Channel Surfing

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Click...Click...Click.... Consumers' short attention spans demand greater shopping flexibility. For some retailers, that means it's time to flip the supply chain processes behind their sales channels.

Shopping has come a long way since the black-and-white days of traditional retail stores. Want to shop for a digital camera online but pick it up at the mall? No problem. See a sweater on the rack that your daughter would love but can't find her size? Have the clerk order it on the company's Web site, ship it to your daughter's home, and e-mail you a link so you can track the delivery online. How about that jacket in the window of the Polo Ralph Lauren store? Use your camera phone to scan a code attached to the item, then make the purchase from your screen.

Call center orders, e-commerce, bricks-and-mortar—to consumers faced with a growing number of choices, it's all just shopping.

"Shoppers want a good purchasing experience that's consistent across all sales channels," says Nikki Baird, managing partner at Retail Systems Research in Miami. The continuing boom in e-commerce, along with pressure from customers to merge sales channels, is forcing retailers to rethink their fulfillment strategies.

DISTRIBUTION DECISIONS

For companies that operate stores and sell products through their own Web sites, the classic strategy is to maintain two distinct distribution networks. Many retailers still follow this course, with good reason. Shipping large, complex orders to replenish stores and shipping small orders directly to consumers present two very different business challenges.

For example, when a company picks a location for a distribution center to supply its stores, it considers the distance to those stores and what it will cost to serve them with full or partial truckloads. When it chooses a DC for direct customer fulfillment, though, it considers a different question: How quickly and cost effectively can it ship small parcels from this location to customers, wherever they happen to be?

"For direct fulfillment, businesses typically try to locate near the hub of a major parcel service provider," says Bob Spieth, president of the contract logistics division at OHL (formerly Ozburn-Hessey Logistics) in Brentwood, Tenn. A company fulfilling e-commerce orders from the Memphis area, for example, can bring parcels to the FedEx hub as late as 11 p.m. and still get next-day delivery.

Depending on the company, the best solution for e-commerce fulfillment might be to hold inventory in one location or use several DCs to minimize transportation time and costs.

"To determine how many DC locations they need, shippers should compare the cost of maintaining inventory and handling stockouts against the benefits of reducing transportation expenses and improving service levels," Spieth says.

Inside the warehouse, e-commerce fulfillment also looks different than store replenishment. "Order size makes a big difference in how warehouses pick, pack, and ship product," says Daniel Napoli, chief executive officer at Ossining, N.Y.-based Knighted Computer Systems, provider of a warehouse management system (WMS) that supports multichannel operations.

"For example, employees picking to fulfill e-commerce orders may have to travel all over the warehouse to retrieve single items and match them up for shipping," he says. "But when fulfilling to their own retail stores, shippers try to optimize as much as possible for a particular zone."

Also, while many retailers beef up DC staff to accommodate holiday traffic, e-commerce makes the demand for temporary labor especially acute.

"The seasonality of direct-to-consumer shipping is very high," says Spieth, with a steep peak occurring between Thanksgiving and December 20. Many orders that come through a Web site during that period require labor-intensive services, such as gift wrapping and inserting personal greeting cards. In addition, "there will be a significant number of returns compared to shipments into stores," he notes.

BUY ANYWHERE, DELIVER ANYWHERE

There are plenty of solid reasons to separate inventories for store sales and Web sales. But running those operations in different buildings, or even in different sections of a single warehouse, also presents drawbacks. Notably, the dual-inventory strategy holds back companies that want to provide a "buy anywhere, deliver anywhere" experience.

With products for the brick-and-mortar and e-commerce channels sitting in different locations, often managed by different software, retailers find it difficult to offer online ordering with store pickups, or in-store shopping with home delivery.

"Now that retailers are trying to bring these channels closer together, many early decisions made for expediency's sake and e-commerce growth are coming back to haunt them," Baird says.

Some companies have tried to use point-of-sale (POS) systems to bridge the gap between channels. But these efforts are largely unsuccessful because POS systems can't handle order management. The software also needs the intelligence to direct an e-commerce order to a particular store, track it, and close it out when the customer picks up.

Recently, software vendors such as Sterling Commerce, Dublin, Ohio, and Boston's Order Motion introduced software to close this gap. Knighted's WMS also offers a back-end bridge between sales channels. Companies using this software may either keep separate inventories for stores and e-commerce sales or run an integrated DC.

"Knighted's WMS can run in a multichannel environment in the same warehouse," Napoli says. The picker who's taking down cases of goods at 10 a.m. might be picking "eaches" an hour later, simply following whatever instructions come from the WMS.

"He has no idea if he's picking for retail, direct, or catalog; he's just picking and processing," Napoli notes. The software tracks the day's demands, setting work priorities based on channel needs and carrier schedules.

Combining inventory cuts the risk of depleting stock for individual channels and reduces space and labor requirements.

A SWEETER STRATEGY

Integrating the supply chain to support different channels doesn't need to be an all-or-nothing proposition. For Harry and David, a leading merchant of gourmet fruit and food gifts, merging just part of the transportation network for stores and direct sales has paid off in lower costs and enhanced customer service.

Harry and David's direct marketing channel dates back to 1934, when brothers Harry and David Rosenberg started selling their Oregon-grown Royal Riviera pears by mail.

Today, Harry and David sells a variety of fruits, confections, gift baskets, and other treats, shipping to customers and selling through approximately 134 stores, including the flagship Country Village Store at company headquarters in Medford, Ore. In the late 1990s, Harry and David added an e-commerce channel; the company also wholesales to big box chains such as Costco and Sam's Club.

Harry and David produces about 80 percent of the product it sells via the direct marketing channel and about 60 percent of the product sold in stores. It ships year-round from DCs in Medford and Hebron, Ohio. To help with holiday traffic, each year it leases space in three or four third-party warehouses, strategically located across the United States and stocked with its best-selling SKUs.

Until this year, Harry and David used separate transportation networks to deliver product for its retail and direct marketing business units. The company contracted with refrigerated carriers to deliver to stores every other week.

"We loaded a truck with approximately 20 pallets, making five to six delivery stops," says Philip Littleton, Harry and David's corporate vice president of logistics. Refrigerated carriers also moved the direct orders to UPS hubs for last-mile delivery to customers.

Managing transportation separately for each business unit wasn't the most efficient strategy. "We were dispatching two different refrigerated carriers to the same cities, states, and transportation networks," Littleton says.

In July 2008, the two units started co-loading freight for long-haul transportation. Parcel carriers—generally UPS, but sometimes the U.S. Postal Service or FedEx—still make last-mile deliveries to e-commerce and catalog customers. For store deliveries, the company has developed a similar hub-and-spoke approach.

"We have contracts with small, temperature-controlled LTL carriers to deliver the last mile to the stores," Littleton says.

Consolidating the two delivery networks cut Harry and David's fuel costs and halved delivery time for both channels.

One distribution challenge Harry and David faces in both channels arises from local ordinances that restrict the times of day when carriers can make deliveries. "We've had to adjust both channels to meet shipping schedules and make delivery appointments to the UPS hubs," says Littleton.

Another challenge springs from the volatile market that Harry and David serves, especially in the direct marketing channel, where gift-giving far outweighs personal consumption.

"In today's economy, gift-giving is slightly down," Littleton says. "But when gift orders do come in, they're in large quantities."

Corporate gifts comprise a large portion of Harry and David's direct sales. "Certain corporations place 10,000-item orders and expect a rapid turnaround," Littleton says.

Harry and David draws on five to six years of historical data to forecast corporate orders, adjusting the numbers according to economic conditions. The company also contacts regular customers early in the season to gauge their buying intent. These tactics help Harry and David develop a good feel for which fruit boxes, chocolate towers, or deluxe gift baskets are likely to sell.

"Forecasting makes it easier to evaluate the SKUs and quantities to produce," Littleton says.

FULFILLMENT WORRIES PUT TO BED

For a small retailer, one simple solution for replenishing store inventory is to place an order on the e-commerce channel, just like a customer. That's how they do it at Keetsa, which sells earth-friendly mattresses and other sleep products through its Web site and from three stores in San Francisco, Berkeley, and Fairfield, Calif.

Keetsa debuted in September 2007 as a Web-only business, but it soon started opening stores. "We learned very quickly that the Internet will never dominate in sleep products because people want to lie on a mattress before they buy it," says Joe Alexander, the company's director.

Because a Keetsa mattress is highly-compressible, the company can crush it flat, vacuum-seal it, then fold it into a small box. That simplifies shipping and allows in-store customers to take a mattress home in their cars.

To fulfill online orders, Keetsa contracts with Shipwire, a Sunnyvale, Calif.-based Internet fulfillment company. This strategy spares Keetsa the work and expense of running a warehouse and shipping products, allowing it to focus on sales.

Keetsa currently keeps product at Shipwire's warehouses in Los Angeles and Chicago. In the near future, it plans to start using one or more Shipwire warehouses in Canada, too.

LEVELING THE PLAYING FIELD

Dividing product among several warehouses gives small Web merchants the same advantage that larger companies net from their distribution networks.

"Small retailers can move inventory closer to end buyers and cut shipping costs," says Nate Gilmore, vice president of marketing and sales at Shipwire. This is a particular advantage for U.S. companies trying to extend their reach outside the country. By holding some inventory in Shipwire's Canadian warehouses, for example, Keetsa won't have to ship internationally to fill individual orders. "It will save on cost, delivery time, and hassle," Gilmore notes.

Keetsa owns a manufacturing facility in China, from which it ships products via ocean to Los Angeles. "Products are picked up at the dock and trucked to the Shipwire warehouse," Alexander says.

When Shipwire receives a shipment, it first checks to make sure the product matches the merchant's expectations. "We measure and weigh the shipment to ensure that the product is what the merchant expected. If not, we work with the merchant to solve the problem," Gilmore says.

Shipwire provides merchants with software tools that link the shopping carts in their e-commerce software to Shipwire's own information system. This connection lets Shipwire receive order information and push order status and inventory details back to the merchant.

"Shippers can get order history and tracking information for any shipment," Gilmore says. "They can also get a series of reports on shipment status, as well as all the inventory information at any time."

While storing most of its inventory at Shipwire's warehouses, Keetsa keeps two or three of every SKU at each store. When a store needs more product, employees use the Internet to conduct a transaction, much as customers do.

"We order from Shipwire, and it arranges the FedEx shipment," Alexander says.

Using Shipwire to fulfill inventory needs at the stores wasn't the original plan. "But as business picked up, we had more demand for product and began running low on inventory," says Da Nnie Lee, Keetsa's chief operating officer. With limited storage space at the stores, keeping the optimum quantity of each SKU at each location was becoming difficult. Now Shipwire moves inventory into the stores as needed.

Because of its business volume with carriers such as FedEx and UPS, Shipwire can negotiate discounts, keeping shipping costs lower than Keetsa expected. "We earn the volume discount whether we ship to customers or to our stores," Lee says.

Just as Keetsa employees go online to replenish store inventory, an occasional customer who comes into a store to test mattresses goes to the Web site to purchase. "About 20 percent of Keetsa's customers are unable to pick up the mattress, so Shipwire delivers it to their homes," Alexander says.

Reverse logistics is a simple matter. In the rare event that a mattress is defective and a customer needs to return it, Keetsa has a local service provider haul it to a recycling facility.

MULTI-CHANNEL MADNESS

While many retailers puzzle over how to integrate their sales channels, one sporting gear and apparel chain has already aced the test. Moosejaw, headquartered in Madison Heights, Mich., caters to the kind of young, hip shopper who uses an iPhone to order a kayak paddle, or expects to pay for a hoodie in the store using a PayPal account.

"We are trying to be the first true multi-channel retailer," says Jeffrey Wolfe, owner and chief operating officer of Moosejaw. "We want to blur the line between Web, call center, catalog, mobile, and retail shops."

With that goal in mind, Moosejaw has created a single database using IBM's WebSphere Commerce platform to capture information on all customer purchases, no matter how they originate. Moosejaw's vendor, New York-based CrossView, implemented the IBM solution, along with a point-of-sale system that sits on top of the database "the same way our Web sites and call center sit on top of it," Wolfe says.

Moosejaw customers have many shopping options. They may leave a store with their merchandise, ask an employee to order an item that's not in stock, phone the call center to buy from the print catalog, order from the full-screen Web site, or use a site tailored for smart phones. In every case, the same database captures information about the sale. All the channels draw from the same inventory and receive the same updates when a customer makes a purchase, or when the company's warehouse in Madison Heights receives new merchandise.

Moosejaw uses a custom-built, Web-based system called Retail Backbone to manage back-end functions, including replenishment, warehouse management, fulfillment, receiving, pricing, purchasing, and inventory control.

SAME DIFFERENCE

In its organization and staffing, the warehouse makes no distinction between product destined for brick-and-mortar stores and product that Moosejaw will ship to customers.

"Like most warehouses, we put fast-moving products closer to the packing stations, but we have pickers who fulfill Web orders, individual store transfers, and bulk store transfers," Wolfe says.

The software determines when stores need more merchandise and places the orders, which the buying team reviews and confirms. "A transfer order is no different than a Web or store order, except that instead of a customer, our buying team places it," he adds.

A single Moosejaw truck delivers merchandise from the warehouse to the company's six stores in Michigan. A seventh store in Chicago receives its shipments via UPS.

About 80 percent of Moosejaw's direct-to-customer orders come from the warehouse, carried by UPS. Retail stores or suppliers ship the other 20 percent. Software keeps tabs on traffic at the stores, changing priorities for steering customer orders throughout the day.

"If the traffic counter in Grosse Point tells us that the shop is packed with customers, we'll only send Grosse Point an order if we can't fulfill it from any other store or the warehouse," Wolfe explains.

Shipping from retail shops and suppliers allows Moosejaw to show about 20 percent more product on its Web site than it could otherwise. Shipping from suppliers also helps keep a lid on inventory risk.

Managing inventory in a multi-channel enterprise was more complex back when Moosejaw used separate systems to support point-of-sale, Web sales, the call center, and various back-end functions.

FIRST COME, FIRST SERVED

"During the holidays, products moved so quickly that a customer might buy a tent online at the same time someone bought it at a retail store," Wolfe says. "The online order would eventually make its way to the store, by which time the tent was gone and we'd broken our promise to the customer."

Under the new, integrated regime, whoever buys the tent first gets it. Before an order is completed, the software checks it against real-time inventory, ensuring that Moosejaw sells only items it can actually deliver.

Moosejaw has built its reputation on "Moosejaw Madness," a spirit of fun that turns shopping into a social networking phenomenon. But, Wolfe says, "it's the behind-the-scenes single platform that makes everything possible."

EVERYBODY'S GONE SURFING

While Moosejaw may have perfected the art of surfing from channel to channel, many retailers are only just starting to learn that multi-channel selling in an e-commerce world takes far more than a button on the Web site marked "in-store pickup."

"Until now, most retailers have been thinking about multi-channel selling from just the customer front-end perspective. We're finally getting to the heart of the matter," Baird observes.

As retailers reach that heart and implement new supply chain strategies, more customers will get exactly the product they want, purchased and delivered via the method of their choice.

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