The consumer product and retail landscape continues to evolve as companies race to catch up with leading e-tailers. Traditional brick-and-mortar retailers such as Macy’s, Nordstrom, and Walmart are expanding their online offerings and introducing new models, including in-store fulfillment of online orders. Online players such as Amazon and Zalando are opening their own brick-and-mortar stores. Vertically integrated players such as Bose, Burberry, and Nike1 are strongly pushing their direct-to-consumer business through both online and new physical stores. And players of all kinds are complementing their physical stores and e-commerce offerings with innovative applications and social media to mount a truly omnichannel presence.
With all the difficulties and uncertainties that the COVID-19 pandemic has brought for retailers and consumer product companies, the crisis has also accelerated a preexisting trend toward omnichannel. Online sales have increased significantly across many product categories, and many consumers have tried out new shopping behaviors since the onset of the pandemic.2 For example, more than one-third of Americans have made omnichannel behaviors—such as buying online for in-store pickup—part of their regular shopping routine, and nearly two-thirds of those individuals plan to continue these behaviors. While some proportion of the online sales boost may be temporary in some categories, online sales will continue to grow in others. Even as shops start to reopen, omnichannel will remain the norm for some product categories.3 This new normal has already had significant benefits for those who were prepared and could quickly ramp up their online volumes.4
However, many players still struggle with omnichannel given its supply chain requirements, particularly in terms of speed, complexity, and efficiency. Consumers expect to be able to receive their products anytime and anywhere—and with a minimal lag between order and delivery, as well as with a high level of convenience. Traditional supply chain networks are often not built for same-day delivery with excellent service. This is an issue in this era of fierce competition; Amazon continually redefines delivery standards, for example.
Companies that can rise to these challenges, however, are already reaping significant benefits: our research shows that consumer experience leaders are more resilient during recessionary periods, experiencing shallower troughs and quicker recoveries.5
In this article, we focus on the network and ecosystem of the future, and describe the principles that can guide companies’ approaches to omnichannel network design in an increasingly complex environment.
Traditional supply chain networks are often not built for same-day delivery with excellent service.
The current e-commerce landscape
While apparel trails industries such as electronics and sporting goods in e-commerce penetration, the number of people shopping for clothes and shoes online has risen in response to the pandemic. This shift to online is true across regions. From 2018 to 2020, for example, online apparel purchases grew at a CAGR of 31 percent in Eastern Europe and 15 percent in Southern and Western Europe. In the United States, online apparel sales grew 13.5 percent in 2020, while the total apparel market actually declined by 23.0 percent. Online sales in 2020, therefore, made up more than one-third of all apparel sales.6 In China, total online retail spending grew 18.5 percent in 2020, with 27.3 percent of retail sales taking place online.7
Companies of all kinds, not only in apparel, are racing to meet consumer needs. This includes, as we have already seen, paying close attention to their existing supply chains. In particular, e-commerce fulfillment is much more complex than traditional brick-and-mortar or wholesaler fulfillment. When consumers can order 24/7, demand is less predictable and more difficult to shape. Order sizes are significantly lower, and the number of products offered continuously rises.
The increase in speed and complexity drives up fulfillment costs. In our experience, an online order’s cost per unit can easily be four to five times higher than traditional brick-and-mortar replenishment order and ten times higher than fulfillment of an order to wholesaler DC. All the while, consumers demand a seamless omnichannel journey.
Building out the omnichannel experience can result in huge value for retailers, e-tailers, and vertically integrated players with direct-to-consumer business; our research has found that consumers shopping online tend to buy more, and consumers who pick up online orders in stores often make additional in-store purchases.8 With the seven building blocks of a successful omnichannel supply chain in mind, the following principles should be top of mind while working to build the network and ecosystem of the future.
Put the customer’s needs first
To start, companies need to adopt a granular perspective on what the consumer really wants, today and in the future. This understanding will inform which channels to serve, which products and services to offer, and where to offer them. For example, a young adult living in a large city, such as London or New York, wants to purchase and receive a newly launched sneaker that a celebrity presented on Instagram that same day. However, the consumer does not know where she will be in a few hours, so it is important that she can track the delivery and reroute it at any time. If, for example, she goes to a café, the shoes are rerouted (via an app) to be delivered there.
Developing this detailed understanding of consumers requires harnessing consumer data. This information should be combined with consumer-behavior insights culled from consumer interviews, observations, and the latest research from market experts, as well as analyses of competitors’ e-commerce offerings. Advanced analytics can be used to process all this information and gain a clear understanding of consumer expectations.
In addition to understanding the consumer today, companies must also look to the future and stay flexible as the market rapidly changes. For example, while next-day service was novel just a few years ago, it is common today. How future incumbents and disrupters will shape the market is still unknown. As such, serving the consumer of the future requires unprecedented agility and the ability to quickly adapt to changing consumer expectations.
Forget one size fits all
A deep understanding of consumer desires should be the foundation of defining the strategy and building various consumer segments based on preferences, product categories, and locations.9 This segmentation recognizes that a one-size-fits-all approach is a waste of resources. A segmented approach enables the company to prioritize specific services for each consumer group—for example, which speed of delivery to offer for each segment and which differentiated services to offer or not. While the London consumer may expect same-hour service, consumers living in remote areas might not mind waiting a few days. Developing this understanding to undergird the strategy is crucial to avoid common mistakes, such as offering convenience at a premium to consumers who care more about price, or defining offerings that quickly become outdated.10
Be fast and collaborative
In the traditional supply chain model, companies often choose a purely quantitative approach to model the perfect fulfillment network needed for the service offering. This generally involves a rather rigid and time-consuming approach: three months of data collection, six months of modeling, and three months of decision making before implementation. This traditional approach leads to a onetime strategy and long implementation times. However, in an ever-volatile environment with constantly changing consumer needs, evolving partnerships, and newly developing competition, reacting quickly is critical to ensure that the supply chain network is responsive, flexible, and efficient.
Therefore, companies should remain agile in their thinking and assemble a cross-functional team. One best practice is to develop the future supply chain network in a workshop-based environment. In practice, this means determining the fulfillment options suitable for each consumer, product, and location segment and defining the required product flow. Starting with the segment that has the most demanding lead time, the best fulfillment option needs to be found for each segment while considering operational needs, such as costs to serve and volume constraints. Once a solution for each segment in each location is defined, it must all be combined into one comprehensive service network.
Seek partnerships and share resources
In an ever-volatile environment, speed of implementation and efficient use of resources are crucial. Therefore, it is necessary to take advantage of existing infrastructure, such as warehouses and retail stores, as well as resources available in the market. Leading companies are actively seeking partnerships, not only along their own value chain but also with players from other industries. Sharing infrastructure brings synergies—costs and risk are split, for example—and enables better consumer service and faster delivery times. For instance, a player operating department stores may offer in-store pickup services to e-commerce companies, and e-commerce companies can offer online order fulfillment to department stores. The partners would establish commercial terms for compensation, such as sharing the margin. Connected inventory is another example of using existing partner resources, enabling players to offer products that are already close to the consumer rather than putting additional inventory into the market. This can increase the availability of certain products with minimal effort from the retailer.
Rising consumer expectations for faster delivery have triggered the development of more innovative fulfillment options.
Look for innovative fulfillment options
When identifying existing assets within a company and its partners’ networks, it is important to consider innovative fulfillment options. The types of fulfillment options a player regards as suitable depend on the specificities of the market and the company, but consumer orders can be fulfilled in a variety of ways. Shipping products from a warehouse or distribution center is the most traditional and cost-efficient way. Warehouses typically have a higher level of automation, handle significant volumes, and seek locations that incur low operating costs, such as rural areas or industrial areas outside of large cities.
However, rising consumer expectations for faster delivery have triggered the development of more innovative fulfillment options. Thus, one should consider that products can also be shipped directly from the production facility or from “dark stores”—miniwarehouses that are not consumer facing, usually within a city, where products are stored, picked, and shipped directly to consumers. Pop-up nodes are another option; for example, a container placed at a major sports event—or a truck, van, or bike driving around a city, holding inventory and delivering products to consumers who order via an app. Products could also be manufactured right where the consumer is—for example, with 3-D printing techniques. The main advantage of these fulfillment options is proximity to the consumer; however, operations are less efficient and more costly, and they require additional capabilities. Indeed, retailers have several elements to weigh when considering the variety of fulfillment options available to them (exhibit).
Regardless of how the omnichannel distribution network looks, it is important to stay flexible and adjust to any road-map changes.
Think early about new capabilities and never stop learning
To enable the identified solutions, companies must carefully consider the new capabilities required to run their future networks and understand how to build them. Those capabilities include physical flow—ranging from operating new node types, such as dark stores and pop-up nodes, to managing new transport flows and partners, such as last-mile services. Information-flow capabilities—such as planning demand and inventory, stock visibility in the decentral node network, and distributed order management—should also be implemented.11 For example, a new fulfillment solution such as shipping from a dark store requires new operational processes and systems to run a small-scale node efficiently and an agile and efficient structure that supplies it with small quantities at a high frequency. In addition, the planning landscape needed to have the right inventory in the dark store requires new capabilities, such as demand sensing, dynamic supply allocation, and capacity planning at each location. Finally, the dark store requires real-time and accurate inventory visibility, combined with a distributed order-management system that makes the stock available and accessible.
This connected fulfillment network should be deployed along an agile road map to enable quick testing and learning of different node types that include capabilities in various locations, rather than the traditional approach that initiates only when all node types and capabilities are fully developed. Building these required capabilities should also be planned in modular sequence. Regardless of how the omnichannel distribution network looks, it is important to stay flexible and adjust to any roadmap changes, such as an increase in consumer requirements or new logistics service offerings—for example, delivery solutions for fast last-mile delivery. Testing, learning, and adjusting quickly should be the credo. (For two examples of retailers that found success in building a network and ecosystem of the future, see sidebar, “Case studies: Two global brands find omnichannel success.”)
Enabling a truly end-to-end omnichannel experience requires a new way of thinking about the supply chain. The supply chain needs to be readjusted based on changing market conditions, and players should pursue an agile approach that enables them to adjust quickly to changing trends, options, and consumer expectations. These principles can help determine the approach to building the network and ecosystem of the future.