boozco the mandate for multichannel retail

8/13/2019 BoozCo the Mandate for Multichannel Retail

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Perspective

Rich KauffeldHenning



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Retail Evaluating S u ppl yChain M od el s



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EXECUTIVE

SUMMARY

(etailing has entered a ne$ age in $hich consumers are

demanding and e)pecting all store o$ners to offer a

multichannel shopping e)perience* deli+ered seamlessl& acrossmobile* online* and in,store merchandising platforms- 'irtuall&

all of the gro$th in retail sales o+er the ne)t fe$ &ears $ill come

from multichannel +enues* dri+en primaril& b& the impact of

digiti.ation/the changes in people0s li+es

as smartphones* tablets* and high,band$idth connections

become pre+alent-

(etailers can choose among si) different suppl& chain models to

operationall& support seamless multichannel shopping

e)periences- In making this choice* each retailer $ill ha+eto decide bet$een independent and shared suppl& chains*

and $hether to build them internall& or through outsourcing-

1hese choices $ill depend on the retailer0s o+erall +alue creation

proposition- 2ach retailer has a distincti+e 3$a& to pla&4 that

combines a business model* customer e)pectations* and

distincti+e capabilities to set a strateg& for dri+ing

gro$th* profitabilit&* and long,term success-

#oo : Compan;

''



THE MULTI-CHANNEL

CONSUMER

9here<s no den;ing an;more that an

increasing number of shoppers are

demanding far richer retail

environments than ever before=

anchored b; multiple digital channels for

bro7sing= evaluating= comparing= and

purchasing products. 9he prevalence of

smartphones= tablets= and >al7a;s(on?

broadband connections is transforming

consumer behavior. 2aced 7ith the impact of

this digitiation= virtuall; ever; retailerno

matter

ho7 strong its ph;sical stores are or= indeed=

7hether it has an; ph;sical stores at all@

must no7 respond to this siable and restless

digital consumer base. t must offer a seamless

mobile and online strateg; that integrates the

shopping experience across portals=

apps= and retail channels.

9he statistics highlight the

importance for retailers of

fulfilling these consumer

expectationsB Although overall

retail sales are stagnant= online

sales are expected to increase at a

compound annual gro7th rate of

about '* percent in the next five

;ears see 2)hibit 5DE some

categoriesfood and beverage=

5e7elr;= and health and beaut;=

among others@7ill likel; expand

b; as much as '+ percent ;ear(

over(;ear online. Moreover=

cross(channel annual spend( ing

levels of multichannel shoppersare often double those of retail(

onl; customers. All of this means

that retail( ers that fail to put in

place effective multichannel

operations 7ill lose out

on '+ to &* percent of their

categor; sales b; )*'+= and

much more in the follo7ing

;ears.

Retailers that offer a more robust

and integrated shopping

experience 7ill primaril; capture

these double(digit online gains.

According to a )*'*

#oo : Compan; surve;= /0

percent of Feb users like to do

side(b;(side and site(b;(siteD

product comparisons on

the nternet before making purchases=

and ,- percent feel that it is

important to be able to order

online and pick up the items in a

store. 9hese features 5ust hint at

7hat consumers increasingl;

expect from retailers through

multiple channels= a 7ish list that

includes access to a 7ide s7ath of

products

online and the option to revie7 in(

store inventor; via the Feb see

2)hibit 6* page 7D.

8ot surprisingl;= considering ho7

inno( vative and entrepreneurial

the nternet channel is= the 7inners

of the online retail 7ars= no7 and

in the future= 7ill be the most

creative companies that

can deftl; provide a shopping

experi( ence compatible 7ith the

expanding expectations of

consumers. #ut it is vir ( tuall;

impossible to deliver this desir (

able shopping experience 7ithout

first implementing an optimalmultichannel suppl; chain@one

that is efficient and scalable

designed to best support the

compan;<s overall channel strateg;

and the distinctive characteristics

of its customer reGuirements and

economic trade(offs.

Exhibit 1 Across Retail Categories, OnlineGrowth s Shi!ting Sales Online

.$. I8!86 $HAR6 I2

#oo : Compan;

+



I"6RA!! R69A! $A!6$)*'*J)*'+ 2orecast

'*CAR

'/'

Ke;(

overall retail sales arestagnant= online sales 7ill

gro7 at a CAR of '*

''

''',

($omecategorieslikefoodand beve

rages= 5e7elr;=andhealth and beaut; aregro7ingabout'+;ear(over(;earonline

( Multichannelcustomershavesignificantl;higher lifetimevalues than

bricks(and(

mortar or online(onl;customers

)*'* )

*

'

'

) ) ) )( n addition toonline sales=

digital channelsinfluence an evenlarger percentageof retailsales forexample= throughonline research=mobilecouponing= orlocation(basedoffersD

( Retailers that failto put in placeeffectivemultichannelcapabilities 7ill

lose out on '+ toActual2orecast

&* ofrevenue intheir categor;

b; )*'+= andstruggle tocompeteeffectivel; fordigitall;

in

fluencedrevenues in ret

$ourceB 2orrester ResearchEMorgan $tanle;E #oo : Compan

anal;sis

/#oo : Compan;



Exhibit "#hat Custo$ers #ant !ro$ Multichannel Retailers

"R9I$ CLC!6 I2C$9IM6R 6P6R68C6$tages and Potential#reakdo7ns

Post($ales Research

!

"

Ho7 the Customer 6xperience Can2ounder

! $tore shoppers don<t have access to revie7sand ratingsE sales reps don<t use productinformation that can be found online

! $tore does not offer online long tail of assortment

# 8o option to revie7 in(store inventor; online

# tem out of stock in store can<t be ordered for home deliver; from store

# nconsistentonline and offline pricing3eliver ;

$ Purchase

$hop

#

$ Channel(specific promotions can cause bu;er<sremorse if discovered

onl; after a purchase" 8o option to reserve and pick up in store and

order from store for home deliver; Inline returns cannot be returned to store or can onl be returned to store

$ourceB #oo : Compan;

Creating a multichannel

suppl; chain is a complex

task due to the starkl;

different ob5ectives and

priorities of traditional andonline retail suppl; chains.

2or example= in the ph;si(

cal retail environment= suppl;

chains are designed to

efficientl; keep the products

that consumers 7ant most on

store shelves= 7ith rapid

replenishment

from regional distribution centers.

2or online channels= customer

value is driven b; the abilit;

to offer a much 7ider

assortment= and even

custom( ied products that

the retailer ships from a

central 7arehouse or

supplier inventor;.

Ir consider the difference inlogistics costsB 2or retailers=transportation costs arekept relativel; lo7 b;

moving pallets and

truckloads of products

through a net7ork of

regional distribution

centers. #ut in the online

channels= logistics costs are

substantial= as most

products are

shipped directl; to people<s

homes or offices individuall;

or in small groups b; parce

carriers see 2)hibit 7D.

Exhibit %$uppl; Chain

A Co$parison o! Operating Models in the &raditional Retail and Online Retail Environ$en

9raditional Retail

( Retailer<s 5ob is assortment selection to fill limited shelf

Inline Retail

( !ong(tail or virtuall; unlimited assortment is a ke; value

Procurementspace= cut long tail

( tems are procured and negotiated in bulk and 7ill get sold proposition of online retail

( $lo7(moving long tailD items ma; be procured in ver;through the channel small Guantities

nventor; ( nventor; exists at up to three levelsB distribution center =re ional distribution center and store ( nventor; onl; exists at one levelB distribution center



Management ( nventor; value is mostl; driven b; stock levels of $K s

Farehouse( !o7er number of orders= stable throughput

( High number of orders= high throughput gro7th

Iperations ( 2orklift and pallets to trucks ( High degree of manual labor or smart automation e.g.= KivaD

9ransport :( Iften compan;(o7ned fleet that delivers bet7een

distribution centers and to stores( 2reight carrier picks up large number of

shipments from distribution center !ogistics( !ogistics costs per item are lo7 ( !ogistics costs per item are high

Post($ale( Return to store can create reverse logistics complexit;

( Return b; mail or store for some multichannel pla;ersD

$upport up(sell ( Iften extensive service levels and generous policies




STRATE%ICCHOICES

9here are six different suppl; chain

models that retailers can deplo;

to maximie returns from their

multichannel operations. 6ach of them

reGuires its o7n capabilities. 3epending

on a compan;<s existing strengths=

some of them are more difficult to

implement than others= but each of

these models focuses on

different core aspects of

suppl; chain management

and on generating distinctive

results see 2)hibit 8D.

Model !& Online-Onl'(In-

Hou)e

Su**l' Chain

Amaon.com is the best(

kno7n pro( ponent of this

approach= 7hich relies on

extensive product salesforecasting and inventor;

management s;stems

to fulfill orders Guickl; at ahigh rateof accurac; 7hile optimiingshipping times to customers.ndeed= because

of its aggressivel;

innovative= inter ( nall;

developed e(commercesuppl; chain= Amaon can

offer a vibrant and

attractive customer

experience

that includes

recommendation tools= a

variet; of shipping options=

and excel( lent post(sale

communications through its

7ebsite. Managing suppl;

chain

and logistics in(house makes

sense for Amaon= 7hich uses

these operations to build=

leverage= and differentiate

itself through scale and

customer service. Moreover=

maintaining internal control

of the suppl; chain also allo7s Amaon

Exhibit ' Supply Chain Strategies !or Online and Multichannel Retailers

Pros Cons

! (Amaon

(Ouid

sin(House

(app $et

up

Iutsourc

ed

# (ilt

rou

pe Inline Inl;



$

"

+

$cope

$h

ar ed($u

per marketChain

3e

di

cat

ed(!uxur;Ap par

elR etailer

$hared( 3ell

3edicate

d( Falmart

Multichan

nel

( 6nables operations( based competitiveadvantage

# ( Keeps investments lo7 and offers

( 6liminates distractionfrom other areas of

business$ ( Creates potential s;nergies such as

reduced overhead=though difficult to full;realie

" ( Maintains completecontrol

( 6nables operations( based competitive

advantage

( !everages preexisting relationship7ith vendor

+

( Keeps investments lo7 and

offers service(leveloptions

( 6liminates distractionfrom other areas of

business

( !ong learning curve beforeadvantages ma; berealied

( 9;picall; cannot scale forh;pergro7th

( nfrastructure and processes t;picall; poorl; matched to e(commerce

( Potential s;nergies andexisting expertise oftenoverstated

( Cost plus third(part; logistics pricing model passes inefficiencies back toretailer

( Challenging to createmultichannel experience




to collect vast Guantities of

data= 7hich can in turn be

mined to improve all aspectsof the suppl; chain and the

7ebsite.

Ither prominent pure e(

tailers have also chosen an

in(house suppl; chain

management model that

facilitates high(touch

customer service. $hoe

seller appos designed a

proprietar; suppl; chain

that could provide a

best(in(class returns polic;

and Guickl; place returned

items back into inven( tor;.

appos based this approach

on the notion that shoes are

an;thing but an impulse bu;E

customers 7ant to

tr; them on and see ho7 the;

feel and look before bu;ing

them. #; offering free= fast=

and convenient returns

customers send back as man;

as &+ percent of the shoes

appos made

the at(home trial period

uncomplicated and overcame

consumer resistance to

making shoe purchases

online. As a result= rather

than competing on price=appos provides great

service= enabled through

its suppl; chain@its

differenti( ating

advantage. And because

appos has such high

volume concentrated in

a single product

categor;= b; manag( ing

distribution in(house the

e(tailer can develop and

control specialied

infrastructure for this

product line and

command good

transportation rates.

Ouidsi= 7hich o7ns

3iapers.com=

$oap.com= and other

personal goods

sites= has among the most

sophisti( cated in(house

suppl; chains of all

e(tailers. 2or Ouidsi= as fo

appos= in(house suppl;

chain management i

economical because larg

volumes

of ver; similar products

7arrant and support

investments in highl; special

ied infrastructure and

processes. 9o reduce

7arehousing costs= an inven

tor; management s;stem

determines the minimum

amount of product that nee

to be on hand in the compan;

three regional distribution

centers b; assessing custome

life c;cle and order freGuenc

trends= 7hich are highl; predictable for Ouidsi<s

products. 9o minimie

shipping expenses and 7aste

proprietar; packaging

algorithms select the optimal

box sie for each order . Fhi

shopping= consumers are

offered additional items that

purchased= could help optim

logistics costs. Productivit;



improved b; intelligent pod(

enabled picking s;stems that find

shelved items Guickl; and

efficientl;.

9he combination of these suppl;

chain innovations enables Ouidsi

to offer same(da; fulfillment= free

t7o(da; shipping at a modest

threshold= and

a &/+(da; return polic;= 7hile

main( taining competitive pricing

critical reGuirements for

success in the con( sumer goods

categor;. 8ot surprisingl;=Amaon acGuired appos in

)**-

and Ouidsi a ;ear later in part for

their efficient= innovative= andscalable

in(house operating s;stems.n March

)*')= Amaon announced

the acGuisi( tion of

distribution center pioneer

Kiva $;stems= 7hich

specialies in building

7arehousing s;stems for

online and multichannel

retailers. 9his acGuisition

7ill help Amaon

substantiall; improve its

o7n fulfillment capabilitiesE

in the process= Amaon 7ill

be able to better control itsfulfillment costs as a

percent( age of revenue and

also Guickl; build highl;

effective distribution centers

in man; additional

locations. 9o avoid having

to charge sales tax= Amaon

has not established a

ph;sical presence in man;

states= a situation that 7illlikel; change soon as state

legislatures exempt online

retailers from this

reGuirement.D

Model #& Online-

Onl'(Out)ourced

Su**l' Chain

#; turning over suppl; chainmanage( ment to a third(

part; logistics firm= ;oung

online companies 7ith

rapidl; gro7ing but still

subscale operations can

focus their limited

management band7idth

and capital on their most

distinctive and important

capabilities. 9his model has

been adopted promi( nentl;

b; ilt roupe.

An online retailer of luxur;clothing

and other high(end items=

ilt<s greatest value and skill

sets are in merchandis( ing= a

activit; that depends on stron

marketing and promotion o

ilt<s

site as 7ell as providing acompelling



product line. n addition= procurement

is considered a differentiatingcapabilit; at the e(tailer=

7hich scours suppliers

for high(end products that it

can offer at lo7 prices in

online >7arehouse? sales.

Fith this approach= ilt has

expanded into other luxur;

areas such as gourmet food

and travel.

iven these priorities= ilt

vie7s its less distinctive

fulfillment capabilities as a

pure support function that is

better out( sourced= 7hile the

compan; 7orks on building

better relationships 7ith sup(

pliers and on fostering a sense

of exclu( sivit; among its

customers through an

attractive 7ebsite 7ith a 7ide

assort( ment of products.

Moreover= vie7ed purel;

from an economic standpoint=

the investments reGuired for

in(house distribution

operations are difficult to

5ustif; 7hen= as is the case

7ith ilt= products sold var;

7idel; in geographic origin=

available Guantit;= sie= and

7eight. As ilt<s sales profileshifts 7ith changing market

opportunities= out( sourcing

provides the flexibilit; to

scale distribution

operations up or do7nD

rapidl; in response to

reGuirements.

2or bulk; or perishable

products= such as furniture

and food= ilt goes be;ond

outsourcing suppl; chain

operations 7hile o7ning the

inventor;. nstead=

the e(tailer utilies drop

shipping= in 7hich the

products are sent out b; the

manufacturers from their o7n

7are( houses. n so doing= ilt

never ph;si( call; touches or o7unsold inventor; in these produ

categories and reduces the numb

of stops that items make bet7ee

manufacturer and consumer .

Model $& Multichannel(Shared

In-Hou)e Su**l' Chain

#ecause traditional and online

retail make different demands on

their suppl; chains= combined

fulfillment and distri( bution

operations serving both channe

are generall; not optimal for

either. #ut there are cases 7hen

shared= in(house suppl; chain is

fact= the best and

onl; optionfor example= 7he

online orders account for a ver;

small shareof sales.

9hat 7as the situation at one

large supermarket chain= 7hich

set up a s;stem in 7hich online

orders are routed to one of a

select set of stores based on

customers< locations. At these

sites= inventor; for online and

retail purchases is shared.



6mplo;ees filling online

orders pick from the same

shelves as retail customers=

and the supermarket<s trucks

deliver orders to consumer

homes. Across the small

number of online orders from

each geographic location=

demand for specific $Ks is

highl; variable. $o the

supermarket includes online

purchases in the sales reports

that are used for

determining in(store

inventor; to make sure

that the shelves are

stocked 7ith sufficient

items for both online and ph;sical store orders.

#uilding a dedicated

distribution net7ork

for its minimal online

busi( ness 7ould have

been an expensive

undertaking for the

supermarket 7ith ver;

little return. #ecauseman; grocer; products

are perishable and

are expected to be

delivered relativel;

Guickl;= the supermarket

7ould have had to set up

a large net7ork of

fulfill( ment points as

close as possible to

customers 5ust for onlinesales= and it 7ould have

had to maintain separate

inventor; for this channelE

both are costl; ventures.

9he adaptations reGuired to

pick online orders from stores

designed for customers< use

are minimal. Customers<

basketsthe number and

value of items the; bu;@are

substantiall; the same online

and in(store. 3espite charging

a fee for delivering orders

under a minimum value=

the supermarket still is7illing to s7allo7 a net

loss

on online fulfillment. 9his

loss is the rule= not the

exception= for ph;sical

supermarkets 7ith online

businesses.D Fere its online

business to gro7 larger = the

compan; might attempt

greater scale economies in picking. Fere it to gro7 much

larger= these economies



7ould reGuire dedicated

facilities. 2or the online

business<s current stage ofdevelopment7here the

densit; of online orders from

an; one geograph; is lo7@a

shared model is cost(effective

and not disruptive to the

store<s

primar; business.

Model "&

Multichannel(,edicatedIn-Hou)e Su**l' Chain

Fith this approach= the

suppl; chains that serve the

online and ph;sical parts of

the business are maintained

separatel; to meet the

distinct opera( tional

reGuirements of each

channel. $eparate net7orks

and inventories

involve incremental costs= so

the results must be 7eighed

carefull; to deter ( mine

7hether the benefits are

7orth these costs. Ine luxur;

apparel retailer tried this

strateg; b; establishing t7o

distinct distribution centers in

the same region of the nited

$tates. 9he results 7ere

not Guite 7hat a discount

e(tailer 7ould like= butthe; 7ere satisfactor;

in comparison to those

of competitors in the

high(endNluxur;

categor;B Irder

processing took about ,0

hours= and

the free shipping

threshold 7as up7ard of

Q)**. Although these

numbers are not best in

class 7hen it comes to

fulfill( ment efficienc;

and pricing= the; 7ere

more than offset b; the

benefits gained b;

customiing the suppl;

chain to each channel<s

uniGue operational needs.9he t7o dedicated suppl;

chains ensured

that luxur; service(level

reGuirements 7ere met in the

stores= 7here stock ( outs ofsuch high(margin products

are ver; costl;= 7hile the e(

commerce sites had the 7ide

and varied assortment of

products that customers have

come

to expect from e(tailers for

goods at an; price.

$eparate= dedicated suppl;chains

are preferable 7hen a

capabilit; like customer

service is more important fo

some channels than others.

Ho7ever = this approach

makes economic sense onl; i

both the ph;sical and online

sides of the business are siab

enough

to operate at an efficient scal

and if the savings from

combining the channels 7ou

not be significant.

Model &

Multichannel(Shared

Out)ourced Su**l' Chain

3ell tried this model and

learned that it should be



adopted onl; if the retail and

online sides of the business share

man; of the same characteristics

relating to meeting customer

needs and logis(

tics reGuirements. n 3ell<s case=

the demands of its online and

store(based sales components

couldn<t have been much more

different.

3ell made its name and fortune

on selling custom(built

computers directl; to consumers

over the nternet. At first 7ith anin(house suppl; chain and

later rel;ing on third(part;

manu( facturing and

operations= 3ell had

become extremel; adept at

customiing individual products for consumers and

shipping them efficientl; and

rapidl; to people<s homes

and offices. sing this

model= the computer maker

7as ver; profitable and

earned a 7ell(deserved

reputation for being one of

the most innovative e(

commerce companiesin the 7orld. ts online

suppl; chain 7as especiall;

admired for its demand

shaping capabilities= its

abilit; to manage

complexit;= and its

excellent 7orking capital

metrics. #ut b; )**1=

competition and price 7ars

in the PC industr; had

intensified and margins had

tightened. 3ell 7as

compelled to 7iden its

distribution model b; selling

its computers through retail

channels.

n making that decision= 3ell

also made another difficult

choiceB to use the exist( ing

direct(to(consumer suppl;

chain to produce and ship

products for retailers.

9hat turned out to be

problematic. 2or one thing=

3ell made most of its

computers in Asia= deliveringthem directl; to consumers

around the 7orld b; plane

and bur;ing the shipping

costs in the price of the

machine. 3ell<s suppl; chain

7as optimied for flex( ibilit

in manufacturing= inventor;=

and transportation= as the

custom model reGuired= but

did not have the demandforecasting capabilities that

7ould



allo7 the compan; to build in

the extra time needed for the

more economi(cal ocean shipping reGuired

b; retail<s raor(thin profit

margins for PCs. Moreover=

7hen 3ell tried to re5igger its

suppl; chain to satisf; high(

volume retail orders=

production in the direct(

to(consumer side of the

business slo7ed considerabl;

and customers 7ere

forced to endure dela;s before

their computers arrived. More

recentl;= the compan; has

made significant efforts to

increase the efficienc; of its

retail(facing suppl; chain

operations b; expanding

ocean shipping and improving

product planning andforecasting. 9hese moves

to7ard dedicated suppl;

chains for

each channel illustrate that

a shared multichannel

suppl; chain capabilit;

is suitable 7hen business

reGuirements are similar

across channels but not 7hen

the; differ dramaticall;= as

the; do in 3ell<s case.

Model +&Multichannel(,edicated

Out)ourced Su**l' Chain

Companies that are adept at

traditional retail suppl;

chains ma; not have the

innate capabilities alread; in

place to put together a

successful e(commerce

suppl; chain. 9he differences

bet7een the t7o channelsare Guite starkE in par (

ticular= the online

component reGuires the

rigid order processing=

picking=

and parcel shipping accurac;

aligned 7ith first(class

customer service= 7hile

ph;sical stores reGuire

strong inventor;

management= consumer deman

fore( casting= and order planning

capabili( ties to keep costs lo77hile ensuring that products ar

available on shelves 7hen

customers 7ant to bu; them. 2or

these reasons= having separate

suppl; chains for each channel

in(house

for the stores and outsourced fo

the ne7 e(commerce function

can make sense= particularl; if

compan; is unfamiliar 7ith the

nuances of online retailing and

dares not risk compro( mising a

7ell(functioning retail suppl;

chain 7ith the additional

complexit; of fulfilling the onli

channel through it.

Falmart= the undisputed suppl;

chain king in the retail sector= cato this conclusion= and has

benefited greatl; from it. Fhile

still using its massive clout as a

purchaser to drive advanta( geo

procurement programs throug

out the organiationboth in th

retail channel and online

Falmart chose

to outsource much of the

inventor; management and



logistics aspect of its e(

commerce business. Fhen

imple( menting this choice= the

compan; emphasied that it

7anted a fulfill( ment and

distribution partner that

could keep costs lo7 7hile

meeting the service

reGuirementsprompt fulfill(

ment= expedited shipping

options= and package tracking

that customers

have come to expect of online

retail. ltimatel;= Falmart

found a third( part; providerthat has a 7ide 7are(

housing and distribution

footprint. 9he provider

has been able to 7ork

7ith

the retailer to set up programs that offer

customers convenient

options such as being

able to pick up or return

items ordered online at

Falmart stores.

Falmart<s case illustrates

that third( part;

fulfillment firms can offer

boththe advantages of

outsourcingsuch as

flexible capacit; for use

during the bus; holida;

seasonand man; of

the services associated

7ith managing dis(

tribution in(house.

Although Falmart<s

distribution capabilities

are 7orld( reno7ned

and Falmart.com

attained the scale to

5ustif; in(house

distribution Guite Guickl;= it

has little reason to rush to

bring distribution in(house.

2reGuentl;= companies

choose one of these six

models b; default or 7ithout

careful consideration of

7hether the approach the;

pick 7ill fit 7ell 7ith their

current suppl; chain setup or

the particular t;pes of

customers the; are serving@

often 7ithout kno7ing

7hether it 7ill benefit theircompanies or not. 9hat<s a

shortsighted approach that

can cost a retailer market

share and= for the largest

companies= billions of

dollars in lost profits.

Although

there isn<t a single right

multichannel approach for all

retailers= there is a correct onefor each retailer depending on

its business model= value

proposi( tion 7ith consumers=

and existing set of

operational capabilities.



Picking the Right Multichannel Approach

2or man; retailers= the decision about 7hich multichannel

strateg; to choose can be difficult= because the; lack a clear

set of rules to follo7 to determine the best path for7ard. 9o

mitigate this hardship= #oo : Compan; has created a

diagnostic program that can identif; the capabilit; gaps

that retailers need to address in order to succeed in

multichannel environments 7ith the most effective suppl;

chain strateg;.

9he diagnostic begins 7ith a soft launch during 7hich

executives and others in the compan; are intervie7ed in an

effort to aD understand corporate strateg; and the

compan;<s desired customer value proposition= bD design

a 7orking plan for the operational reGuirements needed todeliver that customer experience= and cD launch data

gathering for the diagnostic and market anal;sis.

After this step= the first phase is devoted to a capabilities assessment and

market(back anal;sis in order to evaluate the follo7ingB

R Current capabilities

R $tructural options and economics

R Customer segments

R Ke; processes= s;stems= and customer experience break points

R

Competitive landscapeR $ervice levels

R Capabilit; gaps

R $ie of multichannel opportunities

Phase t7o of the diagnostic is devoted to developing

recommendations= as follo7sB

R Iperations vision and strategic priorities are defined.

R A long list of opportunities and differentiating capabilities is created.

R Priorities are set for 7hich capabilities need to be addressed first= based

on ease ofimplementation

and potential impact.

R Priorit; items are translated into recommendations for strategic initiatives

that deliver the operationsvision.

R A business case is developed for the strategic initiatives.

R A draft road map for multichannel suppl; chain strateg;

is produced that includes implications for capabilities=

organiational structure= decision rights= s;stems=

processes= and investments.

Phase three of the diagnostic is reserved for finaliing the multichannel



suppl; chain road map. 9his stage includes the follo7ingB

R terating the road map and incorporating stakeholder feedback

R 2inaliing the case for change 7ith an emphasis on the business case

R Iutlining ke; success factors and implementation risks

R 3rafting the governance structure and high(level implementation plan

to execute

initiatives

RFriting and presenting the final report

9his diagnostic and strategic development program is a

targeted and step7ise approach that can provide a uniGue

perspective on the direction a retailer needs to take to

succeed in the multichannel environment. More than

an;thing= it provides a road map for Guickl; identif;ing the

capabilit; gaps that must be closed and the operational

strategies that should be embraced.

T ATCH revenue becomes an

increasingl; large share of a

must be appropriatel; located

near ma5or cities.stream= retailers 7ill have to not onl;

choose and execute their suppl; chain Greater e$phasis on drop

strategies 7ell but also respond to Retailers have generall; used drop

ne7 trends and economic conditions. shipping to provide products

n our vie7= over the next fe7 ;ears= that 7ere out of their traditional

three critical trends 7ill pla; essential orbit that is= bulk; or reGuiring

roles in determining the contours of refrigerationD. #ut as retailers

multichannel suppl; chainsB 7iden their sales channels and= in

the process= increasingl; turn to

Shorter delivery ti$es( !ed b; third(part; logistics providers to

Amaon and its remarkabl; efficient handle fulfillment= drop shipping

overnight and t7o(da; shipping 7ill become more popular because

programs= online customers are it achieves three valuable resultsB

expecting Guicker processing and t expands product assortment

faster deliveries. 6ven luxur; retailers= virtuall; instantaneousl;= allo7ing

7hich traditionall; haven<t had to retailers to reach longer( and

meet these rapid(fire standards= are tail customers 7ithout increasing

not going to be able to ignore the inventor; carr;ing costsE it transfers

need for speed in nternet retailing errors and omissions risk to the

7hile offering this service virtuall; for third(part; logistics firm= 7hich is

free. 9o remain competitive= retailers especiall; beneficial 7ith expensive

7ill have to implement forecasting and perishable inventor;E and it

s;stems that provide a high level reduces inventor; holding cost and

of accurac; to minimie stockouts obsolescence risk for the retailer .

and keep inventor; at a reasonable 9o successfull; execute a droplevel and simultaneousl; embrace shipping program= retailers 7ill

innovation in picking= packing= and sophisticated vendor management

shipping so that packages can s;stems that help ensure strong

TR EN,S

As the multichannel landscape continues to evolve and as online

rapidl; depart an increasingl; dense net7ork of distribution centers= 7hich



As the $ultichannel landscape continues to evolve,

retailers will have to not only choose and execute their

supply chain strategies well

but also respond to new trends and econo$ic

conditions)



oversight of suppliers and

logistics firms and a

consistent customer

experience across all brands

and product lines. n

addition= 7ell( functioningelectronic links bet7een

retailers and suppliers for

sharing sales and financial

forecasts are necessar; to

decrease stockouts

and failures in order

processing and shipping.

9he trend to7ard drop

shipping makes aspects of

their suppl; chain

operations easier for

retailers= 7hile it gives

product manufacturers an

opportunit; to differentiate

themselves as first(rate

shipping and logistics

partners for retailNe(tail

outfits.

*yper+ocal -istribution

Centers( $hipping time is one

of the biggest challenges for e(

commerce companies.

Consumers 7ant instant

gratification= or as instant as

possible. And the thought of

7aiting even three da;s

for a deliver; can turn a

7ould(be customer into ano(sho7as does the

thought of having to pa;

for

t7o(da; shipping. Fhile

Amaon and others have

perfected free t7o(da;

shipments= same(da;

deliver; is the next

frontier in online

fulfillment

and 7ill create a huge

competitive advantagefor retailers that can

meet that promise

before others. 9o do

this= h;per(local

distribution centers are

a possible ans7er. #ut

these are extremel;

difficult and expensive

to establish. Hard

Guestions must be addressedB Ho7 can

distribution centers be

located close enough to

the lion<s share of

customers to effectuate

same(da; deliver;S s

demand forecasting

sophisticated enough to

enable a compan; to

have on hand locall; the

products that customers

7ant= 7hile not creating

excessive inventor;

carr;ing cost across the

suppl; chainS Can the

higher costs of operating

a h;per(local

distribution

center be passed on tocustomersS

And can the order deadline bflexible

enough to attract consumers

Most of these Guestions and

the constraints are more

relevant to pure(pla; online

retailers= 7hich have no

inherent local presence in

consumer communities. n

contrast= multichannel

retailers are in a more

advantageous positionE the;

can use their retail outlets anthe logistics infrastructure th

feeds these ph;sical stores to

serve as local distribution

centers. #; building

neighborhood fulfillment

capabilities 7ithin existing

stores= 7hich includes investi

in sophisticated inventor;

management s;stems to mak

sure that storeshave sufficient amounts of

popular products in stock=

multichannel retailers can

offer same(da; in(store or at

home deliver; of products

purchased on the Feb or on

the gro7ing number of

mobile channels.

As described in our Model &

shared in(house operationsD

retailers can effectivel; turn

each of their stores into a loc

distribution center capable

fulfilling e(commerce orders

#oo : Compan;

))))#oo : Compan;



9o facilitate this highl; distinctive

capabilit;= s;stems

need to be designed to improve

inventor; accurac; and create

product transparenc; and

visibilit; throughout the suppl;

chain and all retail outlets so

items can be moved Guickl; to7here the; are most

needed. n addition= staff training

and incentives encouraging

emplo;ees to fulfill online orders

during in(store do7ntime are

important. 9here are

a number of tangible gains from

this model= including improved

margins as better inventor; control

ensures that less online or in(store

merchandise

has to be sold on sale. And eGuall;

important= the retailer can resell

long(

tail $Ks returned to stores

7ithout the expense of

sending these items back to

the main distribution

center .

Amaon has begun to

experiment 7ith its o7nans7er to h;per(local

deliver;. 9he e(tailer is

putting lockers in some 1(

6leven stores in $eattle and

!ondon and Rite Aid

pharmacies in 8e7 Lork at

7hich customers can pick up

their Amaon orders using

a barcode and P8 sent to

their smartphones. 2or

people in urban areas= these

distribution outlets=

generall; open late if not

),N1= are a convenient 7a;

to get the products the;

purchased Guickl; perhaps

even the same da; orderedD=

especiall; if the; are not at

home during the da; to receive the items from P$

or 2ed6x. 9his pilot

program illustrates that

7ith innovations

surrounding h;per(local

distribution= the most scaled

online(onl; retailers ma;

even be able to compete

against ph;sical retailers in

offering almost immediate

gratification for consumers

over

the last mile 7ithout the

expense of opening actualstores. 9he precise financial

arrangement that Amaon

is setting up 7ith 1(6leven

and Rite Aid outlets has not

been disclosed.

#ut since the stores 7ill get

additional foot traffic and=

hence= possible incremental

sales from the presence

of the lockers= Amaon 7ill

likel; be able to persuade

retailers to 5oin this program

7ithout pa;ing them much

or even an;thing. Ince rolle

out= it is possible that

Amaon 7ill provide this

service for a fee to other e(

tailers as an enhancement of

its business(to( business e(fulfillment offerings= and its

acGuisition of Kiva $;stems

could be a smart path7a;

for scaling up regional

operations to service retail

locker deliveries.

#oo : Compan;

)&



ESTA.LISHIN% A

MULTICHANNEL

SU//LY CHAIN

2or multichannel retailers=

these models and trends pose

important Guestions thatreGuire insightful anal;( sis of

the business and its customers.

9n the consumer front*

companies must understand

their customers< expectations

of service levels= channel and

shopping dimensions=

product offerings= pricing=

and convenience= and also

anticipate changes in cus(

tomer behavior. 9hese

assessments

of consumer attitudes and

prefer ( ences@and

assessments of ho7 the; ma;

change@must be 7eighed

against the suppl; chain and

operational reGuirements andcosts to implement a

multichannel inventor;=

logistics= and deliver;

net7ork.

9n the strategic front*

companies must understand

7ell the competitive

landscape and its d;namics

and then chart a course to

outrun the competi( tion b;creating a better customer

experience and a

differentiated

online or ph;sical retail

environment. Armed 7ith

this plan= companies can then

pinpoint the suppl; chain

and operational capabilities

the; need to succeed.

1o build a good

multichannel suppl& chain*

companies must determine

7hich suppl; chain

capabilities are most critical

to their customer value

proposition for each channel

and optimie their suppl;

chains for these capabilities=7ithin cost constraints.

Fhether the optimal suppl;

chain

is in(house or outsourced

depends primaril; on the

compan;<s scale= existing

capabilities= and operations

strateg;.



CONCLUSION for all retailers to develop7inning multichannel business models enabled b;sound multichannel suppl;chain ca pa bilities.

Clearl;=multichannel

retailing is a

business

model that

cannot be

ignored b;

established

or ne7

retailers.

ndeed= it is

the gr o7th

area for all of

retail.

Customer s

alread;

expect

multiple

or der ing

and deliver;options. As

digitiation

becomes more

ubiGuitous in

the lives of

consumersas

their

smar t phones

and tablets

integrate further

into their da;(

to(da; existence=

offer ing 7a;s

for people to

purchase items

7herever the;

are and

7henever

the; like@it7ill becomecr itical

9here is no

universall; right

or 7rong

approach to

establishing a

multichannel

suppl; chain.

Fhether dedicat

or shared= intern

or outsourced= t

appropriatesuppl; chain

depends on a

com pan;<s

customer s<

expectations= its

cost trade(offs= a

its existing

capabilities. Afte

these three issue

are considered

along 7ith ho7

future trends 7i

impact them @ a

retailer can mak

clear(e;ed choic

about 7hich of t

six suppl; chain

models delineate

in this Per s pectiv

is the right one to

adopt.

#oo : Compan;

)+



About

the Author

s

RichKauffel

d is a partner7ith

#oo

:

Com

pan;

based

in

8e7

Lork. He

devel

ops

suppl;

chain

strate

gies

and

sup(

porting

capabi

lities

to

enable

gro7t

h

and

effi

cien

c;

for

con

su

mer

pro

duc

ts

co

mp

a(

niesand

reta

iler

s.

HenningHagen is a princi pal7ith

#oo

:

Co

mpa

n;

base

d in

Hou

ston.

He

spec

iali

es in

the

digital

ecos;

stem=

includ

( ing

corpo

rate

strate

g;=

suppl

;

chain

strat(

eg;=

and

retailopera

tions=

as

7ell

as e(

tail

and

retail

marke

ting

and

sales

produ

ctivit;

.

Alex

andr

a

Conr

ad is

an

asso

ciate

7ith

#oo : Compan;

based in $an

2rancisco. $he

7orks across a

range of

industries=

primaril; on

suppl; chain

logistics and

distribution.

#oo : Compan;

)/#oo : Compan;

)/



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in3 fir2 focu)ed on )er5in3 and )ha*in3 the )enior a3enda of the 6orld7)

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6hen he e)ta4li)hed the fir)t 2ana3e2ent con)ultin3 fir2 in Chica3o in

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e 4elie5e *a))ionatel' that e))ential ad5anta3e lie) 6ithin and that a fe6

differentiatin3 ca*a4ilitie) dri5e an' or3ani- 0ation7) identit' and )ucce))8

e 6or< 6ith our client) to di)co5er and 4uild tho)e )tren3th) and ca*ture

the 2ar<et o**ortunitie) 6here the' can earn the ri3ht to 6in8

e are a fir2 of *ractical )trate3i)t) <no6n for our func- tional e=*erti)e9

indu)tr' fore)i3ht9 and >)lee5e) rolled u*? a**roach to 6or<in3 6ith our

client)8 To learn 2ore a4out .oo0 1 Co2*an' or to acce)) it) thou3ht

leader)hi*9 5i)it 4oo08co28 Our a6ard-6innin3 2ana3e2ent 2a3a0ine9

strateg&:business9 i) a5aila4le at )trate3'-4u)ine))8co28

V)*') #oo : Compan; nc.

boozco the mandate for multichannel retail

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