Transforming the Supply Chain in an Omnichannel World

Stephen DeAngelis

March 25, 2015

“The rise of the omni-consumer,” asserts Fabrizio Brasca (), Vice President of Global Logistics at JDA Software, “has changed virtually every aspect of the way retailers and manufacturers conduct their businesses.” [“The Omni-Consumer and the Future of Transportation,” Logistics Viewpoints, 21 June 2012] The omni-consumer is an individual who uses more than one sales channel on his or her path to purchase. This omnichannel approach to shopping has required manufacturers and retailers to transform almost every aspect of their business model because consumers expect a seamless shopping experience whether shopping online from a desktop or mobile device or in a bricks-and-mortar store. I believe it’s fair to say that, for many companies, the road leading to the omnichannel world has been paved with cobblestones. Giselle Abramovich (), Senior & Strategic Editor of CMO.com, reports, “Although the term ‘omnichannel’ has become most associated with success in retail and consumer goods, few companies are confident in their omnichannel abilities, according to a new study by Ernst & Young and the Consumer Goods Forum.” [“Omnichannel Must Be A Team Effort Among Marketing, CX, Operations,” CMO.com, 24 February 2015] Abramovich’s headline provides a hint as to why the road to omnichannel success has been so rocky — omnichannel strategies require collaboration both within companies and between companies in order for it to succeed.

Brasca, for example, discusses how omnichannel operations have affected just one segment of the supply chain — transportation. “While the omni-consumer has created new challenges in every part of the supply chain,” he writes, “a special impact is felt in the area of transportation, as consumers have quickly grown accustomed to the ‘fast and free’ home delivery offered by Amazon and other online retailers. Many companies are finding that their traditional transportation networks are simply not built to serve the demands of the new omni-consumer.” Brasca’s point is important. Many people seem to believe that the omnichannel shopping experience is mostly about marketing. Brasca knows that omnichannel operations are more about the supply chain. Corporate executives have apparently come to this conclusion as well. According to Abramovich, one of the key findings of the Ernst & Young/Consumer Goods Forum study was “that 81% of executives believe the supply chain — an integral part of any seamless online-offline commerce experience — is holding back their omnichannel strategies.” That’s not good news; especially for supply chain professionals.

Jon Wood, Vice President at DHL’s Retail (Home & Leisure) Division, writes, “With customers shopping via a range of channels, it is important to provide a flexible and seamless shopping experience regardless of whether the customer visits a store, orders online, over the phone or through an app. The supply chain is integral for retailers to deliver the seamless cross channel experience that consumers expect, and meet ever-changing fluctuations in demand.” [“Supply Chain and the multichannel buying experience,” Retail Gazette, 26 March 2014] He continues:

“Delivering on time, ensuring there is good stock availability and taking a consistent approach to delivering a great experience online and in store is important to make sure that the customer’s experience is positive, especially if they have ordered remotely. Cost management is also key in both arenas however, by offering cheaper online deals with free delivery there’s a growing risk of decreasing footfall in stores. In addition, increasingly shorter lead times, i.e., within 60-minute delivery windows, mean that routes to market need to be less complex to meet demand. Consumers can now dictate a dedicated time and place that the retailer is required to meet this to deliver a great customer experience.”

Making routes to market less complex at a time when supply chain complexity is increasing (thanks in part to omnichannel operations) is no easy task; but, as Wood insists, “Getting the supply chain right is crucial.” Lalit Wadhwa of Avnet believes that one way to make supply chains less complex is to segment them. “Supply chain segmentation involves clustering services or capabilities that together are used to meet a specific set of requirements,” Wadhwa explains. [“Steps to Successful Supply Chain Segmentation,” SupplyChainBrain, 13 February 2014] He elaborates:

“While similar in concept to customer or product segmentation, supply chain segmentation is all about capabilities, he says. ‘How you take a product and get it to the customer involves a unique set of capabilities that are really not about the kind of product or customer involved,’ he says. Wadhwa says supply chain segmentation is important for three reasons: It enables companies to meet customer needs at the lowest possible cost; it creates a framework that focuses the entire organization on delivering value to the customer; and it provides an effective way to manage the entire life cycle of a product.”

Wadhwa indicates that there is no silver bullet or one-size-fits-all approach to supply chain segmentation. “There are multiple methodologies for approaching supply chain segmentation.” He adds, however, “Segmenting the supply chain is easy. Execution is the hard part.” Regardless of the methodology selected, Wadhwa asserts three steps are always involved. He explains:

“The first step is to cluster products and cluster the channels through which they are delivered, then create a matrix. … Every product/channel combination in the matrix represents an individual supply chain. The next step is to prioritize the supply chains based on attributes like revenue, gross margin and the number of SKUs. The second step is deciding on the tradeoffs between cost, service and speed, using the early prioritization and customers’ needs and value. The third step is execution, which is the hardest part. … This is where you take all the business processes within the company, starting with supply management — how you negotiate contracts with suppliers, how you build products, inventory policies, how and where you stock products, businesses processes and metrics, supply chain performance — these all need to be aligned with the individual supply chains that you have identified. That is the critical piece where most of the challenges emerge.”

David R. Bell, a professor of marketing at the Wharton School at the University of Pennsylvania, along with Santiago Gallino, an assistant professor at the Tuck School of Business at Dartmouth College, and Antonio Moreno, an assistant professor at the Kellogg School of Management at Northwestern University, offer up some insights about how retailers can win in an omnichannel world. They write, “The challenge omnichannel retailers face is this: How can retailers provide consumers with information (about what products best suit them) without incurring downside on product fulfillment (delivery of products)? The omnichannel environment presents new challenges and opportunities for both information and product fulfillment.” [“How to Win in an Omnichannel World,” MIT Sloan Management Review, 16 September 2014] They conclude, “The best way to navigate the omnichannel environment is to: (1) take a customer perspective and (2) view the activities of the company through the lens of the two core functions of information and fulfillment.” They discuss in detail what they call the “information and fulfillment matrix.” They conclude:

“Like it or not, customers are omnichannel in their thinking and behavior. Sellers need to be as well. Omnichannel features initially perceived as ‘nice add-ons’ are becoming ‘must-haves.’ The question for sellers is no longer whether to operate an omnichannel strategy, but how to implement it most effectively. Our research underscores that the best sellers will win the omnichannel revolution by working across the permeable boundaries of information and fulfillment, offering the right combination of experiences for the customers that demand them.”

Navigating the landscape in an omnichannel world is not easy, but it is a journey that must be taken if manufacturers and retailers are going to survive in the decades ahead.