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Winning Supply Chain in Omnichannel –Trends and Strategic Implications
Babson College
2016
2
• Introduction: What is omnichannel? Why is supply chain critical?
• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?
• Key trends in omnichannel and implications for future supply chains
Agenda
3
What is omnichannel? - allowing consumers to buy how they want, what they want and when they want it
Source: A.T. Kearney
TRANSACT
FOLLOWUP BROWSESTIMULUS
EVALUATE
Frictionless Consumer Journey
4
5
21
3
Digital stores and pop-ups
Curated, free home trials
One click buy on social media
Amazon dash button
Click & Collect
Locker Pickup
Time Definite Delivery
Real time promotions
Digital augmented dressing rooms
Mobile, alternative payment
Online dressing room
24/7 customer care
Endless aisle marketplace
Automated stores
Crowd sourced same day delivery
Chat-bots and shopping assistant
Smart device replenishment
4
Mixing Centers
Distribution Centers StoresPlant
Brands Retailers
Mixing Centers
Distribution Centers StoresPlant
Brand’s .com Distribution
Center
• Homes• Lockers
Last Mile (pick-from-store)
Last Mile
Last Mile (click and collect)
Line haul Line haul
Line haul
Line haulLine haul
Retailer owned or Brand owned
Retailer .com Distribution
Centers
eCommerce assets
eCommerce flows
• Mixed or full pallets
• Line haul trucks
•Full or layer case picking to pallet
•Pallets of products pushed to stores (and end customers)
•Unit or eaches picking to basket•Pick against consumer order•Can be located 750 mile to <50 mile of demand
•750 – <50 miles (depending on order lead time: 3 days vs. same day)
•Parcel express trucks if Next -3 days•Delivery vans, courier, drones if Same/Next day
Source: A.T. Kearney
Omnichannel supply chain is different than traditional retail
5
• Visibility at pallet level• Fewer, higher velocity SKUs
• Limited need for real-time integration and analytics
• Visibility at basket level• More, thin SKUs
• Real time Big Data analyticsand integration critical
Inventory Management
Front & Back-End Systems
ChallengeTraditional Brick &
Mortar Focus Omnichannel Focus
• Store location key• Less demand volatility
• Store+ warehouse key• More demand volatility
Network Footprint
• High volume cases• Replenish stores
• Low volume eaches units • Building consumer baskets
Warehouse Operations
Source: A.T. Kearney
Omnichannel supply chain is different than traditional retail
6
Supply chain and fulfillment is critical for omnichannel success
More Direct Impact on Consumer Experience
Missed cross-dock scheduling or delay in LTL replenishment = increased likelihood of shelf Out of Stock
Delayed online order fulfillment from warehouse fulfillment = 100% unhappy customer
Brick & Mortar
Omni-channel
More Impact on Profit
1 2 3
Source: A.T. Kearney; GfK FutureBuy
Higher Consumer Expectations
7
Amazon vs. Walmart: supply chain disruption accelerating
Source: Morgan Stanley; Bloomberg
Amazon Overtakes Walmart in Market Cap
Walmart: 25 years to reach $20B (USD)
Amazon: 14 years
Alibaba: 9 years
8
• Introduction: What is omnichannel? Why is supply chain critical?
• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?
• Key trends in omnichannel and implications for future supply chains
Agenda
9
Omnichannel supply chain must start with a clear segmented view of future consumer promise
Illustrative
Customer Promise Grocery FreshPersonal
Care/BeautyApparel Electronics
Home & Furniture
Delivery Speed: <2 Day Delivery Lead Time
Endless Aisle Assortment
Free Shipping Cost
Subscription/Auto refill
Product Recommendations
Product Sampling
M-checkout and text
Click & Collect
No Hassle Returns Any Channel
More ImportantLess Important
Trade-off bets are key ! …. why place bets at all? What about Amazon?
Source: A.T. Kearney
10
Category
…
Customer Promise
➢ Assortment
➢ Delivery Time
➢ Returns
➢ Replenishment Orders
➢ Order notification
➢ Personalization
Ensure Optimal Design
• Product Cube Profile
• Peak Profile
• SKU Count
Asset
• SKU Velocity
• SKU Productivity
Inventory
• Footprint / flow
• Capacity
• Eaches picking solution
• Technology/ CapEx
• Capital outlay
Supply Chain Requirements
• Throughput
• Delivery Speed
Network
Traditional B&M Retailer Define strategy Pilot Roll out
Omnichannel
Define (Many) Strategic Scenarios
Model (Should-cost,
benchmarking) Pilot
Sequenced Roll-Out
Customer promise drives optimal supply chain design …
and vice versa
Source: A.T. Kearney
11
Delivery Speed (in business days)
Same Day9 3568 2 17 4
Big & Bulky
Consumables& Baby
Toys
Electronics
Hardlines
Apparel and Beauty
Media
2 d
ays
de
live
ry
1-2
days
Sam
e-N
ex
t D
ay
3-5 days
Emerging “table stakes” in futureCurrent industry range
• Store picking • 15-20 .com
warehouses
• Store picking• 4-8 .com
warehouses
• 4-7 .com warehouses
• Leverage existing store (case picking) warehouses
Fulfillment Network Needs
Example: Delivery speed can impact DC asset and capital needs
Source: A.T. Kearney
12
… as well as supply chain footprint and flow
Customer Promise
Centralized Single Tier Network Multi-Tier Network
>3 Days Ground or Air 2 Day Ground Next day Ground
Large and/or high value SKUs; mostly slow
movers
Moderate SKUs; mostly fast movers
Large SKUs; combination of fast and slow movers
Critical Low-Moderate Moderate
Irregular Stable Highly Seasonal
LVDC
HVDC HVDC
HVDC
LVDC
High Velocity DC (Fulfillment Center)
Customers
Low Velocity DC
HVDC
Customers
Customers
SuppliersSuppliersSuppliers
Speed
Minimal Split Orders
Assortment
Illustrative
Stores / In-City Mini DCs / mobile trucks (moving DCs)
Volume Predictability
Source: A.T. Kearney
13
• Introduction: What is omnichannel? Why is supply chain critical?
• What is customer promise? Why is customer promise segmentation key for designing a winning supply chain?
• Key trends in omnichannel and implications for future supply chains
Agenda
14
Flexible Fulfillment Networks
Global trends shaping omnichannel fulfillment and supply chain
Rise of Marketplace
Strategic Bet in Same Day Delivery
Ambidextrous Role of Stores
Blurring of Manufacturer and Retailer Value Chain
Source: A.T. Kearney
Service‒ Assortment
‒ Service
‒ Convenience
Efficiency
Best
Today
Competitive Frontier Tomorrow
1
2
3
4
5
Digital Disruption
6
15
What is the traditional role of retailers vs. manufacturers? … increasingly blurring today
1
Source: A.T. Kearney
SellDistributeDesign Source Make Deliver
• New product specifications from demand
• Bundle products into end consumer batches
• Distribute batches to points of purchase or consumption
• Discovery and trials
• Offer vehicle for purchases
• Ensure order fulfillment
Retailers
Manufacturers
Brands aggressively expand Retail Footprint and DTC sales
• L’Occitane sells 9% online, with the channel experiencing 30%+ growth in 2015
• Significant retail footprint: L’Occitane, MAC, Benefit, Kiehl’s, Urban Decay, NYX owned stores, The Body Shop; Pure online subscription services e.g., Birchbox, looking to expand with retail presence as well
Leading Beauty Retailer Strong in Private Label
• ~360 self-standing stores + ~570 within JCP
• Sephora leader in beauty Ecommerce (22%+ sales online)
• Sephora private label assortment includes 700+ SKUs
• Launched new designer cosmetic collaboration within LVMH group with Marc Jacobs
16
Depth of OfferingLevel 1 Level 2 Level 3 Level 4 Level 5
Research
Shop
Service / Omni
• Online/mobile product search
• Side by side feature comparisons
• Online memberships
• High resolution specs/photos (3D)
• Product narration
• User feedbacks and reviews
• Smart recommend
• User communities
• Buy online for
direct delivery
• 1-click and/or
mobile-payment
• Store pick-up
• Global shipping
• Store fulfill with last
mile deliveryBuy / Fulfill
• Subscriptions
• Segmented assortment by channel
• Product sampling for VIP customers
• Online customization
• Retail location recommend
• Customized order management
• No hassle
returns
• One click live
customer service
• Omni-channel
integration
Source: A.T. Kearney
Manufacturers across sectors are pursuing forward integration
1
What drives the intensity of Manufacturer’s forward integration?
17
Supply Chain Implications
Strategy
Capabilities
For Manufacturers For Retailers
Manage Channel Conflict
Improve Collaboration
Better segmentation of products and SKUs to cost to serve (manuf. direct vs. direct ship vs. retailer)
Ensure touch points are aligned to maximize consumer journey with brand (Integrated flows by category/channel that drives win-win value)
Shared asset and capabilities (e.g. manufacturer’s E-store on retailer marketplace)
Joint inbound logistics optimization (e.g. factory to retailer DC direct, etc.)
Retailer showroom integrated with manufacturer fulfillment (direct ship)
Adopt manufacturer mindset and capabilities in private label:
• Product development and component sourcing
• Lifecycle management
• Should-costing, benchmarks
• Manufacturing and contract-manufacturing
Develop segmented supply chain for private label
• More sophisticated inventory deployment
• Managing more on-hand inventory
• Eaches / piece-picking based flows
Direct to consumer fulfillment and go-to-market strategies
• Eaches picking DC and fulfillment networks
• De-centralized, forward deployed inventory flows and management
• Fulfillment network integration with retailer store/web orders
• Store and pop-up store operations and systems
1
18
Birth of the Market Place
The concept of Market Places have been around since the “Classified Ads” in the Sunday paper
Digital Market Places have existed for over 20 years
On-line retailers quickly discovered the power of the Market Place led by Amazon and eBay
2
What exactly is an online marketplace?
19
Marketplace is now a key growth platform for omnichannel
Source: A.T. Kearney
2
The Top 3
• Marketplace growth as outpaced traditional e-Commerce growth
• Lower cost, lower risk way to sell to new market
• Endless aisle, long tail marketing
Alibaba• $11B USD in Single Day’s sales (Chinese equiv. of
Cyber Monday) in 2015 • On pace to surpass Walmart in gross merchant
value by 2017Amazon• Marketplace sales growing at twice the pace of
overall e-Commerce
Why would a Retailer build a Marketplace? Why would a Brand use one?
20
Supply Chain Implications
Strategy
• Marketplaces are key consideration in almost every e-commerce company
• Can be a significant compliment to standard e-commerce sales; used by many U.S. and European retailers to expand in emerging markets
• With lower lead-time expectations vis-à-vis new product assortment and pricing in Asia, marketplaces are a low risk alternative
‒ Rapidly becoming primary e-Commerce channel in China
• Great opportunity to introduce niche products and go after niche consumers
• Emerging market locations find marketplaces to be a low risk opportunity
Capabilities
• Channel risk management (quality, imitations, lead times are risk-points for consumers)
• Integrated cost and flow modeling logic (decide between: holding inventory, cross-docking orders, and direct flow)
• Technology integration with vendor OMS
• Technology and supply chain organizational DNA, not just traditional retailing
2
21
Retailer DC
Manufacturer DC
Retailer Store
Converted / Dark Store
Home or Office
Lockers
Store for
Pickup
Movement of goods from the last inventory point to the point of consumer
chosen access in 24 hours
Order to Delivery <24 hours
What is the Last Mile? Same Day Delivery?
3
Source: A.T. Kearney
22
Drivers for Same Day Penetration …
58%-64% of Millennials want
Same Day
61% consumers willing to pay for
Same Day convenience
Supply side innovation
transforms cost economics (e.g.
crowdsourcing)
Source: Trustve; Coldwell Banker; PWC
Same Day Delivery Market – US ($B)
Source: B.I. Intelligence
Same Day is still emerging … but rapidly growing
3
What are the challenges preventing mass adoption in the US?
23
Several Same Day supply chain models emerging
3
Retailer
Managed
3PL Managed
(Owned)
3PL Managed
(Crowdsource)
Marketplace
(Outsourced)
Marketplace
(Crowdsource)
Source: A.T. Kearney
Retail owned and operated
last mile assets and drivers
Outsourced to a 3PL who executes with owned assets
and drivers
Outsourced to a 3PL who fulfills using crowd-
sourced drivers
Retail sells through a marketplace, who
in turn manages last mile delivery via crowdsourced
drivers
Control and Shopper Visibility
Scale efficiency and access to enabling capabilities
Retail sells through a
marketplace, who in turn manages last mile delivery
using owned and/or 3PL assets
Higher Lower
Lower Higher
Which brand category likely to adopt which model?
24
3
Many are making strategic bets in Same Day
US
• Offered across 11 metro areas (~25% of population area)
• $5.99 (Prime); $10+ $.99/add’l item(non-Prime)
• 500K-1M SKUs
UK
• Same day click & collect
• Order before 11AM/ready by 4pm; order by 7:45pm/ready next 8-10AM
• Free (Prime); $BP 4.99 (non Prime)
• LeveragingConnectGroup news distributor partner (500+ stores / pick-up locations today)
US
• Offered across major US cities
• $5-6 (basket >$99); $15 (basket<$99)
• Order by noon-1pm (mon-sat)
China
• Same day delivery across 40+ cities
• Piloting 3 hour delivery in 6 major cities
• Owned network of 7 DCs, 97 warehouse and 715+ pick-up stations
• In-house real-time tracking and routing technology platform
Retailer Managed 3PL - Crowdsourced
Marketplace - Crowdsourced
US
• 6 US metro areas
• $95 annual subscription or $5/order (consumer) + commission from retailer
• Strategic value sharing / conflict beyond fulfillment (consumer intel)
Source: Financial Times; Guardian; Mintel; Amazon; RILA; AT Kearney
25
Supply Chain Implications
Strategy
Capabilities
• Define clear, fact based approach to activating Last Mile
‒ Establish understanding into “should-cost” / “should-impact” drivers (e.g. cost drivers for crowdsource model, trigger point managing Uber like courier risks, etc.)
‒ Define clear inflection points between investing internal Same Day vs. 3PL managed vs. crowdsourced models (e.g. value of absolute performance vs. differentiation? First mover or Fast follow?)
• In-market product availability – ensure upstream supply chain footprint and systems can supportinventory replenishment processes and one-pool inventory visibility
• Ensure Same Day requirements linked to omnichannel consumer promise and broader supply chain strategy at the category level
• Determine which categories are candidates for same day delivery: (grocery, mobile devices, specialty products, high margin products)
• Pilot and experiment with different Same Day models, do not dismiss models pre-maturely
• Determine the reason for Same Day: drive sales, competitor requirements, marketing play/ excitement
3
26
Building a flexible network with dynamic flows will be key for competitive performance
Store DCs
combo DCs
Store
Customer
Suppliers
Inter-store “hot run” replenish
High velocity DC
Slow mover replenish
Store
DSV (direct ship vendor)
Right Mix of Flows Needed for Differentiated
Performance
SC Cost Service Variety
INV Cost
A
B
C
D
E
E
B
C
✓✓
✓ ✓
✓ ✓
✓
X-dock
D
Store-to-DC recirculate
✓ ✓
Nimble Connected Network
Same / Next day
2-Next Day
Store Fulfillment (Deliver or Collect)
A
Non-traditional supply chain flows ✓Enable best possible
Inbound Consolidate
Inbound
4
Source: A.T. Kearney
27
Lead Time
Pick/Pack
Cost
.com
Volume
Assortment
(Capacity)
Store or Mini-
Hub Picking
Store
Converted
Warehouse
High Velocity
Eaches
Warehouse
Low Velocity
Eaches
Warehouse
Same/Next Day Same/Next Day Next – 2 Day 2 – 3 Days
Low
(2-5K SKUs)
Low
(5-10K SKUs)
Medium-High
(15-50K SKUs)
High
(50-200K SKUs)
Med-High
($1-2/unit)
Low-Med
($1-2/unit)
Low
($0.4-1/unit US)
Med
($0.4-1.3/unit US)
<1MM units/year <5MM units/year >5 MM units / year >5 MM units/year
Nature of “In-Scope”
Demand
Fulfillment center design and solutions are also rapidly evolving
Low Low Med-High CapEx Med-High
4
Source: A.T. Kearney
28
Leveraging partners is also critical for flexibility and learning
3PLs and supplier direct ship as part of overall fulfillment
VOLUME >25K orders/day 1-25K orders/day <0.5K orders/day
PEAKLow Seasonal
peak
Moderate
Seasonality Highly Seasonable
SKU TYPEFast Moving
SKUs
Fast + Medium
Moving SKUsLong Tail SKUs
EXPERIENCE
Extensive In-
House
Fulfillment
Experience
Developing In-
House ExperienceNew Category
AFFINITYHigh x-Category
Affinity
Medium x-Category
Affinity
Low x-Category
Affinity
In-House Operations 3PL Partnership Supplier Direct Ship
• Optimize cost vs.
service
• Minimize over-
investment
• Invest with demand,
not ahead of it
• Grow and
experiment long tail
assortments
• Disciplined learning
IllustrativeCategory Profile
4
Source: A.T. Kearney
Owned Shared On-Demand
?
Outsourced
29
Supply Chain Implications
Strategy
Capabilities
LogisticsTechnology Organization
• Priority
– Geographic inventory planning
– Store to store transportation
– Distributed order management
• Future
– Inbound freight optimization
– Dynamic order sourcing
– 3rd party logistics integration
• Priority
– Centralized (PMO) for supply chain decision making
– Integrated, customer-centric performance metrics
• Future
– Omnichannel culture
– New employee capabilities
• Priority
– Real time inventory visibility “one pool”
– POS (demand signal) integration with OM, Replenishment
– Visible and accurate cost to serve
– Dynamic channel decisions (direct vs. 3PL vs. DSV)
• Future
– Common item file
– Local delivery TMS
DC Fulfillment
• Priority
– Right level of automated material handling (voice, pick to light, Goods to Man)
– WMS with flexible batch and wave picks
– Conveyance for multiple flows (reverse, x-dock, expedited)
• Future Capabilities
– Product customization and personalization
Iterative Design
Rapid Analytics
• Faster modeling and more predictive analytics
– Collaboration with Merchandising, Finance, Sales on key modeling assumption and inputs
– Embed “what-if” simulation capabilities
– Embed predictive analytics (forecasting, replenishment)
• Iterative refresh of supply chain design and strategy as part of annual planning cycle
– Compress planning cycle (next generation supply chain is next 1-2 years)
– Feedback and update from field experiments and pilots
4
30
Future stores will be ambidextrous, combining the right mix of Consumer Experience and Local Fulfillment
Consumer Experience Local Fulfillment
Product TrialAllow shoppers to touch and feel products
Treasure HuntIncubate exclusive or little known brands
exclusively
MerchantainmentProvide an exciting environment to
engage consumers in-store
Relationship ManagementEnhanced level of personalized service
Click and Collect (In-Store / Drive-Thru)
Pick, Pack and Ship (Same Day)
Inter-Network Transfers
Returns
Getting the right balance will be key for retailers
5
Source: A.T. Kearney
31
Supply chain implication: select the right store footprint and capacity
Pick the right stores and fulfillment solution to optimize cost and minimize in-store disruptions …
… while ensuring the necessary assortment and lead time promise
• Model Output Opens
22 stores…
• Of which 5 are in the
NextDayZone for Sally
x• Only 3 (66%) of the
Stores near Sally have
the SKU (mirroring)
Sally’s Order is
comprised completely
of SKUs that are both
“Online / Store
SKUs”
“Sally”Products A+B
x
12
3
4 • Each Store has 55%
chance of having INV…
60% X 92%=
55%
• But three stores have
a 91% chance
5
6
1-(1-55%)^3=
91%
91% chance
the unit will
be fulfilled
and
delivered
Next Day
Illustrative• Define the right
customer service level needs :
‒Store vs. com SKU overlap
‒# of stores needed to meet service level coverage
• Pick the right stores (proximity to demand vs. in-store disruption)
• Select right op-model
‒ Labor processes
‒ Pick/pack solution
Store eligibility:
• Location, proximity to .com demand
• Minimum sq. ft.
• In-store traffic/sales threshold
In-store fulfillment model:
• Pick from shelf vs. back-room converted DC
• Cart vs. automation
• Store WMS capabilities
• In store-labor inventory handling, pick/pack approach
5
Source: A.T. Kearney
How many stores are needed to ensure Next Day delivery?
32
Supply chain implication: ensure seamless inventory and order management
Product A Product B Product C
SKU Type Store+Online SKU Store+Online SKU Store-Only SKU
Inventory “Watermark” 10 Units 10 Units
NAQuantity-On-Hand 15 Units 5 Units
QOH >= Watermark? Yes No
Required
“Watermark
Inventory”
Quantity on
Hand
• Ensuring appropriate on-hand (Watermark) reserved for in-store customers only• Defining the optimal
INV level to meet both in-store and .com demand needs
Store Alpha
Store Beta
• Clear segmentation of in-store only vs. store/.com SKUs based on local demand
Getting the above right will be key for delivering the right service at the right cost
Illustration – Defining the right store level inventory to fulfill in-store and .com orders
• Ensure real time visibility to drop order to right store (e.g Store Beta does not have sufficient on-hand, drop to Store Alpha instead)
• Key system enablers: real-time common inventory pool; cross-channel forecasting & allocation
5
Source: A.T. Kearney
33
Thank you
Michael Hu
www.linkedin.com/in/mhuspace
@mhu_snowcrash
34
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