Are we there yet?

The retail sector has been permanently disrupted by technology, and retailers of all sizes are battling to manage technology's impact on their business models. For many of them, gaining control of e-commerce, multichannel and omnichannel fulfillment, and customers' expectations of ever-faster and customized delivery is a matter of survival.

To find out how companies are responding to these and other pressures, Auburn University annually polls supply chain executives about their overall strategies as well as their experiences and plans regarding several "hot topic" areas. As in the past, this year's study was conducted by the university's Center for Supply Chain Innovation under the leadership of professor Brian Gibson, with colleagues Rafay Ishfaq, Cliff Defee, and Elizabeth Davis-Sramek. The researchers surveyed members of the Retail Industry Leaders Association, readers of Supply Chain Quarterly's sister publication, DC Velocity, and companies that collaborate with the Center for Supply Chain Innovation. To round out the picture, the research team conducted telephone interviews with supply chain executives.

This year's "State of the Retail Supply Chain" report will be released in late February at RILA's 2018 Retail Supply Chain Conference in Phoenix. DC Velocity will cover the research findings in two parts: this article, which will focus on the topics discussed in the interviews, and a summary of the survey results in our April issue.

GETTING A GRIP ON CHANGE

The researchers conducted 20 interviews with retail supply chain executives, most of whom were chief supply chain officers or senior vice presidents of supply chain. All work for medium-sized to very large retailers; all but a handful of those companies report annual revenues exceeding $1 billion, and together, they account for nearly $1 trillion in annual sales.

When asked about their overall strategy for 2018, many executives cited better management of omnichannel commerce as a top priority. Although a small "lagging" group of retailers are still rolling out basic omnichannel capabilities, companies that can be described as "leaders"—generally, the biggest brand names—are looking at refining the omnichannel strategies and practices they already have in place, such as cutting delivery times to consumers and ensuring service consistency across all channels. Those companies, the researchers say, have come a long way since their previous survey report was published. "Last year, we were still getting a lot of companies wondering how to respond to the 'Amazon effect.' Now, retail leaders have taken control of their omnichannel operations and have a game plan they're ready to execute," Defee says.

The interviews with retail supply chain executives also zeroed in on several specific areas, including urban fulfillment, relationships with third-party logistics service providers (3PLs), sustainability, and disruptive technologies. Here is the research team's take on the issues and trends the interviewees addressed.

• Managing urban fulfillment. As the array of products consumers order online continues to expand, urban fulfillment has become a major concern for an increasingly wide range of retail segments. But retailers are being cautious about the delivery services they offer. Some interviewees said they would "move as fast on [urban delivery services] as our customers demand it," Gibson says. In other words, they are investing in various delivery options only when demand is sufficient and the cost of providing those services can be justified. One surprise: Although many people assume that urban delivery only matters in a few big markets like New York City and Los Angeles, respondents said they were working to meet rapidly growing demand for same-day and next-day delivery in dozens of other urban markets across the country.
  
  Increasingly, retailers are using urban stores as fulfillment locations to accommodate their "BOPIS"—buy online, pick up in store—services. Some are also investing in small-footprint distribution centers in urban areas that offer same-day delivery for a limited assortment of stock-keeping units (SKUs). A third option mentioned by respondents is a "dark store"—a facility that's set up like a retail store but is used for assembling e-commerce orders, which are then delivered to consumers or to pickup locations. In Gibson's view, the benefit of the latter two options compared with in-store fulfillment is that it avoids disrupting store operations and offers quick access to backup inventory if a nearby store runs out.
  
  The cost of meeting consumers' expectations is forcing retailers to rethink how they deliver orders in cities. Some are testing the use of employees to drop off packages on their way home from work. Others are setting up their own private fleets of local-delivery vehicles. But they're most likely to use for-hire services, such as Uber, Lyft, Shipt, and Instacart, because of their flexible capacity and variable cost structure, according to Gibson.
• Working with logistics service providers. As retailers contend with changing business models, their relationships with 3PLs are also changing. Their strategies appear to follow two different paths. Several executives said they are seeking fewer, more strategic partnerships with 3PLs in order to reduce complexity. This trend is leading service providers to expand their portfolios in hopes of becoming a "one-stop shop" for big retail accounts, Ishfaq says. Of course, when 3PLs expand their reach and their service portfolios, their costs go up—and so do the prices they charge their customers. That, he says, could undermine one of their core value propositions: that they can handle logistics activities more cost-effectively than their clients could on their own.
  
  That's one reason why other executives are considering a different approach: taking some warehousing and distribution activities back from 3PLs. "If a market was mature and the service demand was stable and predictable, then some would talk about doing it in-house," Ishfaq says, adding that these were all "really big players with thousands of stores who see the scale in a particular brand or product category." In addition, concerns about transportation capacity are prompting some to consider private delivery fleets or dedicated contract carriage. Still, interviewees said they would continue working with 3PLs when expansion to a new market/location or the rollout of new services was involved.
  
  As customers put pressure on retailers to improve their service, the retailers, in turn, expect 3PLs to "up their game," Ishfaq says. But those expectations seem to be changing faster than the 3PLs can keep up with. "That has put pressure on them from both a cost and a performance-guarantee standpoint. It's a pressure cooker right now," he says. "We could see failures or tougher going."
• Achieving supply chain sustainability. How much priority retailers give to sustainability, which includes environmental, health and safety compliance, and labor considerations, varies widely. Large companies that have published sustainability reports, made someone responsible for sustainability, or integrated it into their corporate culture considered it to be very important, but for others, sustainability is not a strategic priority, Davis-Sramek says. Those companies' efforts often focused on things like energy and fuel efficiency, where they can see a direct connection to cost savings. Several executives said it's critical that their sourcing organizations ensure that goods are in compliance with relevant regulations, make sure products are environmentally safe, and address problems like forced labor, but that focus didn't necessarily carry over into supply chain activities.
  
  The interviewees have not widely considered an issue that could have a major impact on their supply chain costs in the future: the conflict between sustainability goals and consumers' escalating demands for fast, convenient service. "We asked them, if you ship one item to one customer in one box, what does that do to your ability to meet sustainability goals?" Davis-Sramek recalls. "The pretty universal response was, 'We've placed so much emphasis on fulfillment and meeting customer requests that we haven't really made that connection yet.'"
  
  Davis-Sramek expects that at some point, retailers will come under external pressure to resolve the tension between e-commerce and sustainability. That pressure may come from nongovernmental organizations (NGOs), perhaps through a study on the impact of home delivery on the environment. Or it could come in the form of regulation, such as a carbon tax or European-style regulations on packaging waste. Nobody knows how far in the future that will happen, but Davis-Sramek expects retailers will step up when it does. "I think they'll apply the same kind of innovative thinking they used to develop omnichannel commerce," she says.
• Leveraging disruptive technology. Disruptive technology is still more concept than reality for most retailers. "There's no single cutting-edge technology that everybody's focused on," says Defee. "They know it's coming, but nobody sees one they're really banking on right now." Technologies that were mentioned most frequently included artificial intelligence and machine learning, which were seen as potentially having a beneficial impact on such areas as demand forecasting, understanding customers' preferences, and identifying trends that will impact inventory plans.
  
  Most, though, are just beginning to investigate those and other technologies, such as robotics, blockchain, and the Internet of Things. "There's a lot of interest and there's monitoring, but not a lot of money invested," Gibson says. "There's still a healthy amount of skepticism about how these technologies will play in the supply chain area." Return on investment (ROI) is another top concern; one interviewee, Defee says, called articulating an ROI to justify investment "the No. 1 challenge of disruptive technology."
  
  Not surprisingly, then, when it comes to new technology, retailers are focusing on proven winners, such as analytics and warehouse automation. E-commerce fulfillment is driving investment in those and other technologies, but retailers are also using them to improve store operations, Gibson notes. For example, some are buying automated picking and sequencing technology for their stores because the automated systems do a much better job of picking aisle-specific pallets or cartons than a human can, thus allowing for faster on-shelf replenishment.

COMMON PRINCIPLES

During the course of the researchers' interviews, several common principles came to the fore. One was that retailers should ensure consistent service and product availability regardless of how they are interacting with customers. Another was that they must become true omnichannel organizations, leveraging inventory, technology, and distribution networks to get to a single pool of stock. Omnichannel success also requires the capacity to deliver orders wherever and whenever the customer wants them. "We're going to hit that tipping point where a retailer's capacity to make last-mile deliveries will either be game-changing or it will bog [the operation] down and get very expensive," Gibson says.

Finally, the researchers say, retailers are starting to understand that being involved in omnichannel does not mean they are obligated to be "all things to all people." Instead, many are taking advantage of advances in supply chain analytics to judge whether their scope of offerings and cost to serve specific channels and customers are justifiable. How they respond to the data will be driven by external competition and/or internal strategies, Gibson points out. Something may be costly from a supply chain standpoint, he says, but in an omnichannel world, retailers ultimately must make decisions based on overall strategic benefit.

Editor's note: An earlier version of this article originally said that the Retail Industry Leaders Association conducts the poll. While RILA members (among others) are polled, the survey itself is conducted by Auburn University's Center for Supply Chain Innovation.