Responding to the retail revolution

It's probably safe to say that many retail supply chain executives haven't been sleeping well of late. Ask any of them "What keeps you up at night?" and they're almost certain to respond with two words: omnichannel commerce. Consumers' demands for instantaneous, flawless online service—not to mention the ability to order, take delivery, and return merchandise however, wherever, and whenever they like—have created numerous challenges for retail supply chains and those who manage them.

To find out how retailers plan to address these and other supply chain challenges, the Retail Industry Leaders Association (RILA) conducts its State of the Retail Supply Chain survey each year. For the latest survey (the study's sixth edition), researchers from Auburn University polled RILA's members, DC Velocity's readers, and customers of the study's sponsor, Checkpoint Systems. To round out the picture, the research team conducted telephone interviews with some two-dozen retail supply chain executives. The results will be formally released at RILA's 2016 Retail Supply Chain Conference, scheduled for Feb. 28-March 2 in Dallas, but the preliminary findings provide some insight into how retailers are managing supply chains that are in constant flux.

The 36 respondents to date represented some of the largest U.S. retailers, with three-fourths reporting annual revenues of $5 billion or more. They are also well qualified to speak about supply chain strategy: 69 percent hold vice president or higher positions, and they have 24 years of supply chain management experience on average.

The survey and interviews explored three main areas: demand planning, store-based order fulfillment, and returns management, all key success factors in omnichannel commerce. To master them requires operational flexibility and precision as well as technical prowess—including the ability to track, manage, and deploy inventory across an enterprise, regardless of location or sales channel. It's no surprise, then, that half of the respondents said they plan to increase their investments in supply chain processes and upgrading supply chain software and technology in 2016.

Here are some highlights from the preliminary survey results and a sampling of what the researchers and retail executives had to say about each of the three areas.

• Demand planning. Forecasting demand that comes through multiple channels, that is no longer bound by geography, and that fluctuates in response to Internet-driven consumer trends is among the toughest challenges facing retailers today. Accordingly, respondents said their top three demand planning challenges included achieving forecast accuracy goals (63 percent), peak-period demand forecasting (47 percent), and demand planning for online channels (43 percent).
  
  Despite those difficulties, fewer than half of the respondents (45 percent) said that e-commerce retailing "greatly complicates" their demand planning activities. Still, some respondents clearly are struggling. Only 16 percent said their ability to forecast e-commerce demand is excellent, and just one-third claim to effectively adjust forecasts to account for marketplace uncertainty. One factor that may be hampering them: A mere 13 percent believe their existing technologies effectively support e-commerce planning. As one sporting goods retailer told the researchers, "We're either leaving money on the table or losing money in markdowns because we don't have the tools to make the right decisions."
  
  Supply chain executives interviewed for this year's study also cited inadequate communication among merchandising, demand planning, and stores as a reason for their forecasting difficulties. A number of them said that aligning these functions by creating cross-functional teams of merchandising, store operations, and supply chain professionals will be a high priority in 2016, says Dr. Rafay Ishfaq, assistant professor and research fellow in supply chain management in Auburn University's Harbert College of Business. Other frequently cited priorities included more granular-level demand plans that cover multiple demand streams and fulfillment nodes; innovative store-replenishment and delivery processes to respond to changing demand dynamics; and adopting "pull-based" store replenishment, which leaves most stock at a DC with small quantities delivered to individual stores as needed.
  
• Store-based order fulfillment. There appears to be no single, right answer to the question of who should be responsible for store-based order fulfillment activities, such as order allocation to stores, delivery planning, inventory accuracy, and labor scheduling. Take order allocation to stores, for example: 49 percent assign it to their supply chain group and 8 percent to store operations, while 44 percent make it a shared responsibility. At the opposite end of the spectrum is labor scheduling: 67 percent put store operations in charge, 10 percent assign it to the supply chain group, and 23 percent say it's a shared responsibility. (See Exhibit 1.)

"One of the surprises we had when we kicked off the study six years ago was that for almost all retailers, the supply chain ended at the back door of the store. From that point forward, inventory management and handling was 100 percent a store operations responsibility," says Dr. C. Clifford Defee, associate professor of supply chain management at Auburn University.

One thing that is bringing the two organizations together is the need to train store associates in efficient order picking, packing, and shipping processes. Most of the interviewees said they are using DC personnel not only to train store associates, but also to assist in developing store fulfillment processes and identifying system change requirements. Among survey respondents, 54 percent leave that up to store operations, with the rest making it a supply chain or shared responsibility.

Another is retailers' intensifying focus on customer service. A comparison of respondents' overall strategies in 2015 and 2016 shows that the percentage saying a cost-related strategy ("control supply chain costs" or "balance cost and service") was their primary strategic focus declined, while the percentage who identified "enhancing customer service" as their primary strategic focus more than doubled, to 24 percent in 2016 from 10 percent in 2015. Store operations and supply chain organizations historically have been separate divisions in the retail environment, with separate goals, according to Defee. "The fulfill-from-store movement has created a dynamic that brings these organizations closer together in some instances, but not all," he says. "We anticipate that store, supply chain, and omnichannel organizations will become better aligned in the next few years as the goal of serving the customer takes top priority, regardless of where the customer's order originates."

That trend seems to be well under way: Just 16 percent of respondents said that store-based fulfillment hinders their ability to provide quality service to customers. Still, the cost vs. customer service question is central to store fulfillment decisions. That's why some of the responses to questions about the impact of store-based fulfillment on costs, inventory, and efficiency were somewhat surprising. For example, 45 percent of respondents said that store-based fulfillment would force them to hire additional store associates, and 42 percent stated that store-based fulfillment requires higher in-store inventory levels—both implying significant ongoing additional costs—yet only 13 percent said that store-based fulfillment is not cost-effective.

In-store inventory accuracy, at 74 percent, is far and away respondents' most significant store fulfillment challenge, followed by effective labor scheduling (49 percent). Managing peak volume and achieving timely fulfillment tied for third place with 46 percent, while in-store inventory visibility was close behind at 41 percent.

Retailers are tackling those problems in a variety of ways. "Many are in the midst of system overhauls to provide a more holistic view of inventory across the network, but this does not deal with the issue of inventory being misplaced in the store itself," Defee says. A technology like radio-frequency identification (RFID) could give some retailers a way to verify inventories on the shelf relatively quickly, he says. In the short term, uncertainty about inventory accuracy has led some to require minimum in-store inventory levels for an order to be allocated to the store. In addition, retailers are still evaluating questions pertaining to the complexity of orders that can be effectively handled and the volume each store can support. Some are also following a "hub store" strategy, focusing store fulfillment inside a few larger and/or centrally located stores rather than offering this capability across the entire store network.

• Returns management. Responsibility for handling returns from customers generally lies with store operations, while supply chain groups typically handle activities involving external logistics, such as moving returned items out of stores (61 percent), returning merchandise to vendors (58 percent), and executing the disposal process (50 percent).

Many retailers have taken "a very casual attitude toward returns," but omnichannel commerce is causing more of them to recognize that returns management is a big issue not only from a customer service standpoint, but also in terms of costs, says Dr. Brian J. Gibson, professor of supply chain management at Auburn University and the study's leader. One interviewee explained the magnitude of the impact this way: "Taking product back to a reprocessing center to be scrapped or liquidated is a huge margin hit. Moving it around not only has cost implications, but you are also losing time. And when you lose time, you lose margin, especially in fashion."

The relative importance of returns management to retailers depends to a large degree on the type of products they sell. For retailers of low-margin merchandise (discount stores) and perishable goods (grocers, pet supply stores), returns are not a priority, as the volume is either low or the product is destroyed at the retail location, Gibson notes. It's different for retailers with high stock-keeping unit (SKU) variety (such as style, size, and color), high-value and high-margin goods, "perishable" apparel, and online-only offerings. The cost and complexity of those returns can be high, especially when retailers allow online orders to be returned to stores. A product may not be sold in the store where the return is made, the product may be an online-only offering that is not sold in any store, and there are tax collection/refund issues, among other potential complications, he points out.

The biggest challenges in this area include maintaining visibility and control of returns, cited by 68 percent of respondents, analyzing returns-process performance (55 percent), and capturing maximum value from returned goods (50 percent). Even so, 78 percent of respondents believe that their customer returns policy is "appropriately aligned" with their supply chain capabilities. But that doesn't mean they have returns management completely under their thumbs. Almost half of the respondents (48 percent) said they needed to develop a more effective strategy for omnichannel returns. Tellingly, only one respondent strongly agreed with the statement "Our return-to-vendor process is highly effective." (See Exhibit 2.)

To address such challenges while protecting margins and customer service, many of the retailers in the study are making—or actively considering—technology investments, and a number of them are planning and executing process improvements, Gibson says. At a macro level, some of the retailers are engaging in network-design studies for their reverse supply chains. At a facility level, a few are streamlining processes, creating dedicated returns teams and establishing engineered time standards to promote operational consistency and efficiency. And at an information level, retailers are trying to use data to improve visibility, understand the causes, and minimize the frequency and cost of returns, he explains.

Editor's note: The full results of the 6th annual "State of the Retail Supply Chain" survey will be publicly available on the Retail Industry Leaders Association's website in early March, following the group's 2016 Retail Supply Chain Conference.