2015 Technology Roundtable: Visibility yields accuracy

Manufactures and retailers are investing massive amounts of effort and money—in a very short period of time—to ratchet up logistics and supply chain management technology capabilities that can keep up with the pace of our brave new world.

Today is “too late” in the mindset of an e-commerce customer, and manufactures in all verticals are watching their linear supply chains transform into a “supply web” of suppliers and global sources that’s as complicated to manage as any e-commerce fulfillment operation.

And while many are searching for established best practices to apply, the truth is that most organizations are flying by the seat of their pants, simply learning as they go.

Futuristic concepts like the Internet of Things (IoT)—connected networks of sensors, smart machines, and software designed to make data more usable—are quickly becoming reality across global supply chains. In the meantime, it’s impossible to ignore the pressure on retailers and distribution centers (DC) to re-engineer operations to meet the omni-channel fulfillment mandate.

In our 2015 Technology Roundtable, our multi-faceted panel of technology analysts put context around the evolution of the IoT; help managers get a better handle on how DCs and transportation operations need to respond to omni-channel fulfillment pressures; and explain how to gain a single view of inventory availability to achieve omni-channel success.

This year’s panel includes Steve Banker, head of the supply chain and logistics consulting team at ARC Advisory Group, a technology research and advisory firm; Norm Saenz, managing director of St. Onge Company, a supply chain engineering and logistics consulting company; Britt Dayton, director at Deloitte and supply chain subject matter expert within the retail industry practice; and Dwight Klappich, a vice president at Gartner and an authority on supply chain management software. 

The Industrial Internet of Things (IIoT)
Logistics Management (LM): All definitions of IoT revolve around connecting sensors, programmable logic controllers, and RFID data with the Internet so that other systems or analytics software can respond to or make sense of the data. Where would you say we are on this journey toward an interconnected Utopia?
Steve Banker: Actually, the acronym is new, but the concept is not, particularly in logistics. For example, an RF gun, voice recognition, and RFID in the warehouse all provide IoT-style sensor data. Actually, at ARC we call it the ‘Industrial Internet of Things’ (IIoT) to differentiate from consumer applications like FitBit. However, what is new is that the IIoT logistics applications are expanding rapidly, so we’re seeing it take shape in more and more operations.

LM: In terms of logistics management and it’s relationship to manufacturing, what do you think are the strongest applications and possibilities for overall process improvement as the IIoT evolves in this area?
Banker: One example would be smart forklifts that include diagnostics that allow the equipment to signal when it needs to be serviced, speed controls, anti-slip technology that monitors wheel spin to improve traction, collision detection, and fork speed optimization. And these new intelligent forklifts promote new process flows in the warehouse. 
When integrated to a WMS, the forklift’s fork can be raised or lowered much quicker. The WMS directs a forklift to a pick location, and once at the location, the forklift knows whether the pallet to be picked is being stored at a height of three feet or six feet. The operator pushes a button on the console and the forks move at the maximum safe speed—a speed considerably faster than the operator would move.
In mixed-case picking, intelligent forklifts can integrate with pickers wearing voice systems, follow them up an aisle, lift the pallet to the correct ergonomic height for picking based on the location of the inventory in the racking, and then, when ordered to do so, autonomously make the trip to a shipping dock for unloading.

LM: In terms of logistics management outside of the four walls—the tracking, tracing, and monitoring of freight in motion—what applications and benefits would the IIoT have?
Banker: Well, tracking and tracing is based on RF scans on and off a truck, GPS, temperature, and other sensors embedded in the freight, including RFID. None of that is new, and all of it fits the definition of IIoT. What is new is the improved network-based routing. When drivers use smart phones for routing, they may give permission to Google, or other providers, to use their data. That driver’s data, and the data on the speed of other drivers on that road, is used to determine congestion and better alternative routes.

LM: What technologies are we lacking at this point and what’s hindering progress?
Banker: Security is the number one concern around IIoT, especially when you consider that it works hand in hand with cloud solutions, particularly public cloud. Cyber attackers use to gain access to proprietary systems by tricking employees into opening infected e-mails.

Today, cyber criminals are using ‘spear phishing’ techniques that harvest information from social sites to tailor e-mails that can trick even the most cautious employees. But that does not mean we should not use IIoT. We just need to be able to detect attacks quickly, segment off different parts of the application so an attack in one area does not spread to others, and have appropriate recovery processes in place. 

LM: How far are we?
Banker: Prices on sensors, networking, and other key parts of this technology stack are falling quickly. Applications that made no sense five years ago can have a strong payback today. 

Omni-channel’s impact inside the four walls
LM: DC operations are now compelled to overcome a pallet-based legacy to deliver smaller and more complex orders. What are some of the most common challenges to overcome for omni-channel?
Norm Saenz: The first step in working with a retailer considering expansion into the omni-channel world is to understand their strategy. There are many facets of omni-channel, including a customer ordering an item on-line or from a store and returning to the store at a later date to retrieve the item. The ability to ask for that item to be shipped to your home while shopping in a store is also an increasing option for consumers. The operational impact is increased volume of single line or piece pick orders from the DC.

Another major application of omni-channel is a customer ordering a product on-line and the retailer fulfilling the order from within their store network versus a distribution center. This introduces the complication and requirement of advanced information systems to provide the awareness of inventory throughout the store network. These systems would identify the stores with the right inventory and determine the most cost effective location to fulfill from to provide the promised service level.

LM: Are retailers prepared for this operational shift to the store?
Saenz: For most retailers, it’s been decades since they were shipping single-item pallets from their DC to the store—with the exception of warehouse-style retail stores. Today’s retail DC is fulfilling case and piece picks and building multiple item pallets for shipment to their stores, and many have removed the pallet from the equation and ship floor-loaded shipments. The emergence of omni-channel fulfillment has only increased the range of products and transactions of piece picking required in the DC.

When shipping these omni-channel orders to the stores, the complication comes in the need to identify the customer-assigned inventory when received at the stores. If it falls into the general merchandise at the store, it could be sold before the omni-customer returns to get the item. To solve this challenge, retailers must identify these items on the shipment headed to the store. Meanwhile, the more technically savvy retailers use information systems, including barcoding and scanning at the DC and the stores to identify these items.

LM: What technology will be the most helpful in the move to integrate store fulfillment and DC fulfillment operations?
Saenz: The growing trend for omni-channel fulfillment is customers ordering on-line and their orders being fulfilled from within the store network. With this strategy, the store is required to ‘pick’ and ‘ship’ items for customers, playing the role of a mini-DC. Some stores pick these items from overstock inventory in the back stockroom, while others may walk through the retail store.

Technology plays a vital role in this environment by enabling store employees to efficiently navigate the store floor to find the ordered inventory. In this environment, you may find more shelf-carts being pushed through the retail store by employees fulfilling omni-channel orders. Some retailers have even made advancements to include store locator systems and WMS-like picking functionality to guide this mini-DC process.

Once retrieved, store employees utilize packaging stations to prepare orders for shipment and utilize small parcel carriers to pick-up and deliver the orders. Within the grocery industry, it may be a private fleet that is used to delivery orders to customers.

LM: How are retailers using technology to streamline transportation management in this new environment?
Saenz: The advancement of TMS technology has been in the market for many years, and the most efficient companies are utilizing these systems to support the emergence of omni-channel delivery. This includes identifying the right store for fulfillment and load planning trailers for delivery to the stores with the omni-channel merchandise. 

For handling the delivery of e-commerce and store orders to the store, most retailers are using the same trailers scheduled for normal store delivery. However, separating these pre-ordered items on the trailer is the critical piece in this strategy. Loading these items at the front of the trailer, labeling them with special tags, utilizing bar code/scanning technology, and using colored totes are a few ways to flag the inventory.

Inventory Management: Hidden key to success
LM: From a software perspective, what would you say is the biggest challenge for logistics operations as they’ve gone about their transformation process to meet the omni-channel challenge?
Britt Dayton: For store-based retailers, there were—and still are—many processes and systems that were built assuming one sales and fulfillment channel. Most of a retail company’s core systems, from merchandise assortment planning to vendor ordering, warehouse management, and POS have required changes to enable the seamless, omni-channel consumer experience that is expected today.

This has required a massive amount of effort and investment in a short amount of time in a changing environment. Online sales have continued to grow, while store sales have remained basically flat. These changing demand patterns and fulfillment methods present a moving target that makes systems design, and capacity planning, very difficult. Some retailers are beginning to reach a “new normal,” but others are just beginning the transformation.

LM: Would you say that retailers have been “blind-sided” by the challenge or do you feel most have been prepared—with appropriate tools in place to help manage?
Dayton: Many store-based retailers initially built separate online sales and fulfillment capabilities. They began to realize the need to merge those capabilities to leverage their inventory investments, but the shift to virtual sales and fulfilling orders from stores has happened faster than most anticipated. Many retailers are working hard to keep up with these changes and struggling with additional costs.
Perhaps the biggest gap at many retailers was a consumer-direct order management capability that could take in sales from multiple selling systems—online, mobile, in-store—and orchestrate the different fulfillment methods such as buy online, pickup in store, or ship from store.

A lot of effort has gone into implementing new order management systems, and building a single view of inventory availability that is the foundation of omni-channel fulfillment.

The next challenge for many retailers will be to modify their demand and inventory planning systems to recognize the new consumer expectations and shopping patterns. The goal will be to optimize inventory deployment so that the required inventory is where it should be to satisfy consumer demand at a lower cost.

LM: Deloitte recently conducted research across retail supply chain managers. From those findings, what would you say are the biggest priorities respondents now have?
Dayton: The top three priorities we identified are inventory planning, fulfillment capabilities, and returns processing. Retailers are still working on enterprise-wide visibility of available inventory to fulfill demand. Those that have tackled visibility are now working on improving the accuracy of that inventory at the store level. There’s also a recognition that inventory must be deployed differently in an omni-channel world, so many retailers are beginning to address that challenge.

According to the findings, many retailers have developed or are developing, flexible fulfillment capabilities that leverage stores, DCs, and vendors to fulfill consumer demand. However, store fulfillment processes are not as efficient as they are in a DC where conditions are more controlled. Retailers are rethinking store processes and systems to improve efficiency and deliver on the consumer promise of omni-channel fulfillment.

Lastly, returns processing is still an improvement opportunity for many omni-channel retailers. The goal is to allow consumers to return purchases to either stores or a central returns facility regardless of where the sales originated.

LM: How would you describe what a fully-functional, technology-enabled omni-channel fulfillment operation acts like?
Dayton: The company’s order management system has to be integrated with the various selling systems, be they in-store, online, mobile, or in the call center. That order management system needs to orchestrate the fulfillment by interacting with inventory, allocation, warehouse management, transportation, and workforce scheduling systems using user configurable business rules.

To fulfill the order, the order management system has to determine whether to fulfill from a DC, store, or drop ship from a vendor by considering the current inventory picture, labor availability, labor cost, impact to the current store tasks, and the shipping cost and time.

When fulfilling from stores, the systems should have intelligence to determine which store by considering work queues and actual labor availability in candidate stores, proximity to the customer’s address, and total costs while maximizing selling price and margin. The omni-channel systems must be flexible to capture consumer demand when inventory is not where it should be, and also learn what the consumer shopping patterns are to better deploy inventory in the future. The overall goal for omni-channel is to satisfy more consumer demand with acceptable profit margins. 

SCM “maturity” yields performance
LM: Omni-channel fulfillment is putting pressure on organizations to make sure their people, process, and technology are all working in seamless collaboration. How are we doing in this area in general?
Dwight Klappich: Overall I think a high percentage of retail and manufacturing organizations are doing a remarkably good job embracing the evolution to omni-channel. Compared to the move to e-commerce in the late 1990s, the move to omni-channel has been much more rapid and more organizations have been successful with initial initiatives.

A good example is a recent conversation I had with the CIO of one of Gartner’s retail clients. He made a noteworthy observation that omni-channel commerce is a strategic shift in the operating model for his as well as his competitors business. He further said that at this point in time, there are no set ‘best’ practices—all the competitors in his market are moving as rapidly as they can and are learning as they go.

LM: Organizations are changing and adapting on the fly. But with fulfillment now the foundation of the business, does it takes corner office buy in?
Klappich: Indeed. We’re finding that, unlike many other investments, omni-channel is a top down strategic investment and is often driven from the board and C-level executive suite. Because of this strategic focus, I think this has been freeing many organizations to experiment, allowing them to make faster decisions and absorb a bit more risk than they would normally have been allowed. Consequently, I’m finding that omni-channel adoption is successfully moving forward, and organizations are developing approaches that allow them to rapidly evolve.

LM: From Gartner’s technology “wants and needs” studies, does data show that the move to omni-channel is pushing thoughtful technology adoption, or is it a mad scramble to put a solution in place?
Klappich: We find that many supply chain organizations recognize that omni-channel is strategically transformative, and they don’t have the luxury of waiting for the concept to mature. One of the key things our research highlights is that SCM maturity level is tightly correlated with the risk tolerance of an organization.

We see that low-level maturity organizations tend to either try to avoid or cope with risk versus higher-level maturity companies look more to embrace or exploit risk. This manifests itself in how supply chain organizations are approaching omni-channel. Early adopter and innovative companies are on the forefront of adopting omni-channel commerce in part because their organizations have allowed their supply chain organizations to take more informed risks. These organizations will allow more experimentation, embody empowerment, and are unlikely to punish employees who take informed risks. The same CIO I mentioned before told me that, in his view, there’s little notion of a best practice at this point in omni-channel. 

LM: Based on Gartner’s Supply Chain Maturity Model work, is there a correlation between supply chain maturity, technology adoption, and business performance?
Klappich: Without question we find a strong correlation between supply chain maturity and business performance. We find that low maturity organizations are generally underperforming their peers, while higher maturity companies out perform their peers.

While technology is not the only factor in supply chain maturity, it’s certainly a critical component to success.

Our research clearly tells us that companies of high maturity have more comprehensive application and technology strategies. Where lower-level maturity companies are primarily focused on technology issues within the enterprise, higher-level maturity companies are increasingly focused outside the enterprise—with the highest level of maturity companies focused on managing multi-enterprise value chains.

Omni-channel is having a profound impact on supply chain organizations—especially logistics—across all levels of maturity. However, what we find is organizations of higher level of maturity are better equipped to embrace omni-channel from a people, process, and technology perspective.