Supply chain of the future: Key principles in building an omnichannel distribution network

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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, such as 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 Nike 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.

However, many players still struggle with omnichannel success given the requirements it places on their supply chains—especially in terms of speed, complexity, and efficiency. Customers expect to receive their products anytime and anywhere with a very short time between order and delivery, with excellent service and high convenience. Our research shows that service represents the primary factor that brands and retailers can use to differentiate themselves and “delight” omnichannel shoppers.

Companies that succeed, in our experience, master seven key building blocks of the omnichannel supply chain (see sidebar “The seven supply chain building blocks for omnichannel excellence”). In this article, we focus on building block number two, the network and ecosystem of the future, and describe the principles that can guide companies’ approach to omnichannel network design in an increasingly complex environment.

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 is rising rapidly. This trend is true across regions. From 2014 to 2017, online apparel purchases grew at a CAGR of 24, 15, and 14 percent in Southern Europe, North and Western Europe, and Central Europe, respectively. In the United States, online apparel sales grew 18.5 percent in 2018 alone, to more than one-third of all apparel sales that year.1 This growth far outpaced total apparel sales growth of 5.3 percent that same year. In China, total online retail spending grew 27 percent in 2018, with 24 percent of retail sales taking place online.2

Companies of all kinds, not only in apparel, are racing to meet customer needs—and adapting their supply chain is often one of the primary hurdles. Traditional supply chain networks are often not built for same-day delivery with excellent service. This is an issue especially when fierce competition offers shorter delivery times with a great customer experience; for example, Amazon continuously redefines delivery standards.

Traditional supply chain networks are often not built for same-day delivery with excellent service.

In addition, e-commerce fulfillment is much more complex than traditional brick-and-mortar or wholesaler fulfillment. When customers 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 and ten times higher than wholesale fulfillment. All the while, customers demand a seamless omnichannel journey.

Building out the omnichannel experience can bring huge value for retailers, e-tailers, and vertically integrated players with direct-to-consumer business; our research has found that customers shopping online tend to buy more, and customers that pick up online orders in store often make additional in-store purchases.3 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 of what the customer 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 City, wants to purchase and receive a newly launched sneaker that a celebrity presented on Instagram that same day. However, the customer 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 customers requires harnessing customer data. This information should be combined with customer-behavior insights culled from customer 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 customer expectations.

In an ever-volatile environment, speed of implementation and efficient use of resources are crucial.

In addition to understanding the customer 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 customer of the future requires unprecedented agility—quickly adapting to changing customer expectations.

Forget one size fits all

A deep understanding of customer desires should be the foundation of defining the strategy and building various customer segments based on preferences, product categories, and locations.4Building omnichannel excellence,” April 2017. 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 customer group—for example, which speed of delivery to offer for each segment and which differentiated services to offer or not. While the London customer may expect same-hour service, customers 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 customers that care more about price or building offerings that quickly become outdated.

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 customer needs, evolving partnerships, and newly developing competition, reacting quickly is critical to ensure that the supply chain network is responsive, flexible, and efficient.

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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 customer, product, and location segment and defining the required product flow. Starting with the segment that has the most demanding lead time, the best fulfilment 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 customer 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.5Better service with connected inventory.”

Look for innovative fulfillment options

When identifying existing assets within a company and their 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 customer 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.

A transformation in store

A transformation in store

However, rising customer 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 dark stores—noncustomer-facing miniwarehouses 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 customers who order via an app. Products could also be manufactured right where the customer is with, for example, 3-D printing techniques. The main advantage of these fulfillment options is proximity to the customer; 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).

It is crucial to consider all elements when weighing fulfillment options.

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 network 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 (see sidebar “The seven supply chain building blocks for omnichannel excellence”). 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 road map changes, such as an increase in customer 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 an example of a retailer that found success in building a network and ecosystem of the future, see sidebar “Case study: A global brand’s omnichannel success.”

Enabling a truly end-to-end omnichannel experience requires a new way of supply chain thinking. 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 customer expectations. These principles can help determine the approach to building the network and ecosystem of the future.

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