DC Velocity - IdeaBook 2016

decision making around offers, price, and lead times based on the availability of products, workforce, and other assets, which ultimately was determined by upstream planning processes.

Capabilities based on orchestration and decision rules improve efficiency but require greater levels of sophistication in processes and technologies. Here’s an example: A consumer purchases a product online and specifies that it be delivered to her home. Fulfillment processes and technologies must instantaneously determine the best place from which to source that product. The product is available in a distribution center (DC), in Store A, and in Store B. However, the DC inventory has already been allocated, and planned replenishments will not be available for another two days. Meanwhile, Store A has available inventory, and it is closer to the customer’s home, so transportation costs would be lower. But demand for the product at Store A is forecast to be higher than at Store B, and Store A will be short on labor capacity for the next several days. Store B, by contrast, not only has the necessary inventory, but also has planned excess labor for the next several days. However, Store B is further away from the customer’s home than Store A, so transportation costs would be higher.

In this situation, each order fulfillment option has different costs. Fulfillment processes and systems must consider all of the options and make the best profitable decision while satisfying the service needs of the customer. An additional level of sophistication might involve fulfillment processes that can provide trade-off offers to the consumer. For example, if it is more economical for the company to ship from the DC, but the product will not be available for another two days, a “micro offer” can be made to the customer: wait an additional two days in exchange for a slightly lower price. This offer would be made only if its overall profitability to the company is superior to that of sourcing from Store A or Store B. This is an example of demand shaping, in which visibility to excesses and shortages in the supply chain are used to influence buying patterns. There are many such demand-shaping opportunities in an omnichannel world.

THE 10 KEY FOCUS AREAS

As noted earlier, an integrated, end-to-end omnichannel supply chain strategy is critical to profitably capturing e-commerce sales. There are 10 key focus areas in the supply chain that enable such a strategy. Figure 4 summarizes these focus areas within the four major business process areas: strategy and structure; planning; fulfillment; and learning and automation. The sections that follow discuss each focus area.

1 Implement flexible, many-to-many relationships in the physical supply chain based on flexibility versus cost-to-serve trade-offs. This is a network activity that defines the level of flexibility a company wants to employ for the receipt and shipment of orders. The vision of omnichannel is to provide the flexibility to order from anywhere, source from anywhere, deliver to anywhere, and return to anywhere. But flexibility comes at a cost. For example, enabling the concept of an endless aisle, in which the customer can order from anywhere and have the inventory shipped from anywhere, requires the flexibility to locate inventory, and pick, pack, and ship from any stocking location to any location the customer desires. If the seller offers free shipping, the shipping cost represents margin erosion relative to the margin that would have been obtained if the product were bought in a retail store. If the product is shipped from a store, the cost of picking and packing also represents margin erosion if additional labor is required for such activities.

The flexibility of the network design and its associated cost-to-serve (CTS) will establish the “profitability envelope” within which the supply chain operates to support omnichannel strategies. Cost-to-serve is important in understanding the margin implications of various fulfillment options, such as those shown in Figure 2.

To understand the trade-offs between fulfillment flexibility and the cost of providing that flexibility, it’s necessary to conduct a network design and cost-to-serve analysis. This analysis identifies “from-to” relationships and helps to determine which nodes in the supply chain should be used as omnichannel sources of supply, including warehouses and DCs, stores, and pickup locations. Some retailers may choose to use some, all, or none of their stores as sources of e-commerce supply. For example, a CTS analysis may suggest that endless-aisle capability be limited to a certain geographic area. Conditions change quickly in e-commerce, so this type of analysis should be conducted on a regular basis to determine whether fulfillment options should be expanded or cut back.

2 Enable stocking locations—whether they are ware- houses, retail locations, or pickup points—to receive, pick, pack, and ship single-item orders, and to likewise handle returns. Supply chains have largely been designed for efficiencies, driven by scale and economic order quantities. The predominant pattern of the past has been to “supersize” everything—plants, ships, warehouses, and stores. One challenge in an omnichannel world is to deliver single-order quantities with the economics offered by supersized assets.