Today's Retailing Requires Advanced Technology

By: Britt Dayton, Director, Deloitte

Britt Dayton, Director, Deloitte

Retailers Need to Invest in Advanced Technologies to Enable an Omni-Channel Consumer Experience

The rise in omni-channel retailing is the industry’s response to consumer expectations for a consistent experience across physical stores and digital shopping platforms. For the past several years, the growth of online sales has significantly outpaced sales for comparable brick and mortar stores, a trend that is anticipated to continue. The difference is significant: According to the U.S. Census Bureau, in 2014, e-commerce grew at a rate of 14 percent versus only 2 percent for traditional retail outlets. The influence that digital is having on retail is even more dramatic. Digital influence is the impact that digital devices such as laptops, smartphones and kiosks have on a consumer’s shopping behavior, be it reading reviews on social media to redeeming electronic coupons to transacting a sale online. By the end of 2015, digital is expected to influence 64 percent of total in-store retail sales, or nearly $2.2 trillion dollars. Consumers have come to expect digital tools to personalize their shopping journey, so retailers that do not provide this flexibility could struggle to remain competitive.

Omni-channel retailing also requires new supply chain capabilities, and corresponding technologies to enable them. Traditional boundaries between physical stores, catalog, and online shopping are being eliminated via websites, mobile apps, and social media. Customers can buy products in a store or on their mobile device, have the product delivered where they want at low (or no) shipping costs, and return the product at their convenience to a local store or a remote distribution center. Building an omni-channel supply chain requires significant changes in processes and infrastructure which take time to fully implement. In the intensely competitive retail market, companies are looking for ways to quickly transform their inventory management and order fulfillment processes to prevent losing market share. Strategic investments in several key advanced technologies can facilitate the required changes.

Cost and integration barriers

Many retailers implementing an omni-channel consumer experience have encountered some difficult business challenges. They are experiencing higher logistics costs associated with order fulfillment and shipping. In many companies, the higher costs are associated with order returns, direct to consumer shipments, and in-store pickup. Adding to these costs is an increase in e-commerce transactions resulting from higher levels of omni-channel adoption which requires retailers to manage smaller, more frequent orders. The focus of retail distribution centers is shifting from pallet and case picking for store replenishment to single-item picking for orders shipped directly to the customer. This effect is compounded by rising consumer expectations to have their orders delivered quickly, which often requires retailers to do more work in less time and utilize more expensive shipping methods to meet promise dates.

Retailers must invest capital in solutions to help mitigate the added costs of omni-channel to maintain acceptable margins. Many existing supply chain systems are not suited for omni-channel retailing in their present form. Due to the rapid growth in online sales, some companies added omni-channel retailing as extensions to current capabilities and did not develop fully integrated solutions. Established retailers are now reengineering existing systems to improve how supply chain data are collected, analyzed, and shared within and beyond the enterprise to address more complex operational challenges.

Technology solutions

There are four retail technology “building blocks” that can enable effective management of omni-channel logistics and distribution:

• Item-level radio frequency identification (RFID) It is inherently more difficult to manage inventory accuracy at stores than at distribution centers. Still, when retailers accept an online order, they must be confident that the merchandise will be available in the designated store for customer pickup or shipping to the customer’s address. This is important because retailers want to avoid the expense of split shipments that results when, due to inventory inaccuracies, an item that is part of a multi-item order cannot be located at the intended shipping or pickup location. To help solve this problem and better track inventory within the store, many retailers are starting to implement item-level RFID, especially for categories like shoes where inventory is commonly split between the front of the store and the back room, and for higher end fashion items that often have a few items of each color and size stocked at retail stores.

Collaborative inventory planning

Fulfilling orders from stores adds complexity to retailers’ historical challenge of having the right product in the right store at the right time. Direct-to-store and especially direct-to-customer drop-ship deliveries, which enable retailers to offer a broader range of merchandise, have become increasingly beneficial. To help manage these activities, many retailers have started jointly planning inventory deployments with key vendors. They are able to do this by using collaborative inventory planning platforms that give all parties real-time or near real-time access to planning information, such as current inventory levels, expected demand, and expected shipments.

• Distributed order management To leverage inventory and fulfillment capacity, retailers need visibility of inventory across the enterprise and customer orders from multiple selling channels. Distributed order management (DOM) solutions can provide intelligent sourcing engines to determine the best fulfillment location for an order based on a broad set of parameters, including inventory availability, fulfillment capacity, and margin impacts. As the number of fulfillment points grows, configurable business rules are required to prioritize inventory allocation and determine how those orders should be fulfilled while taking into account customer promise date, order type, and margin targets.

• Transportation management system (TMS) integration With shipping costs representing one of the major expenses for most e-commerce retailers, the ability to select the right shipping methods across the organization, including from stores, will have a direct impact on the bottom line. To be most effective, transportation management systems must be integrated with order management capabilities so that both inventory and transportation costs are considered together when making fulfillment decisions. Additionally, these systems can provide the order tracking and proof of delivery information that consumers now expect.

Adapt now to store-based fulfillment

From a supply chain perspective, one of the biggest opportunities and challenges in omni-channel retailing is the shift toward fulfilling a subset of orders through physical stores in addition to distribution centers. Viewing stores as storage and delivery locations provides many advantages for retailers that sell online, including lower inventory requirements, quicker delivery times, lower costs, and better customer service resulting in increased revenues and higher margins. However, store-based fulfillment is complex to execute and for many retailers is resulting in a significant business transformation—affecting how they physically ship products to the technology required to manage order fulfillment processes. Retailers that adapt to this trend now will likely be able to profitably serve their online and in-store customers while remaining relevant in a fast-changing, competitive retail environment.