Supply Chain Management in Multichannel and Omnichannel Retailing

Contents

List of Abbreviations

List of Figures

1 Introduction

2 Multichannel Retailing
2.1 Characteristics and Forms of Multichannel Retailing
2.2 Omni is the new Multi

3 Challenges of Multi-/Omnichannel Retailing and Implications for SCM
3.1 New Challenges
3.2 Shorter Lead Times
3.3 Challenge of the “Last Mile”
3.4 Returns Logistics
3.5 Logistics Network: Integration vs. Separation
3.6 Stock Transparency and Information Technology
3.7 Profitability in Omnichannel Supply Chains

4 Conclusion

Bibliography

List of Internet Sources

List of Abbreviations

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List of Figures

Figure 1: Retail supply chain with multichannel distribution

Figure 2: Examples of interaction and fulfillment

Figure 3: Fulfillment methods used by leading retailers

Figure 4: 10 steps to a profitable omnichannel commerce

1 Introduction

Multichannel retailing, the parallel use of several distribution channels by retailing companies, is an established strategy in retail business and not a new concept.^[1] Nevertheless, multichannel retailing practice is getting more interesting and has exploded over the last years due to the rising importance of the internet as an attractive channel for sales. The selling and distribution of goods and services via internet, typically called e-commerce, has boomed over the last decades and m-commerce, the use of mobile technology like smartphones or tablets for purchasing, is growing even more rapidly.^[2] Particularly for young consumers, online shopping has become normality.^[3] In Germany, e-commerce is still showing double-digit growth rates with an average growth of 21% since the millennium and has reached an annual turnover of more than 50 bn Euros.^[4] 60% of German retailers are doing more than quarter of their sales with online orders, 30% more than half of their sales – with rising tendency.^[5] This increase of e- and m-commerce volumes is confronting multichannel retailers with a multitude of new challenges, especially for supply chain management and also for logistics, which need to be prepared for the increasing number of parcels.^[6]

In the U.S. and the UK, omnichannel retailing as an advancement of multichannel retail business is gaining ground and is one of the most powerful trends shaping the way retailers are interacting with their customers in selling and delivering goods.^[7] More and more retailers are choosing the strategy of allowing customers “to order anywhere, any time, and on any device, but also let them take delivery when and where they want”^[8] – with the aim of attracting new customers and increasing revenues. But companies are still discovering what this implies for their supply chain processes, as creating a profitable omnichannel supply chain challenges almost every business function, “from supply chain management and information technology to marketing, store operations, and order fulfillment.”^[9] 90% of the fifty most meaningful European retailers see the future volume growth of omnichannel and e-commerce and the according risen requirements for processes, organization and systems as the biggest challenge for logistics in the next years. This will provoke enormous changes in the companies’ supply chains.^[10]

The aim of this paper is to give an overview of challenges for logistics and supply chain management which are linked to multichannel and omnichannel retailing. For this purpose, the characteristics and forms of multi- and omnichannel retailing are described and developments and their implications for retailers pointed out. In combination with best practice approaches in SCM, recommendations for successful omnichannel supply chains, especially for order fulfillment^[11] and distribution logistics shall be outlined.

Starting with the definitions multi- and omnichannel retailing in the second chapter, the third chapter will focus on specific challenges and appropriate implications for retailers’ supply chain management that are related to multi- and omnichannel distribution. The fourth chapter will finish with a conclusion and outlook.

2 Multichannel Retailing

2.1 Characteristics and Forms of Multichannel Retailing

Neither in literature nor in business practice a common definition of multichannel retailing exists. Different descriptions of the multichannel concept have in common that it is a distribution strategy pursued by retailers, which uses two or more distribution channels in parallel in order to sell goods or services.^[12] Therefore, the designation “multichannel fulfillment” is commonly used synonymously to multichannel retailing.^[13] Yet, the terms are not to be confused with multichannel marketing which uses multiple communication channels for the spreading of marketing messages. In contrast to communications channels, distribution channels within multichannel retailing have the feature to make it possible for customers to actually make a purchase. However, according to Rittinger the term of multichannel retailing does not indicate any level of integration of the different channels.^[14] Other definitions state the multichannel involves the combined and integrated use of direct and indirect sales channels.^[15] Often, the term is only used for distribution systems, that combine traditional stores with e-commerce, since the parallel use of distribution channels, like the combination of stores and catalogues, is nothing new. But with the development and dynamics of new distribution channels like e- and m-commerce, a change in thinking and structuring of retail channels is required.^[16]

Multi-channel retailers, also known as multi-players, have a more complex supply chain than pure-players who are only focusing on one distribution channel.^[17] An example of a multi-channel retailer’s supply chain is shown in figure 1.

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Figure 1: Retail supply chain with multichannel distribution^[18]

In order to realize a multichannel retail system, a variety of different distribution channels can be used. The possibilities of channel combinations are versatile as well. In business practice, stationary stores, online shops and print catalogues are used the most. With regard to these channels, three major forms of multichannel retailing can be distinguished:^[19]

- “Bricks & clicks”: traditional over-the-counter retail stores (“bricks”) and e-commerce (“clicks”) are combined. An example is the German retailer of electronics Saturn. “Bricks & clicks” is the most common used form of multichannel systems.
- “Sheets & clicks”: combining traditional catalogue business (“sheets”) with e-commerce is a multichannel mail-order trade. A German example is the mail-order retailer Baur.
- “Bricks, clicks & sheets”: companies using all the three channels parallely, e.g. the sports equipment retailer SportScheck.^[20]

Printed catalogues („sheets“), which still are an important sales channel in fashion retailing, are more and more replaced by internet-based solutions.^[21]

Most “clicks & bricks” retailers have their origins in stationary retail stores and have opened the internet channel at a certain point of time in order to expand their market presence. Many electronic retailers like Media Markt or fashion retailers like Zara have followed this strategy of “adding clicks to bricks”.^[22] Companies that have “added bricks to clicks” started business as pure e-commerce traders and extended their distribution by local stores. A well-known example is the producer of cereals and granola mymuesli.^[23] According to their significance and commonness in practice and science, this paper will put a focus on multichannel systems that are combining local stores with an online shop, thus doing “bricks & clicks”.^[24]

2.2 Omni is the new Multi

Rushton clearly states that multichannel fulfilment means that consumers can “interact with retailers through a variety of channels at different stages of a transaction”^[25], meaning the channels are integrated. For example, the initial awareness of the product is created through an internet advertising, the customer gets information about the product through a store salesperson, purchases the product on a website, receives it via home delivery and returns it in the local store. This integration of channels and the linkage of physical and virtual world – the seamless cross-linking of offline and online distribution channels – is often referred to as so-called “omnichannel retailing”, an integrated form of multichannel retailing.^[26] Possible different points of interaction and omnichannel fulfillment are shown in figure 2.

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Figure 2: Examples of interaction and fulfillment^[27]

Omnichannel is much more than multichannel. In multichannel retailing, the different channels are separated. Interrelations are avoided in order to enable a strong focus on each particular channel target group.^[28] Companies mostly have separate supply chains with separate supporting processes for each channel. In omnichannel retailing, customers can freely choose between the channels for each phase of the purchasing process, meaning that the channels are synchronized and fully coordinated. The physical brick-and mortar stores and the digital e-commerce meld together.^[29] The entire shopping experience – both sales and fulfillment – is “seamlessly and consistently integrated across all channels of interaction.”^[30] The commingling of channels makes it possible for consumers to shop whenever they want and wherever they are.^[31] This “everywhere commerce“ has become a customer requirement which poses great challenges to retailers, supply chain managers and logistics providers.^[32] Retailers are putting priority on omnichannel in their strategic focus since customers, who are increasingly using smartphones and tablets for purchasing, attach importance to a consistent shopping experience.^[33] The isolated view of stationary and online sales is a thing of the past and no longer defendable towards customers. That is why the ability of a retailer, to integrate his different channels creating a value to the customer, is the basis for a future sustainable competitive advantage.^[34] However, the transition from an isolated multichannel retailing to an integrated omnichannel system is a complex process of transformation due to the multiple strategic, organizational, IT and cultural changes that are required to operationalize an omnichannel system.^[35]

In the U.S., where omnichannel retailing is already much more established than in Germany, different consumer-direct store-based fulfillment techniques are used.^[36] The three most commonly used ones are shown in the blue box in figure 3, together with other omnichannel fulfillment methods independent from stationary stores.

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Figure 3: Fulfillment methods used by leading retailers^[37]

The most meaningful is the so-called “click & collect”, which allows the customer to pickup his online order in a local store. Also in Germany “click & collect” is offered by more and more retailers, connecting online sales with stationary retail.^[38] In general, a stronger linkage of distribution channels and therefore the shift from multi- to omnichannel can be observed in Germany, too, especially in fashion and sports article retailing. One of the German pioneers for introducing integrated multi-channel structures is for example the outdoor equipment retailer Globetrotter.^[39]

Omnichannel retailing is the new multichannel retailing, which has already become a standard in the U.S. or the UK and France; and it will gain ground in Germany, too. Therefore, the following chapters focus on challenges of both multichannel and omnichannel retailing and the implications for supply chain management and logistics.

3 Challenges of Multi-/Omnichannel Retailing and Implications for SCM

3.1 New Challenges

Store-based retailers are increasingly becoming multi-channel retailers by opening an additional online sales channel.^[40] In Germany, more than 30% of retailers have opened an own online shop and this percentage is growing every year even higher.^[41] A key question is how to design and implement this new business model successfully. Traditional success factors of stationary store business like location or sales personnel are not valid any more in an online sales channel.^[42] E-commerce has different constraints and requires different competences which has major impacts on order fulfillment and correspondingly on supply chain management and operations.^[43] A recent trend study conducted by EHI Retail Institute and Fraunhofer IML found four essential success factors for successful multichannel logistics including the speed of delivery, stock transparency across all channels, customer-friendly returns management and adequate IT management.^[44] These and further difficulties shall be described in the following chapters.

3.2 Shorter Lead Times

„Young millennial“ shoppers^[45] are true digital natives and are demanding to receive ordered items instantly, thereby increasing pressure on multichannel retailers and their 3PL fulfillment partners.^[46] If consumers want to obtain their purchases as soon as possible, products must be available on stock and delivered quickly in good condition, at a point of time convenient to them.^[47] Delivery on a desired date is getting more important and the lead times, ie the time between receiving an order and delivering it to the customer, are reduced further due to the changed customer requirements.^[48] Even though German omni-channel retailers lie ahead with an average lead time of 2.8 days in comparison to the established omnichannel markets France (3.2) and UK (4.0), pure online players are delivering much faster, are offering various delivery options and are competing for even shorter delivery times like same-day-delivery.^[49] The basic prerequisite to enable such processes is the change of the entire supply chain towards flexible logistics networks, dynamic flow of goods and integrated inventory strategies.^[50] And a key challenge is the high cost of delivery, often denominated as the “killer costs” of picking and transport costs.^[51] These additional handling and shipping costs often represent a margin erosion because they are not paid by the customer.^[52]

German electronic retailers Media Markt and Saturn are taking up this challenge and are offering same-day-delivery with a maximum delivery time of three hours.^[53] The fashion group Peter Hahn follows the approach of Near Time Fulfillment. They are not promising every customer a 24-hour-delivery, but rather group customers so that time-critical e-commerce customer orders are handled prior to catalogue orders. Peter Hahn wants to reduce lead times by half a day though process optimization and automatization of non-value-adding steps like standardized delivery documents or direct labeling at the packing station. Smaller and smaller order structures need to be bundled and short lead times made possible by flexible and multi-step picking.^[54] In order to meet customers‘ expectations in terms of availability and speed of delivery, the strengths of omnichannel systems must be played out. The integration of stores as mini-hubs for fulfillment, flexible and efficient technologies in warehousing and handling and the introduction of distributed order management (DOM) systems are important enablers and make omnichannel retailers stay competitive against pure online players.^[55] DOM systems “determine the best fulfillment location for an order based on a broad set of parameters, including inventory availability, capacity, and potential margin.”^[56]

3.3 Challenge of the “Last Mile”

In order to enable the requested shorter lead times, the fast fulfillment of online orders and especially the “last mile” of delivering goods to the customer are a key success factor.^[57] The final step of delivering to the customer’s home brings the challenge of “an acceptable and profitable balance between customer convenience, distribution cost and security.”^[58] The most common option for handling the “last mile” delivery are courier delivery services like DHL or Hermes.^[59] The “last mile” is becoming an expensive problem both for carrier and customer, when the latter is not at home and repeated delivery failures occur.^[60]

In omnichannel retailing, when consumers can order anywhere, anyhow and anytime, unattended delivery remains a problem. But the improved real-time communication from companies with customers via e-mail or apps about the detailed time of home delivery makes it easier to coordinate or react to customers’ feedbacks. Another way of addressing the “last mile” problem is to provide alternative delivery options, including delivery points (e.g. garage or even in the car’s trunk) and collection of goods (e.g. “click & collect” in stationary store).^[61] In the UK “click & collect” turned out to be a popular selection amongst customers, who find it more convenient to collect their order in a store near their place of work than home delivery. The British clothing, footwear and home products retailer Next has already 50% of their online orders picked up in their local shops, helping them to reduce high costs of home delivery. Additionally, customers have an extra option to return goods.^[62] In store-based fulfillment, multiple approaches can be taken. That way, in the U.S. 64% of omnichannel retailers pick at store and hold the items for customer pickup, 46% ship from a distribution centre to the store for customer pickup and 68% both pick and ship from the store. Picking at the store is mostly done from the back in the stockroom (71%) and from the front in the showroom (64%).^[63]

Similarly, German omnichannel retailers recognize that in cities only decentralized structures with local hubs ensure a functioning delivery infrastructure. The logistics consultancy Metroplan is sure, that separate regional distribution networks are indispensable to secure a fast accomplishment of the “last mile”. Head of Business Development DACH^[64] of online pure player Ebay assures that alternative delivery points like parcel shops or DHL Packstation are gaining importance as well as the usage of stores as small logistics centres for “click & collect”.^[65] Numerous retailers in German fashion business are already offering the “click & collect” delivery alternative: Hugo Boss, Tom Tailor, Orsay, Pimkie, Butlers, s.Oliver, Decathlon, Karstadt, Adidas, Jack Wolfskin, hunkemöller – just to name a few. Deichmann & Kik are working on corresponding solutions. “Click & collect” has the huge advantage of lower or no delivery costs an it’s an easy way of delivery and return.^[66] Nevertheless, a recent study made by DHBW Heilbronn^[67] found that in many cases, “click & collect” is implemented as a mere collection at parcel shops (44% of all tested “click & collect” orders), so that retailers miss the chance of making additional turnover while the customer is testing the ordered items in a store. There is still great potential for improvement in terms of design and realization of “click & collect” and a standard form of that omnichannel method has not established in Germany yet.^[68]

[...]

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^[1] Cf. Schramm-Klein, H. (2006), p. 503f.; Rittinger, S. (2014), p.1.

^[2] Cf. Fernie, J./Fernie, S./McKinnon, A. (2014), p. 205.

^[3] Cf. Rittinger, S. (2014), p. 1.

^[4] Cf. Bradl, N. (2015), p. 48; Kromer, S. (2016), p. 1.

^[5] Cf. Daniluk, D./Wolf, O. (2015), p. 20.

^[6] Cf. Fernie, J./Sparks, L. (2014), p. 21; Bradl, N. (2015), pp. 48f.

^[7] Cf. Ames, B. (2015), p. 20.

^[8] Ames, B. (2015), p. 20.

^[9] Ames, B. (2015), p. 20.

^[10] Cf. Kromer, S. (2016), p. 21.

^[11] The term fulfillment is typically used for the delivery of individual online purchases.

^[12] Cf. Rittinger, S. (2014), p. 3.

^[13] Cf. Rushton, A./Croucher, P./Baker, P. (2014), p. 168.

^[14] Cf. Rittinger, S. (2014), p. 3.

^[15] Cf. Sonntag, F./Thulesius, M. (2015), p. 95.

^[16] Cf. Schramm-Klein, H. (2006), p. 504.

^[17] Cf. Agrawal, N. M./Smith, S. A. (2015), p. 11.

^[18] Agrawal, N. M./Smith, S. A. (2015), p. 14.

^[19] Cf. Rittinger, S. (2014), p. 5.

^[20] Cf. Sonntag, F./Thulesius, M. (2015), p. 95; Rittinger, S. (2014), p.5.

^[21] Cf. Rittinger, S. (2014), p. 6.

^[22] Cf. Sonntag, F./Thulesius, M. (2015), p. 95; Rittinger, S. (2014), p. 6.

^[23] Cf. Rittinger, S. (2014), p. 6.

^[24] Cf. Rittinger, S. (2014), p. 6.

^[25] Rushton, A./Croucher, P./Baker, P. (2014), p. 168.

^[26] Cf. Bradl, N. (2015), p. 48; Janz, O. (2016), p. 12.

^[27] Thomas, K. (2015), p. 26.

^[28] Cf. Rittinger, S. (2014), p. 14.

^[29] Cf. Thomas, K. (2015), p. 25.

^[30] Fernie, J./Grant, D. B. (2015), p. 138.

^[31] Cf. Ern-Stockum, D. (2015), p. 1.

^[32] Cf. Goyarts, F. (2015), p. 17.

^[33] Cf. Ern-Stockum, D. (2015), p. 1; Rittinger, S. (2014), p. 17.

^[34] Cf. Rittinger, S. (2014), p. 32.

^[35] Cf. Rittinger, S. (2014), p. 21; Ern-Stockum, D. (2015), p. 1.

^[36] Cf. Griffin-Cryan, B./Wall, K. (2015), p. 45.

^[37] Griffin-Cryan, B./Wall, K. (2015), p. 46.

^[38] Cf. Janz, O. (2016), pp. 11f.

^[39] Cf. Rittinger, S. (2014), p. 15.

^[40] Cf. Lang, G. (2011), p. 1.

^[41] Cf. Rittinger, S. (2014), p. 1.

^[42] Cf. Lang, G. (2011), p. 5.

^[43] Cf. Lang, G. (2011), p. 1.

^[44] Cf. LOGISTIK HEUTE (2015).

^[45] People born between 1990 and 2000.

^[46] Cf. Fernie, J./Grant, D. B. (2015), pp. 138f.

^[47] Cf. Fernie, J./Grant, D. B. (2015), p. 141.

^[48] Cf. Bradl, N. (2015), p. 49.

^[49] Cf. Kromer, S. (2016), p. 2.

^[50] Cf. Kromer, S. (2016), p. 2.

^[51] Cf. Fernie, J./Sparks, L. (2014), p. 22.

^[52] Cf. Thomas, K. (2015), p. 26.

^[53] Cf. Goyarts, F. (2015), p. 17.

^[54] Cf. Bradl, N. (2014), pp. 48f.

^[55] Cf. Kromer, S. (2016), p. 3.

^[56] Griffin-Cryan, B./Wall, K. (2015), p. 48.

^[57] Cf. Fernie, J./Sparks, L. (2014), p. 21.

^[58] Cf. Fernie, J./Fernie, S./McKinnon, A. (2014), p. 226.

^[59] Cf. Ames, B. (2015), p. 22.

^[60] Cf. Fernie, J./Grant, D. B. (2015), p. 21.

^[61] Cf. Fernie, J./Fernie, S./McKinnon, A. (2014), p. 231f.; Fernie, J./Grant, D. B. (2015), p. 22.

^[62] Cf. Fernie, J./Grant, D. B. (2015), p. 22.

^[63] Cf. Ames, B. (2015), p. 23.

^[64] Abbreviation for the business areas of Germany, Austria and Switzerland.

^[65] Cf. Bradl, N. (2015), p. 49.

^[66] Cf. Janz, O. (2016), p. 17.

^[67] Duale Hochschule Baden-Württemberg, Standort Heilbronn.

^[68] Cf. Duale Hochschule Baden-Württemberg Heilbronn (2016).