Retail Channel Convergence: Stock 'Til It Drops

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Changing consumer buying habits compel retailers to integrate in-store, catalog, and online channels to keep inventory on hand and shoppers coming back for more.

The direct-to-consumer peak retail season is an unforgiving one.

"All product has to reach the consumer by Dec. 23 or 24, creating a huge challenge for the distribution network," notes Janine Renella, retail group leader for supply chain at software vendor RedPrairie, Waukesha, Wisc.

"In addition, the stakes are high. If customers shop online and an item is not in stock or cannot be delivered on time, they just go somewhere else. The retailer loses a sale and a customer."

Unforgiving is not the direct retail channel's only tough attribute. "Online distribution is more challenging and more complex than distribution to retail stores," Renella says.

Retailers ship merchandise to stores in full-case or multi-case lots. That's far easier than shipping direct-to-consumer and online, where the order profile is much smaller.

In this case, retailers ship 'eaches'—resulting in a greater number of shipments. This causes a high number of picks, the volume of which you can't always predict because online customers are fickle.

The value-added services online customers require also place a burden on fulfillment operations.

"If I order a sweater for my sister's birthday, I want it gift wrapped with a personalized card," Renella continues. "So instead of shipping the sweater to a store in a case lot, the distribution center has to prepare a single product for shipping—with gift wrap and card—within a small time window."

As the online retail sector matures and profit margins moderate, retailers are looking for ways to improve how they handle this business. They are retooling their supply chains to drive greater profitability, particularly during the crucial holiday peak season.

A Market Snapshot

Market statistics confirm online retail's popularity among consumers. Analyst firm Jupiter Research expects U.S. retailers to rack up $116 billion in online sales this holiday season, 15 percent more than last year.

"Looking out five years, that pace of growth will slow," says Patti Freeman Evans, a senior analyst with Jupiter. "We are seeing the beginning of a phase of maturity in online retail, so we predict an 11-percent compound annual growth rate over the next five years."

Two factors drive online retail's maturation process. First, the overall supply of new people coming online to buy will be exhausted.

"New individuals will always come online to shop, but the new behavior change has run its course," Freeman Evans notes.

"Overall penetration of online buyers is 70 percent and we don't expect that to get much higher. We have already reached a 90-percent penetration rate in higher income brackets—the heaviest buyers."

Wallet shift is the second factor driving online retail's maturation.

"People are shifting more of their spending to online; last year they spent perhaps $100 online, this year they will spend $150," says Freeman Evans. "Although this trend continues to grow, there are indications of plateauing."

With the days of explosive growth behind them, retailers now look for ways to control costs and wrest more profitability from the online channel.

"Historically, retailers held one set of inventory for the Web, one set for brick and mortar stores, and one set for catalogs, resulting in a lot of redundant SKUs," explains Jeff Cashman, senior vice president of business development for supply chain software provider Manhattan Associates, Atlanta, Ga.

"If retailers can treat inventory as a common pool, they can begin to optimize inventory by channel demand."

Craig Stevenson, global multi-channel solutions leader at IBM Global Services, Armonk, N.Y., agrees.

"Most retailers are still organized around channels," he notes. "To optimize their total inventory, retailers have to break down the walls between channels.

"They have to enable consumers to shop on their terms—shopping, picking up, or having their purchases delivered from anywhere."

This new approach represents a reversal of power in the retail industry.

"In the past, retailers called the shots, merchandising based on how they wanted to sell. Today consumers want to buy based on their specific needs. They're telling retailers, 'Let me shop the way I want to buy,'" Stevenson says.

With consumers wanting to buy from anywhere and retailers wanting to fulfill from anywhere, multi-channel retailers need full visibility and access to inventory across their entire fulfillment network.

"If retailers don't have an item in their direct-to-consumer distribution center, can they fill the order from store inventory?" Stevenson asks. "Or do they have visibility into the supplier so they can drop-ship directly to the consumer?"

Channels are starting to converge as retailers realize the only thing that matters is that consumers buy from them. "Consumers don't care about channels," Stevenson says. "They don't buy from channels, they buy from retail brands."

But achieving such convergence—where a retailer can fulfill any store, catalog, or online order from a single inventory pool and supplier network—is not easy.

"The back end of multi-channel retailing is complex," Cashman acknowledges.

To get a better handle on operations, leading retailers have transformed themselves so that people and parts now come together under a holistic view of the supply chain.

In some areas of retail, for example, merchants or buyers are reporting to supply chain. Supply chain's sphere now extends from demand and supply all the way to delivery.

Within this holistic supply chain, the real opportunity for savings and efficiencies lies in cross-functional optimization both within and across the supply chain.

This kind of optimization requires distributed order management; the retailer has to be able to service any order at any DC.

"Traditional order management systems allocate orders to a specific DC dedicated to a single channel," Cashman explains.

"But companies are investing a lot of capital in redesigning their networks so their DCs can handle everything from single picks to mass picks for the retail store. They need systems that can capture the order and allocate it appropriately across the distribution network."

That's where order management systems come in. They pick the right path for the order to follow to achieve the best margin. "You just can't slam an order into any DC and assume it will be shipped the optimum way," Cashman notes.

Going Into Labor

One large challenge retailers face during seasonal peak periods is labor planning in the distribution center. "How do you plan labor when you don't know what orders will arrive in the next five minutes or the next five days?" Renella asks.

To manage warehouse labor effectively, companies need to be able to deploy resources dynamically based on what's happening in the DC real time.

"Maybe 200 orders are backed up at the packing station because they all require gift wrapping," Renella suggests.

Those value-added services typically cause bottlenecks in online order fulfillment. A labor management system could provide the solution through real-time alerting to the warehouse supervisor.

"The report might show that, based on work in the queue, there are 200 hours of gift wrapping, 10 hours of picking, and 20 hours of shipping," Renella says. "The system would recommend that 52 DC associates move into gift wrapping to address the bottleneck."

Labor management systems today are more proactive than in the past, when supervisors received labor performance reports at the end of a day, a week, or a month. Problems became apparent but it was too late to do anything about them.

With today's labor management systems, problems are visible as they occur so they can be addressed immediately.

Tales From the Trenches

Multi-channel retailers Urban Outfitters Inc. and Restoration Hardware have embarked on missions to transform their supply chains toward a channel convergence model. Although neither has completed the transition, both are already experiencing benefits.

Philadelphia-based Urban Outfitters Inc. is a specialty retailer and wholesaler, with stores in the United States, Canada, and Europe as well as multiple catalog and online operations. Its brands include Urban Outfitters, Anthropologie, Free People, and bdg.

Online transactions represent about 13 percent of Urban Outfitters' total retail sales and 12 percent of total company sales.

"We use three channels—retail, direct-to-consumer, and wholesale," says Ken McKinney, director of distribution for the retailer. "While we offer many of the same products across the channels, some items are unique to our Web sites."

Pumping Up the Volume

Last December, Urban Outfitters shipped 223,000 online orders, compared to the 120,000 orders it shipped in an average month that year. "We almost double our volume during peak season," McKinney notes.

Retail store and online orders peak at different times. "Retail store fulfillment distribution centers feel the impact in early October to mid-November," he says.

"But our direct-to-consumer business doesn't peak until early to mid-December, when it spikes up dramatically," McKinney says. "On an average day we could process 6,000 to 8,000 orders, but that number jumps to 13,000 during peak season."

One challenge Urban Outfitters faced in managing its surge business was the lack of common SKUs across channels.

"We had three individual host systems managing three channels, without a single block of inventory," McKinney notes. "Two of our three DCs distribute to retail stores; one handles direct-to-consumer and wholesale fulfillment in Trenton, S.C."

Initially, Urban Outfitters outsourced its direct-to-consumer fulfillment to a third party. After about a year, however, the company decided to bring the operation in house.

"When we were conducting due diligence for the Anthropologie catalog, we were looking at retail order management host systems and warehouse management systems," recalls McKinney. "We recognized then that in order to operate our supply chain most effectively, we needed to get to single SKUs across all our channels."

Urban Outfitters acquired the Trenton DC from another catalog retailer. The facility has 420,000 square feet of high bay storage plus a 38,000-square-foot mezzanine. It houses 20,000 to 30,000 SKUs.

"When we moved to South Carolina, we needed a new WMS to accomplish our goals," McKinney says. "We implemented Manhattan Associates' WMS for our online business and are in the process of implementing it for our wholesale operation."

During holiday peak, Urban Outfitters' direct channel supply chain faces the complex task of managing the company's three brands, each of which comprises its own personality and customer expectations.

"Anthropologie customers—upscale 30- to 45-year-old women—want a wonderful shopping experience, with tape and a sticker applied just so to a box holding their purchase," McKinney explains. "Urban Outfitters customers are fine with plastic bags."

Managing the holiday returns spike presents another challenge.

"The returns rate across our brands reaches nearly 20 percent," McKinney says. "Urban customers do not return a lot of merchandise, but Anthropologie shoppers often order two of an item and return the one that doesn't work."

Urban Outfitters maintains a liberal returns policy. With every shipment, Urban includes a pre-paid, pre-addressed return label that can be sent anywhere in the U.S. Postal Service system. To return an item, a customer applies the label to the return package. The return charge is deducted from the customer's refund.

Overall, Urban Outfitters' investment in technology to more efficiently manage online fulfillment is already paying off.

Since implementation, the retailer has experienced:

  • A 35-percent reduction in total headcount.
  • An 80-percent reduction in manifesting and invoicing processes.
  • A 66-percent reduction in order turn time, from three days to less than 24 hours.
  • A 60-percent rise in putaway efficiency.

Within one year of implementing the software solutions for its direct channel operations at the Trenton site, Urban Outfitters was able to move its wholesale operations into the facility as well. Future plans include rolling the wholesale channel on to the same WMS.

With both channels in a single facility and on a single solution—and eventually sharing a single inventory—Urban Outfitters believes it will increase flexibility and productivity.

Restoration Hardware Finds Fulfillment

California-based Restoration Hardware is a leading purveyor of premium home furnishings. It operates a multi-channel, multi-brand, multi-market business, with revenues expected to reach $754 to $764 million this year.

The company comprises more than 100 retail and outlet store locations in the United States and Canada, as well as a rapidly growing direct-to-consumer business that includes stand-alone catalogs and two e-commerce sites.

"Multiple channels—retail store, catalog, and e-commerce—push activity into the supply chain," says Jim Brownell, chief information officer of Restoration Hardware. "We work hard to ensure that our customers get what they want, how they want it, regardless of what channel it comes from.

"Our retail store associates, for example, can now order product for a customer from any channel. They have visibility into inventory levels across the entire company."

Restoration Hardware is in the process of implementing a fulfillment solution that automatically finds the most effective way to fill an order, regardless of the channel.

"Two forces drive Restoration Hardware's supply chain," Brownell explains. "First is visibility, which has to be appropriate by both geography and time. If you are situated on the West Coast, you want to locate product in that area so you don't spend a fortune on transportation.

"From a time perspective, you have to know if you can meet your customers' needs. You have to understand and have visibility into product lead times," he adds.

"The second challenge is assortment," he continues. "We have a lot of product permutations—selling an upholstered couch in more than 100 fabrics and several types of frames, for example. Not only do they have different lead times, some are in stock, others aren't.

"Because we carry products ranging from monogrammed hand towels to sofas, we use every kind of transportation service from parcel to home delivery. All those variables add complexity."

A Special Gift

Peak season volume can reach five to 10 times an average non-peak day. But volume is not the only issue Restoration Hardware grapples with at peak time. The nature of holiday gifting creates more demand for special services such as monogramming and embroidering.

"We do most of that work in-house," Brownell notes. "Forecasting how much labor we need to add to meet this surge business is our biggest challenge."

When volumes are ramped up, supply chain resources such as storage become stressed.

"Obviously, you can't afford to build your facilities to accommodate holiday volumes because you won't use the space for 46 weeks out of the year," Brownell says.

Currently, Restoration Hardware operates two furniture and two retail DCs, and next year will open a new facility that will be able to handle multi-channel fulfillment.

When operating a distribution facility capable of serving multiple channels packaging then poses a challenge.

"Packaging differs by channel," Brownell explains. "For a retail store, I can ship a box of towels from the DC that arrives at the store as a unit. In the direct channel, however, I may have an order for only one towel, which is packaged in an individual poly bag. I have to design DC operations to handle these differences effectively."

The supply chain has to be flexible enough to handle surges and accommodate added services and requirements.

"This may mean the vendors hold inventory, but we still have visibility into it. Or it may mean we use a 3PL or run a 'pop-up' center ourselves," Brownell says. "We insource and outsource to handle the peaks, and the choice depends on the situation."

Regardless of who operates Restoration Hardware's supply chain elements, visibility is essential.

"You can't manage what you can't see at the right level of detail," Brownell says. "I can see a truck, but that doesn't help me. I need to know what's in it, down to the carton SKU level."

Restoration Hardware uses a combination of enterprise and supply chain IT solutions to serve its customers, and is in the process of installing a new WMS that will provide this visibility across channels.

Far to Go

Retailers such as Urban Outfitters and Restoration Hardware stand at the forefront of the retail industry's evolution toward channel convergence.

"But some basic process capabilities need to be implemented before any company can lay claim to retail convergence," notes Nikki Baird, managing partner at research company Retail Systems Research LLC.

These process capabilities include managing in-store inventory with the same precision and accuracy as a warehouse. This allows retailers to extend the online shopping season by enabling customers to order online and pick up at the store as late as Christmas Eve.

Circuit City unveiled such an arrangement last holiday season; other retailers are likely to follow suit this year.

"You can rig a 'buy online/pickup in store' scenario with chewing gum and baling wire in the short term, but long term, workflows have to automate this process," Baird says.

"What happens if, for example, a customer tries to get an in-store pickup order and the merchandise is not there? Is there a provision to alert the customer? And how does that play out if it's one item in a multi-line order?" she asks.

Peak season is not about building rigid lanes of distribution. Supply chains must be modular, so retailers can put the pieces they need in place when and where they need them, and capture customer orders, regardless of channel.

"Peak season is about having the flexibility to respond to the customer," concludes Brownell.

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