Designing an Organization with an Omni-Channel World in Mind

Research shows that, in the next five years, the most significant shift in omni-channel fulfillment will be in-store pickup of goods

Significant new demands are being placed on retailers’ supply chains. In omni-channel fulfillment, all the resources of the supply chain are focused on transparently serving a single shopper who places a single order. Many retailers may be able to meet omni-channel fulfillment challenges by retrofitting existing operations, or adding new processes and technology. However, very few existing distribution centers of more than a few years old are set up to accommodate the needs of an omni-channel distribution strategy.

Omni-channel retailing is steadily growing in size in the market, especially from the e-commerce segment. According to a study performed by Forrester and published by eMarketer.com, U.S. retail e-commerce sales are expected to reach $362 billion by 2016 and will continue to grow at a double-digit rate. By 2015, the number of online shoppers will exceed 200 million in the U.S., representing over 90 percent of all Internet users. Not only is the number of shoppers increasing, the amount spent by each shopper annually is also expected to increase from $1,207 in 2012 to $1,738 by 2016.

Retailers who want to compete in the omni-channel world must be able to fulfill orders from anywhere to anywhere, whether it’s the consumer’s home or the retail store. Research shows that, in the next five years, the most significant shift in omni-channel fulfillment will be the in-store pickup of goods, a fulfillment option predicted to virtually double by 2017. This is good news for the customer, offering added convenience, and for the retailer, delivering additional in-store traffic.

In the past, retailers built two types of distribution centers, one (or two) on the East and West coasts of the U.S. to handle store fulfillment, and another to handle strictly e-commerce. These distribution centers (DCs) were built to handle their own specific type of fulfillment and none other. The retail stores on the East Coast were fulfilled from the closest DC, while the outlets on the West Coast were fulfilled from a DC located in the western U.S. Fulfillment typically took one to two days, but for stores in the central U.S., they had to live with three- to five-day fulfillment. If the retailer received an e-commerce order, regardless of the location of the buyer, that order was fulfilled out of the e-commerce-only warehouse. The consumer could be located next door to the West Coast distribution center, but since he ordered his item online, it would only be shipped from the e-commerce DC, and he must wait to receive it.

So, companies not wanting to lose a single sale opened up new sales channels without enough consideration as to how they were going to fulfill those orders. Fulfilling orders that originate directly from the online customer is a much different proposition than replenishing brick-and-mortar stores. Typically, merchandise is sent in bulk shipments to the stores to replenish inventory. On the other hand, online order sizes are very small, often a single unit. These orders are then shipped directly to the customer rather than in bulk to the store. Say goodbye to bulk shipping rates through truckload carriers and hello to higher rates through parcel shippers. If these basic elements are not addressed in the supply chain, the resulting new business will be less than profitable.

Many larger retailers and department stores with growing e-commerce sales are using ship from store to defer investing capital in additional distri­bution centers. With increasing e-commerce busi­ness beginning to stress fulfillment capacities to the breaking point during peak season, retailers without ship-from-store capabilities are often operating at maximum capacity.

But you still have to get the merchandise to the store from somewhere. And if an item costs only $6, and your customer expects free shipping and wants the product overnight, which costs you $10 to ship from your DC on the other side of the U.S., you are actually losing money just to make your customer happy.

Omni-Channel Distribution Center Design

Developing an omni-channel supply chain strategy requires rethinking the number and location of distribution centers, as well as their layout and design features. The average omni-channel DC is greater than 250,000 square feet with clear ceiling heights of 36 to 40 feet to accommodate multiple mezzanine levels for processing and shipping individual orders. Typically, these distribution centers are built in areas where they can reach the most consumers and stores quickly and cost-effectively, such as Chicago, Atlanta, Dallas, Philadelphia, Long Beach and New Jersey.

Many traditional warehouse operations are not set up to efficiently accommodate a large range of orders with varying units and lines per order characteristics typical of multi-channel orders. When your operation tops 3,000 orders each day with 500 stock-keeping units (SKUs) in inventory, you will need an order fulfillment automation solution to keep throughput and accuracy numbers satisfactory.

Order Fulfillment Automation

Back-office systems, warehouse control systems and/or warehouse management systems direct picking operations for filling orders. Workers who pick orders should use automated picking solutions, such as pick to light, pick to voice, radio frequency identification (RFID) or pick to cart, to increase efficiency of their picking operations. Automated order fulfillment solutions can provide real-time notifications to adjustments needed in picking sequences, while shortening walk times and improving order-picking accuracy. These solutions can also optimize order batching and dynamic slotting to handle specials and seasonal orders.

Omni-channel distribution centers seamlessly combine both e-commerce and traditional store distribution channels, but it requires significant capital investment in material handling, conveyor sortation and controls, optimized racking systems and lift equipment, inventory management software, and picking/packing technology.

In the store-based distribution area, automation is key. When a customer makes a store purchase, the bar code reader or point-of-sale equipment notes the transaction at checkout, and it is pulled from inventory. The product picking process involves pick to cart, pick to voice or pick to light of items into totes, which are then consolidated and packed into store shipments, and scheduled for delivery. Picked products are automatically back-filled in the next delivery cycle. Merchandise bought from stores one day is back on the shelf often the very next day, with little or no direct human action involved between the scanning of the sale and the restocking of the shelf by store employees.

Automation Required

Historically, retailers approached automation in their distribution centers from the standpoint of push operations, with shipping activity based on forecasts, historical sales and production capacity. Relatively little automation was needed.

Now, with the growth of electronic commerce, retail replenishment is being tied much more closely to actual demand, with an eye toward maximizing customer service. Material-handling systems are being embraced as a means of getting products into the hands of the consumer more quickly. Typical equipment used in omni-channel fulfillment include:

  • Inventory management system that spans the entire supply chain for achieving real-time visibility.
  • Distributed order management system to decide cost-effectively whether to drop orders into a DC, e-commerce fulfillment center, combination DC or store to meet customer service levels.
  • Warehouse management system.
  • Warehouse control system to direct the flow of materials within the warehouse and communicate with all the material-handling equipment.
  • Conveyors for moving products around the warehouse to appropriate locations.
  • Sortation units that deliver items to shipping locations.
  • Picking/packing systems for directing workers what to pick, how many, where to pick or pack, etc. Some DCs are starting to use robotic picking technology, too.
  • Automatic storage and retrieval systems (AS/RS).
  • Miscellaneous, such as robotics, goods to person, transportation management systems, RFID, equipment to apply labels to cartons, etc.

Despite the challenges, retailers can’t afford not to work toward an omni-channel organization. As consumer expectations around cross-channel experience, assortment and fulfillment continue to grow, the only retailers able to meet these needs will be those supported by an organization designed with an omni-channel world in mind.

Chris Castaldi is the director of business development at W&H Systems.

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