Omni-Channel Retailing – Part 2 – Implications for Freight Carriers and Logistics Service Providers

In last week’s blog I provided an overview of Omni-Channel Retailing, a very important transformational change that is taking place.  This change will have a profound effect on the retail and freight industries.  In this blog, I will outline some of the impacts that it likely to have on carriers and LSPs.

The catalyst for the changes to shipping processes and pricing has been Amazon Prime. Back in 2005, the online retailer announced free two-day shipping on qualified items. Designed to enhance loyalty and fuel top line sales growth, the Amazon Prime program has had a huge impact on Amazon’s success in recent years.

The impact has rippled through the retail and transportation industries. Brick-and-mortar retailers, in particular, have scrambled to devise strategies to counter free shipping.

In response, retailers are deploying a variety of solutions that leverage one of their best assets—their stores. This coupled with the growth of mobile commerce and social shopping, has seen the emergence of a new approach that represents a kind of boundary-less retail, where the silos between brick-and-mortar, catalog, and Internet retailers have disappeared—at least as far as the consumer is concerned. This is what many are calling omni-channel retailing.

The transportation and logistics companies that wish to be effective in the Omni-Channel arena must align their service portfolios and infrastructure to meet the needs of the retailers and consumers who will be increasingly operating in this environment.  To gain a better understanding of where omni-channel retailing is going, UPS commissioned a research study of 3000 consumers.  ComScore, a leading digital analytics firm, performed the study.  The result is the 2013 UPS Pulse of the Online Shopper: A Customer Experience Study.  Here is what they learned from a carrier perspective. 

One of the first questions they asked consumers was which factors compel them to shop with an online retailer. Many respondents said they expect a streamlined process across multiple channels:

• 62 percent want the ability to purchase online and make returns in-store;
• 47 percent want a coupon or promotion sent to their smartphone when they are in-store or nearby; and
• 44 percent want the ability to buy online and pick up at the store.

Online shoppers said they want the ability to choose their preferred delivery date, time of day for delivery and they want options to reroute their inbund packages.  They also value a hassle-free returns policy, especially repeat customers: 82 percent of consumers said they would complete the purchase if they could return the item to the store or have free return shipping.

Another trend retailers are considering is same-day delivery. Like free shipping, this is a proactive supply chain innovation being driven by Amazon, eBay, and even Google. Other retailers, such as Walmart, Best Buy and Indigo Books have announced they are running same-day delivery trials.

The omni-channel consumer is driving the desire for a seamless customer experience across all customer touch points for retailers. They want to buy from anywhere—in a store, on a laptop or PC, or from their phones and tablets; they want to pick it up from anywhere—in a store, at their place of work, at their home, or sent to a friend; and they want to return it anywhere—to a store or back to a distribution point.

Moreover, in an omni-channel world, retailers want to be able to satisfy demand from anywhere—a retail store, a distribution center, a third-party distributor, or drop-shipped from a manufacturer; and they want the ability to have an order returned to where it can generate the most value on the next sale.

Implications for Carriers and Logistics Companies

Serving an omni-channel customer requires a Network Approach

As the name implies, an omni-channel retailer is using a network of retail distribution channels.  To play in the space requires a network approach.  Carriers must adapt to the procurement arrangements established by the retailer.  This may involve several options.

• Buy Online—Ship from a Store
• Buy at a Store—Ship from a Distribution Centre
• Buy at a Store—Ship from a (Different) Store

Carriers may need to adjust to changes in outbound shipping processes to leverage the retailer’s existing store replenishment network. Retailers must pick the stores closest to the consumer to meet delivery expectations. Often, the online fulfillment and distribution centers are in different locations. In other words, there is a great deal of business intelligence as the underpinning to omni-channel retailing.  Carriers and LSPs must gain a complete understanding of the retailer’s business rules.  As retailers consider the added volume that will move to their stores from distribution centres or suppliers, and from stores to consumers, they often discover a need to re-evaluate their distribution network.

Another challenge is establishing the logic for routing orders to the stores for shipment. There are two primary strategies deployed:

• Reduce delivery time and/or costs for online orders by shipping from the nearest store to the consumer enabling next-day or second-day delivery.

• Optimize revenue by shipping merchandise sitting in stores and out-of-season to fulfill online demand. This will help reduce markdowns.

The deployment of either, or both, of these strategies can be a challenge as the business models need to be coordinated between store operations, merchandising, and supply chain operations to make sure all groups’ priorities are considered.

Carriers must provide tight but flexible Last Mile Delivery Options

With broad visibility into inventory and consumer profiles, retailers can begin to offer more advanced delivery options.

• Buy Online—Get Delivered Next Day: This service caters to consumers who shop online between 6 p.m. and 9 p.m. or “sit-back shoppers.” 

• Same Day Delivery: For this service to be practical the merchandise needs to be near the customer.

Filling the increased volume of individual orders in omni-channel retailing is labour intensive and less efficient than conventional distribution models. This is especially true as retailers fulfill demand from retail stores.

Carriers and LSPs must have visibility into the various components of the network.  In other words, they need a robust information system to track where the orders are coming from, where the customer is going to pick us his goods or where he expects them to be delivered and possibly where he expects to return them.  This is a very different environment as compared to traditional point to point shipping.

A retailer’s network optimization determines the right number of hubs and stores for the network, where those should be located, and how inventory should be positioned to meet both cost and customer service expectations.  Carriers and LSPs will need to optimize their networks to complement the requirements of their retail customers.

Carriers and LSPs must develop new Freight Rate Pricing for Omni-Channel Retailers and Consumers

Consumers have become big fans of Amazon’s “free shipping’ or their annual dues approach to shipping.  Of course, somebody has to pay for freight.  Under an omni-channel model, the costs don’t go away.  They are different and in many ways more complex to calculate.  Carriers and LSPs will need sophisticated costing models to define the various increments and volumes of work so they can cost and price their services correctly.

Welcome to the brave new world of Omni-Channel Retailing.

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