Retailers’ fulfillment dilemma

Retailers were already facing rapid change before Covid-19 struck. But the pandemic prompted a surge in e-commerce that is overwhelming retail supply chains. Between March and September 2020, US online orders at Walmart more than tripled to 20% of sales; at Best Buy, they more than doubled to 50%. At the same time, digital pioneers like Amazon have raised customer expectations on speed of delivery to one day or less. And the biggest challenge is yet to come: Bain & Company research shows that US retail e-commerce penetration will grow to nearly 30% of total sales by 2025.

The rapid growth in online sales has magnified the problems of aging distribution networks, including inventory pileups, slow cycle times and poorly located supply. Executives struggle from week to week to increase network speed, boost flexibility and keep costs down. It’s the ultimate supply chain balancing act. Leading retailers are taking a new approach to meeting customer demands quickly, without a massive investment in new distribution facilities. The trick is making the most of their vast network of stores to relieve the distribution strain. Using the infrastructure they have in place allows them to design a long-term strategy to improve supply chain performance without rushing into large capital outlays.

How does it work? Successful retailers optimize network efficiency, speed and flexibility by determining what matters most to their customers. That allows them to make better use of their existing supply nodes—distribution centers, microfulfillment centers, hub stores and individual stores—to meet the most pressing need first. It also enables them to rapidly improve customer satisfaction at minimal cost. Retailers that rank convenience and fast delivery as top priorities, for example, rely more on their own stores for e-commerce fulfillment. Those that care most about efficiency use distribution centers or microfulfillment centers.

In our experience, many retailers can achieve gains in all three categories—cost, speed and flexibility—by tackling basic inefficiencies in omnichannel fulfillment. For instance, a US specialty retailer, with a supply chain designed to minimize cost, is on track to double its same-day and next-day delivery capacity, turning its network into a competitive weapon. The shift to a store-centric fulfillment model will increase fulfillment speed and avert a large capital investment—the forecast increase in operating costs is less than 1%.

Vast store networks To meet growing online demand, many retailers are rushing to build microfulfillment centers that push fulfillment closer to the end customer but still offer the benefits of a centralized facility and operations. Sometimes that’s the right choice. However, many retailers can fulfill e-commerce orders efficiently from their existing stores, cutting down the high cost of last-mile delivery.

One of Target’s early digital moves was to offer customers the option of buying online and picking up their purchases in stores. Now, the retailer is increasingly relying on ship-from-store, which it has determined is cheaper, in many instances, than shipping from a microfulfillment center. Target is also experimenting with fulfilling e-commerce orders from a sorting center, sending purchases from the store closest to the customer to a nearby center to be packaged and shipped for last-mile delivery.

Retailers with vast store networks, such as Best Buy, are scaling the store-fulfillment strategy by delegating hub stores with extra capacity to fulfill digital orders. Of course, microfulfillment centers and traditional distribution centers are more efficient: Their labor costs are lower and they require less inventory—as long as they can deliver goods in a timely manner.

Speed. Retailers that offer to deliver orders on the same day or the next day can improve speed and responsiveness by shipping the majority of goods from existing stores. The approach is especially well suited to larger stores that can accommodate in-house fulfillment workers, either picking goods from the floor or from a separate platform in the back of the store.

Walmart uses the same approach in China, and it relies on a partner to offer one-hour grocery delivery within a limited radius. In-store fulfillment reduces the cost of the last mile of delivery, but it also results in a greater number of split shipments and increased inventory stock. So, retailers that choose this option require more accurate demand forecasting by fulfillment location.

Efficiency. Retailers that put cost efficiency first use a heavier mix of centralized e-commerce fulfillment centers in their network model design, including microfulfillment centers. Centralized fulfillment is more productive when it comes to picking and packing units per hour. That gain helps offset the increased delivery cost of shipping from a more distant supply. The risk: If picking and packing efficiencies in a centralized fulfillment model don’t offset higher delivery cost—and consumer expectations for rapid delivery continue to rise—this strategy may result in a competitive disadvantage.

Kroger has taken an efficiency-first approach in its partnership with British grocer Ocado: It licensed Ocado’s automated warehouse technology, which is designed to fulfill online orders for delivery to consumers’ doors.

Many European retailers are also relying more on distribution centers or microfulfillment centers, as stores are not always large enough to accommodate e-commerce picker capacity. For instance, Waitrose opened a six-acre fulfillment center in north London in May 2020, doubling its capacity to fulfill online orders, and plans to open a third fulfillment center, located in west London.

Flexibility. The world has become more volatile and less predictable. No retailer can forecast exactly how e-commerce will develop. And a range of external forces from weather to geopolitics can suddenly disrupt global supply chains. A flexible fulfillment strategy will help companies adjust rapidly to unexpected shifts in supply and demand.

For instance, when Covid-19 reduced store traffic, some European retailers quickly increased their reliance on ship-from-store as the number of customers shopping in-store declined, opening up space for fulfillment employees on the floor. Having this flexibility gave these retailers a competitive edge.

Successful retailers have a clear customer-first vision that helps determine the right priority when it comes to fulfillment, be it speed, efficiency or flexibility.

About the authors: Travis Wibracht and Mikey Vu are partners in Bain & Company’s Retail practice. Travis is based in the firm’s Dallas office, and Mikey Vu is based in the Austin office.