Omnichannel Fulfillment and the Amazon Effect

Stephen DeAngelis

August 13, 2018

Many analysts assert the rise of e-commerce and the emergence of Amazon as an online retailer created the so-called “Amazon Effect” and set the stage for the Retail Apocalypse. Lin Grosman, Director of Communications and PR at GoDataFeed, observes, “The Amazon effect has dramatically changed the way we shop since the company debuted in 1994. This term describes the effect that the entire digital marketplace has had on traditional forms of commerce, like brick-and-mortar retail. Namely, the Amazon effect has introduced consumers to an almost completely frictionless shopping process with near-immediate results (more and more, this refers to delivery, too).”[1] Retailers puzzling over how to counter the Amazon Effect realized their brick-and-mortar stores could be used as fulfillment centers and began to roll out “click-and-collect” capabilities — allowing shoppers to purchase an item online and pick it up in store. Krystina Gustafson (@KrystinaGustafs), Vice President of Content at Shop Talk, notes click-and collect strategies were “touted as a key advantage [over Amazon] in stemming their sales bleed.”[2] Unfortunately, the click-and-collect strategy proved insufficient to halt the onset of the Retail Apocalypse.

Why click-and-collect is insufficient

Just because click-and-collect didn’t solve all of the challenges faced by traditional retailers doesn’t mean it didn’t have a positive impact. Gustafson notes, “The benefits are multiple. First, the service brings shoppers into stores, increasing the likelihood they’ll scoop up extra items on their visit. Second, it streamlines distribution, often eliminating the cost of shipping, and getting orders in consumers’ hands more quickly. But perhaps most importantly, it allows traditional retailers to leverage the key advantage they have over Amazon: Their physical stores.” Despite the benefits listed by Gustafson, Professor Yossi Sheffi (@YossiSheffi), the Elisha Gray II Professor of Engineering Systems at the Massachusetts Institute of Technology, asserts the click-and-collect strategy has serious flaws.[3] “Many traditional retailers and supermarkets,” he writes, “are trying to turn a weakness — their costly brick-and-mortar stores — into a competitive advantage. The so-called omnichannel solution envisions those outlets operating both as familiar sites for merchandise display and as fulfillment nodes for online sales. … The goal is to outflank the e-tailers’ cost advantage by using the physical store network to serve the online buying channel. In reality, however, there are critical flaws in the strategy, and without adjustments retailers won’t get the gains in efficiency and lower costs they need to compete with online marketplaces.”

The first flaw Sheffi identifies in the click-and-collect strategy is that it runs counter to cost-saving, load-shifting strategies in which retailers have begun “to use technology to reduce costs and employee head count by shifting work from employees to customers.” Self-service check-out stands are a prime example of how retailers have tried to shift work from employees to customers. Click-and-collect strategies, Sheffi notes, “requires store employees or contractors to roam the aisles and ‘pick’ the goods that customers have placed in their digital carts. … In-store fulfillment moves retailers in the opposite direction by creating work for store employees that used to be performed by customers.” Sheffi also suspects other touted benefits of click-and-collect, like increased impulse buying and lower transportation costs, are spurious. “The biggest cost in the in-store fulfillment model,” he writes, “is the picking and packing operation, not transportation, and here companies are adding new costs and new complications that spread across their business.” Jim Prewitt, Vice President of retail industry strategy at JDA Software, agrees with Sheffi. He told Gustafson, “Any time you touch the product, obviously you’re adding cost.”

Sheffi isn’t trying discourage traditional retailers from developing omnichannel operations, he is simply pointing out challenges such operations must face. He offers a few suggestions about other strategies traditional retailers can try; but, he warns, “These options aren’t easy; they involve substantial investments, creativity, silo-busting, and a good deal of experimentation. But the alternative is even less attractive. That would be the inexorable decline of brick-and-mortar retailers as they lose customers to much more efficient e-commerce players.” Robert J. Bowman agrees with Sheffi that the click-and-collect model is too inefficient to compete with other types of omnichannel strategies. “It’s one thing for a million-plus square-foot distribution center to pick and ship an online order,” he writes. “That’s precisely what it’s designed to do. Making that process work from the sales floor or backroom of a retail outlet is another matter entirely. Stores aren’t set up to do that.”[4] He points out challenges only surmount if direct shipment from stores is added to the mix.

Competing in the omnichannel environment

Despite the numerous challenges detailed above, analysts at Magestore insist, “Omnichannel fulfillment is more and more becoming an indispensable solution for retailers who want to stay competitive today.”[5] They cite a study from BI Intelligence which concludes, “Brick-and-mortar retailers are caught on the wrong side of the digital shift in retail, with many stuck in a dangerous cycle of falling foot traffic, declining comparable-store sales, and increasing store closures.” As a result, they see omnichannel operations as the only hope for future growth. According the Magestore analysts, omnichannel order fulfillment involves 5 basic processes which must be mastered. They are:

1. Warehouse organization: Check the merchandise, warehousing, inventory management;
2. Order management: Order processing, order confirmation;
3. Packaging: Pick the products, print labels, packaging;
4. Shipping/Return: Delivery, shipping, payment/refund, return goods;
5. Customer communication: Contact, customer care after sales.

Most analysts agree managing customer expectations is essential in an omnichannel world. Today’s consumers expect a seamless buying experience regardless of the journey their path to purchase takes. Omnichannel operations are physical manifestations of consumers’ digital path to purchase expectations. Jon Kuerschner, Vice President of Product Management and Consulting for HighJump, asserts retailers generally begin their quest for omnichannel mastery from either a defensive or an offensive position.[6] Organizations whose strategy is defensive generally:

  • Try to protect the current revenue. Kuerschner believes pursuing this goal often prevents organizations from embracing new business opportunities.
  • Fail to prepare adequately. Kuerschner believes defensive strategies lack innovation and planning. “They simply follow the model of others in hopes that it will work for them, too.”
  • See technology as savior. Technologies support processes, not the other way around. Kuerschner insists people, processes, and technology all still matter, but the balance must be right.
  • Make ill-advised promises to customers. Over-promising and under-performing can only result in disaster. As Kuerschner notes, “You typically only have ONE chance to leave a positive impact on the buyer in the omnichannel world.”

In sports, commentators often insist, “The best offense is a good defense.” Although some defense in the omnichannel space is important, Kuerschner insists an offensive strategy “is a much more sensible one.” Kuerschner suggests an offensive approach is guided by the following best practices:

  • Enhance the business through new channels. The term “omnichannel” means all channels. Retailers shouldn’t overlook any potential channel. Using an offensive strategy, Kuerschner explains, “The organization views new avenues to the customer as a tremendous opportunity for growth. Not only might this mean more revenue immediately, but it puts the business in a great spot for long-term success.”
  • Build a strategic plan. You’ll never get anywhere if you don’t know where you want to end up. Kuerschner writes, “Sufficient time and resources [must be] set aside to craft a detailed plan. Leadership establishes a rallying vision and all departments in the organization see, understand and support the vision.”
  • Find the right technology. We live in the Digital Age and organizations must learn how to leverage digital technologies. With the right technologies, Kuerschner insists, “technology will help meet broader corporate goals.”
  • Find and hire the right people. The right people aren’t all technologists. Retailers are finding that personnel providing customer service are just as critical in today’s omnichannel environment.

Finding the right omnichannel strategy can be challenging; but, it’s absolutely essential to remaining profitable in today’s business environment.

Footnotes
[1] Lin Grosman, “What The Amazon Effect Means For Retailers,” Forbes, 22 February 2018.
[2] Krystina Gustafson, “Retail’s big advantage over Amazon isn’t foolproof,” CNBC, 29 January 2016.
[3] Yossi Sheffi, “Guest Voices: In-Store Fulfillment is No Defense Against Amazon,” The Wall Street Journal, 27 July 2016.
[4] Robert J. Bowman, “Why Retailers Are Struggling With Ship-From-Store Fulfillment,” SupplyChainBrain, 18 June 2018.
[5] Staff, “Omnichannel Fulfillment: The Key of Growth,” Magestore, 17 January 2018.
[6] Jon Kuerschner, “Transforming Your Supply Chain for Omnichannel Fulfillment,” MultiChannel Merchant, 6 June 2017.