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This post is written by David S. DuBose, Director of Supply Chain Solutions, Sedlak
This three-part series explores a number of near-term and long-term moves retailers can make to eliminate or minimize holiday season fulfillment headaches and ensure their supply chain is up to the task.

In part one of the series, we identified the issues retailers faced during the holiday season of 2015. Specifically, retailers were unequipped to handle the surge in online sales and a prolonged holiday shopping season. In this second section of the series, we detail the specific actions retailers should take now to improve their operative efficiency and achieve success.

Retailers should start by analyzing the 2015 season’s volumes to understand where things broke down. Two dimensions, in particular, are important to explore:
1. One is product flow: How does merchandise flow through the network? What are the routings? How does it get from factories through the distribution network—and how does this add to or limit flexibility?
2. The other is capacity: What are the capacity and flexibility of the different nodes in the network—the central DC, regional DCs, and any consolidation points or pooled distribution points? Did carriers and suppliers provide sufficient capacity?
Other important capacity levers to analyze include pick faces, throughput, parking, storage areas, staging, and sorters/conveyors. Ideally, this analysis should be done at the SKU level (or, at minimum, the product group level) so a retailer can fully understand the amount of space needed in the DC for each item’s slot. Such insights can indicate whether the projected product flow for the upcoming season will overwhelm the DC’s ability to store and fulfill product.

In some cases, spreadsheets will do the trick. But for a growing number of retailers whose network complexity has mushroomed, more robust packaged tools are likely required. Sophisticated modeling tools enable a retailer to simultaneously consider and optimize complex trade-offs among distribution, production, transportation, service levels and working capital. In doing so, the company can understand the economic benefits and costs of strategic scenarios relative to an agreed-upon baseline.

Such analyses also can help a retailer pinpoint bottlenecks in the network that erode performance. One of the most common is labor: The retailer may not have enough people working in the DC at the right times to keep up with the volume of orders during promotion- or volume-driven spikes. Another typical bottleneck is equipment: The DC’s materials handling equipment—sorters and conveyors—may simply be maxed out. Trucking could also be a problem: There’s insufficient trucking capacity on key lanes to get products from DC to DC or from a delivery agent to stores.
Eliminating the bottlenecks

There are several ways to eliminate or minimize these bottlenecks, depending on the nature and location of the problem. At a high level, retailers can either change the flow or change the capacity.

For instance, one simple step could be to alter the timing of the inbound flow: If a retailer finds that its products are creating a logjam at the receiving docks because they’re all arriving at once, it could smooth out inbound flow by pooling some product in an upstream facility, meter it in, and then release it to the DC in a just-in-time flow. This can help ensure that the products aren’t storming the gate at the same time and overwhelming the DC.

But more often, the answer is to add more capacity to the network to improve outbound flow. One obvious move is to increase the number of people on hand by adding more shifts or work days to boost labor capacity. Another move could involve rethinking how the retailer groups or waves orders for picking in the warehouse management system.

For instance, using a simulation tool, the company could find there are some logical groupings—say, picking all single-item orders that are going to a particular geography—that can make picking more efficient. Doing so can boost the existing labor pool’s productivity, which means an increase in units picked per hour without having to bring on more people. This is especially critical with the online, direct-to-consumer business, which tends to be a lot more dynamic and promotions driven during the holidays.

Such grouping decisions must be made in the context of the retailer’s broader service-level strategy (free shipping? one-day? two-day?) and cut-off times for parcel delivery providers.

Retailers also can employ the fairly standard practice of grouping all single-SKU orders for its online business in a processing wave—as lululemon athletica does. Through its warehouse management system, the yoga retailer separates single-line from multi-line orders, picking the former into a large tote that can hold as many as 35 orders and packing them using an autobagger. This eliminates manual packing from single-line orders and boosts efficiency.

For physical stores, a retailer can relieve some stress on the DC by pushing unallocated inventory to delivery agents, then flowing the inventory to the stores once demand becomes clear. In this way, the company can “read and react” more effectively to local markets or stores and more precisely place inventory at the store level. But there are technology implications: The business must have real-time visibility to the inventory at the delivery agent (typically a third party), which means the retailer’s and agent’s systems must be tightly linked.

In cases where it’s impossible to change the flow or squeeze any more capacity from the existing network, it could be time to go outside for help. Third-party logistics companies can provide supplemental capacity to relieve some of the pressure. But it’s important to lock up that help early; competition for such services becomes more fierce as the holidays get closer.

Collaborating via S&OP

A more ambitious action—one that could take longer than a few months to implement, but also is potentially much more impactful—is to adopt a “retail version” of sales and operations planning (S&OP). The goal is to get key merchants and supply chain decision makers together on a formal basis to collaboratively determine how best to meet the one- to two-month surge in demand. Using a simple model, such as the one below, the combined team can more effectively understand where they expect the peaks and valleys of demand and how the company will respond.

A simple model for a retail version of S&OP

Of course, S&OP’s not a crystal ball. Demand will lag for some items and exceed estimates for others. Promotions will be offered, generating spikes in demand. To help deal with this uncertainty, the team can look to the previous year as a guide. An analysis of past seasons could indicate that certain factors typically resulted in a specific promotion and accompanying spike in demand. This insight can help the supply chain team understand how the merchants are thinking about demand so they can ensure the supply chain can be responsive to those changes. For instance, the supply chain team might create new, temporary fulfillment nodes to flex capacity, increase speed, and reduce delivery costs.

In essence, S&OP helps the merchants and supply chain professionals create a basic “playbook” for the season. This playbook lays out a variety of demand scenarios and actions merchants could take, and the corresponding potential moves the supply chain would need to make to support those actions. Thus, during the season, when a merchant calls a specific “play”—e.g., a promotion on a slow-selling item or a chase order for more of a hot product—the supply chain isn’t caught off guard and forced to scramble to respond. It already knows what’s coming and what it, in turn, will do.

Importantly, with S&OP, communication goes both ways. True, the merchants must keep the supply chain informed of their thinking. But the supply chain team also must be upfront about what’s operationally possible and reasonable. They need to be able to say to a merchant, “We’ve deeply analyzed the situation, and if you take this action, we know what will happen from a supply chain perspective, and we’re going to have a bunch of angry customers.” From there, the merchants and supply chain team can jointly come up with the best solution.

Here’s how one company, a multi-billion dollar, global fashion retailer, used S&OP to its advantage. Several years ago, during an enterprise-wide systems upgrade, the company implemented tools to monitor and manage the flow of product through the distribution network. Beyond the tools, the company put in place a complete solution—encompassing people, process and technology—that became known as “Flow Planning.” Flow Planning became a critical, in-line planning function that optimized inventory flow through the network, subject to each store’s service requirements. Essentially, it dynamically solved the problem of “pushing the pig through the python”—managing the bubble of product flow in an efficient and effective way to ensure product availability. The S&OP dimension of this retailer’s solution is the ongoing dialogue between merchandise planning and allocation and the flow planning teams, which is backed up by fact-based analysis. This is especially critical in handling “fractional” or ”digital” demand—i.e., items that sell fewer than one unit per week, such as “fringe” sizes or items in uncommon combinations of style, size and color.

Part 3 of this series will detail the additional, and more substantial, steps needed to build stronger operational capabilities to improve holiday season performance in future years.
For nearly 60 years, Sedlak has helped retailers optimize their operations to meet peak season volumes and deliver on their promises to their customers. To learn more, visit www.jasedlak.com.

Photo credit: www.flickr.com Willo

This post was written by David S. DuBose, Director of Supply Chain Solutions, Sedlak

This three-part series explores a number of near-term and long-term moves retailers can make to eliminate or minimize holiday season fulfillment headaches and ensure their supply chain is up to the task.

As noted in the previous posts in this series, retailers face several operative challenges during the holiday season. In Part 2, we discussed immediate actions to help retailers prepare for what’s coming later this year and next. In this final section, we detail the additional, and more substantial, steps needed to build stronger operational capabilities to improve holiday season performance in future years.
Put in Place the Right Network Design
The most important thing a retailer can do is ensure it has the distribution capacities and infrastructure needed over the long term to support its growth goals and accommodate shifts in consumer demand and buying behavior. This involves taking a deep look at its network design to determine what changes it must make, and when, to be successful (see figure below).

Figure: High-level supply chain network design process:

The process begins with collecting the data required to forge a deep understanding of the company’s existing supply chain network along two dimensions. The first involves the markets the retailer serves, the types of customers it sells to, and sources of supply. The second is more tactical, concerned with things such as product flow and transportation costs. This data provide insights into:
• The current state and capacity of the retailer’s stores, DCs and contracted facilities
• The operations and process within the stores and DCs
• The overall performance of the network, including costs and service levels

While it’s collecting data, the retailer also should discuss exactly what it will investigate from a network design perspective. For instance, the company could project an increase in compounded annual growth over the next five years driven predominantly by an expansion on the West Coast. It could contemplate a strategic shift to generate a much greater percentage of online sales and turn its physical stores into showrooms. Or it could launch a new store format in a new geographic area. Such conversations are critical to have at the outset of the process. They help define the scope of the effort, which ensures the retailer collects the right data and makes the right assumptions.

Once relevant data are collected, modeling and validation ensure that the data are as complete and accurate as possible. The output of this initial modeling is the base case—the existing network environment. A retailer can then begin to create possible scenarios to illustrate the resulting impact on network design. Adjusting various constraints—including level and type of demand, merchandise mix, target customers, geographic location of customers, capacity, desired average cost, and service requirements— can determine which types and sizes of DCs and fulfillment nodes it would need, and where, to deliver the best business results.

After a retailer develops a number of prospective scenarios, a handful will typically rise to the top as the most desirable. The retailer further vets these finalists through additional sensitivity analysis, eventually determining the one that will best help the company achieve its business goals.

In the final step of the process, the retailer refines the chosen scenario to ensure it aligns with the overall business and its technology, operations, vendors and customers. Key elements of this exercise include:

• Reviewing transition planning and organization alignment (to understand what exactly is involved in moving from the current to future state)
• Sensitivity analysis (to determine how the move may impact other dimensions of the business)
• Risk analysis (to highlight how the new network design changes the retailer’s risk posture).

Addressing these factors enables the retailer to shape the final recommendation for a multi-year implementation plan designed to acquire the capacity (whether built or leased) to support the retailer’s projected growth over a 10-year horizon. It also provides formal objectives for key performance metrics, including revenue, service level, inventory, and transportation and fulfillment costs.

Implement Distributed Order Management Technology

Another important step retailers can take is embracing emerging Distributed Order Management (DOM) technology that can help them route orders more efficiently.
With more customers wanting to shop online, retailers increasingly are adopting an omnichannel focus to meet customer demands. In fact, according to Forrester Research, omnichannel will account for $1.8 trillion, or nearly 60 percent, of U.S. retail sales by 2018. But along with omnichannel comes an explosion in order replenishment complexity. A recent survey found that retailers maintain an average of four different selling channels to reach their customers. Yet, only 38 percent of them actually have the software to manage these channels, which helps explain their lackluster delivery performance last season.
Enter DOM. DOM software is designed to give retailers with complex order management processes a real-time view of inventory, order status, and location across their enterprise. It helps retailers with a significant direct-to-customer business choose the best fulfillment option for each order.

Being able to choose from multiple fulfillment options not only enables a retailer to effectively balance service levels and cost, it also can help take the strain off a DC during times of peak demand. DOM provides another measure of flexibility and speed for the supply chain to minimize disruptions that could disappoint customers.

However, to fully leverage DOM, a retailer’s stores must be capable of shipping orders to customers or enabling customers to pick up items they ordered online—something not all are set up to do. For example, a recent study found that nearly 40 percent of customers who chose to use a retailer’s “buy online, pickup in store” option have had challenges with store employees. The most common problem was that workers took too long to find orders in the store or system, or couldn’t find them at all.

This study highlights a common challenge for retailers: Stores must have appropriate staffing to execute shipping from stores or have product picked and available for customer pick-up. This can be tricky: Ideally, store associates are on the floor providing great customer service and increasing sales, so the store manager has to balance who does the picking and fulfillment, and when, to avoid compromising front-of-the-house performance.

Furthermore, there are implications for the skill sets needed in store employees and advanced planning and scheduling of store labor to execute. Some of these issues can be mitigated by concentrating this fulfillment into a subset of well-prepared stores or adjusting the fulfillment promised time to reflect what can actually be executed.
DOM also is a major IT project. It requires replacing or augmenting the existing order management system, carefully thinking through how to set up the order routing and processing rules, and ensuring accurate inventory at the SKU-store level.

Deployment of DOM tools is currently not widespread. However, because of its substantial promise to help tackle complex omnichannel fulfillment, that’s likely to change in the near future.

Manage Other Flow Options

Finally, retailers should take steps to aggressively manage other flow options that can take stress off the distribution network.

One option is exploring origin-based logistics—i.e., value-added services that could be done at the factory and make downstream distribution easier. Store-ready pre-packs are one example. A pre-pack is an assortment of items that reflect different sizes and colors for a particular style. The pre-pack can be assembled at the factory so that the store or market receives an assortment that reflects what it needs. Pre-packs make it easier to move the received product to the store sales area; reduce costs by having offshore factory-based resources do the assembling instead of more expensive store employees; and, perhaps most important, give store employees more time to service customers.

One caveat with this approach: Creating pre-packs may require merchandise planning and allocation professionals to make their decisions earlier in the process. This runs counter to the preference of waiting as long as possible in order to get the most accurate read on market demand. The key, again, is striking the right balance between efficiency, responsiveness, and capacity.

In addition to origin-based logistics, retailers could employ DC bypass, in which all inventory of certain items needed for a store is consolidated at a separate facility and shipped directly to the store. Fashion retailers, for instance, can use DC bypass to handle their seasonal products while dedicating their DCs to their mainstream goods. In this way, the consolidation point acts as a “release valve” that can relieve some pressure when the network is in danger of bogging down.

Conclusion

There’s no doubt the retail world has become much more complex, especially as customers increasingly demand omnichannel access to their favorite goods. The expanded “Black Holiday” selling season has only added to the challenges today’s retailers must effectively manage to keep customers happy and still grow profitably. By taking the appropriate short- and long-term steps to identify and remove potential supply chain bottlenecks, retailers can make upcoming holiday seasons “blacker,” and less likely to be revisited by those unwelcome old ghosts.

photo credit: www.flickr.com Allen Scheffield