Winning Supply Chain in Omnichannel - Trends and Implications

Winning Supply Chain in Omnichannel –
Trends and Strategic Implications
Kellogg School of Management
2016

2
Introduction
Michael Hu
Principal
Email: Michael.Hu@atkearney.com
− Area of focus: eCommerce and omni-channel supply chain; digital transformation
− Passionate about working with retailers and brands
− 2007 Kellogg grad
− 2 year consulting stint turned into 9 years … and counting

3
• Introduction: What is omnichannel? Why is supply chain critical?
• What is customer promise? Why is customer promise
segmentation key for designing a winning supply chain?
• Key trends in omnichannel and implications for future supply
chains
Agenda

4
What is omnichannel? - allowing consumers to buy how they
want, what they want and when they want it
Source: A.T. Kearney
TRANSACT
FOLLOWUP BROWSESTIMULUS
EVALUATE
Frictionless Consumer Journey
4
5
21
3
Digital stores and pop-ups
Curated, free home trials
One click buy on
social media
Amazon dash
button
Click & Collect
Locker Pickup
Time Definite Delivery
Real time promotions
Digital augmented
dressing rooms
Mobile, alternative payment
Online dressing room
24/7 customer care
Endless aisle
marketplace
Automated
stores
Crowd
sourced same
day delivery
Chat-bots and
shopping assistant
Smart device
replenishment

5
Online sales growth and penetration significantly outpacing
traditional channels
1. Euromonitor, A.T. Kearney Analysis
-1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
18%
20%
0%
26%
22%
16%
6%
2%
24%
4%
Haircare
Bath & Shower
Offline Growth
Men’s Grooming
Color Cosmetics
Skincare
FragrancesSets / Kits
Online Growth
Deodorants
Online vs. Offline Growth by Category
(Retail Value, 2013-2015 CAGR)
Size of bubble indicates product penetration, ranging from 0% to 20% for categories shown
FragrancesSkincare DeodorantsSets / KitsColor Cosmetics Bath & ShowerHaircare Men’s Grooming

6
Mixing
Centers
Distribution
Centers StoresPlant
Brands Retailers
Mixing
Centers
Distribution
Centers StoresPlant
Brand’s .com
Distribution
Center
• Homes
• Lockers
Last Mile
(pick-from-store)
Last Mile
Last Mile
(click and
collect)
Line haul Line haul
Line haul
Line haulLine haul
Retailer owned
or Brand owned
Retailer .com
Distribution
Centers
eCommerce assets
eCommerce flows
• Mixed or full
pallets
• Line haul trucks
•Full or layer case
picking to pallet
•Pallets of products
pushed to stores (and
end customers)
•Unit or eaches picking to basket
•Pick against consumer order
•Can be located 750 mile to <50
mile of demand
•750 – <50 miles (depending on order
lead time: 3 days vs. same day)
•Parcel express trucks if Next -3 days
•Delivery vans, courier, drones if
Same/Next day
Omnichannel supply chain is different than traditional retail

7
• Visibility at pallet level
• Fewer, higher velocity SKUs
• Limited need for real-time
integration and analytics
• Visibility at basket level
• More, thin SKUs
• Real time Big Data analytics
and integration critical
Inventory
Management
Front & Back-
End Systems
Challenge
Traditional Brick &
Mortar Focus Omnichannel Focus
• Store location key
• Less demand volatility
• Store+ warehouse key
• More demand volatility
Network
Footprint
• High volume cases
• Replenish stores
• Low volume eaches units
• Building consumer baskets
Warehouse
Operations
Omnichannel supply chain is different than traditional retail

8
Supply chain and fulfillment is critical for omnichannel success
More Direct Impact on
Consumer Experience
Missed cross-dock
scheduling or delay
in LTL
replenishment =
increased
likelihood of shelf
Out of Stock
Delayed online
order fulfillment
from warehouse
fulfillment = 100%
unhappy
customer
Brick &
Mortar
Omni-
channel
More Impact on Profit
1 2 3
Source: A.T. Kearney; GfK FutureBuy
Higher Consumer
Expectations

9
Amazon vs. Walmart: supply chain disruption accelerating
Source: Morgan Stanley; Bloomberg
Amazon Overtakes Walmart in Market Cap
Walmart: 25 years to reach $20B (USD)
Amazon: 14 years
Alibaba: 9 years

10
chains
Agenda

11
Omnichannel supply chain must start with a clear segmented
view of future consumer promise
Illustrative
Customer Promise Grocery Fresh
Personal
Care/Beauty
Apparel Electronics
Home &
Furniture
Delivery Speed: <2 Day
Delivery Lead Time
Endless Aisle
Assortment
Free Shipping Cost
Subscription/Auto refill
Product
Recommendations
Product Sampling
M-checkout and text
Click & Collect
No Hassle Returns Any
Channel
More ImportantLess Important
Trade-off bets are key ! …. why place bets at all? What about Amazon?

12
Category
…
Customer Promise
➢ Assortment
➢ Delivery Time
➢ Returns
➢ Replenishment
Orders
➢ Order notification
➢ Personalization
Ensure
Optimal
Design
• Product Cube Profile
• Peak Profile
• SKU Count
Asset
• SKU Velocity
• SKU Productivity
Inventory
• Footprint / flow
• Capacity
• Eaches picking
solution
• Technology/
CapEx
• Capital outlay
Supply Chain
Requirements
• Throughput
• Delivery Speed
Network
Traditional B&M
Retailer Define strategy Pilot Roll out
Omnichannel
Define (Many)
Strategic Scenarios
Model
(Should-cost,
benchmarking) Pilot
Sequenced Roll-Out
Customer promise drives optimal supply chain design …
and vice versa

13
Delivery Speed (in business days)
Same Day9 3568 2 17 4
Big & Bulky
Consumables
& Baby
Toys
Electronics
Hardlines
Apparel and
Beauty
Media
2daysdelivery
1-2days
Same-Next
Day
3-5 days
Emerging “table stakes” in futureCurrent industry range
• Store picking
• 15-20 .com
warehouses
• Store picking
• 4-8 .com
warehouses
• 4-7 .com
warehouses
• Leverage
existing
store (case
picking)
warehouses
Fulfillment
Network Needs
Example: Delivery speed can impact DC asset and capital
needs

14
chains
Agenda

15
Flexible Fulfillment Networks
Global trends shaping omnichannel fulfillment and supply chain
Rise of Marketplace
Strategic Bet in Same Day
Delivery
Ambidextrous Role of Stores
Blurring of Manufacturer and
Retailer Value Chain
Service
‒ Assortment
‒ Service
‒ Convenience
Efficiency
Best
Today
Competitive
Frontier Tomorrow
1
2
3
4
5
Digital Disruption
6

16
What is the traditional role of retailers vs. manufacturers? …
increasingly blurring today
1
SellDistributeDesign Source Make Deliver
• New product specifications from
demand
• Bundle products into end consumer batches
• Distribute batches to points of purchase or
consumption
• Discovery and trials
• Offer vehicle for purchases
• Ensure order fulfillment
Retailers
Manufacturers
Brands aggressively expand
Retail Footprint and DTC sales
• L’Occitane sells 9% online, with the
channel experiencing 30%+ growth
in 2015
• Significant retail footprint: L’Occitane,
MAC, Benefit, Kiehl’s, Urban Decay,
NYX owned stores, The Body Shop;
Pure online subscription services
e.g., Birchbox, looking to expand
with retail presence as well
Leading Beauty Retailer Strong
in Private Label
• ~360 self-standing stores + ~570 within
JCP
• Sephora leader in beauty Ecommerce
(22%+ sales online)
• Sephora private label assortment
includes 700+ SKUs
• Launched new designer cosmetic
collaboration within LVMH group with
Marc Jacobs

17
Depth of OfferingLevel 1 Level 2 Level 3 Level 4 Level 5
Research
Shop
Service /
Omni
• Online/mobile product search
• Side by side feature comparisons
• Online memberships
• High resolution specs/photos (3D)
• Product narration
• User feedbacks and reviews
• Smart recommend
• User communities
• Buy online for
direct delivery
• 1-click and/or
mobile-payment
• Store pick-up
• Global shipping
• Store fulfill with last
mile deliveryBuy / Fulfill
• Subscriptions
• Segmented assortment by channel
• Product sampling for VIP customers
• Online customization
• Retail location recommend
• Customized order management
• No hassle
returns
• One click live
customer service
• Omni-channel
integration
Manufacturers across sectors are pursuing forward integration
1
What drives the intensity of Manufacturer’s forward integration?

18
Supply Chain Implications
Strategy
Capabilities
For Manufacturers For Retailers
Manage
Channel
Conflict
Improve
Collaboration
Better segmentation of products and SKUs to cost to serve (manuf. direct vs. direct
ship vs. retailer)
Ensure touch points are aligned to maximize consumer journey with brand (Integrated
flows by category/channel that drives win-win value)
Shared asset and capabilities (e.g. manufacturer’s E-store on retailer marketplace)
Joint inbound logistics optimization (e.g. factory to retailer DC direct, etc.)
Retailer showroom integrated with manufacturer fulfillment (direct ship)
Adopt manufacturer mindset and capabilities in
private label:
• Product development and component sourcing
• Lifecycle management
• Should-costing, benchmarks
• Manufacturing and contract-manufacturing
Develop segmented supply chain for private label
• More sophisticated inventory deployment
• Managing more on-hand inventory
• Eaches / piece-picking based flows
Direct to consumer fulfillment and go-to-market
strategies
• Eaches picking DC and fulfillment networks
• De-centralized, forward deployed inventory
flows and management
• Fulfillment network integration with retailer
store/web orders
• Store and pop-up store operations and
systems
1

19
Birth of the Market Place
The concept of Market Places have been around since
the “Classified Ads” in the Sunday paper
Digital Market Places have existed for over 20 years
On-line retailers quickly discovered the power of the
Market Place led by Amazon and eBay
2
What exactly is an online marketplace?

20
Marketplace is now a key growth platform for omnichannel
2
The Top 3
• Marketplace growth as outpaced
traditional e-Commerce growth
• Lower cost, lower risk way to sell
to new market
• Endless aisle, long tail marketing
Alibaba
• $11B USD in Single Day’s sales (Chinese equiv. of
Cyber Monday) in 2015
• On pace to surpass Walmart in gross merchant
value by 2017
Amazon
• Marketplace sales growing at twice the pace of
overall e-Commerce
Why would a Retailer build a Marketplace? Why would a Brand use one?

21
Strategy
• Marketplaces are key consideration in almost every e-commerce company
• Can be a significant compliment to standard e-commerce sales; used by many U.S. and
European retailers to expand in emerging markets
• With lower lead-time expectations vis-à-vis new product assortment and pricing in Asia,
marketplaces are a low risk alternative
‒ Rapidly becoming primary e-Commerce channel in China
• Great opportunity to introduce niche products and go after niche consumers
• Emerging market locations find marketplaces to be a low risk opportunity
Capabilities
• Channel risk management (quality, imitations, lead times are risk-points for consumers)
• Integrated cost and flow modeling logic (decide between: holding inventory, cross-docking
orders, and direct flow)
• Technology integration with vendor OMS
• Technology and supply chain organizational DNA, not just traditional retailing
2

22
Retailer DC
Manufacturer
DC
Retailer Store
Converted /
Dark Store
Home or Office
Lockers
Store for
Pickup
Movement of goods from the last inventory point to the point of consumer
chosen access in 24 hours
Order to Delivery <24 hours
What is the Last Mile? Same Day Delivery?
3

23
Drivers for Same Day Penetration …
58%-64% of Millennials want
Same Day
61% consumers willing to pay for
Same Day convenience
Supply side innovation
transforms cost economics (e.g.
crowdsourcing)
Source: Trustve; Coldwell Banker; PWC
Same Day Delivery Market – US ($B)
Source: B.I. Intelligence
Same Day is still emerging … but rapidly growing
3
What are the challenges preventing mass adoption in the US?

24
Several Same Day supply chain models emerging
3
Retailer
Managed
3PL Managed
(Owned)
3PL Managed
(Crowdsource)
Marketplace
(Outsourced)
Marketplace
(Crowdsource)
Retail owned
and operated
last mile assets
and drivers
Outsourced to a
3PL who executes
with owned assets
and drivers
Outsourced to a
3PL who fulfills
using crowd-
sourced drivers
Retail sells through
a marketplace, who
in turn manages
last mile delivery
via crowdsourced
drivers
Control and
Shopper
Visibility
Scale efficiency
and access to
enabling
capabilities
Retail sells
through a
marketplace, who
in turn manages
last mile delivery
using owned
and/or 3PL assets
Higher Lower
Lower Higher
Which brand category likely to adopt which model?

25
3
Many are making strategic bets in Same Day
US
• Offered across 11 metro
areas (~25% of
population area)
• $5.99 (Prime); $10+
$.99/add’l item(non-Prime)
• 500K-1M SKUs
UK
• Same day click & collect
• Order before 11AM/ready
by 4pm; order by
7:45pm/ready next 8-
10AM
• Free (Prime); $BP 4.99
(non Prime)
• Leveraging
ConnectGroup news
distributor partner (500+
stores / pick-up locations
today)
US
• Offered across major US cities
• $5-6 (basket >$99); $15 (basket<$99)
• Order by noon-1pm (mon-sat)
China
• Same day delivery
across 40+ cities
• Piloting 3 hour
delivery in 6 major
cities
• Owned network of 7
DCs, 97 warehouse
and 715+ pick-up
stations
• In-house real-time
tracking and routing
technology platform
Retailer Managed 3PL - Crowdsourced
Marketplace - Crowdsourced
US
• 6 US metro areas
• $95 annual subscription or $5/order
(consumer) + commission from retailer
• Strategic value sharing / conflict beyond
fulfillment (consumer intel)
Source: Financial Times; Guardian; Mintel; Amazon; RILA; AT Kearney

26
Strategy
Capabilities
• Define clear, fact based approach to activating Last Mile
‒ Establish understanding into “should-cost” / “should-impact” drivers (e.g. cost drivers for
crowdsource model, trigger point managing Uber like courier risks, etc.)
‒ Define clear inflection points between investing internal Same Day vs. 3PL managed vs.
crowdsourced models (e.g. value of absolute performance vs. differentiation? First mover or Fast
follow?)
• In-market product availability – ensure upstream supply chain footprint and systems can support
inventory replenishment processes and one-pool inventory visibility
• Ensure Same Day requirements linked to omnichannel consumer promise and broader supply
chain strategy at the category level
• Determine which categories are candidates for same day delivery: (grocery, mobile devices,
specialty products, high margin products)
• Pilot and experiment with different Same Day models, do not dismiss models pre-maturely
• Determine the reason for Same Day: drive sales, competitor requirements, marketing play/
excitement
3

27
Building a flexible network with dynamic flows will be key for
competitive performance
Store DCs
combo
DCs
Store
Customer
Suppliers
Inter-store
“hot run”
replenish
High velocity
DC
Slow mover
replenish
Store
DSV (direct ship vendor)
Right Mix of Flows
Needed for Differentiated
Performance
SC
Cost Service Variety
INV
Cost
A
B
C
D
E
E
B
C
✓✓
✓ ✓
✓ ✓
✓
X-dock
D
Store-to-DC
recirculate
✓ ✓
Nimble Connected Network
Same /
Next
day
2-Next
Day
Store Fulfillment
(Deliver or Collect)
A
Non-traditional supply chain flows ✓ Enable best possible
Inbound
Consolidate
Inbound
4

28
Lead Time
Pick/Pack
Cost
.com
Volume
Assortment
(Capacity)
Store or Mini-
Hub Picking
Store
Converted
Warehouse
High Velocity
Eaches
Warehouse
Low Velocity
Eaches
Warehouse
Same/Next Day Same/Next Day Next – 2 Day 2 – 3 Days
Low
(2-5K SKUs)
Low
(5-10K SKUs)
Medium-High
(15-50K SKUs)
High
(50-200K SKUs)
Med-High
($1-2/unit)
Low-Med
($1-2/unit)
Low
($0.4-1/unit US)
Med
($0.4-1.3/unit US)
<1MM units/year <5MM units/year >5 MM units / year >5 MM units/year
Nature of
“In-Scope”
Demand
Fulfillment center design and solutions are also rapidly evolving
Low Low Med-High
CapEx Med-High
4

29
Leveraging partners is also critical for flexibility and learning
3PLs and supplier direct ship as part of overall fulfillment
VOLUME >25K orders/day 1-25K orders/day <0.5K orders/day
PEAK
Low Seasonal
peak
Moderate
Seasonality
Highly Seasonable
SKU TYPE
Fast Moving
SKUs
Fast + Medium
Moving SKUs
Long Tail SKUs
EXPERIENCE
Extensive In-
House
Fulfillment
Experience
Developing In-
House Experience
New Category
AFFINITY
High x-Category
Affinity
Medium x-Category
Affinity
Low x-Category
Affinity
In-House Operations 3PL Partnership Supplier Direct Ship
• Optimize cost vs.
service
• Minimize over-
investment
• Invest with demand,
not ahead of it
• Grow and
experiment long tail
assortments
• Disciplined learning
IllustrativeCategory
Profile
4
Owned Shared On-Demand
?
Outsourced

30
Strategy
Capabilities
LogisticsTechnology Organization
• Priority
– Geographic inventory
planning
– Store to store
transportation
– Distributed order
management
• Future
– Inbound freight
optimization
– Dynamic order
sourcing
– 3rd party logistics
integration
• Priority
– Centralized (PMO)
for supply chain
decision making
– Integrated,
customer-centric
performance
metrics
• Future
– Omnichannel
culture
– New employee
capabilities
• Priority
– Real time inventory
visibility “one pool”
– POS (demand signal)
integration with OM,
Replenishment
– Visible and accurate
cost to serve
– Dynamic channel
decisions (direct vs.
3PL vs. DSV)
• Future
– Common item file
– Local delivery TMS
DC Fulfillment
• Priority
– Right level of
automated material
handling (voice, pick to
light, Goods to Man)
– WMS with flexible batch
and wave picks
– Conveyance for
multiple flows (reverse,
x-dock, expedited)
• Future Capabilities
– Product customization
and personalization
Iterative Design
Rapid Analytics
• Faster modeling and more predictive analytics
– Collaboration with Merchandising, Finance, Sales on key modeling
assumption and inputs
– Embed “what-if” simulation capabilities
– Embed predictive analytics (forecasting, replenishment)
• Iterative refresh of supply chain design and strategy as part of annual
planning cycle
– Compress planning cycle (next generation supply chain is next 1-2 years)
– Feedback and update from field experiments and pilots
4

31
Future stores will be ambidextrous, combining the right mix of
Consumer Experience and Local Fulfillment
Consumer Experience Local Fulfillment
Product Trial
Allow shoppers to touch and feel products
Treasure Hunt
Incubate exclusive or little known brands
exclusively
Merchantainment
Provide an exciting environment to
engage consumers in-store
Relationship Management
Enhanced level of personalized service
Click and Collect
(In-Store / Drive-Thru)
Pick, Pack and Ship
(Same Day)
Inter-Network Transfers
Returns
Getting the right balance will be key for retailers
5

32
Related readings from A.T. Kearney
Best
Practices in
Strategic
Multichannel
Fulfillment
Is Your Supply
Chain Ready
for the
Omnichannel
Revolution?
Heavy Lifting
Required: A
Large Format
Home Delivery
Breakthrough
Global Retail
E-Commerce
Keeps on
Clicking
Recasting the
Retail Store
in Today’s
Omnichannel
World
Brick and
Mortar is the
Foundation of
Omnichannel
Retailing

33
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