overnight carrier.
“Some firms do ‘buy online, pick up from store’; some
do ‘buy online, ship from store.’ You need to monitor
whichever fulfillment flow you’re using, and go back and
optimize that,” said Denmon.
For example, some retailers offer free shipping for home
goods and bulky items ordered online if the customer is
willing to pick them up from the store. Such a retailer might
save money on omnichannel operations if it adjusted its
truck routes to make sure each shipment leaving the warehouse was a full truckload.
THERE’S NO SUCH THING AS FREE SHIPPING
A second crucial step for boosting the profitability of your
omnichannel operation is to set realistic shipping fees.
That can be difficult in a market where online retailers
compete for customers by offering free shipping or next-day delivery. But companies that sell $10 items can seldom
make a profit shipping one or two units to an online buyer’s home. Shipping costs will simply wipe out their profit
margins.
That’s led some retailers to adopt a more nuanced,
choice-based approach. “The more progressive retailers
have changed their website designs to communicate options
to customers and give them choices,” Denmon said. “For
example, you can have it shipped for free and wait three to
five days, or you can upgrade and get it tomorrow. They let
the customer choose what speed is worth.”
A variation on that scenario has been playing out in the
U.K., where some online grocers have begun charging a
fee for their “click and collect” programs, where online
shoppers place food orders at home, then pick them up in
person at the nearest supermarket.
However, that model has met with some resistance. The
grocers are simply charging for their picking and packing
services, but many customers have been outraged because
they’ve become accustomed to free shipping, said David
Jefferys, global market leader for e-commerce and omni-channel at KUKA Swisslog.
“Same-day service is a race to the bottom,” Jefferys said.
“The service level has to increase with a cost. There’s no
win-win that leads to an increase in service level without an
increase in cost.”
OUTSOURCING OMNICHANNEL OPERATIONS
Many retailers have been paying for shipping all along,
whether they charge their e-commerce customers or not.
But that means they have to find some way to offset that
hidden cost. A number of brick-and-mortar retailers have
used funds from other departments to subsidize the cost
of building out their omnichannel fulfillment operations,
Jefferys said. That accounting may work fine for the launch,
but as e-commerce begins to account for a larger share of
total revenue, the operation becomes more expensive and
tougher to justify.
Faced with that reality, many companies have chosen
to outsource their e-commerce fulfillment to a major
third-party logistics service provider (3PL) such as DHL
International, said Jefferys. Huge retailers like Amazon.com
Inc. and Alibaba.com can afford to run their own distribu-
tion channels, but most of the smaller players need help
with transportation and warehousing.
But even the major retailers are likely to face challenges
when it comes to building a homegrown omnichannel
operation. For example, there’s the question of where
to locate their operations. A company that builds a DC
dedicated to e-commerce must decide whether it needs
to provide one- or two-day delivery to customers’ homes.
That decision may affect whether it picks a warehouse
located near Louisville, Ky., or Memphis, Tenn., depending
on whether they’re a UPS Inc. or a FedEx Corp. shop, said
Marc Wulfraat, president of the Montreal-based consulting
firm MWPVL International Inc.
Another challenge in building a successful omnichannel
operation is balancing the demands of e-commerce with
those of retail store operations. The primary function of
physical storefronts is to serve as a showroom for the com-
pany’s products and to allow sales associates to build rela-
tionships with customers. But a situation where workers are
pulling inventory off store shelves even as live shoppers try
to fill their carts is hardly conducive to relationship build-
ing. “Let’s say a guy grabs the last box of your favorite cereal
and he’s wearing a Wal-Mart uniform,” said Wulfraat.
Chances are, the in-store shopper will be left feeling that the
company values the e-commerce customer’s business more
than his or her own.
In addition to potentially offending shoppers, some
retailers find that fulfilling e-commerce orders from stores
is simply inefficient, Wulfraat said. Store employees may
find that it takes much longer to pick and pack specific
items in a hectic retail environment than in a well-ordered
warehouse.
Despite the challenges, big national retailers such as
Macy’s Inc., Target Brands Inc., and Wal-Mart continue to
fill orders from stores, he said, setting the standard for run-
ning an omnichannel operation and keeping the pressure
on their competitors.
As for what the future holds, it’s anybody’s guess. As a
recent survey made clear (see “Study: Omnichannel retailers
still fine-tuning fulfillment operations” in this issue), there
are just two universal truths when it comes to omnichannel
distribution: each company is adapting to the omnichannel
challenge in its own way, and the future will continue to
bring changes in fulfillment strategies and practices.
