The Retail Supply Chain is Hot Hot Hot

When things are running smoothly, all eyes are generally on eking additional efficiency, throughput and profitability out of those operations. For example, not long ago many retailers were focused on optimizing their supply chains, squeezing more out of interconnected networks and using leaner inventory management strategies.

Then along came a pandemic that changed everything. Now, Sudhir Balebail, program director at IBM, says the conversation has shifted from optimizing supply chains to making them more resilient and adaptable. “Everyone has come to embrace the fact that change is inevitable,” says Balebail. “It’s no longer about getting the supply chain ‘right’; it’s about getting supply chains to react in a manner that can make things right.”

The pivot hasn’t been easy. Retailers that went into the pandemic with a fairly accurate picture of what their customers wanted and how they wanted those goods served up were suddenly dealing with completely different demands and expectations. The role of the brick-and-mortar store shifted, fulfillment operations had to reorganize and transportation networks were reimagined.

No corner of the retail supply chain was left untouched and many valuable lessons were learned along the way. For example, Balebail says many retailers changed how they view peak seasons, marketing campaigns and new product launches. Rather than peg their profitability to one selling season (e.g., Black Friday, Cyber Monday, etc.) or marketing campaign, they’re coming up with alternative plans well in advance—moves that have also helped combat pandemic-driven supply chain shortages.

“Retailers are moving away from the concept of putting all of their eggs in one basket,” says Balebail. “No one’s waiting for that ‘one big event’ to make or break their numbers. We saw this take hold in 2020 and then trend throughout 2021.”

Tracking retail trends

As they continue to retool their supply chains amid ongoing uncertainty, retailers are putting a bigger focus on inventory management. They’re rethinking inventory locations, shipping direct from store (versus from a warehouse or DC) and leveraging existing store inventory for customer pickup.

Tom Enright, a Gartner Supply Chain Research VP for the retail industry, says retailers are also using their physical stores and a hub-and-spoke model to create mini-regional DCs without having to build more warehouses or lease more space.

“In a large city where a retailer has two or three ‘hub’ stores, those locations are acting as feeder stores for the smaller locations,” Enright explains. This helps expand inventory options for customers whose stores stock less product and minimizes the mileage that a retailer has to cover to get an order to a consumer—effectively closing last-mile supply chain gaps. In the grocery space, he says micro-fulfillment is catching on quickly as stores deploy more robotics to pick, pack and dispatch orders.

“We’ve seen examples of micro-fulfillment being up to 10 times quicker than employees walking around [picking] from store shelves,” says Enright. “That’s a trend that’s emerging quite strongly, but predominantly within the grocery space right now.”

Re-commerce and takebacks

A model centered on selling used or previously-owned goods, re-commerce is another trend that’s taking hold in the retail space, where the sale of secondhand goods aligns well with the world’s increased interest in environmental sustainability.

Some examples include Levi’s dedicated secondhand goods website and how Patagonia allows consumers to choose between “new” and “worn” merchandise for some products.

In a similar vein, retailers are “taking back” used clothing that would otherwise be discarded in exchange for credits for future orders. Others are putting out recycling bins for takebacks in their physical stores and then reselling, breaking down or disposing of the goods in an environmentally-friendly manner.

“There’s a big focus on keeping clothing and other goods out of landfills,” says Enright, “and retailers are in a good position to be able to help facilitate this goal by extending the useable life of perfectly good products that someone may just not want anymore.”

Managing complexity

In surveying the current retail environment, Bryan Jensen, chairman and executive VP at St. Onge Company, sees a lot of companies taking “very atypical measures” to both tackle their current challenges and also shield themselves against future disruption. As part of this push, many companies are turning to technology for help transforming their supply chains.

“To one degree or another,” Jensen says, “just about every brick-and-mortar retailer is moving to more e-commerce, whether it’s buying online/picking up at store (BOPUS), shipping a parcel to a doorstep or some other approach.”

It has been a difficult shift for retailers, Jensen adds, mainly because existing order management systems (OMS) and inventory management systems (IMS) were designed to manage the shipment of cartons and pallets from DCs to physical stores. Complicating the issue are retailers that lack a single, shared inventory pool to tap for satisfying both store and e-commerce demand.

“Most of them segregate their inventory for e-commerce and store, which can create a ‘we ran out of stock on this item for our website’ situation,” Jensen explains. “Meanwhile, there might be 20 pallets of that product in inventory and reserved for the stores.” Rectifying the situation usually requires manual intervention, although Jensen says retailers whose order management systems can handle multi-channel operations have been able to effectively draw from a single inventory pool for both types of sales.

Exactly what these systems look like depends on the retailer itself, its sales volume (both brick-and-mortar and e-commerce) and what unit of measure it’s shipping to stores versus directly to consumers. Some retailers have even more complex needs. For example, a luxury goods retailer may have wholesale, e-commerce and retail channels to feed. “All of these factors drive a retailer’s preferred solution for managing the distribution of common inventory from multiple channels,” says Jensen, “and have hastened both the investigation into and investment in OMS over the last year or so.”

Tear down the silos

Steve Simmerman, head of global alliances at Locus Robotics, says retailers are also dealing with a much higher volume of smaller orders and a growth in SKUs. Add a persistent labor shortage to the equation and the need for more automation and robotics in the retail supply chain has become clear over the last year or two. “The level of expectation from the end consumer service, order visibility and on-time delivery perspective has probably never been higher,” he says.

Retailers are also tearing down any traditional silos that have been left standing and replacing them with flatter, more collaborative approaches. This trend has spilled over into the supply chain, where companies are using technology to get clearer, end-to-end views of their networks and operations. “Retailers continue to change the way their organizations are structured,” says Simmerman, “and tie organizational metrics and compensation to goals that may not have been measured in the past.”

Simmerman also sees more retailers blending robotics with human workforces to help drive higher throughputs in the most efficient manner possible. “Companies are using an interesting blend of automation, robotics and humans and figuring out ways that they can best work together,” he points out. “It’s not an ‘either or;’ it’s a combined solution that includes all three.”

Focus on forecasting

Forecasting and demand planning have never been more important in the retail space, where trying to figure out what customers are going to buy and then pairing that information with availability in the middle of ongoing supply chain shortages has been a full-time job for companies across most sectors. In the often-fickle retail environment, the task has become more difficult than ever.

Knowing this, Enright says some companies are putting more emphasis on forecasting more than just the timing of the sale. Using historical data, machine learning and artificial intelligence, they’re going beyond the typical weekly or monthly forecasts—usually centered on how many customers will pay for a product at a specific time—and looking at the choices that those buyers will make (e.g., do they want next-day shipping or are they willing to wait two days to three days to get their goods in exchange for free shipping?). Retailers can incorporate these points into their fulfillment plans, knowing that those choices will dictate where they need to hold their inventory.

Enright says that he’s been tracking this particular trend for several years now, but feels that the events of the last two years may push more retailers to take their forecasting to this next level. This will directly impact inventory management in a world where most customers expect fast fulfillment but don’t want to pay shipping fees.

The retailer that knows it’s going to sell 1,000 units of a specific product next week in Kansas City, for example, and that knows how many buyers want same-day or next-day shipping, can better allocate product close to those buyers.

“If all of those customers are prepared to wait two days to three days for their orders, then the retailer doesn’t have to hold all 1,000 units close to those buyers,” says Enright. “However, it does need to forecast the choices those buyers make from a speed point of view. That way, it can segregate that portion of online orders for the coming week into those who want it quickly, and then hold the rest in a hub or a local store.”