March 13, 2017 | Written by: Alberto Jimenez
Categorized: Order Management
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It is no secret that the world of fulfillment has changed drastically in recent years. Just look at how the experience of purchasing a cellphone charger has changed. Five years ago, you would have found yourself in the endangered species that is RadioShack. Today, you could find the specific model online, receive it at home in two-four days, and ship it back as a return free-of-charge if it doesn’t fit your charging needs. Want it today? The store down the road has it. If they don’t, the merchant can ship from a nearby store in less than a day.
While convenient, all that flexibility raises fulfillment costs and creates high expectations from consumers. To meet these expectations, retailers have been forced to sacrifice margins as they struggle to optimize their omni-channel transition. Meanwhile, Amazon’s market capitalization is now larger than that of the next eight retailers combined, with their famous ease of returns and unmatched delivery speeds¹. However, while entering the ocean freight, drone delivery, and air transport business to more vertically integrate, Amazon lost over $7 billion in shipping costs in 2016².
It’s not getting easier. Shipping costs have increased 75% for ground transportation and 81.8% for air travel over the past decade (’07-’17)³. The journey has been especially long and hard for traditional retailers, which have been shutting down stores in the face of shrinking margins and meager returns.
Delivering on Delivery
During the recent holiday season, I wanted to purchase a tablet for my sister. Cognizant of the convenience that some online retailers offer, I only browsed retailers that had a free and easy ship-to-return policy. A study by Convey shows that most consumers online —66 percent of them— consider delivery a decisive factor in their shopping experience⁴. In addition, 43 percent of shoppers expect their delivery experience to be personalized based on their order and purchase history.
“Artificial” Intelligence for Real
For these retailers, artificial intelligence opens a new world of possibilities by efficiently assessing billions of different scenarios to minimize total cost to serve, all while creating a seamless and uniform experience for the consumer. It leverages retailers’ critical existing assets – loyal customers, physical stores, and rich data – to enable and enhance capabilities like ship-from-store. By empowering the stores to fulfill orders, rather than distribution centers, retailers can protect margins and reduce mark-downs by prioritizing under-performing inventory. While stores may lose some of their titan status as e-commerce grows, their relevance in the consumer experience will become even more important. By integrating AI judgement into your ship-from-store operations, a retailer can significantly increase the capacity and agility of their distribution network.
Take Black Friday as an example. You order that phone charger, along with 1,376,983 other people. The merchant could ship from a distribution center in the neighboring state, but due to the high demand, there may be a backlog, meaning that the only way to get the product to you on time is through expensive expedited shipping. That retailer would prefer to send you that item from the retail store down the road, where the inventory has been sitting on the shelf for weeks and is about to go to the discount rack. AI can help reduce those ever-rising shipping costs by optimally allocating weight across shipments, avoiding upgraded shipping, and efficiently splitting orders to reduce costs for the consumer.
Cognitive fulfillment will deliver further value by incorporating external factors into a company’s inventory decision making, such as weather patterns, local events, or social media. With this data, retailers can run simulations and predict where demand is affected and by how much. Achieving these goals is simply impossible using traditional tools. By automating certain parts of the decision-making process, retailers can empower their managers to make smarter, more informed decisions.
The case for artificial intelligence in operations will only continue to strengthen in the coming years. As companies build up their AI prowess, retailers who fail to keep up will be competed out of the market.
Find out more – access the IBM Watson Order Optimizer site.
¹ Yahoo! Finance, Amazon Bigger Than Next Eight Retailers, 2017.
² TechCrunch, Amazon adds ocean freight to the pieces of the shipping puzzle it controls, 2017.
³ Lojistic, UPS & FedEx General Price Increase History, 2017.
⁴ Convey, Deliver Experience is a Decisive Factor When Shopping Online, 2016