Study: to excel at omnichannel distribution, you need the right stuff
Everyone wants to be the master of the omnichannel universe. But our exclusive study shows that most companies have been reluctant to make the necessary investment in distribution technology.
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP?s Supply Chain Quarterly and a staff writer for DC Velocity.
As retail goes omnichannel, many distribution operations are undergoing a seismic shift. That's particularly true of conventional retailers, which once only had to worry about keeping their store shelves stocked. These days, that's not enough. When it comes to the shopping experience, today's consumers expect to move effortlessly between the physical and digital worlds—they want the option to buy online and pick up at the store, or buy at a store and have the order delivered from a warehouse/DC—or even another store. That puts enormous pressure on the retailer's order fulfillment and distribution operations to integrate their store and digital selling channels to work seamlessly together.
To get a better understanding of how this has affected distribution operations, DCV and ARC Advisory Group teamed up last year to conduct the inaugural omnichannel distribution study. Among other findings, the research indicated that retailers' service ambitions often outpaced their capabilities. That is, although they offered customers a wide array of omnichannel services, they didn't always have the proper groundwork in place—particularly at the store level.
To see what progress has been made in the past year, DC Velocity and its sister publication, CSCMP's Supply Chain Quarterly, teamed up with ARC Advisory Group to conduct a follow-up study—one that would take a deeper dive into the details of DC operations that support omnichannel initiatives. This year's survey sought to answer a number of key questions: How far have retailers progressed down the omnichannel road? How are they responding to the new demands of an "anything, anytime, anywhere" retail environment? And what tools and technologies are they using to manage their operations?
THE WHYS AND HOWS
Given all the headaches involved, it seems fair to ask why companies get involved in omnichannel in the first place. As the study made clear, most consider omnichannel a business imperative. When asked to name their top reason for engaging in omnichannel commerce, 83 percent of respondents said their objective was to increase sales—up slightly from last year's 78 percent. In both years' studies, the second and third most frequent responses were to boost market share and to increase customer loyalty.
As for what sales channels the respondents are using, 38 percent are engaged in "direct sales" to the customer or consumer, meaning they sell the merchandise themselves either in a brick-and-mortar store or through a Web store or catalog operation. Another 10 percent engage in "indirect sales," working with suppliers or manufacturers that provide and ship the merchandise on the retailer's behalf. The remaining 52 percent are using a combination of direct sales and indirect sales.
Not surprisingly, the study indicated that the Internet has become a primary sales channel for consumer goods. Eighty-two percent of survey participants were selling products online, while only 70 percent were engaged in traditional brick-and-mortar retailing. Another 52 percent said they did either call center or catalog selling. (Respondents were allowed to select more than one option.)
As to how they're handling fulfillment of e-commerce orders, 57 percent are using stock from distribution centers that support both e-commerce and store replenishment. Another 37 percent are taking merchandise from store shelves, while 32 percent use a Web-only DC. (See Exhibit 1.)
When it comes to who operates those e-commerce distribution centers, 17 percent outsource the operations to a third-party logistics (3PL) company. Still, the majority—62 percent—run their own facilities for e-commerce pick-pack-and-ship, while another 21 percent use a combination of company-owned and outsourced facilities.
Retailers are embracing the "common pool of inventory" concept, meaning they use any available inventory, no matter the location, to fill both online and store orders. Exactly half the respondents—50 percent—share direct sales inventory across all channels. Another 32 percent said they had plans to move in that direction.
As for how retail outlets fit into the e-commerce fulfillment picture, the study indicated that stores play a variety of roles. Eighty-six percent of respondents that use retail outlets to fill online orders said they picked and shipped online orders from stores. Another 68 percent picked orders and held them at the store for customer pickup, while 45 percent had their DCs ship merchandise to the store for customer pickup. (Respondents were allowed to select more than one option.)
For online orders picked from retail outlet stock, 90 percent of respondents said they selected items from the front of the store and 71 percent pulled items from the backroom. As for how store management is communicating information on what items to pick, the majority—71 percent—are using a paper-based method to convey instructions to order selectors. Thirty-eight percent are using some type of radio-frequency communication, although some of those respondents are doing so in conjunction with a paper-based approach.
The use of paper-based picking in stores stands in sharp contrast to the automated processes found in today's distribution centers. When respondents were asked what order fulfillment technologies they employed in their DCs, the majority—64 percent—said they used a warehouse management system (WMS) in combination with radio-frequency technology, an approach that allows order selectors to receive instructions in real time as they move about the facility. Still, a third of DCs perform order selection the old-fashioned way, using a paper-based process in conjunction with their WMS. Another 16 percent have deployed a voice-recognition system, while 6 percent were using goods-to-person automation and 6 percent a pick-to-light system.
SEPARATE BUT UNEQUAL?
With well over half the respondents filling both e-commerce and store replenishment orders from a single DC, the question arises as to how they handle these "hybrid" operations. The survey results indicated that most separate the two activities. Fifty-seven percent of respondents said they segregated their e-fulfillment operations from their traditional store fulfillment activities. Eighty-five percent of respondents segregating e-fulfillment reported that they had a separate, distinct area for e-commerce within the warehouse. Along with the physical separation, many respondents said they maintained distinct inventory for e-commerce as well as separate labor forces.
It appears that some use separate technology as well. For instance, among the respondents that used goods-to-person picking systems (roughly a quarter of the survey participants), less than half deployed them for both traditional and e-commerce fulfillment. About a quarter used goods-to-person picking systems solely for traditional fulfillment and another quarter solely for e-fulfillment.
It was a different story, however, when it came to their warehouse management systems. Seventy-one percent of respondents use the same WMS to oversee both e-commerce and traditional fulfillment within the DC.
GETTING THE BIG PICTURE
As for what software and technologies the respondents use in their omnichannel distribution operations, most of the survey participants are employing the traditional "supply chain execution" (SCE) applications. These include warehouse management systems, transportation management systems, inventory optimization software, and labor management systems. (See Exhibit 2.)
But respondents are not limiting themselves to the use of SCE tools. They're using specialized applications as well. For instance, the study found that 64 percent had installed demand management software, which helps companies predict what stock they'll need in their stores and DCs. Another 24 percent were using a demand signal repository to gather information on stocking needs, and, interestingly, 28 percent claimed to be using "demand shaping" software, a sophisticated application designed to stoke buyer interest in products.
Given the popularity of the "common pool of inventory" approach, it was no surprise that many respondents had invested in "distributed order management" (DOM) software, which provides visibility into inventory held in all locations. Fifty-six percent of respondents currently use DOM applications, while 38 percent plan to implement the software.
When it comes to inventory visibility, it's not enough to have the right software. You also need good data—up-to-the-minute information on the precise whereabouts of items. That has proved to be a stumbling block for many operations. Last year's survey found that most companies lacked the technology required to generate accurate data on store inventory.
This year's study indicated companies had made progress in this area. Fifty-eight percent of respondents had deployed bar-code scanners—an essential technology for providing in-store inventory visibility—on the selling floor and in the backroom. Another 43 percent said they had installed a real-time inventory location application for their stores. Still, only 11 percent said they had outfitted their stores with radio-frequency identification technology, which allows for real-time location tracking down to the item level.
LEADERS RELY ON SOFTWARE
All in all, the study shows that companies have made progress toward building the infrastructure required for omnichannel commerce. But the results also pointed to what could be termed a great techno-divide between the top-performing companies and the rest of the pack. (Top performers were defined as those respondents who self-reported year-over-year revenue growth and 95 percent or better on-time order fulfillment.)
Top performers had invested heavily in sophisticated tools and technology. For instance, 100 percent of the leaders had implemented a WMS to manage their operations, and 81 percent were using demand management software to help determine future inventory needs. They had also invested in bar-code scanning equipment, reverse logistics systems, and inventory optimization software.
It was another story altogether with their less tech-savvy counterparts, which lagged well behind the top performers in a number of categories. (See Exhibit 3.) The failure to invest in technology could cause problems for them down the road. For example, the reliance on paper-based selection methods by many retailers could hamper their efforts to use store inventory to fill online orders. As noted in last year's study, if retailers are to succeed at omnichannel distribution, they'll need to spend the time and money to bring their store fulfillment operations up to par with their DC operations.
For distribution centers, the challenge will be to boost throughput and step up their e-commerce fulfillment game. Although many companies have put in an RF-based WMS, more will have to embrace this technology. So, despite some progress since last year, retailers and manufacturers have their work cut out for them if they want to master omnichannel commerce.
About the study
This year's omnichannel study was conducted by DC Velocity and CSCMP's Supply Chain Quarterly magazines in conjunction with ARC Advisory Group. ARC analysts Clint Reiser and Chris Cunnane conducted the survey and compiled the results. The 2014 study builds on research done last year in this area, which found that stores were the weak link in omnichannel distribution. Compared with last year's survey, this year's study delved more into the details of DC operations to support omnichannel initiatives.
It's important to note that the findings reported here are based on 60 responses deemed valid because of the respondents' direct involvement in omnichannel distribution operations. The valid responses were culled from nearly 200 replies to a questionnaire sent this summer to readers of DC Velocity and Supply Chain Quarterly as well as to select ARC client lists.
As for the demographic breakdown, the majority of respondents (52 percent) came from the retail sector. Another 37 percent came from manufacturing, and the remaining 11 percent from other sectors. Although the participants represented a broad swath of industries, the largest share (18 percent) came from the apparel business. The next largest segments were food/beverage and computers/electronics, each at 13 percent.
A report containing a more detailed examination of the omnichannel survey results is available from ARC for a fee. For information, visit www.arcweb.com/pages/info-request.aspx.
Most of the apparel sold in North America is manufactured in Asia, meaning the finished goods travel long distances to reach end markets, with all the associated greenhouse gas emissions. On top of that, apparel manufacturing itself requires a significant amount of energy, water, and raw materials like cotton. Overall, the production of apparel is responsible for about 2% of the world’s total greenhouse gas emissions, according to a report titled
Taking Stock of Progress Against the Roadmap to Net Zeroby the Apparel Impact Institute. Founded in 2017, the Apparel Impact Institute is an organization dedicated to identifying, funding, and then scaling solutions aimed at reducing the carbon emissions and other environmental impacts of the apparel and textile industries.
The author of this annual study is researcher and consultant Michael Sadowski. He wrote the first report in 2021 as well as the latest edition, which was released earlier this year. Sadowski, who is also executive director of the environmental nonprofit
The Circulate Initiative, recently joined DC Velocity Group Editorial Director David Maloney on an episode of the “Logistics Matters” podcast to discuss the key findings of the research, what companies are doing to reduce emissions, and the progress they’ve made since the first report was issued.
A: While companies in the apparel industry can set their own sustainability targets, we realized there was a need to give them a blueprint for actually reducing emissions. And so, we produced the first report back in 2021, where we laid out the emissions from the sector, based on the best estimates [we could make using] data from various sources. It gives companies and the sector a blueprint for what we collectively need to do to drive toward the ambitious reduction [target] of staying within a 1.5 degrees Celsius pathway. That was the first report, and then we committed to refresh the analysis on an annual basis. The second report was published last year, and the third report came out in May of this year.
Q: What were some of the key findings of your research?
A: We found that about half of the emissions in the sector come from Tier Two, which is essentially textile production. That includes the knitting, weaving, dyeing, and finishing of fabric, which together account for over half of the total emissions. That was a really important finding, and it allows us to focus our attention on the interventions that can drive those emissions down.
Raw material production accounts for another quarter of emissions. That includes cotton farming, extracting gas and oil from the ground to make synthetics, and things like that. So we now have a really keen understanding of the source of our industry’s emissions.
Q: Your report mentions that the apparel industry is responsible for about 2% of global emissions. Is that an accurate statistic?
A: That’s our best estimate of the total emissions [generated by] the apparel sector. Some other reports on the industry have apparel at up to 8% of global emissions. And there is a commonly misquoted number in the media that it’s 10%. From my perspective, I think the best estimate is somewhere under 2%.
We know that globally, humankind needs to reduce emissions by roughly half by 2030 and reach net zero by 2050 to hit international goals. [Reaching that target will require the involvement of] every facet of the global economy and every aspect of the apparel sector—transportation, material production, manufacturing, cotton farming. Through our work and that of others, I think the apparel sector understands what has to happen. We have highlighted examples of how companies are taking action to reduce emissions in the roadmap reports.
Q: What are some of those actions the industry can take to reduce emissions?
A: I think one of the positive developments since we wrote the first report is that we’re seeing companies really focus on the most impactful areas. We see companies diving deep on thermal energy, for example. With respect to Tier Two, we [focus] a lot of attention on things like ocean freight versus air. There’s a rule of thumb I’ve heard that indicates air freight is about 10 times the cost [of ocean] and also produces 10 times more greenhouse gas emissions.
There is money available to invest in sustainability efforts. It’s really exciting to see the funding that’s coming through for AI [artificial intelligence] and to see that individual companies, such as H&M and Lululemon, are investing in real solutions in their supply chains. I think a lot of concrete actions are being taken.
And yet we know that reducing emissions by half on an absolute basis by 2030 is a monumental undertaking. So I don’t want to be overly optimistic, because I think we have a lot of work to do. But I do think we’ve got some amazing progress happening.
Q: You mentioned several companies that are starting to address their emissions. Is that a result of their being more aware of the emissions they generate? Have you seen progress made since the first report came out in 2021?
A: Yes. When we published the first roadmap back in 2021, our statistics showed that only about 12 companies had met the criteria [for setting] science-based targets. In 2024, the number of apparel, textile, and footwear companies that have set targets or have commitments to set targets is close to 500. It’s an enormous increase. I think they see the urgency more than other sectors do.
We have companies that have been working at sustainability for quite a long time. I think the apparel sector has developed a keen understanding of the impacts of climate change. You can see the impacts of flooding, drought, heat, and other things happening in places like Bangladesh and Pakistan and India. If you’re a brand or a manufacturer and you have operations and supply chains in these places, I think you understand what the future will look like if we don’t significantly reduce emissions.
Q: There are different categories of emission levels, depending on the role within the supply chain. Scope 1 are “direct” emissions under the reporting company’s control. For apparel, this might be the production of raw materials or the manufacturing of the finished product. Scope 2 covers “indirect” emissions from purchased energy, such as electricity used in these processes. Scope 3 emissions are harder to track, as they include emissions from supply chain partners both upstream and downstream.
Now companies are finding there are legislative efforts around the world that could soon require them to track and report on all these emissions, including emissions produced by their partners’ supply chains. Does this mean that companies now need to be more aware of not only what greenhouse gas emissions they produce, but also what their partners produce?
A: That’s right. Just to put this into context, if you’re a brand like an Adidas or a Gap, you still have to consider the Scope 3 emissions. In particular, there are the so-called “purchased goods and services,” which refers to all of the embedded emissions in your products, from farming cotton to knitting yarn to making fabric. Those “purchased goods and services” generally account for well above 80% of the total emissions associated with a product. It’s by far the most significant portion of your emissions.
Leading companies have begun measuring and taking action on Scope 3 emissions because of regulatory developments in Europe and, to some extent now, in California. I do think this is just a further tailwind for the work that the industry is doing.
I also think it will definitely ratchet up the quality requirements of Scope 3 data, which is not yet where we’d all like it to be. Companies are working to improve that data, but I think the regulatory push will make the quality side increasingly important.
Q: Overall, do you think the work being done by the Apparel Impact Institute will help reduce greenhouse gas emissions within the industry?
A: When we started this back in 2020, we were at a place where companies were setting targets and knew their intended destination, but what they needed was a blueprint for how to get there. And so, the roadmap [provided] this blueprint and identified six key things that the sector needed to do—from using more sustainable materials to deploying renewable electricity in the supply chain.
Decarbonizing any sector, whether it’s transportation, chemicals, or automotive, requires investment. The Apparel Impact Institute is bringing collective investment, which is so critical. I’m really optimistic about what they’re doing. They have taken a data-driven, evidence-based approach, so they know where the emissions are and they know what the needed interventions are. And they’ve got the industry behind them in doing that.
The global air cargo market’s hot summer of double-digit demand growth continued in August with average spot rates showing their largest year-on-year jump with a 24% increase, according to the latest weekly analysis by Xeneta.
Xeneta cited two reasons to explain the increase. First, Global average air cargo spot rates reached $2.68 per kg in August due to continuing supply and demand imbalance. That came as August's global cargo supply grew at its slowest ratio in 2024 to-date at 2% year-on-year, while global cargo demand continued its double-digit growth, rising +11%.
The second reason for higher rates was an ocean-to-air shift in freight volumes due to Red Sea disruptions and e-commerce demand.
Those factors could soon be amplified as e-commerce shows continued strong growth approaching the hotly anticipated winter peak season. E-commerce and low-value goods exports from China in the first seven months of 2024 increased 30% year-on-year, including shipments to Europe and the US rising 38% and 30% growth respectively, Xeneta said.
“Typically, air cargo market performance in August tends to follow the July trend. But another month of double-digit demand growth and the strongest rate growths of the year means there was definitely no summer slack season in 2024,” Niall van de Wouw, Xeneta’s chief airfreight officer, said in a release.
“Rates we saw bottoming out in late July started picking up again in mid-August. This is too short a period to call a season. This has been a busy summer, and now we’re at the threshold of Q4, it will be interesting to see what will happen and if all the anticipation of a red-hot peak season materializes,” van de Wouw said.
The report cites data showing that there are approximately 1.7 million workers missing from the post-pandemic workforce and that 38% of small firms are unable to fill open positions. At the same time, the “skills gap” in the workforce is accelerating as automation and AI create significant shifts in how work is performed.
That information comes from the “2024 Labor Day Report” released by Littler’s Workplace Policy Institute (WPI), the firm’s government relations and public policy arm.
“We continue to see a labor shortage and an urgent need to upskill the current workforce to adapt to the new world of work,” said Michael Lotito, Littler shareholder and co-chair of WPI. “As corporate executives and business leaders look to the future, they are focused on realizing the many benefits of AI to streamline operations and guide strategic decision-making, while cultivating a talent pipeline that can support this growth.”
But while the need is clear, solutions may be complicated by public policy changes such as the upcoming U.S. general election and the proliferation of employment-related legislation at the state and local levels amid Congressional gridlock.
“We are heading into a contentious election that has already proven to be unpredictable and is poised to create even more uncertainty for employers, no matter the outcome,” Shannon Meade, WPI’s executive director, said in a release. “At the same time, the growing patchwork of state and local requirements across the U.S. is exacerbating compliance challenges for companies. That, coupled with looming changes following several Supreme Court decisions that have the potential to upend rulemaking, gives C-suite executives much to contend with in planning their workforce-related strategies.”
Stax Engineering, the venture-backed startup that provides smokestack emissions reduction services for maritime ships, will service all vessels from Toyota Motor North America Inc. visiting the Toyota Berth at the Port of Long Beach, according to a new five-year deal announced today.
Beginning in 2025 to coincide with new California Air Resources Board (CARB) standards, STAX will become the first and only emissions control provider to service roll-on/roll-off (ro-ros) vessels in the state of California, the company said.
Stax has rapidly grown since its launch in the first quarter of this year, supported in part by a $40 million funding round from investors, announced in July. It now holds exclusive service agreements at California ports including Los Angeles, Long Beach, Hueneme, Benicia, Richmond, and Oakland. The firm has also partnered with individual companies like NYK Line, Hyundai GLOVIS, Equilon Enterprises LLC d/b/a Shell Oil Products US (Shell), and now Toyota.
Stax says it offers an alternative to shore power with land- and barge-based, mobile emissions capture and control technology for shipping terminal and fleet operators without the need for retrofits.
In the case of this latest deal, the Toyota Long Beach Vehicle Distribution Center imports about 200,000 vehicles each year on ro-ro vessels. Stax will keep those ships green with its flexible exhaust capture system, which attaches to all vessel classes without modification to remove 99% of emitted particulate matter (PM) and 95% of emitted oxides of nitrogen (NOx). Over the lifetime of this new agreement with Toyota, Stax estimated the service will account for approximately 3,700 hours and more than 47 tons of emissions controlled.
“We set out to provide an emissions capture and control solution that was reliable, easily accessible, and cost-effective. As we begin to service Toyota, we’re confident that we can meet the needs of the full breadth of the maritime industry, furthering our impact on the local air quality, public health, and environment,” Mike Walker, CEO of Stax, said in a release. “Continuing to establish strong partnerships will help build momentum for and trust in our technology as we expand beyond the state of California.”
That result showed that driver wages across the industry continue to increase post-pandemic, despite a challenging freight market for motor carriers. The data comes from ATA’s “Driver Compensation Study,” which asked 120 fleets, more than 150,000 employee drivers, and 14,000 independent contractors about their wage and benefit information.
Drilling into specific categories, linehaul less-than-truckload (LTL) drivers earned a median annual amount of $94,525 in 2023, while local LTL drivers earned a median of $80,680. The median annual compensation for drivers at private carriers has risen 12% since 2021, reaching $95,114 in 2023. And leased-on independent contractors for truckload carriers were paid an annual median amount of $186,016 in 2023.
The results also showed how the demographics of the industry are changing, as carriers offered smaller referral and fewer sign-on bonuses for new drivers in 2023 compared to 2021 but more frequently offered tenure bonuses to their current drivers and with a greater median value.
"While our last study, conducted in 2021, illustrated how drivers benefitted from the strongest freight environment in a generation, this latest report shows professional drivers' earnings are still rising—even in a weaker freight economy," ATA Chief Economist Bob Costello said in a release. "By offering greater tenure bonuses to their current driver force, many fleets appear to be shifting their workforce priorities from recruitment to retention."