The Omnichannel Retail Supply Chain

The Omnichannel Retail Supply Chain

The Omnichannel Retail Supply Chain How Technology and Networks Delivered in the Cloud Will Separate the Winners and Losers in the Eyes of Today’s Con...

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The Omnichannel Retail Supply Chain How Technology and Networks Delivered in the Cloud Will Separate the Winners and Losers in the Eyes of Today’s Consumer

A GT Nexus White Paper

Executive Summary Retail is undergoing a transformation spurred by new technology and consumer demands. The new requirement for retail success is a single, clear view of every channel in the supply chain. Buyers hold the power in this market. They are demanding more options and leveraging retailers against each other to get the best value for their money. A competitive and increasingly global retail environment is leading retailers to make a move towards an omnichannel strategy: seamlessly integrating their distribution channels to improve visibility into inventory and better serve their customers. Many companies are experimenting with ways to fuse their channels; they are adopting powerful, cloud-based technology to gain visibility into inventory, share data with trading partners, and find new ways to offer phenomenal customer service. However — they are far from finished, and the tactics they undertake over the next few years will have a profound impact on the future of the shopping experience. Some of today’s household names will emerge as the pioneers of omnichannel retail, while others will fall victim to slowing revenues and waning customer loyalty.

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The Onset of Omnichannel Retail The phrase “omnichannel retail” will be the defining term of this era’s retail overhaul. Swift changes in technology, supply chain complexity, and consumer behavior are generating a need for a new model by which a retail customer can have the same buying experience over all distribution channels. The latest buzzword is ubiquitous in the retail industry — and for good reason. Modern retail came about at the turn of the 20th century, with pioneers like Sears, Roebuck and Co. and J.C. Penney Company, Inc. Over the next several decades, department stores and apparel shops popped up all over cities and suburbia alike, joined by big-box retailers in the ‘60s and challenged by product-specific category killers in the ‘70s. Those that survived the fragmentation of the retail industry sustained largely the same model until the arrival of ecommerce in the 1990s. Then, among the dotcoms, Amazon came along; it thrived on an incredibly efficient supply chain coupled with a vast selection of products. Zappos arrived on the scene with outstanding customer service and a compelling brand story. Suddenly, traditional merchants were faced with the prospect of losing sales to online competitors. They began investing in their own ecommerce offerings, racing to establish themselves as a customer favorite in a world of rapidly expanding choices. Thus the word “omnichannel” was born. Retailers are fighting to integrate their distribution channels and compete on better visibility and customer service. Sweeping changes across the retail environment are happening, and the choices that industry executives make now will result in the survival — or downfall — of today’s leaders.

The Customer’s Newfound Power It’s a Buyer’s Market… Leaping technological advances over the last couple of decades have placed endless choices at the customer’s fingertips — allowing them to shop through any channel for only as long as their interest is held. Smart phones, ubiquitous internet connections, and the success of strictly ecommerce retailers are presenting shoppers with several paths to the same products. Price competition due to the ease of comparison shopping has made it less profitable for retailers to offer alluring deals, especially on commoditized items. Marked by the decline of brand loyalty, the omnichannel environment demands that retailers focus on holding the attention of buyers in other ways — like wide-ranging delivery options and exceptional customer service. Moreover, omnichannel consumers (those that are likely to shop and purchase through several channels) spend 15-30% more than traditional shoppers.1 Right now, online sales still make up a small slice of the pie. But in the United States, estimated retail ecommerce sales as a percent of total quarterly retail sales have risen from 1.6% in Q1 2003 to 4.9% in Q1 2012,2 and tech-savvy omnichannel shoppers spend more than their single-channel counterparts.

1 2

Omnichannel Consumer Spending Traditional Consumer Spending

$

Omnichannel consumers spend 15-30% more than traditional shoppers.

IDC Retail report 2012 Department of Commerce 2012

3

© GT Nexus, Inc. | www.gtnexus.com

For retailers, this has strong implications: as online sales increase, the amount of revenue from those sales will increase at an even faster rate. In other words, if retailers fail to provide a better customer experience and integrate channels, they will lose exponentially more revenue as the landscape changes.

… And They’re Buying Differently Armed with their mobile devices and plenty of options, shoppers are calling the shots. They are demanding more flexibility; expecting that the product they want will be found, shipped, and delivered quickly to a convenient location — and easily returned, if necessary. They are making choices based not on brand or physical location but on speed, availability, cost, and user experience. The omnichannel shopper makes a slew of decisions on the path to purchase; for the unprepared retailer, many of these decisions could lead to losing the sale. These omnichannel shoppers can only be retained if retailers have visibility into available inventory and are agile enough to quickly meet demand when it is necessary. FIGURE 1: W  hen today’s shopper hits a bump in the road, they need a clear reason to keep moving forward with the same seller.

Omnichannel shopper wants a particular purse.

Goes online and finds purse at Retailer A.

Y

Calls nearby Retailer A.

Is Retailer A nearby? N

Is purse in stock?

Is online experience easy and inexpensive?

N

Y

Want to drive?

Y

SALE!

N

N

Is timely delivery available?

Y

Y

SALE!

SALE!

4

N

NO SALE! Goes to Retailer B.

© GT Nexus, Inc. | www.gtnexus.com

The Transforming Retail Supply Chain It’s a Global Network Supply chains today span continents. Retailers have more trading partners with fewer common currencies, languages, and regulations. Costs incurred through longer cycle times, increasing raw materials and labor costs, and a tightening freight environment are encroaching on profit margins; fulfillment is often hindered by poor distribution strategies. The success of a global supply chain is now dependent on visibility, agility, and data integrity. Visibility and data are especially important when weighing the benefits of current production locations. Increased labor costs, regulation, and challenges with sourcing raw materials in China over the next several years will cause some companies to consider reshoring or moving to lower-cost regions. They must fight to balance increasing supply chain costs with lean inventory and low-wage labor strategies. Retailers will increasingly use cloud-based trading platforms to assess their manufacturing costs and supplier performance SKU Proliferation Fuels the Need when making global sourcing decisions. for Collaborative Global Networks As some companies expand their product lines in an effort to stay competitive, procurement and sourcing is becoming more complicated. Retailers are moving towards supply chain management systems that can successfully onboard a large number of suppliers to a trading network.

Agility comes into play when observing the precarious state of the world’s economies. Demand is volatile — even more so when supply chains are intertwined with more than one country’s financial system. This element calls for lean, proactive inventory management. Retailers must be able to trace inventory through all channels on single visibility platform, moving it around as demand fluctuates and keeping down the costs of buffer stock and missed sales.

New Technology Is in Play and It’s in the Cloud The most visionary retailers are investing big money into new technology to gain visibility, manage the growing pool of data, and collaborate with their global trading partners. Rather than buying and installing traditional license software, they’re now “renting” their technology — paying for subscription Software-as-a-Service (SaaS) models, hosted in the cloud. Traditionally, large capital expenditure, time, and resources needed to install on-premise licensed software have inhibited retailers from properly integrating channels. However, the arrival of cloud (or SaaS) has made it more financially feasible to adopt new systems in support of these efforts. The move to cloud is illustrated in a recent report by Citi Research, which looks into retailers’ accounting activity. Citi estimated that 2012 IT capital expenditure will increase by a smaller percentage (3.5%) than total capital expenditure (4.9%). While it may at first sound like IT is spending less, it is actually illustrating an increase in payment for SaaS, which is included in operating expenses and not as capital expenditure.

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Citi’s Investment Arm Lists the Benefits of Cloud Technology • Data is more accessible. • Vast networks of servers and hardware can be simplified. • Rollout is quick because hardware requirements are minimal. • Cloud improves inventory management. Source: Citi Research — Weinswig’s Deep Dive Retail Technology 2012

© GT Nexus, Inc. | www.gtnexus.com

The increase in global cloud services revenue further highlights the move to cloud: it is estimated to increase to $73 billion by 2015 — more than double that of 2012.3

Competition Is Fierce and the Status Quo Is Not an Option Two factors are largely contributing to the heightened competition in the retail arena today. The first is the leveling off of the upward trend in retail sales over the last several years. After dismal levels of consumer confidence and lack of credit led to five-year lows back in 2009, retail spending had been steadily rising until just last quarter, signaling a possible plateau or even reversal. At least in the short term, retailers may have to fight for their share of a stagnant pool of cash. The second component is the way customers are spending their money. Retailers are racing to capture increasing online and mobile sales. Those that pull ahead during this transitional phase will have time to strengthen their brand and create a great customer experience as omnichannel becomes the norm.

Williams-Sonoma’s Competitive 2012 Strategy During their 2011 Earnings Call, Williams-Sonoma discussed their omnichannel goals: • Serve the customer anywhere, anytime, through any device or store • Invest in supply chain to ensure the highest service levels in the industry • Become less reliant on retail store expansion by growing direct-tocustomer sales • Make the in-store experience dynamic and helpful

From Forecasting to Lean Manufacturing A chief agent of change in the retail industry is the use of technology in planning and execution. Traditionally, companies have used sales and operations planning (S&OP) to forecast demand and establish an ideal inventory level and production plan. However, this process is based on the use of historical numbers rather than real-time information.

• Focus on back-end technology investments and leverage multichannel customer data Source: Williams-Sonoma 2011 Earnings Call

Now, some retail players are looking to a leaner model; using cloud-based supply chain technology to look straight into current demand. They count in-transit inventory as on-hand because they can see exactly where it is and reallocate it as needed. In order to achieve this, retailers must integrate their existing ERP system with a visibility platform that can view inventory across channels.

Fulfillment with Value-Added Services Retailers are experimenting with several fulfillment methods as they struggle to balance supply chain costs with customer service expectations. Direct-to-store delivery has increasingly included value-added services like inventory management, or been discarded in favor of centralized distribution. Free shipping has become a huge competitive advantage for retailers offering home delivery services. Same-day delivery is also becoming more common.

3

IDC Retail and Citi Research

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© GT Nexus, Inc. | www.gtnexus.com

The retailer must choose these strategies based on the type and variety of goods being shipped and the need for expertise and service level at the receiving end. Ultimately, each fulfillment method requires excellent visibility into the supply chain in order to deliver memorable customer service.

Surviving the Omnichannel Transition Retail’s advancement has reached the tipping point. The most recent studies in the industry reveal the blurring of lines between physical and digital channels available to today’s customer. According to a recent survey of retail professionals by RSR, only 8% of respondents indicated that the typical model of channel-specifics supply networks is ideal. 54% of them said they would prefer to have an integrated channel strategy.4 Aberdeen stated in a retail report this year that lost sales opportunity costs was the top business pressure driving retailers to channel integration.5 Retail executives placed two cross-channel opportunities at the top of the list for 2012:

1. The ability of customers to purchase, take delivery, or return a product through the channels of their choice.



2. The creation of a single brand identity across channels.

Nearly all retailers realize that they don’t have the optimal solution; the market leaders are working to improve their supply chains and purchase the latest technology. If retailers plan on being successful in the future, they must take specific steps on the path to omnichannel.

Building Out a Channel Integration Strategy Siloed channels have been the norm for decades. Most companies chose, at inception, to drive sales through one main channel — whether catalog, store, or online. They bought systems that best reflected the history of one channel, with all the data residing within the four walls of the enterprise. Now, operating in a silo can doom even the most omnipresent names. Retailers must ensure that product availability, promotional strategy, and the shoppers’ experience with the brand remains consistent across all channels. At minimum, competitive retailers will operate online, mobile, and in-store distribution channels. The following are steps to take towards channel integration:

1. Decide on a role for each channel and how they will complement each other.



2. Choose fulfillment modes: vendor-direct, 3PL fulfillment models, separate or combined fulfillment centers/warehouses, inventory-sharing model.



3. Implement a cloud-based supply chain technology to gain visibility into all channels on a single, realtime information platform.

4 5

RSR Supply Chain Survey 2012 Aberdeen Group, The 2012 Omni-Channel Retail Experience, 2012

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© GT Nexus, Inc. | www.gtnexus.com

SILO V. INTEGRATED

A customer finds a shirt she likes in a store, but they don’t have her size.... Scenario 1: Silo An employee tries to call a few nearby stores, but they don’t have anything in stock. A shipment of shirts is sitting in one of their warehouses just 15 miles away, but the SKU is different (for online sales) and they don’t show in the system. The customer goes home empty-handed.

Scenario 2: Integrated Omnichannel An employee scans the tag to find that a shipment will be arriving at another store out of town. The customer pays for the shirt in-store, and the retailer reroutes the shipment to arrive to her home by the end of the next day.

The integrated omnichannel retail supply chain helps deliver a vastly different shopping experience and guides the customer through to the sale.

Visibility Is a Key Enabler An omnichannel strategy requires visibility both into and out of every channel. First, employees and customers should have the ability to see clearly into all available inventory — both on-hand and in-transit. Second, the company should have an accurate picture of customer activity across channels. Visibility can help retailers gain a competitive advantage by allowing them to operate with less overhead and inventory, quicken reaction time to demand fluctuations or disruptions, and manage risk more effectively. This can only be achieved by assessing current capabilities and upgrading them with the proper technology. Today, the most effective visibility tools are in cloud-based platforms that allow trading partners to share data across their entire network.

QUICK VISIBILITY TEST

Can customers view available inventory and expected shipping dates via any channel? Is inventory traceable from the moment it is manufactured? Are milestones in place for supply chain activity? Can last minute changes in demand be filled by quickly rerouting items for distribution? Is it easy to compare provider performance levels to actual results? Is the time to information less than ten seconds? If a retailer can’t answer yes to all of these, they don’t have full supply chain visibility.

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© GT Nexus, Inc. | www.gtnexus.com

1

Request is made

2

Problem: DC does not have items requested in stock

3

Solution: With visibility into inbound supply, requested items destined for DC are expedited directly through DC

4

Delivered

FIGURE W  hat Does Visibility Out of2:Market

Inbound Pipeline

Look Like? West DC W

1

East DC Ea

Demand

2

3

DC Yard 4

4

1

Based on early forecasts, a steady supply is planned to arrive in the DCs.

2

Problem: Unexpected change in demand can’t be met with existing inventory in East DC; no visibility into yard, where there may be inventory, or into ETAs of inventory en route, which could be just days away.

3

An Out-of-Market transfer is initiated; inventory is trucked across the country to replenish the East DC, incurring additional handling and transport costs.

4

Solution: With visibility into yard inventory and the inbound pipeline, yard inventory could be used, and container shipments destined for the West DC could be diverted en route to the East DC, avoiding an Out-of-Market transfer.

Embracing the New Role of Stores In addition to integrating channels, retailers may need to dramatically alter their footprint in order to stay competitive. Physical stores are no longer places to simply purchase an item; they now can serve as showrooms, distribution centers, and an arm of the extended supply chain. In part, the evolution of the store is a response to threat of “showrooming”— when customers visit a store to examine a product but ultimately purchase it online from another company. By increasing options for testing, purchasing, shipping, and pickup, retailers are building a line of defense against their online competitors. Stores as showrooms offer customers a chance to consult with experts, and then make a purchase through the most convenient channel. If an item is not already available at the store location, shoppers will be encouraged to buy on an in-store device, from the retailer’s own site at the lowest price in the market. The focus is shifting to stores as an interactive experience.

Abt Electronics: Store as a Showroom Abt follows an innovative approach at its store in Glenview, Illinois, featuring a 100,000 ft2 showroom. The building boasts an aquarium, activity stations for children, fresh-baked cookies, and salaried (plus bonus) associates with the ability to hand out on-the-spot discounts as part of its goal to give the customer a great in-store experience. The store is also beginning to carry merchandise other than electronics — a sign that the company is one that is willing to change as the market requires. Jon Abt, co-president of the store, said sales and profits in 2011 were up from 2010.

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Stores may also operate as distribution centers — allowing for online orders to be picked up, inventory to be shipped directly to customers’ homes, and returns to be sent back into the supply chain. By doing this, retailers can entice online customers who would rather not pay for shipping or want a product more quickly than online retailers can provide.

Walmart and In-Store Pickup Walmart has allowed online purchases to be picked up in store for the past six years. The retail giant decided to embrace the showrooming trend — whereby customers peruse items in a store but turn to online companies to make the actual purchase — by allowing shoppers to purchase their items online and pick them up at no cost at the store of their choice. Walmart, along with other retailers experimenting with channel integration, have added such services as Web return centers, pickup locations, and drive-through customer service centers to encourage online sales while satisfying customer needs for instant gratification. This strategy has so far been a success — 50% of their online sales are now picked up in a store, leading to huge savings in inventory and transportation. As an added bonus, a customer that picks up in store may make additional purchases while there. Source: New York Times, “Luring Online Shoppers Offline” http://nyti.ms/MCI7D4

Improving Data Quality Data quality is one of the most important drivers of omnichannel strategy success. Retailers must share data across a network of trading partners in order to rely on a single version of the truth. When retailers are equipped with a cloud-based technology that can integrate all of their systems and provide a useful analysis of the data that flows through them, they can make intelligent supply chain decisions. Inventory Numbers Visibility and integration are two concepts that lack practical application without reliable data. Without it, a company may “see” where inventory is several days too late — or miss it entirely — and be forced to make logistical decisions based on inaccurate information. However, when data is mapped properly, updated instantly across a trading network, and presented in visual form, a company can see clearly into its on-hand and in-transit inventory and achieve the agility needed to become truly omnichannel. Supplier Performance Levels High quality data can also be used to measure supplier performance levels. Carefully organized, timely data can help companies compare rates with their contracted carriers and display the likelihood of on-time shipment and delivery. Data can also be used to track allocations to multiple carriers. For example, if a store is preparing for a back-toschool promotion, they may use performance data to choose a carrier with more reliable service. In this case, the knowledge that the shipments will arrive on time for the sale is more important than saving money on shipping rates. Other times, they may pick a low-cost carrier if a late shipment will not negatively affect store sales. Customer Service Customer service can be greatly improved if a retailer can track dynamic ETAs for the shipment of products to customers. A good supply chain platform will alert trading partners when a shipment has reached a certain milestone, allowing for a quick response to any disruption or last-minute changes. This information can be passed on to the customer, improving transparency and increasing the likelihood of repeat business.

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Connecting with Trading Partners Globalization means there is a growing need to connect across continents with trading partners. Retailers are increasingly investing in cloud-based collaboration platforms; these virtual networks allow companies to share best practices with partners, spread the IT costs over the entire network, align shipping and distribution needs, and improve the procurement process. Cloud-based platforms also offer another benefit: a way to communicate easily with everyone on the network, in real-time. FIGURE 3: Single Enterprise v. Agile Network Informational nervous systems that extend beyond corporate boundaries allow companies to be agile and responsive across their global business networks.

The Single Enterprise

Suppliers

The Agile Network

Customers

Suppliers

Customers

Enterprise

Enterprise

Logistics Services Providers

Logistics Services Providers

a single enterprise

zone of central influence

The growing use of collaborative tools between businesses is greatly reducing supply chain inefficiencies. Retailers that choose not to participate will endure less than stellar rates, operations in a silo, and higher costs of using traditional, license-based systems.

One View, Many Channels To survive in retail today, companies must embrace the omnichannel movement. Many are already doing so — by integrating their distribution channels, embracing cloud-based supply chain technology to increase visibility, and focusing on new ways to provide value and service to their customers. Ultimately, it is the consumers that will weed out the laggards from the leaders. Shoppers will choose their favorite retailers based on measurable action; how much money saved, how many days to delivery, and how often what they wanted was available. The leaders that emerge will be the ones that, with the click of a button, will be able to peer out over their vast web of global trading partners and guide a single item to their customer’s doorstep.

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