into profit margins that are consistent with their traditional
business models.
Figure 2 illustrates the profit challenge facing traditional
brick-and-mortar retailers as they grow their e-commerce
sales. (These are general estimates and do not reflect any
specific retailer.) Additional shipping and handling costs
that are not paid by customers represent margin erosion;
those paid by consumers are margin-dilutive, since they
only cover costs. In this example, the retailer operates with a
30 percent gross margin in its traditional brick-and-mortar
business model. Different fulfillment permutations necessary to support e-commerce sales growth have different
margin-erosion profiles.
As a point of reference, Amazon spends 9. 8 percent
of its overall revenue on shipping. This is partially offset
by shipping revenue (shipping costs paid by customers),
which amounts to 5. 1 percent of overall revenue. Thus,
net shipping costs to Amazon are 4. 7 percent of revenue. 3
Therefore, traditional brick-and-mortar retailers that provide an e-commerce capability similar to that of Amazon’s
can expect approximately 5 percentage points of gross
margin degradation, as this is not part of their traditional
business model. Since most retailers operate with net margins of 3 to 4 percent, shipping costs alone can result in
unprofitable sales.
The goal of an end-to-end omnichannel supply chain
strategy is to capture e-commerce sales while staying above
the gross margin break-even point, and ultimately to leverage the supply chain to deliver gross margins comparable
to those of a company’s traditional brick-and-mortar operation. The implication is that supply chains will have to be
much more flexible. Furthermore, systems and processes
that manage supply chains will have to provide much more
decision support in order to provide individualized but
profitable responses to each customer.
The basic operational framework to support omnichannel involves four major process areas: strategy and structure; planning; fulfillment; and learning and automation
(Figure 3). Strategy and structure establish the flexibility
and cost-to-serve boundaries within which the supply chain
will operate. Planning and fulfillment processes execute
within these boundaries. Learning provides a feedback loop
between fulfillment and planning and strategy, while automation adds tools for linking business strategies directly to
supply chain operational processes.
Let’s take a closer look at planning and fulfillment.
Planning is designed to maximize a company’s offer value
proposition, including the specific range of products, the
price, and the bundling and interaction between products
tailored to a specific individual; this is coupled with a time-
phased plan of deployments of these products to various
physical locations across the supply chain for a complete
offer value proposition. Fulfillment is designed to maximize
a company’s service value proposition, including delivering
and returning goods in the way that is most convenient to
the customer. Fulfillment must also provide short-term
20
21
22
23
24
25
26
27
28
29
30
Break-even
gross margin
Gr
oss
Ma
rg
i
n
(G
M
)
Brick-and-
mortar GM
Order online,
available in
store, pickup
in store
Order online,
ship from DC
to home
Order online,
parcel from
DC to store
for pickup
= incremental handling costs = incremental shipping costs
DC = distribution center
Note that some companies include shipping and handling as part of gross
margin, while others do not.
[FIGURE 2] MARGIN CHALLENGE FOR
TYPICAL RETAILER WITH 30 PERCENT
GROSS MARGIN
q Strategy and Structure
w Planning
e Fulfillment
r Learning and
Automation
[FIGURE 3] OMNICHANNEL SUPPLY CHAIN
OPERATIONAL FRAMEWORK
