The rapid growth of mobile technology and e-commerce continues to change the retail landscape dramatically. Although the growth in e-commerce has moderated since the height of the Covid-19 pandemic, recent forecasts from the National Retail Federation (NRF) indicate online sales continue to increase. The NRF projects that nonstore and online sales will grow between 10% and 12% year over year in 2023, to $1.41–$1.43 trillion.1 However, according to NRF, most of those sales are being driven by a multichannel or omnichannel approach with brick-and-mortar stores still remaining the primary point of purchase for 70% of retail sales. As a result, the line between traditional brick-and-mortar and pure-play e-commerce retailers is blurring. Both types of players are now omnichannel retailers in response to rising consumer demand for multiple buying channels.
This type of major shift in sales channels comes with many new challenges and opportunities. To gain a better sense of where retailers’ greatest concerns lie and how they are responding, the Omnichannel Lab at the Massachusetts Institute of Technology Center for Transportation & Logistics (MIT CTL) conducted an online survey of U.S. retailers from October 2022 to April 2023 in collaboration with CSCMP’s Supply Chain Quarterly’s sister publication DC Velocity.2 Of the 270 people who responded to the survey, 68% said that order fulfillment is the area of supply chain management that is most impacted by the growth in e-commerce. (See infographic on pages 12–13 for survey results.)
We believe that an effective omnichannel strategy must address the challenges of omnichannel fulfillment. Based on our research of omnichannel supply chains, including an analysis of those 270 survey responses, we have identified six omnichannel fulfillment challenges that companies must address in order to be successful in today’s continually changing retail space. The answer in many cases, we believe, will involve adopting innovative technology and processes.
Challenge #1: Align your omnichannel strategy
The first challenge is the need to revisit the company’s strategic plans. To succeed in implementing an omnichannel strategy, it must be aligned with the company’s corporate and supply chain strategies. In our survey, 54% of respondents indicated that redefining company strategy to provide a seamless omnichannel experience for customers was the number one challenge companies face when shaping omnichannel distribution strategies. However, those retail companies that do take such a strategic approach tend to be more successful.
For example, Adidas started its omnichannel journey in 2015,3 and one of the keys to its success was aligning the company’s omnichannel strategy with its supply chain and overall strategy. Some of the key changes involved accelerating the enterprise’s digital transformation program, driving further growth through its online presence, and adopting a more customer-centric approach to its business.4
Challenge #2: Integrate online and offline channels
To be successful in the omnichannel realm, retailers need to integrate online and offline channels to offer a seamless customer experience. Integrating these channels means using the same existing facilities (for example, stores and distribution centers) to prepare online and offline orders, or adding new facilities (for example, online distribution centers) to the network and managing the entire network as part of the same supply chain. In contrast, previous multichannel strategies like the one followed by Dell in 2000 used a separate network to fulfill and deliver products.
Sixty percent of survey respondents indicated that integrating online and offline channels was a top challenge that they faced when it came to creating an omnichannel distribution strategy. That’s not surprising as adding channels typically increases network complexity, and in most cases, retail companies need to redesign their networks, rethink the roles of stores, and add new fulfillment options. Indeed, 47% of respondents in our survey indicated that network design is one of the supply chain areas highly impacted by e-commerce.
Zara, a major player in the fast-fashion industry, is a good example of a company that implemented these changes.5 The retailer introduced online distribution centers and overflow warehouses in its existing network to fully integrate its online and offline distribution channels. Also, Zara’s flagship stores created a unified customer experience across channels by offering a larger assortment of products closer to the range of products offered online and employed stores to fulfill online orders.
Challenge #3: Decide how to allocate inventory
Once the network is redesigned, retailers must decide where and how to allocate inventory. The challenge here is keeping the right inventory level in each channel location that allows the company to meet its service level commitments without incurring excessive inventory costs. Some configurations decentralize inventory to move stock closer to the customer and to facilitate fast deliveries. Others opted for a centralized inventory model, allowing inventory pooling that typically lowers inventory volumes and stockout rates. There are pros and cons associated with each decision.
Forty-eight percent of survey respondents identified positioning the correct item at the right location as one of the top pain points when implementing omnichannel distribution strategies. And 30% indicated they are focusing on item allocation/inventory placement.
The higher the number of channels managed, the more complexity is built into the network. In the survey, 37% of respondents reported managing a wider variety of stock-keeping units (SKUs) and 12% confirmed they manage lower orders per SKU than they had previously. Both findings point to more inventory management complexity in omnichannel supply chains.
Challenge #4: Decide when to deliver
Some reports indicate that the race to provide faster delivery times is slowing down in the post-Covid era, which might offer some relief to retailers as fast shipping options typically come a high cost. However, 36% of our survey respondents indicated they are still looking into speeding up deliveries to support faster shipping.
Retailers must weigh the costs versus the benefits and decide which combinations of shipping options (such as 2-5 business days, next-day, same-day, and/or two-hour delivery) they will offer to meet their customers’ needs and the demands of different product types. Also, they must configure their inventory management strategies to support their chosen delivery offerings.
Challenge #5: Decide where to fulfill the order
More than a third of survey respondents indicated that deciding where to fulfill omnichannel orders poses a major challenge to today’s retail operations.
Different companies use different types of facilities to fulfill online orders. When order volume justifies it, some companies opt for dedicated e-fulfillment centers. Some brick-and-mortar retailers use their stores to fulfill online orders, while others employ their backroom spaces or “warerooms” for this work. Another option is to use dark stores or micro fulfillment centers.
Deciding which approach works best for their operations plays a key role in the formation of a company’s omnichannel strategy. Fulfillment cost, speed, and capacity are factors retailers must consider when deciding which solutions are the most appropriate. These varied choices are reflected in our survey findings. To fulfill online orders, respondents confirmed they are transforming existing facilities (22%), investing in more internal warehouse capacity (25%), and increasing warehouse capacity through outsourcing (19%).
Challenge #6: Manage commercial returns
As the growth of e-commerce has accelerated, the problem of how to manage product returns has grown both in complexity and scale. One study estimates that $816 billion worth of merchandise was returned in 2022, which represents 16.5% of sales on average.6 Return rates for online sales are higher than for traditional brick-and-mortar retailing (20–25% for digital sales compared to 10-15% for brick-and-mortar). Forty-six percent of respondents in our survey indicated that the growth in e-commerce highly impacts the volume of returns.
One of the reasons for this outcome is that companies use returns policies to replace the customer’s experience of being able to test a product in the store. Customers can buy items, receive and try them, and return the purchases if they are unsatisfied. This policy has made customers more willing to buy an item online that traditionally they would have been reluctant to purchase without trying it on or testing it out first. Excessive returns rates, however, are associated with multiple problems for retailers, including inflated costs for processing, shipping, handling returns as well as restocking and disposing of returned items. To continue to be successful in the online retailing world, companies will have to find an effective way to balance the customers’ need to test out products and the high cost of easy returns.
Innovation toolbox
The need to develop omnichannel fulfillment strategies that meet the demands of an unforgiving customer base represents one of the main strategic challenges retailers face today. Controlling costs while maintaining high service levels is a particularly thorny issue. Fifty-one percent of survey respondents identified higher logistics costs as their number one pain point when implementing omnichannel distribution strategies.
The good news is that retailers have a diverse set of innovative tools at their disposal to overcome these challenges. Notably, 37% of survey respondents said they are increasing levels of automation. Here are some of the innovations that retailers are deploying.
Mobile point of sale (MPOS). Retailers like Apple, Nike, and Adidas are trying to change and improve the in-store customer experience by utilizing digital tools in the brick-and-mortar store. MPOS allows customers to pay directly to store associates rather than visiting cashiers, thus avoiding lanes and wait times. The redesign of the in-store customer experience to incorporate some elements of the online customer experience can help to address challenge #1 (align your omnichannel strategy and your overall corporate strategy). For example, these changes can be made as part of an overall effort to make an organization more customer-centric.
Endless aisle. This technology brings inventory visibility to customers and staff through mobile touchpoints (for example, utilizing mobile device or touch screens located in the store to browse and order products that are not available in-store). Adidas is one company that uses this technology to display stock of available online products that can be shipped from their e-fulfillment centers. This technology enables stock visibility and allows customers to buy online from the store. The solution contributes to challenge #2 (integrate online and offline channels) by helping retailers provide customers with a seamless, integrated omnichannel experience. It also contributes to challenge #1 (redefining the company strategy), since the integration of channels should be part of the company’s supply chain strategy and business proposition.
Radio frequency identification (RFID). This technology uses electromagnetic fields to automatically identify and track tags attached to every single item. It allows retailers to improve inventory visibility and accuracy. RFID technology enables retailers to track their inventory in the store and across their supply chain networks. The technology also allows retailers to use in-store inventory to fulfill online orders, provides more timely information on product replenishment needs, and helps to reduce inventory levels.
Improved inventory visibility and inventory accuracy are issues covered in challenges #2 (integrate online and offline channels) and #3 (decide how to allocate inventory).
Augmented reality (AR) and virtual dressing rooms. This application of AR technology enhances the in-person experience, thereby reducing returns volumes, issues tackled in challenge #6 (managing returns) above. AR apps allow customers to see 3D images of products and provide better information about product fit. AR dressing rooms with RFID readers improve customers’ in-store experience (which helps to address challenge #1), increase sales, and allow retailers to offer online products to customers in-store. Implementing and rolling out this kind of real-time visibility technology takes time, requires flexible and agile processes that evolve jointly with the technology, and should be aligned with the SC strategy.
Retailers are also using technology to speed up the fulfillment of online orders. For example, in our survey, 30% of respondents confirmed they are using real-time inventory management solutions in this way. Cobots, robotic arm picking, and picking-to-light are other fulfillment solutions respondents are deploying to solve challenges #4 and #5 (deciding when and where to fulfill orders). These solutions require retailers to decide what technologies they should invest in, decisions that have a bearing on when and where orders should be fulfilled.
But our survey findings also indicate that while tech-driven fulfillment solutions are central to omnichannel strategies, they can also represent another challenge for retailers. Forty-one percent of respondents indicated that keeping up with relevant technological advances is one of the top pain points they experience when implementing omnichannel strategies.
In conclusion, customer expectations will continue to change, and supply chains must evolve and adapt to these changes. This is especially true with regard to the fast pace of technological change. AI and ML along with various automation technologies are evolving rapidly, and as users gain more experience with these innovations, new ways to apply them will emerge. It is vitally important that retail supply chain processes are flexible and agile enough to advance in synch with the advance of tech-driven innovation.
Editor's Note: This article from Dr. Eva Ponce of MIT appears in a special digital edition of CSCMP's Supply Chain Quarterly that looks at the retail supply chain. You can find the full issue here.
Notes:
1. “NRF Forecasts 2023 Retail Sales to Grow Between 4% and 6%,” National Retail Federation press release (March 29, 2023): https://nrf.com/media-center/press-releases/nrf-forecasts-2023-retail-sales-grow-between-4-and-6
2. Conducted and analyzed by Eva Ponce and Laura Allegue at the MIT Center for Transportation & Logistics (MIT CTL), the 2023 edition of the “How is omnichannel transforming retailer’s supply chain?” survey explored the main omnichannel challenges that retailers have faced over the past 24 months. The project surveyed 270 logistics, warehousing, and supply chain professionals from a variety of industry sectors—including retailing, consulting/support services, and third-party logistics providers—from October 2022 to April 2023.
3. B. Lennox and C. Cordon, “Adidas Russia/CIS and the Russian crisis: retrench or double down—Case Study,” IMD (2016).
4. “2022 Annual Report,” Adidas (2022): https://report.adidas-group.com/2022/en/
5. A. Moreno, “Zara: An Integrated Store and Online Model (A)—Harvard Business School Case Study,” Harvard Business School (2021)
6. National Retail Federation and Appris Retail, “2022 Consumer Returns in the Retail Industry,” December 2022: https://cdn.nrf.com/sites/default/files/2022-12/AR3021-Customer%20Returns%20in%20the%20Retail%20Industry_2022_Final.pdf
