Beating the Burden of Brick and Mortar Success for Breakthrough Omni-Channel Fulfillment

Fulfillment is a critical enabler of a differentiated multi-channel strategy

What consumers want – the winning promise

Fulfillment Enablers

Seamless Experience

• Eaches picking efficiency

• Last mile efficiency

• Managing peak

• Same/next day delivery

• Time definite delivery

• Minimized splits

• Flexible returns

• Flexibility to changing mix

• Channel decision

• One-view inventory

• Real-time demand management

Many fulfillment solutions emerging … but breakthrough performance remains challenging

Elements of Fulfillment – Which is the Right Mix?

Goods to Man Picking

Last Mile Delivery

KIVA AS/RS

Automated Picking

“Eaches” Picking within Asset

• Random Put-Away

• Wave & Batch Picking

WMS

Network / Asset Type

3

Footprint and Flow

Fulfillment Assets

Lockers Store DCs

Network Drop ship

Managed inbound

Home Delivery

Store Pick-Up

Drive-through Click & Collect

Crowd source

Leading brick & mortar retailers must overcome several challenges to unlock full potential performance

• Visibility at pallet level • Fewer, higher velocity

SKUs

• Limited need for real-time integration

• Visibility at basket level • More, thin SKUs

• Integration critical

Inventory Management

Front & Back-End Systems

Challenge Traditional Brick &

Mortar Focus Multichannel 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

Eaches Picking

3 guiding principles for breakthrough fulfillment

• 2-3X service improvement

• >25% fulfillment cost efficiency

• Unlock category growth

• Reduce risk of throw-away investment

5

Design a fit-for-purpose solution

Define shared incentive to mobilize the organization

Balance near-term IT solutions with end-state design

3

1

2

Clean-sheet design anchored on consumer promise

Build for flexibility

1.1

1.2

Fo

cu

s T

od

ay

Note: range reflect observed average of larger retailers

Observed Performance Impact

Fulfillment must start with a clear segmented view of future consumer promise

Consumer Expectations Illustrative

Grocery Fresh Personal

Care/Beauty Apparel Electronics

Home & Furniture

<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

eC

om

me

rce

Ch

an

ne

l S

tore

Ch

an

ne

l

1.1

More Important Less Important

Trade-offs are key: where will you place strategic bets to truly differentiate?

Example: Consumer promise of fast delivery speed can impact your network footprint and asset needs

Delivery Speed (in business days)(1)

Same Day 9 3 5 6 8 2 1 7 4

Big & Bulky

Consumables& Baby

Toys

Electronics

Hardlines

Apparel

Media 2

da

ys

de

live

ry

1-2

da

ys

Sam

e-N

ex

t D

ay

3-5 days

Emerging “table stakes” in future Current industry range

Retailer A

Retailer A

Retailer A

Retailer A

Retailer A

Retailer A

Retailer A

Retailer B

Retailer B

Retailer B

Retailer B

Retailer C

Retailer C

Retailer C

Retailer C

Retailer C

Retailer C

1.1

• Store fulfillment

• 15-20 New DCs

• Store fulfillment

• 7-10 new DCs

• “Sweat” store network assets

• Some new DCs

The “solve” grows complex as you design against the multiple “consumer promise” bets you have placed

Rigorous mapping of customer promise to clean-sheet

supply chain requirements is critical

1.1

Category

…

Clear Customer Promise by Category …

Demand Profile

Seasonality

Delivery Time

Assortment Depth / Breadth

Returns

Ensure Optimal Design

• Product Cube Profile

• Peak Profile

• SKU Count

Asset

• SKU Velocity

• SKU Cycle

• Reverse Logistics

Inventory

• Footprint and flow

• Sizing, capacity

• Eaches picking solution

• Technology/ CapEx

• Roll-out Sequencing

… Inform Clean-Sheet Fulfillment

Requirements

• Item volume

• SLA Profile

Network

Category Bottoms-Up Clean-Sheet Mapping

Your future customer promise requirements will drive optimal network and flow strategy …

Nature of Demand

More Centralized Facility Single Tier Network Multi-Tier Network

>3 Days Ground or Air 2 Day Ground Next day Ground

Mostly Long Tail Mostly Fast Movers

(90/10) 70/30

Critical Low-Moderate Moderate

Irregular Stable Highly Seasonal

FC FC FC

HVFC

LVFC

High Velocity FC (Fulfillment Center)

Customers

Low Velocity FC

HVFC

Customers

Customers

Suppliers Suppliers Suppliers

Lead Time

Minimal Split Orders

Assortment (SKU profile)

Seasonality

1.1

Illustrative

9

Stores/Lockers

Volume Predictability

… as well as your assets and technology configuration

Lead Time

Fulfillment Cost Req.

Volume

Assortment

Store / Locker

Store

Converted

Warehouse

High Velocity

Eaches Facility

Low Velocity

Eaches Facility

Same/Next Day Same/Next Day Next – 2 Day 2 – 3 Days

Medium Low Medium-High Very High

Med-High Low-Med Low Med

<1MM units/year <5MM units/year >5 MM units / year >5 MM units/year

Nature of Demand

Build for Flexibility to manage inherent uncertainty in

future market

The only constant is change

• Consumer expectations changing

• Commercial plan constant flux:

Geo-Demand

Product mix

SKU breadth

SKU profile

Build for Flexibility

Network/Footprint Design

Smart In vs. Outsource

Identify and focus on the “invariant” portion of solution

Leverage partnerships and 3PLs as a flexible asset

Systems Design

Apply advanced systems architecture design that provide reusable components

1.2

11

Focus on the “invariant” aspect of future strategic scenarios when building out a solution

Geo-Demand

Fuel Cost

Category SLAs

Picking vs. Ship Cost

Future Commercial / Market Scenarios

• Metro/East Coast

• $4/Gal Diesel

• Avg. 2 Day Lead Time Req.

• East/West Balance

• $2/Gal Diesel

• Avg. 3 Day Lead Time Req.

• Larger Rural Impact

• $4/Gal Diesel

• Next Day moving to Same Day

Focus on the “invariant” portion of future solution to maximize flexibility

Optimal Solutions (Future Solution Sets)

• Warehouse pick cost ~ TPT cost

• Warehouse pick cost ~ TPT cost

• Warehouse pick cost >> TPT cost

Potential Future Scenarios

Illustrative

1.2

Leverage partnerships and 3PLs as flexible channels

and assets

1.2

Nature of Category Demand Inform In-House vs. Outsourced Option

>25K orders/day 1-25K orders/day <0.5K orders/day

Low Seasonal peak Moderate Seasonality Highly Seasonable

Fast Moving SKUs Fast + Medium

Moving SKUs Long Tail SKUs

Extensive In-House

Experience

Developing In-House

Experience New Category

High x-Category

Affinity

Medium x-Category

Affinity

Low x-Category

Affinity

In-House Operations 3PL Outsourced Supplier Direct Ship

Volume

Peak

SKU Type

Exp.

Affinity

• Optimize cost vs. service

• Minimize over-investment

• Invest with demand, not ahead of it

• Disciplined learning and capability build

Define shared incentives to drive integrated actions

and behaviors

Shared Incentive

Operational Performance Financial Incentives Continuous

Improvement

• Compensation bonus tied to cross-functional financial targets

• Balanced financial targets

Revenue and profit

Incorporate “leading” KPIs

• Leading KPIs to enable growth and lowest possible cost

Inventory turn

Net SKU productivity across channels

• Transform store KPIs to drive integrated-channel experience:

Track incremental store sales from click and collect

• Track and compensate for continuous improvements

Inventory turn

Cost per Unit

etc.

• Track and compensate 360 learning/info sharing behaviors

Emerging best practice

14

2

Fulfillment guiding principles much more difficult to get

right and more mission critical vs. traditional channel

Why Its More Difficult vs. B&M

1. Stores and warehouse need to be ambidextrous in design and capabilities

2. Increased seasonal peak (8-12X ratio not uncommon)

3. 2-10X more assortment (2-10X)

4. Thinner SKUs - harder to forecast demand

5. Enabling IT/system and capability gaps: More back-end More front-end More integration

Why Its More Mission Critical

1. Direct and immediate brand impact

2. More impact on operating-profit

Missed B&M cross-dock = small likelihood of shelf OOS

Missed .com order fulfillment = 100% unhappy customer

Self diagnostic – is your fulfillment ready?

More Prepared = 5 Less Prepared =1

Calculate Your Score:

• Leading: 30-35:

• Learning: 20-30

• Lagging: Under 20

Fit-for-Purpose Design

Systems Enablement

Demand Planning

Inventory Management

Organization Design

Network and Asset Design

Front and back-end integration

Customer Analytics

Integrated Planning

Historic sales driven

Ad-hoc CRM solutions

Forecast at category level based on historic . sales

Push based replenishment

SKU level integrating historic and predictive analytics across channels

Pull based replenishment across channels

CRM and Social Network signals inform planning

Built and grew out of store network

Lack of segmented network design

Ad-hoc use of 3rd party 3PLs

Design based on future consumer needs

Segmented roles for assets

Rigorous Make vs. 3PL vs. drop-ship logic

Limited .com only KPIs / incentives

Money tied to P&L profit

.com incentives shared x-functions

Money tied to profit, growth and y-o-y .com operational targets

Technology saviness

Common item file

One-inventory view

Best in class front-end (Big Data, search algorithm) and backend (operations research) capabilities

Lack common item file

Lack one-inventory view

Limited strength in Search, Network Optimization, Big Data analytics

A.T. Kearney is a global team of forward-thinking, collaborative partners that delivers immediate, meaningful results and long-

term transformative advantage to clients.

Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading organizations across all major

industries and sectors. A.T. Kearney’s offices are located in major business centers in 39 countries.

Raj Kumar raj.kumar@atkearney.com

Contacts

Sumit Chandra sumit.chandra@atkearney.com

Michael Hu michael.hu@atkearney.com