Photo by Bastian Riccardi on Unsplash
A few years ago, while assisting major retail, clothing, and athleisure brands in their supply chain digital transformation, I observed that they utilized traditional supply chain design software. However, these tools weren’t yielding significant ROI and were used sparingly. They effectively optimized the fulfillment network footprint but often fell short in addressing many of their critical strategic or tactical planning questions, including:
What would be the backlog in days during peak days/weeks/seasons? How many orders would be delivered within the promised window?
If the expected service level is going to be lower, where, and how much more capacity is required? Should this involve machine capacity expansion or increasing the workforce would be sufficient?
Should they plan for an additional shift during the peak season? What would be the impact on service level and operating cost?
Should they be using zone skipping? If so, where?
The key takeaway was that designing and planning a supply chain for online or omnichannel operations necessitate additional capabilities.
Online and Offline Supply Chains
Let's explore the differences between online or omnichannel and traditional offline (in-store) supply chains. I'll underscore crucial considerations for retail supply chain teams as they navigate through their supply chain design process.
1. Demand Variability:
Online channel demand is highly variable, due to sales events, holidays, and even fluctuations based on the time of day and day of the week. For instance, consumers tend to engage more in online shopping during evenings or weekends. Unlike offline channels, where stores place aggregated orders to warehouses, online channels directly expose the fulfillment network to demand variability.
To answer supply chain design or planning questions, supply chain teams need to consider demand at the right granularity which could mean capturing daily or shift-level demand. In many cases, merely modeling consumer demand might not be enough. Fulfillment planning also requires balancing the needs of other operations like inbound receiving, returns processing, and more.
In the case of omnichannel, while it adds complexity, the distinct demand profiles of online and offline channels offer the advantage of risk pooling in supply planning.
2. Service Level Targets:
While demand is way more variable, service level targets are usually much stricter on the online channel. This has a compounding effect on the supply planning. Fulfillment centers are under much more scrutiny to meet target service levels which are defined in days if not in hours. Therefore, to analyze fulfillment strategies and plans to meet the target service level, the supply chain team needs to capture demand on a daily granularity and, in some cases even at more granularity. While making customer aggregation decisions in the supply chain design models, consider different service level requirements by customer type.
3. Count and variety of SKUs:
The online channel offers retailers a significant advantage by accommodating a larger count of SKUs compared to the offline channel. Retailers maintain selected SKU assortments in stores while providing a broader and deeper range of SKUs from the fulfillment network. This includes a long tail of low-demand SKUs. While beneficial for the business, it poses challenges in supply chain design and planning.
Traditional supply chain design focuses on inventory cost impact as SKUs are allocated to more warehouses, but the online channel demands different analytical approaches. The SKU assortment for a fulfillment center directly influences metrics like split shipments or units per shipment. Allocating an SKU to multiple fulfillment nodes may seem logical, yet spreading inventory across nodes can result in increased stockouts and subsequently, higher split shipments, potentially counteracting the initial intent.
Furthermore, retailers now operate smaller fulfillment nodes closer to high-demand areas for faster service. These nodes, however, lack space for a complete SKU assortment. As the overall portfolio has long tail SKUs, the number of cartons per SKU needs to be part of the equation otherwise your plan might require breaking down cartons, adding more touches and cost.
Creating an optimal SKU assortment in an online or omnichannel requires supply chain design models to weigh the tradeoffs among storage capacity in units and SKU count, split shipments, and carton count per SKU.
4. Fulfillment Workforce:
Over a decade ago, I had the opportunity to tour both an Amazon Fulfillment Center and a Walmart warehouse. While serving the intended purpose, the contrast between these facilities was striking. Amazon's FC resembled a bustling factory, teeming with automation, a significant workforce, and a constant conveyor belt flow of products. Conversely, the Walmart warehouse focused on serving Walmart stores through limited automation and handling full pallet shipments with a smaller workforce.
Fulfillment centers are intricate with larger workforces and should be carefully planned to get the best out of the investment. Operating costs within these centers are notably high. Therefore, it's crucial for supply chain design teams to include workforce and capacity planning as part of their strategy, rather than relying solely on spreadsheet models handled by fulfillment centers.
We developed a fulfillment capacity and workforce optimization solution for a luxury brand retailer, which became integral to their supply planning efforts throughout the year, particularly during peak demand seasons. This data-driven approach enabled them to analyze strategies aimed at meeting service-level targets while minimizing cost impacts.
Similarly, another apparel brand utilizes a similar solution to plan its workforce needs and assess its impact on service levels.
5. Parcel Shipment:
The online channel is predominately parcel shipments. Parcel has its own rate structure and lots of add-on surcharges that could hit the bottom line if not analyzed carefully. Be careful to consider surcharges while making product aggregation decisions in your models.
Some fulfillment strategies should be evaluated in a supply chain network optimization model but most often couldn’t be easily modeled with supply chain design tools. Such as the zone-skipping strategy can be useful during the peak season if not throughout the year. “Buy online fulfill from store” is another strategy that requires careful evaluation in terms of impact on outbound costs and service levels.
These analysis requirements aren’t necessarily core capabilities of traditional supply chain design tools but are fundamental for retail supply chains.
Take Away
While traditional supply chain design tools excel in determining where to establish Fulfillment nodes, along with high-level storage and throughput capacity analysis, an online or omnichannel supply chain demands a spectrum of additional planning capabilities. As you contemplate your roadmap for the upcoming year, assess whether your planning models encompass these vital capabilities. As I mentioned in my previous blog, check out the decisions made on spreadsheets that could have been optimized in the supply chain strategic and tactical planning models by a central supply chain design team.