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18/03/2021 Client: saad24vbs Deadline: 2 Day

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The future of retail supply chains By Nitin Chaturvedi, Mirko Martich, Brian Ruwadi, Nursen Ulker

Meeting the multichannel consumer’s increasing expectations for speed and convenience is forcing many retailers to revamp obsolete supply chains designed for a single-channel world.

The rapid emergence of Amazon as the new “800-pound gorilla” is fundamentally reshaping the US retail landscape. The company’s triple-threat value proposition of price, assortment, and service has long chipped away at the big reasons to shop in a store. But recent moves toward same-day delivery and a growing network of self- service lockers show how Amazon is pressing its advantage, setting a new industry service standard that others will find expensive and difficult to follow.

And consumer expectations of convenience are only increasing. Our recent surveys indicate that many more categories are migrating online, even ones such as power tools, appliances, and furniture that traditionally relied on an in-person shopping experience (Exhibit 1). Channel boundaries are blurring: consumers are demanding options such as ordering online with in-store pickup, endless inventory regardless of where they shop, and free returns across all channels. The explosion of smartphone- driven shopping, the advent of “show-rooming” (as consumers browse in stores but buy from cheaper competitors online), and the popularity of no-added-cost returns (such as from shoe retailer Zappos) only underscore the pressures retailers face.

6160 Operations as a competitive advantage in retail The future of retail supply chains

Second, today’s retail supply chains are optimized for stores, with online often treated as a bolt-on, separate business. This legacy leads to poor cross-channel coordination across channel-specific inventory pools and fulfillment processes, causing higher out- of-stocks and markdowns in any given channel, especially during peak seasons.

Third, the huge proliferation of SKUs to fulfill the “endless assortment” promise of an online channel is creating new capacity and cost challenges, including expenses for picking additional online orders, acquiring additional DC space, and processing peak- season demand.

As a result, the typical multichannel retailer faces a huge cost disadvantage compared with the online pure play of Amazon. In our estimate, this gap can be as much as 300 to 500 basis points (Exhibit 3).

Today's supply chains are not set up to respond

Many of today’s retail supply chains are simply not set up to handle this demand for speed and convenience in a cost-effective way, and are already creaking under the strain of the new multichannel world.

First, most retailers’ networks do not include enough distribution centers (DCs) to cover individual customer orders cost-effectively for a large geography. Exhibit 2 highlights this challenge; with two to three optimally located DCs, a retailer can reach almost all of its customers with two-day shipping. But moving to one-day shipping would require a huge increase in the number of DCs. Retailers without enough DCs will either have to bear the burden of priority shipping costs or redesign their networks to be closer to customers.

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