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Impact of Macro Trends on Supply Chains: Diversification of Sales Channels

Impact of Macro Trends on Supply Chains: Diversification of Sales Channels

By Ccaplice, January 16, 2014  Supplychainmit.com

Hard sell. The rapid adoption of omni-channel retailing at Macy's underlines both the changing face if retailing and the supply chain challenges.

Hard sell. The rapid adoption of omni-channel retailing by outlets such as Macy’s underlines both the changing face of the business and the strategy’s supply chain challenges.

Dr. Chris Caplice is MIT CTL’s Executive Director and he can be contacted at: caplice@mit.edu

Will the splintering of sales channels redefine supply chains in the United States?

In my last blog post Impact of Macro-Trends on Supply Chains: Densification, I looked at the process of reducing product size (volume or weight) while maintaining or increasing its value, and the implications for distribution. This second post in a four-part series on broad trends that could transform supply chains considers the effects of sales channel fragmentation.

E-commerce was launched and came to fruition in the mid to late 1990’s and has enjoyed tremendous growth since then. Over the past 10 years, online sales have grown by a factor of eight while overall retail has grown by just 50% over the same time period. Existing retailers took more time to add a new online channel. Walmart, for example, did not open Walmart.com until 2000 and it took several years (and flirtations with various partners) to make it successful. Even then, most brick and mortar retailers tended to treat their online subsidiary as a separate line of business.

Over the last few years, however, the line between pure internet and traditional retailing is blurring. At the 2013 MIT Center for Transportation & Logistics Annual Crossroads conference*, UPS’s Randy Strang described this evolution from single-channel (traditional brick & mortar) to multi-channel (siloed operations) to cross-channel (where some integration of inventory occurs) and finally to omni-channel (where the consumer experience is a blend of all channels). He noted that retailers need to take a crawl-walk- run-sprint approach to building omni-channel capabilities.

There is so much noise in this space that “omni-channel” might be the most over-used buzz word since RFID in the early 2000’s. Perhaps the term “big data” is its only real competition nowadays!

So what does omni-channel really mean? Well, first it helps to break down the retail experience into four fundamental steps: search, order, pay, and receive. Different people will break down the experience into more detailed components, but these four suffice. In traditional bricks and mortar stores, all four of these activities occur at the store location. For pure internet purchasing, the searching, ordering, and payment steps typically occur on line with the delivery being made at home.

Omni-channel retailing simply adds more options for the consumer. For example, Williams-Sonoma’s “Shop In Store, Ship to Home” program allows shoppers to place an in-store order that is then shipped to their home location for free. They market this as “no bags and no hassle.” That is: search, order, and pay at the store and receive at the home location.

At the other extreme is Walmart.com where more than half of the purchases made online are picked up at local stores where the payment can be made in cash. That is: search and order on line, pay and receive at store. Home Depot reports that almost 25% of its in-store shoppers have conducted some sort of search for products at Homedepot.com prior to purchasing and receiving at the store.

New mobile capabilities are adding even more options for consumers. Take, for example, the relatively recent “showrooming” phenomenon. This is where shoppers with mobile phones visit stores to conduct hands-on searching but use their phone to scan the product and order it from an Internet retailer for home delivery. That is: search at store, order and pay on mobile smartphone, and receive at home. And the use of mobile devices to make purchases is increasing dramatically. For example, one quarter of Staples online traffic currently comes from mobile sources and they expect this hit 50% soon.

Retailers are experimenting with different strategies and approaches. Macy’s can fulfill online orders from about 300 of its stores and hopes to increase this number to 500. What is amazing is that just over a year ago they could only ship from just under two dozen stores. The inventory in the stores is now fair game for fulfillment within other channels.

This store-based model raises some interesting new challenges in determining where to pull inventory. While fulfillment from the closest inventory stocking point seems to make sense, for fashion retailers it is often better to pay more in transportation costs and ship from those stores that are selling that item more slowly. The approach avoids severe mark downs on the items which tend to dwarf the higher transportation costs.

This is not the only challenge with omni-channel retailing. In this model it is difficult to assign inventory to any one channel, for instance. This makes accounting somewhat difficult. Also, retail sales associates are not trained to perform pick, pack, and ship operations that are more suited to distribution center workers. Then there is the question of compensation. Who gets credit for an omni-channel sale?

Omni-channel retailing is gaining ground and is becoming standard practice in the retailing business. Just as e-commerce is just becoming “commerce” so is omni-channel retailing now becoming “retailing.”

But will this diversification of channels disrupt the dominant design of distribution? While it does not appear to change the entry point of product into the country, it could have dramatic impacts on the last echelons of distribution. The retail store has become a potential DC and the DC a potential final delivery point.

This shift and the continued fragmentation of sales channels requires retailers to rethink the way they distribute product, and could dramatically change the dominant, multi-tiered echelon system that has defined distribution for many years.

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