Executive Briefings

E-Commerce, Omnichannel Changing Supply Chain Network Design

Analyst Insight: It's no secret that the explosion of e-commerce, omnichannel, multichannel and social media - along with large online retailers' offerings - have significantly raised customers' expectations for rapid delivery, free shipping and free returns. Customers are clearly signaling that a company's successes and failures rest on high expectations of price, selection, convenience and experience. Companies must "get local" in order to meet customers' demands for speed of delivery. – John Spain, Partner, Tompkins International

E-Commerce, Omnichannel Changing Supply Chain Network Design

Today's e-commerce and omnichannel world makes network design much more important, but also more difficult. It is no longer a straightforward, computer-based exercise of modeling DCs, FCs and transportation to minimize total costs. A huge challenge that must be addressed is how this network should best meet customers' expectations for rapid delivery, free shipping and free returns.

Rapid delivery can be achieved via expedited freight or by placing inventory in the local markets, i.e., "getting local." But the additional high cost of expedited freight is not a viable long-term solution. Instead, companies need to analyze which inventory should be placed in the local market and the best way to do so - that is, what should the network look like?

When retailers "get local," inventory will need to be divided between DCs and FCs. Let's take a look at DC inventory vs. FC inventory:

DC Inventory

Level 1: National Distribution Center (DC1): Where all inventory will be stored and distributed to nearby stores, nearby local DCs and regional DCs. Also potentially distributed to fulfillment centers.

• Level 2: Regional Distribution Center (DC2): Where some inventory will be stored (A and B items) and distributed to nearby local stores and local DCs. Also potentially distributed to FCs.

• Level 3: Local Distribution Center (DC3): Where some limited inventory (A items) will be stored and distributed to nearby stores.

FC Inventory

• Level 1: National Fulfillment Center (FC1): Where all inventory will be stored and fulfilled to nearby customers, nearby lights-out stores, nearby stores (click-and-collect), and regional FCs.

• Level 2: Regional Fulfillment Center (FC2): Where some inventory will be stored (A and B items) and fulfilled to nearby customers, nearby lights-out stores, nearby stores (click-and-collect), and local FCs.

• Level 3: Local Fulfillment Center (FC3): Where some limited inventory (A items) will be stored and fulfilled to nearby customers, nearby lights-out stores, and nearby stores (click-and-collect).

• Level 4: Lights-Out Store (FC4): Where customers can collect their online orders (click-and-collect) and for fulfillment to nearby customers.

• Level 5: Store (FC5): Where customers can collect their online orders (click-and-collect) and for fulfillment to nearby customers.

A key network design question is: Should a DC/FC be separate or combined? In general, far too many supply chains have been designed with the DC/FC separated. But given where the retail industry is today and where it is headed, most DCs/FCs should now be combined. Here are several advantages to combining the DC/FC:

• Inventory optimization

• Fewer challenges in inventory allocation by channel

• Growing number of channels and evolution of channel volumes

• Enhanced justification of automation

• Different channels peaking at different times allows for the reduction of the impacts of overall peak volumes, which can smooth out staffing and facilitate cross-training of full-time warehouse employees

• Shifting order from/ship to is easier to execute

The Outlook

The “get local” methodology requires companies to make decisions about the number, type and location of DCs and FCs when designing their distribution and fulfillment networks. Whether dedicated facilities (DCs and FCs) or shared facilities (DC/FCs), the requirements for e-commerce and omnichannel fulfillment (even in the same facility) are a game-changer that should not be ignored.

Today's e-commerce and omnichannel world makes network design much more important, but also more difficult. It is no longer a straightforward, computer-based exercise of modeling DCs, FCs and transportation to minimize total costs. A huge challenge that must be addressed is how this network should best meet customers' expectations for rapid delivery, free shipping and free returns.

Rapid delivery can be achieved via expedited freight or by placing inventory in the local markets, i.e., "getting local." But the additional high cost of expedited freight is not a viable long-term solution. Instead, companies need to analyze which inventory should be placed in the local market and the best way to do so - that is, what should the network look like?

When retailers "get local," inventory will need to be divided between DCs and FCs. Let's take a look at DC inventory vs. FC inventory:

DC Inventory

Level 1: National Distribution Center (DC1): Where all inventory will be stored and distributed to nearby stores, nearby local DCs and regional DCs. Also potentially distributed to fulfillment centers.

• Level 2: Regional Distribution Center (DC2): Where some inventory will be stored (A and B items) and distributed to nearby local stores and local DCs. Also potentially distributed to FCs.

• Level 3: Local Distribution Center (DC3): Where some limited inventory (A items) will be stored and distributed to nearby stores.

FC Inventory

• Level 1: National Fulfillment Center (FC1): Where all inventory will be stored and fulfilled to nearby customers, nearby lights-out stores, nearby stores (click-and-collect), and regional FCs.

• Level 2: Regional Fulfillment Center (FC2): Where some inventory will be stored (A and B items) and fulfilled to nearby customers, nearby lights-out stores, nearby stores (click-and-collect), and local FCs.

• Level 3: Local Fulfillment Center (FC3): Where some limited inventory (A items) will be stored and fulfilled to nearby customers, nearby lights-out stores, and nearby stores (click-and-collect).

• Level 4: Lights-Out Store (FC4): Where customers can collect their online orders (click-and-collect) and for fulfillment to nearby customers.

• Level 5: Store (FC5): Where customers can collect their online orders (click-and-collect) and for fulfillment to nearby customers.

A key network design question is: Should a DC/FC be separate or combined? In general, far too many supply chains have been designed with the DC/FC separated. But given where the retail industry is today and where it is headed, most DCs/FCs should now be combined. Here are several advantages to combining the DC/FC:

• Inventory optimization

• Fewer challenges in inventory allocation by channel

• Growing number of channels and evolution of channel volumes

• Enhanced justification of automation

• Different channels peaking at different times allows for the reduction of the impacts of overall peak volumes, which can smooth out staffing and facilitate cross-training of full-time warehouse employees

• Shifting order from/ship to is easier to execute

The Outlook

The “get local” methodology requires companies to make decisions about the number, type and location of DCs and FCs when designing their distribution and fulfillment networks. Whether dedicated facilities (DCs and FCs) or shared facilities (DC/FCs), the requirements for e-commerce and omnichannel fulfillment (even in the same facility) are a game-changer that should not be ignored.

E-Commerce, Omnichannel Changing Supply Chain Network Design