July 2020 | Commentary | The Lean Supply Chain

Traditional Retail Supply Chains Tackle Omni Challenges

Tags: Retail, Distribution, E-commerce

Distribution centers (DCs) traditionally shipped orders in bulk to retailers or wholesalers. In the early days of e-commerce, most retailers used a small area in an existing DC to fulfill online orders or outsourced the process to a third party. As online demand grew, many retailers opened fulfillment centers dedicated to picking and packing individual orders shipped to individual end users. DCs and fulfillment centers have much different types of operations and cost structures.

Paul A. Myerson, instructor, management and decision sciences at Monmouth University and author of books on Lean and the Supply Chain for McGraw-Hill, Pearson, and Productivity Press, 732-571-7523

The emerging retail approach, today known as omnichannel, integrates all of a retailer's channels. It creates a seamless shopping experience no matter how the consumer is accessing the product.

As a result of this rapidly growing strategy, some retailers such as Gap, American Eagle, and Target have experimented with consolidating their distribution and fulfillment centers into one facility.

This consolidation often requires new warehouse management and materials handling systems intended to better integrate distribution and fulfillment operations. In some cases, existing systems are "bolted" together while others implement new, integrated systems specifically designed for omnichannel. The advantages and disadvantages of each type of systems approach is a story for another day.

The goal is to take the retailer's replenishment cycle from days to hours and reduce inventory at stores. It requires sending shipments to stores more frequently and in smaller lots to more precisely meet demand rather than shipping big cases of products.

This approach allows retailers to expand their use of stores to fulfill online orders. Holding less inventory at stores allows them to dedicate more room for digital fulfillment, which is another emerging trend.

Before implementing this type of strategy, however, retailers should consider the advantages of traditional separated facilities versus combined omnichannel facilities.

Some advantages of combined facilities include:

  • Potentially lower operational costs as fewer facilities generally equate to less duplication and, therefore, lower operating costs.
  • Shared inventory.
  • More immediate control and flexibility.

Keep it Separate

Having separate facilities also provides many advantages, such as:

  • Lower capital costs, as a new shared facility requires significant investment.
  • Having more options when dealing with order fulfillment challenges.
  • Omnichannel facilities handle a lot more SKUs than brick-and-mortar retail locations, so there is more of a chance to run out of space due to future growth in omnichannel retail.

There's a lot to consider here before making such a huge, long-term strategic decision that can require a significant investment in people, process, infrastructure, and technology. But it is a decision that retailers will have to make in the very near future.






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