The future of retail relies heavily on fulfillment.
Over the past decade, delivery expectations have surged. Two-day and one-day shipping is emerging as the new norm. Retailers continue to move towards shorter delivery times, yet most cannot deliver products profitably within three to five days.
At NRF earlier this year, our CTO, Vivek Farias, made a bold prediction: within the next ten years, two-hour delivery is going to be table stakes.
Retailers are at a point where the failure to provide options for quick delivery comes with the risk of losing a sale. This shouldn’t come as a surprise for those in the industry, yet looking at the actual stats is always mind-boggling:
- About 72% of consumers factor in two-day delivery to help decide whether or not to make an online purchase.
- About 45% of consumers factor in one to two-hour delivery to help decide whether or not to make an online purchase.
Given this data, maybe Vivek’s prediction isn’t so bold.
It’s completely reasonable, and retailers need to prepare for deliver on these expectations in order to survive.
The delivery expectations placing pressure on traditional retailers is only amplified with all the other challenges facing the market, primarily:
- Relentless competition continues to surface
- Online shopping growth rates substantially increased
- Innovative technology continues to progress
Have retail systems evolved to deliver in such an unpredictable market?
Where did it all begin, and more importantly, when did it all get so complicated?
Retail supply chain systems have come a long way since their horse and buggy delivery heyday (yes, it’s true, that was a thing). Nonetheless, retailers still have a looooong way to go. To understand where retail is heading from a fulfillment standpoint, let’s take a brief look at the history of fulfillment in retail.
A Brief History of the Retail Supply Chain
Before, the retail supply chain system was linear and predictable.
Simple and easy.
The average consumer shopped within their community, only visiting stores walking distance away. Independent mom and pop shops thrived in this space, with product traveling directly from supplier to the store.
Then, the transportation revolution emerged.
Here we see one of the first shifts in retail. Highway systems expanded, which led to the development of suburbia. All of your average, American middle-class families funneled into these new developments post-WWII, with their new wheels and ice boxes (the refrigerator was introduced during this time too!).
It was the early makings of American consumer culture.
As more Americans fled the inner cities, bought nice cars, and began indulging in consumerism, larger chains and big box superstores made their mark. At the time, larger chains and big box stores popularized discount shopping—all made possible by funneling bulk fulfillment orders from one main supplier.
"That's when local mom and pops were really hurt the first time, because the neighborhoods began to empty out, and at the same time as they were emptying out, people began to find out about the larger chains that were able to provide less-expensive goods by buying in quantity." – John Grabowski, History Professor at Case Western Reserve University
The establishment of suburbia naturally sparked the conception of the mall—which eventually emerged as the “center of consumer culture” in the U.S.
In fact, by 1987 approximately 30,000 malls accounted for over 50% of retail dollars spent (about $676 billion), a 36% jump from 1960. These figures are clearly a testament to the phenomenal growth of malls and shopping centers during this period.
In Comes Technology
All of these developments crafted the traditional retail space we once knew and loved. However, with the inception of technology—initially, the Internet—another shift emerged.
Access to purchasing products got easier.
E-commerce, mobile commerce and social commerce all come into play, and are still evolving today. While online sources of demand began growing slowly, retailers measured and managed inventory for e-commerce separately from its traditional brick-and-mortar stores. They were seen as two separate entities.
As access to products increased, supply began outpacing demand and consumers gained more power than ever before.
The lines between digital and physical blurred.
The path to purchase started encompassing a number of touch points—merging the online and physical worlds.
As the two channels merged, delivering on consumer expectations grew evermore challenging. Increased access to products simultaneously increased competition—beginning with Amazon, who set the precedent for fast and free delivery.
This “rising power” of consumers would forever change the retail landscape drastically:
“[As] consumers gained increasing access to more goods and services, retailers and brands had to win a consumer’s purchase over the hundreds of equally compelling competitors. Therefore they had to ratchet up their offerings and differentiate themselves by adding value in some unique way. [In] a word, consumers are not just more powerful, they are omnipotent. And it’s their shopping, buying and consumption decisions that are literally forcing all industries to transform drastically and quickly. I call that the ultimate power of omnipotence.” – Robin Report
And the rest is history.
A Look at the Facts: Today's Reality
The importance of delivery speed, convenience and cost is undeniable.
Let’s take a look at the facts:
- 54% of shoppers in the U.S have abandoned an online purchase because delivery was too expensive
- 24% of shoppers cancelled an order due to slow delivery speeds
- 83% of consumers said free delivery was the most important factor for e-commerce purchases (followed by speed of delivery (53%) and free returns (52%))
- 45% said that convenience was the most important factor for e-commerce purchases
Consumers want things delivered better, faster and cheaper. Seems simple enough?
The way the retail supply chain evolved makes it really complex to deliver on these expectations profitably, which has caused the role of the store to transform as well.
"The shift toward online commerce is driving many supply chain and operations leaders in retail to rethink the role of the store to improve all types of fulfillment performance." - Gartner, Survey Analysis: Multichannel Supply Chain Success Driven by Three Factors
To provide one or two-day delivery calls for leveraging the physical store in a number of unique ways, primarily through ship-from-store or BOPIS (buy online, pickup in store) programs. In fact, 56% of U.S. shoppers already use the ‘buy online pick-up in-store’ (BOPIS) option today.
However, providing these services effectively is really difficult.
“With online sales continuing to rise, retailers have to ensure they are operationally competent to deliver on time, have the ability to change direction at a moment’s notice and can offer flexible delivery alternatives such as buy online, pickup in store or risk letting down customers.” - Steve Osburn, Managing Director at Kurt Salmon
As a retailer, you have millions of products to manage across thousands of store locations. How could you possibly consider all the possible scenarios for the most optimal delivery, while weighing in a number of fulfillment objectives, like:
- Low delivery costs
- Fast delivery
- Minimized order cancellations
- Reduced safety stock
- Increased inventory turns
It doesn’t help that most retailers are also limited to recommendations from their traditional OMS system, which is rules-based and doesn't optimize across multiple objectives.
What’s a retailer to do?
This is where technology comes into play, yet again. Now more than ever, as retailers struggle to adapt to the evolving market, they’re also turning to their data to make the best merchandising decision possible.
In this case, shipping from the best possible location for any given ship-from-store scenario. The capabilities of advanced analytics opens the world for retailers to optimize online order fulfillment in the most efficient way possible, while helping understand localized demand and optimizing multiple factors in real-time:
“Today's AI and advanced machine learning techniques are pushing boundaries by allowing marketers and merchandisers to move past the traditional, more manual and rule-based approaches to analysis.”- Gartner's 2017 Hype Cycle for Retail Technologies
It's time to start enabling a more accurate, data-driven approach to fulfillment. The stakes are higher than ever, and those who miss out on the opportunities due to operational inefficiencies or poor inventory management won't survive the shift retail is experiencing today.