Order Management

The Rising Costs of Fulfillment: A Hidden Cost of the Omnichannel Model

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A customer in need of an outfit for an event orders shoes, jewelry and a dress from her favorite brand, and it arrives via courier the next day. A company that wants branded giveaways for a trade show receives a carton of custom gifts in under a week from order to print to delivery. A busy urban professional orders ingredients for a home cooked meal and has them delivered – same day – to his doorstep. A parent in need of a last-minute holiday gift reserves an item online and then picks it up at a store en route to his office the next morning. Today’s omnichannel retail environment has made possible every shopping scenario a customer could require – and put retailers on the hook for delivering every combination flawlessly, each and every time.

How can you thrive over omnichannel complexity?

Ecommerce Profits and Omnichannel Fulfillment Costs: Both on the Rise

Business Insider estimates that e-commerce will grow between 8 and 12 percent this year, hitting a high of potentially $436 billion. This is three times faster than the rest of the retail industry. Retailers aren’t just working to ensure their websites are optimized for mobile or their checkout process is efficient. There’s an entire back-end fulfillment engine companies are furiously working to make these orders a possibility, ensuring retailers delight customers while keeping their cost-to-serve in check. As the percentage of retailers’ omnichannel business rises, so do the costs and complexities of delivering a seamless experience.

Retailers have seen a 300 percent increase in the cost-to-serve for omnichannel customers. It’s been estimated that 18 cents out of every dollar generated online goes to the costs of fulfillment. The Wall Street Journal has reported that fulfillment costs are on the rise across the retail industry, as revenues rise, fulfillment costs also go up. In the Retail Industry Leader Association’s annual survey (as reported in Supply Chain Quarterly), controlling supply chain costs was identified as a top strategic priority for 2017 – and omnichannel costs are a significant part of the picture. Just 50 percent of respondents recover some of the costs of omnichannel fulfillment, 40 percent don’t recover any of the costs, and 10 percent simply aren’t measuring.

Strategies and Tools to Meet Demand – And Keep Margins Up

Against this backdrop, busy retail executives need the right strategies and tools to help them navigate the complex and fast-changing omnichannel retail landscape. Strategies to consider include:

Leverage cognitive tools that utilize holistic, real-time data: Managing a national, or even regional, fulfillment engine requires real-time visibility into a number of different drivers: demand, specific orders, shipping costs, inventory at different distribution points – including stores – and more. Brands are increasingly turning toward tools such as Watson Order Optimizer to help them realize the full picture and harness holistic, real-time data. Fulfillment insights let retail executives understand what factors are influencing fulfillment performance down to the SKU level and make data-driven decisions. As Aberdeen Essentials has reported, today’s best in class omnichannel leaders may have the ability to:

  • Segment the supply chain based on customer profile data.
  • Maintain online visibility into fulfillment costs.
  • Track actual costs as shipments/orders progress.
  • Gain cost-to-serve modeling capabilities down to the product, customer or location level.

Simulate your fulfillment strategies: Fulfillment networks today are a web of relationships: supply chain partners, stores, distribution points, transport partners, shippers and others. As a result, simulating your fulfillment strategies before going live with changes can help you model on a range of different variables and achieve a design that balances between cost effectiveness and delivering on customer expectations.

Optimize inventory at its maximum price point: Inventory is a significant cost for retail brands when it’s not moving. Cognitive tools can help retailers maximize sell-through by identifying returns and at-risk inventory when planning fulfillment and shipping strategies. They can also forecast demand and look for underlying trends during standard and peak periods that drive more cost-effective inventory acquisition. Gartner has noted that markdowns should be data-driven and created, “allowing for situational differentiation by product, channel and location to maximize sell-off.”

Use data to ensure you’re investing in the most important fulfillment options: While retailers are continuing to focus on meeting omnichannel demand, many are scaling back more complex or harder to execute options such as same-day delivery or specified delivery time slots. Cognitive tools can help retailers identify their most profitable customers and determine which fulfillment offerings are most closely aligned with their needs. From there, it’s possible to optimize your supply chain, in-store operations and distribution points to support the options that drive profits at the bottom line.

Omnichannel fulfillment doesn’t have to negatively impact your bottom line. View this slideshare to see how Watson Order Optimizer can help you leverage enhanced insight to solve your omnichannel costs and complexity challenges.

Offering Management Associate, Watson Commerce

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