains in a state of flux. As retailers scramble to adjust to a shifting marketplace, they are experimenting with a wide variety of fulfillment practices and technologies. Stay tuned as DC Velocity continues to track the evolution of omnichannel fulfillment practices and shares the hard-won lessons of industry leaders.
This year's omnichannel study was conducted by ARC Advisory Group in conjunction with DC Velocity. ARC analyst Chris Cunnane oversaw the research and compiled the results. The 2016 study builds on research done last year in this area.
The study explored the details of DC operations to support omnichannel initiatives as well as how companies are handling the last-mile dilemma. The findings reported here are based on 109 responses. Respondents included logistics professionals from a variety of industries, who submitted answers between May and August of 2016.
As for the demographic breakdown, the majority of respondents (63 percent) sold goods through a combination of direct and indirect sales channels. Another 27 percent sold merchandise through direct retail only, and the remaining 10 percent through indirect sales channels only.
A report containing a more detailed examination of the omnichannel survey results is available from ARC for a fee. Find out how to get a copy of the results.
Read the other part of our special report on omnichannel distribution, "Three ways to make omnichannel affordable."