Supply side: in-store execution lacks speed and precision
Because they serve as distribution centers for online retailing, stores have become essential as online sales continue to increase.
A new report from the McKinsey Group has found that despite incredible innovation amid the pandemic, retailers must still use stores as distribution centers for pickup and delivery orders.
McKinsey found that when delivery times or waits are too long, nearly half of online consumers surveyed buy elsewhere. Research indicates that over 90% of online shoppers in the United States expect 2-3 day shipping. Most are primarily reluctant to pay for speed, even amid widely reported supply chain challenges.
One in five consumers said they would accept a marginal increase in shipping costs for faster shipping than standard free shipping options.
McKinsey said that with the high and rising costs of omnichannel order fulfillment, which now account for 10-20% of sales, retailers are facing tough decisions to improve delivery speeds and profitability.
McKinsey said Amazon’s free delivery offering has accelerated by more than 75% since the early 2000s. Delivery times have been reduced from eight days in 2000 to two days in 2015. Major markets have moved to a day in 2019, with the same day in some markets by 2020. While Amazon has been the forerunner in fast delivery for the past decade, Walmart and Target have worked to have comparable services with minimum orders required.
The report also found that 75% of apparel, specialty and other retailers plan to offer fast delivery within the next two years, and 42% are aiming for one-day service by 2022. McKinsey a said supply chain efficiency is expected to improve dramatically for many because seconds matter.
“Most fulfillment operations need time to pick and package shipments,” said John Barbee, one of the McKinsey researchers and author of the report. “This process alone takes an average of four to eight hours, although the best omnichannel operations can fulfill orders within two hours of a customer’s purchase. Once picked up, parcel carriers must pick up shipments at the fulfillment center, which often influences order cut-off times – the last time a retailer can accept an order to meet their promised delivery time.
“Once a package is in the package network, it may take longer to travel the last mile to the customer. In summary, a one-day or even two-day shipment requires tight cycle times and excellent execution between multiple parts of the supply chain.
An important factor in the success of omnichannel retailers involves stores being used for fulfillment and pickup. But using stores for order fulfillment creates other challenges for buyers and the retailer. McKinsey said inventory accuracy is critical when stores have a dual function as fulfillment and buying places. The report found that stores generally have lower inventory accuracy rates (70% to 90%) than traditional distribution centers (99.5%).
The complexity of the assortment is also a challenge, as retailers often have more products online than they sell in-store, and third-party sellers in the marketplace make it even harder to count inventory. When retailers have to split shipments into multiple shipments, costs rise and margins erode. Retailers who bundle orders in one box can reduce the overall cost. Amazon and Walmart give consumers the choice of getting a single plan, which takes longer and often costs the same or a lower price.
Forecasting demand is also a challenge for retailers who use stores as distribution centers. McKinsey said positioning inventory in distribution centers, different types of stores, and market distribution centers is a struggle for most retailers. Then the picking costs are high. McKinsey said that for most retailers, the in-store pickup is 1.5 to 2 times higher on a cost-per-pick basis than the pickup at distribution and distribution centers.
Harps Foods CEO Kim Eskew recently told the Northwest Arkansas Business Journal that paying someone to buy customers is negative profit for small and medium-sized retailers. That’s why many retailers have turned to Instacart to help them become omnichannel overnight.
McKinsey also said stores aren’t typically designed with order fulfillment in mind, and they aren’t necessarily staffed or equipped with the technology to do so on a large scale. During peak hours, it is difficult for many stores to manage exceptions, ensure accurate choices and tightly control cycle times for customers, according to McKinsey. Customer experience is built on retailers doing everything right.
McKinsey said solving the dilemma of speed for execution and delivery will only get more complicated. Food, grocery and beauty product delivery expectations are less than a day. This compares to less than two days for clothing, electronics and general merchandise.
The four recommendations McKinsey made to retailers regarding online execution include more investment in network expansion. Walmart plans to add 120 micro-distribution centers this year and next. The centers will be equipped with automation and will be located next to and connected to supercentres in high demand areas.
Target, where stores process about 80% of orders online, plans to open two sorting centers in October, followed by two more after the holidays, to support its ability to ship from the store. Target said the new centers offer faster delivery times at a lower cost in high-density shipping markets. They will also free up space behind the scenes in stores.
McKinsey said adding distribution centers can cost more than $ 100 million each, which is not feasible for many retailers. Other retailers in urban areas are using dark stores as dedicated distribution centers to expand the distribution network. Capital costs are typically $ 5-15 million, a fraction of the cost of setting up a new distribution center.
Sam’s Club did this with five clubs closed over two years ago, including one in Memphis.
McKinsey also recommends using analytics and automation to increase the efficiency associated with picking or order fulfillment. This is exactly what Walmart did with personal shoppers taking orders from stores now following a path around the store that was set up through analytics. Walmart also uses automation in some stores that pick, consolidate and store orders until they are picked up. This means fewer steps and increased time efficiency in the picking process.
Accurate inventory distributed across multiple sites is critical to achieving supply chain efficiency. Yet McKinsey said this often forces companies to consolidate online and in-store inventory systems into one system. Walmart recently accomplished the feat, and it took the retail giant several years.
There are also many last mile challenges at stake for retailers. McKinsey said that even the fastest execution operation is always at the mercy of the speed and quality of the last mile delivery service. The most common way for retailers to solve this problem is to partner with third-party services like DoorDash and Uber. Target has acquired the Shipt delivery platform, which has been of use to the large retailer, especially in the midst of the pandemic. Walmart uses a combination of options, including Spark, an in-house operation using store employees and third-party delivery services.
McKinsey also warned that with escalating supply chain transportation costs this year, it would become essential for retailers to have strategic partnerships with carriers and to offer consumers pick-up points in local stores. stores, lockers or other neighborhood collection points.
Editor’s Note: The offer side section Talk Business & Politics focuses on businesses, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is operated by Talk Business & Politics and sponsored by Propak Logistics.