This insight is the third in a series of 3 texts that Visagio is launching about Omnichannel. Clique hereto to access the first insight, and click hereto for the second. Sign up here to receive upcoming releases of this and other topics relevant to our insights.
From the point of view of supply chain and logistics, the integration of customer service channels with the proposal of a unique experience, becomes one of the main challenges. This is because decision-making and the operationalization of this customer service, making the product reach their hands at the expected time (and increasingly faster), with an almost online flow of information, is already practically the minimum required. This orchestration involves inventory management, forecasting methods, transportation monitoring, and systems that support and integrate all of this. There are so many variables that even prioritizing the investment of resources and time is a difficult task.
Adding these variables with the knowledge of the customer journey and the main points of contact (Touchpoints) from the organization along this journey, some questions regarding the operation begin to arise:
Megalomaniacal transformation programs that promote Big Bangs in the structure and operation of the company they tend to generate more confusion than actual results. Even though there is a long path of change to take in the direction of an omnichannel operation, it is extremely important to maintain the philosophy of rapid experimentation on a smaller scale to learn and correct errors before expanding these changes.
Here's the second insight in this series: Why Omnichannel? — The benefits of the Customer Journey.
When rediscussing the operation, some topics well known to professionals from supply chain and logistics will need to be adequate for a differentiated business vision that meets the high expectations of the modern consumer. Immersing yourself in these themes tends to aid in the search for answers to the questions asked previously:
Flexible and integrated logistics network review
A good physical positioning is essential, with proximity to the end customer that results in convenience and speed of response. It's no secret that the speed of changing scenarios has never been greater and that companies are at a key moment of Digital Transformation.
These changes, whether motivated by new technologies and/or changes in consumer behavior, have a direct impact on daily operations and decisions about physical assets such as factories, distribution centers, and stores.
Decisions previously taken with long-term horizons now require review much more frequently. A good example of this change are projects of Site location of production plants and distribution centers. Formerly carried out with intervals of years or even decades, today they are revisited within the same year, in some cases, in order to capture the dynamics of the market.
Convenience is an increasingly strong and imperative requirement in the view of the modern consumer, especially in retail. This characteristic can be manifested in a variety of ways and, within the framework of supply chain and operations, the main immediate consequence lies in the location of distribution centers and the chain of stores, as well as the financial impacts of this new distribution network.
This behavior can be attributed, at least in part, to the operating model spread by large Players, such as Amazon, which, through a differentiated customer-centric value proposition, defined a new level of service level for global retail, also known as the Amazon-like experience. Since almost all products can be delivered by the next day and a good part for the same day, Amazon scaled its operation and reached sufficient volume to pressure logistics operators and even, to some extent, dominate the American market at the same time that it made the Same day delivery the standard for customer satisfaction.
When analyzing the number of combinations of purchase and distribution channels that exist today, in addition to the more traditional ones (purchase at the store, with immediate removal of the product or purchase online, with subsequent receipt of the product at home), the complexity of possible flows and the necessary intelligence behind the decision-making process of service is enormous. Just to name a few of the possibilities that have been gaining ground, especially in the American market, BOPIS (buy online, pick up in store) or Click and Collect, when the customer chooses to pick up an item that is already in the store, and the Ship to Store or Ship to Locker, When the item is sent to the store or to a closet to be picked up by the customer, they are already used by, respectively, around 25% and 12% of consumers, according to the report The eMarketer Ecommerce Insights Report, from Bizrate Insights (2018)
In any case, even without considering the additional complexity of these combinations for the logistics operation, the growth of ecommerce with home delivery alone already alters the dynamics of the distribution network. If, on the one hand, the need for inventory in physical stores can reduce, on the other hand, the cost of global transportation in Last Mile (last mile to the final destination), which was “absorbed” by the customer when leaving with the product from the store, tends to increase for the company with direct delivery, mainly due to consumers' greater preference for free shipping.
The result of this combination of factors can be seen in research published in Eye For Transport Report with executives and logistics professionals and supply chain of companies participating in 3rd Retail Supply Chain Summit.
The main motivators for the adaptation of the logistics network were the combination of origin of demand/service source/delivery point (in line with the increasing complexity resulting from the omnichannel model) with 81.5% and the cost of the operation (increasing due to the inadequacy of the current network to the omnichannel model) with 77.8%.
In the “traditional” service model, a large number of stores were serviced from a centralized distribution center, with low customization of the product mix by store/region, which helped to generate scale for warehousing and transportation operations. The focus of operations was, almost entirely, on service to stores, with a reduced percentage of D2C deliveries (Direct-to-Costumer), even for sales via catalog or telephone.
The end result was a sizeable cost increase in Last Mile, with no associated service level, mainly because the network had not been designed with this vision of direct service and, therefore, the distribution centers were not located close to the end customers (although a better location of the product entailed higher storage costs, carrying out the fractional transportation of Last Mile over large distances it is, in general terms, much more expensive). In addition, the type of order generated to fulfill the final consumer was totally different from the order to serve a store (higher level of load fractionation, the need for customization/assembly of specific kits per order, etc.).
In the report Eye For Transport, Preston Mosier, the global vice president of supply chain from the American retailer Target, cites this network's obsolescence when she says that “a large part of our supply chain was built a long time ago and for a different retail scenario”. In this sense, after being clear about the customer journey and their interactions and decisions between purchase and service channels, it is almost inevitable to rethink the logistics network as a whole. Large American and global retailers, such as Target itself, Walmart and Zara, have already understood that timely adaptation to the chain is not enough for the size of the challenge they are facing.
This process also involves the reevaluation of store models, with the adoption of simpler and smaller, cost-efficient formats (less inventory and customized mix for the location), stores popup or temporary and prepared to process and send orders placed on digital channels. Like Target, Best Buy, a large American electronics retailer, evaluates its extensive network of stores as one of its main differentials, considering them its “distribution centers” spread across the country and close to the end customer. In Brazil, the footwear and bag brand Arezzo has been investing in the format called Arezzo Light, with leaner stores serving municipalities with a population of up to 250,000 inhabitants, including sales online in the store for home delivery, when the product is not available in stock.
With the adoption of these initiatives, together with the redesign of the supply chain, Target has experienced significant results, such as the reduction of resupply cycles from days to hours, a reduction in operating costs, both in transportation and in inventory, and the reduction of inventory ruptures in stores.
Adaptation of the format of the stores to act as mini CDs and CDs to ship directly to the final consumer
Whether or not they are mobilized by the need for greater efficiency, not only in terms of cost, but especially in relation to the reduction in Lead time of delivery, the change in the operational profile of both distribution centers and physical stores is a reality that is necessary, on a larger or smaller scale, depending on the sector. The classic vision of a distribution center that receives closed carts with products from factorys/suppliers and addresses them for inventory through an ABC curve (which changed little over time) and had to deal with a reduced mix of SKUs is in the past.
The scale gains of gigantic structures that served hundreds of stores in a centralized manner tend to give rise to a greater number of CDs with mixed operations between shipment to stores and to the final consumer (operations quite different from the point of view of warehousing, Picking and shipping). The most commonly adopted model is to separate areas of the CD specific to each of the operations, as a way of controlling the increasing complexity that comes from all sides (such as, for example, a larger number of SKUs, a more fragmented shipping mix, smaller resupply batches, etc., as already mentioned).
One of the biggest changes compared to the old model is the possibility of fulfilling orders online directly from stores, which also helps reduce distribution costs in Last Mile. In addition, it is possible to take advantage of the physical space freed up in stores by adopting smaller formats and adapting the mix to each location, to operationalize a “mini-area” for preparing and shipping orders at the back of the store, which can be carried out by the employees themselves. This performance of the store as a mini CD, also called Fullfilment Center, has been crucial to enable the much desired Same Day and two-day delivery, given the closest proximity to the end customer.
As a result of these changes mentioned, another very critical and often underprivileged front becomes even more relevant: the empowerment of store teams to carry out these new activities. This lack of training and disagreement with the new model can generate generalized frustration and concern in the team, which can be decisive for the success of the initiatives of omnichannel.
Going further, the misalignment of performance indicators and targets from the traditional model with the new model must be eliminated even before the turnaround. Store teams are, for the most part, remunerated via a sales commission. And how is the time dedicated to expediting a sale online? Will this sale make up the team's goal, even though there was a relatively smaller contribution? What if the sale takes place inside the store, but through an online channel with home delivery? So should we have more stockists to do the expedition as well?
In the case of the store model being implemented in Arezzo (Arezzo Light), the solution adopted was the merger of the figures of seller, stockist and cashier in the role of sales consultant who acts in the process as a whole. Although it does not act as a shipping agent in this store model, the role of a stockist plays a role when large interactive screens with “infinite shelves” are used for home delivery, in other words, in this case, there is no restriction on the stock in the store and the sale also makes up the commission of the consultant who acted in the process.
In any case, there are still several questions on which there is no consensus regarding the best operating model. For this reason and given the current rate of change, the format of continuous experimentation (see Insight 2 — Where to start and how to move forward: The customer journey and continuous experimentation) is the most appropriate way to learn and correct the route while the operation takes place.
Unification of the vision of inventories along the entire chain
Several initiatives and changes mentioned in the previous topics have a direct impact on inventories along the entire chain. In this sense, inventory management and policies play a fundamental role. Low accuracy in sales forecasting and low reliability in operations that result in variability in Lead time of resupply and demand have a significant impact on the customer experience. This more widespread network, with a faster response rate in resupply, allows greater centralization of inventories on CDs, in addition to the possibility of making some stores resupply points for each other, when it makes sense.
But for this entire model to be sustained, it is essential to unify the vision of inventory for all channels (online and offline), without physical restriction to it. This means that, if a CD that meets a certain CEP directly does not have the product, the order management system (or Order Management System - OMS in English) sees and provides the service option from another CD or store to the consumer (with the price adjusted to the new delivery cost). In many cases, what would be a lost sale, implying a loss of margin, turns into a conversion, given that the consumer is willing to pay for it.
Several of these initiatives, such as increasing the number of points in the supply chain or having stores in more noble and higher-circulation locations, tend to increase logistics costs and, consequently, put pressure on already reduced retail margins.
However, operationalizing this unified inventory view, using various technologies, such as RFID, helps to row in the opposite direction by generating efficiency by reducing the cost of inventories and distribution globally in the chain. But it must be borne in mind that in order to make similar models feasible, a great understanding of the cost of service is necessary, so that it can be assessed from various aspects (such as, for example, customers, channels and products) what the profitability of each operation is and how much the customer is willing to pay more for a differentiated level of service.
Reverse logistics for return/exchange of products and their systemic and fiscal components
Few things are as detrimental to the value of the customer experience as not being able to return and/or exchange products in a simple way and through any of the available channels. The much desired convenience is strongly impacted, as is the brand's perception of service level.
At this point, with the proliferation of so many channels and points of contact with the customer, the importance of structuring an equally simple, digital and trouble-free return route is often overlooked. And when consumer dissatisfaction reaches the service channels, it may be too late, since making this reverse operation feasible tends to be much more complicated than it seems.
When seeking to return the product via mail (which in itself is already an inconvenience most of the time), the consumer should easily find the address to which to return the product or at least receive clear information when searching for this type of information. When searching for a store to exchange or return a product, it is common for customers to encounter systems that have a series of difficulties in returning the product to stock, either for tax reasons or because there are systemic restrictions in relation to the channel where it was purchased and not the same where it is being returned.
All of these difficulties are only those that are visible and have the most direct impact on the customer. On the other hand, there are also operational difficulties in reverse logistics, which consume the organization's profits silently.
If the product in question is not in the portfolio of that store, it is no longer in the current collection, it must be returned with it to the CD for proper destination. This unstructured return flow is an open door for waste and even theft/diversion. The problem is that, with the greater penetration of online channels (ecommerce through websites, apps, marketplaces, among others), the volume of returned products is increasing and, as a result, the operating costs associated with them also consume the margins.
Therefore, it is good to dedicate some time on this front so that all the effort dedicated to conquering the customer is not thrown away the moment they need to make an exchange or return.
But what now?
As mentioned at the beginning, the challenge of companies towards a model omnichannel It's long and arduous. Even the most successful companies in initiatives of this kind are still learning and drawing their conclusions as they move forward with this implementation. It's clear that there's no “cake recipe” or Framework ready to follow this path, but what is the retail movement towards integration between channels online and offline seems to be increasingly the only solution to remain competitive in the market. Those who have not yet understood this need may be wasting precious time and are at risk of not being able to pursue the loss in the future.
External references
Ready or Not: Omnichannel Fulfillment & Distribution— Saddle Creek Logistics Services Research (2018)
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About the author
Thomaz Moreira is a Visagio consultant specializing in logistics, supply chain and operations projects, business process reengineering, organizational restructuring, PMO in project implementation, having worked in commercial, operational and support areas in the retail, banking, oil and gas, mining, and other sectors. He specializes in Finance from COPPEAD/UFRJ
