boozco the mandate for multichannel retail
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8/13/2019 BoozCo the Mandate for Multichannel Retail
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Perspective
Rich KauffeldHenning
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Retail Evaluating S u ppl yChain M od el s
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EXECUTIVE
SUMMARY
(etailing has entered a ne$ age in $hich consumers are
demanding and e)pecting all store o$ners to offer a
multichannel shopping e)perience* deli+ered seamlessl& acrossmobile* online* and in,store merchandising platforms- 'irtuall&
all of the gro$th in retail sales o+er the ne)t fe$ &ears $ill come
from multichannel +enues* dri+en primaril& b& the impact of
digiti.ation/the changes in people0s li+es
as smartphones* tablets* and high,band$idth connections
become pre+alent-
(etailers can choose among si) different suppl& chain models to
operationall& support seamless multichannel shopping
e)periences- In making this choice* each retailer $ill ha+eto decide bet$een independent and shared suppl& chains*
and $hether to build them internall& or through outsourcing-
1hese choices $ill depend on the retailer0s o+erall +alue creation
proposition- 2ach retailer has a distincti+e 3$a& to pla&4 that
combines a business model* customer e)pectations* and
distincti+e capabilities to set a strateg& for dri+ing
gro$th* profitabilit&* and long,term success-
#oo : Compan;
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THE MULTI-CHANNEL
CONSUMER
9here<s no den;ing an;more that an
increasing number of shoppers are
demanding far richer retail
environments than ever before=
anchored b; multiple digital channels for
bro7sing= evaluating= comparing= and
purchasing products. 9he prevalence of
smartphones= tablets= and >al7a;s(on?
broadband connections is transforming
consumer behavior. 2aced 7ith the impact of
this digitiation= virtuall; ever; retailerno
matter
ho7 strong its ph;sical stores are or= indeed=
7hether it has an; ph;sical stores at all@
must no7 respond to this siable and restless
digital consumer base. t must offer a seamless
mobile and online strateg; that integrates the
shopping experience across portals=
apps= and retail channels.
9he statistics highlight the
importance for retailers of
fulfilling these consumer
expectationsB Although overall
retail sales are stagnant= online
sales are expected to increase at a
compound annual gro7th rate of
about '* percent in the next five
;ears see 2)hibit 5DE some
categoriesfood and beverage=
5e7elr;= and health and beaut;=
among others@7ill likel; expand
b; as much as '+ percent ;ear(
over(;ear online. Moreover=
cross(channel annual spend( ing
levels of multichannel shoppersare often double those of retail(
onl; customers. All of this means
that retail( ers that fail to put in
place effective multichannel
operations 7ill lose out
on '+ to &* percent of their
categor; sales b; )*'+= and
much more in the follo7ing
;ears.
Retailers that offer a more robust
and integrated shopping
experience 7ill primaril; capture
these double(digit online gains.
According to a )*'*
#oo : Compan; surve;= /0
percent of Feb users like to do
side(b;(side and site(b;(siteD
product comparisons on
the nternet before making purchases=
and ,- percent feel that it is
important to be able to order
online and pick up the items in a
store. 9hese features 5ust hint at
7hat consumers increasingl;
expect from retailers through
multiple channels= a 7ish list that
includes access to a 7ide s7ath of
products
online and the option to revie7 in(
store inventor; via the Feb see
2)hibit 6* page 7D.
8ot surprisingl;= considering ho7
inno( vative and entrepreneurial
the nternet channel is= the 7inners
of the online retail 7ars= no7 and
in the future= 7ill be the most
creative companies that
can deftl; provide a shopping
experi( ence compatible 7ith the
expanding expectations of
consumers. #ut it is vir ( tuall;
impossible to deliver this desir (
able shopping experience 7ithout
first implementing an optimalmultichannel suppl; chain@one
that is efficient and scalable
designed to best support the
compan;<s overall channel strateg;
and the distinctive characteristics
of its customer reGuirements and
economic trade(offs.
Exhibit 1 Across Retail Categories, OnlineGrowth s Shi!ting Sales Online
.$. I8!86 $HAR6 I2
#oo : Compan;
+
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I"6RA!! R69A! $A!6$)*'*J)*'+ 2orecast
'*CAR
'/'
Ke;(
overall retail sales arestagnant= online sales 7ill
gro7 at a CAR of '*
''
''',
($omecategorieslikefoodand beve
rages= 5e7elr;=andhealth and beaut; aregro7ingabout'+;ear(over(;earonline
( Multichannelcustomershavesignificantl;higher lifetimevalues than
bricks(and(
mortar or online(onl;customers
)*'* )
*
'
'
) ) ) )( n addition toonline sales=
digital channelsinfluence an evenlarger percentageof retailsales forexample= throughonline research=mobilecouponing= orlocation(basedoffersD
( Retailers that failto put in placeeffectivemultichannelcapabilities 7ill
lose out on '+ toActual2orecast
&* ofrevenue intheir categor;
b; )*'+= andstruggle tocompeteeffectivel; fordigitall;
in
fluencedrevenues in ret
$ourceB 2orrester ResearchEMorgan $tanle;E #oo : Compan
anal;sis
/#oo : Compan;
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Exhibit "#hat Custo$ers #ant !ro$ Multichannel Retailers
"R9I$ CLC!6 I2C$9IM6R 6P6R68C6$tages and Potential#reakdo7ns
Post($ales Research
!
"
Ho7 the Customer 6xperience Can2ounder
! $tore shoppers don<t have access to revie7sand ratingsE sales reps don<t use productinformation that can be found online
! $tore does not offer online long tail of assortment
# 8o option to revie7 in(store inventor; online
# tem out of stock in store can<t be ordered for home deliver; from store
# nconsistentonline and offline pricing3eliver ;
$ Purchase
$hop
#
$ Channel(specific promotions can cause bu;er<sremorse if discovered
onl; after a purchase" 8o option to reserve and pick up in store and
order from store for home deliver; Inline returns cannot be returned to store or can onl be returned to store
$ourceB #oo : Compan;
Creating a multichannel
suppl; chain is a complex
task due to the starkl;
different ob5ectives and
priorities of traditional andonline retail suppl; chains.
2or example= in the ph;si(
cal retail environment= suppl;
chains are designed to
efficientl; keep the products
that consumers 7ant most on
store shelves= 7ith rapid
replenishment
from regional distribution centers.
2or online channels= customer
value is driven b; the abilit;
to offer a much 7ider
assortment= and even
custom( ied products that
the retailer ships from a
central 7arehouse or
supplier inventor;.
Ir consider the difference inlogistics costsB 2or retailers=transportation costs arekept relativel; lo7 b;
moving pallets and
truckloads of products
through a net7ork of
regional distribution
centers. #ut in the online
channels= logistics costs are
substantial= as most
products are
shipped directl; to people<s
homes or offices individuall;
or in small groups b; parce
carriers see 2)hibit 7D.
Exhibit %$uppl; Chain
A Co$parison o! Operating Models in the &raditional Retail and Online Retail Environ$en
9raditional Retail
( Retailer<s 5ob is assortment selection to fill limited shelf
Inline Retail
( !ong(tail or virtuall; unlimited assortment is a ke; value
Procurementspace= cut long tail
( tems are procured and negotiated in bulk and 7ill get sold proposition of online retail
( $lo7(moving long tailD items ma; be procured in ver;through the channel small Guantities
nventor; ( nventor; exists at up to three levelsB distribution center =re ional distribution center and store ( nventor; onl; exists at one levelB distribution center
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Management ( nventor; value is mostl; driven b; stock levels of $K s
Farehouse( !o7er number of orders= stable throughput
( High number of orders= high throughput gro7th
Iperations ( 2orklift and pallets to trucks ( High degree of manual labor or smart automation e.g.= KivaD
9ransport :( Iften compan;(o7ned fleet that delivers bet7een
distribution centers and to stores( 2reight carrier picks up large number of
shipments from distribution center !ogistics( !ogistics costs per item are lo7 ( !ogistics costs per item are high
Post($ale( Return to store can create reverse logistics complexit;
( Return b; mail or store for some multichannel pla;ersD
$upport up(sell ( Iften extensive service levels and generous policies
$ourceB #oo : Compan;
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STRATE%ICCHOICES
9here are six different suppl; chain
models that retailers can deplo;
to maximie returns from their
multichannel operations. 6ach of them
reGuires its o7n capabilities. 3epending
on a compan;<s existing strengths=
some of them are more difficult to
implement than others= but each of
these models focuses on
different core aspects of
suppl; chain management
and on generating distinctive
results see 2)hibit 8D.
Model !& Online-Onl'(In-
Hou)e
Su**l' Chain
Amaon.com is the best(
kno7n pro( ponent of this
approach= 7hich relies on
extensive product salesforecasting and inventor;
management s;stems
to fulfill orders Guickl; at ahigh rateof accurac; 7hile optimiingshipping times to customers.ndeed= because
of its aggressivel;
innovative= inter ( nall;
developed e(commercesuppl; chain= Amaon can
offer a vibrant and
attractive customer
experience
that includes
recommendation tools= a
variet; of shipping options=
and excel( lent post(sale
communications through its
7ebsite. Managing suppl;
chain
and logistics in(house makes
sense for Amaon= 7hich uses
these operations to build=
leverage= and differentiate
itself through scale and
customer service. Moreover=
maintaining internal control
of the suppl; chain also allo7s Amaon
Exhibit ' Supply Chain Strategies !or Online and Multichannel Retailers
Pros Cons
! (Amaon
(Ouid
sin(House
(app $et
up
Iutsourc
ed
# (ilt
rou
pe Inline Inl;
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$
"
+
$cope
$h
ar ed($u
per marketChain
3e
di
cat
ed(!uxur;Ap par
elR etailer
$hared( 3ell
3edicate
d( Falmart
Multichan
nel
( 6nables operations( based competitiveadvantage
# ( Keeps investments lo7 and offers
( 6liminates distractionfrom other areas of
business$ ( Creates potential s;nergies such as
reduced overhead=though difficult to full;realie
" ( Maintains completecontrol
( 6nables operations( based competitive
advantage
( !everages preexisting relationship7ith vendor
+
( Keeps investments lo7 and
offers service(leveloptions
( 6liminates distractionfrom other areas of
business
( !ong learning curve beforeadvantages ma; berealied
( 9;picall; cannot scale forh;pergro7th
( nfrastructure and processes t;picall; poorl; matched to e(commerce
( Potential s;nergies andexisting expertise oftenoverstated
( Cost plus third(part; logistics pricing model passes inefficiencies back toretailer
( Challenging to createmultichannel experience
$ourceB #oo : Compan;
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to collect vast Guantities of
data= 7hich can in turn be
mined to improve all aspectsof the suppl; chain and the
7ebsite.
Ither prominent pure e(
tailers have also chosen an
in(house suppl; chain
management model that
facilitates high(touch
customer service. $hoe
seller appos designed a
proprietar; suppl; chain
that could provide a
best(in(class returns polic;
and Guickl; place returned
items back into inven( tor;.
appos based this approach
on the notion that shoes are
an;thing but an impulse bu;E
customers 7ant to
tr; them on and see ho7 the;
feel and look before bu;ing
them. #; offering free= fast=
and convenient returns
customers send back as man;
as &+ percent of the shoes
appos made
the at(home trial period
uncomplicated and overcame
consumer resistance to
making shoe purchases
online. As a result= rather
than competing on price=appos provides great
service= enabled through
its suppl; chain@its
differenti( ating
advantage. And because
appos has such high
volume concentrated in
a single product
categor;= b; manag( ing
distribution in(house the
e(tailer can develop and
control specialied
infrastructure for this
product line and
command good
transportation rates.
Ouidsi= 7hich o7ns
3iapers.com=
$oap.com= and other
personal goods
sites= has among the most
sophisti( cated in(house
suppl; chains of all
e(tailers. 2or Ouidsi= as fo
appos= in(house suppl;
chain management i
economical because larg
volumes
of ver; similar products
7arrant and support
investments in highl; special
ied infrastructure and
processes. 9o reduce
7arehousing costs= an inven
tor; management s;stem
determines the minimum
amount of product that nee
to be on hand in the compan;
three regional distribution
centers b; assessing custome
life c;cle and order freGuenc
trends= 7hich are highl; predictable for Ouidsi<s
products. 9o minimie
shipping expenses and 7aste
proprietar; packaging
algorithms select the optimal
box sie for each order . Fhi
shopping= consumers are
offered additional items that
purchased= could help optim
logistics costs. Productivit;
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improved b; intelligent pod(
enabled picking s;stems that find
shelved items Guickl; and
efficientl;.
9he combination of these suppl;
chain innovations enables Ouidsi
to offer same(da; fulfillment= free
t7o(da; shipping at a modest
threshold= and
a &/+(da; return polic;= 7hile
main( taining competitive pricing
critical reGuirements for
success in the con( sumer goods
categor;. 8ot surprisingl;=Amaon acGuired appos in
)**-
and Ouidsi a ;ear later in part for
their efficient= innovative= andscalable
in(house operating s;stems.n March
)*')= Amaon announced
the acGuisi( tion of
distribution center pioneer
Kiva $;stems= 7hich
specialies in building
7arehousing s;stems for
online and multichannel
retailers. 9his acGuisition
7ill help Amaon
substantiall; improve its
o7n fulfillment capabilitiesE
in the process= Amaon 7ill
be able to better control itsfulfillment costs as a
percent( age of revenue and
also Guickl; build highl;
effective distribution centers
in man; additional
locations. 9o avoid having
to charge sales tax= Amaon
has not established a
ph;sical presence in man;
states= a situation that 7illlikel; change soon as state
legislatures exempt online
retailers from this
reGuirement.D
Model #& Online-
Onl'(Out)ourced
Su**l' Chain
#; turning over suppl; chainmanage( ment to a third(
part; logistics firm= ;oung
online companies 7ith
rapidl; gro7ing but still
subscale operations can
focus their limited
management band7idth
and capital on their most
distinctive and important
capabilities. 9his model has
been adopted promi( nentl;
b; ilt roupe.
An online retailer of luxur;clothing
and other high(end items=
ilt<s greatest value and skill
sets are in merchandis( ing= a
activit; that depends on stron
marketing and promotion o
ilt<s
site as 7ell as providing acompelling
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product line. n addition= procurement
is considered a differentiatingcapabilit; at the e(tailer=
7hich scours suppliers
for high(end products that it
can offer at lo7 prices in
online >7arehouse? sales.
Fith this approach= ilt has
expanded into other luxur;
areas such as gourmet food
and travel.
iven these priorities= ilt
vie7s its less distinctive
fulfillment capabilities as a
pure support function that is
better out( sourced= 7hile the
compan; 7orks on building
better relationships 7ith sup(
pliers and on fostering a sense
of exclu( sivit; among its
customers through an
attractive 7ebsite 7ith a 7ide
assort( ment of products.
Moreover= vie7ed purel;
from an economic standpoint=
the investments reGuired for
in(house distribution
operations are difficult to
5ustif; 7hen= as is the case
7ith ilt= products sold var;
7idel; in geographic origin=
available Guantit;= sie= and
7eight. As ilt<s sales profileshifts 7ith changing market
opportunities= out( sourcing
provides the flexibilit; to
scale distribution
operations up or do7nD
rapidl; in response to
reGuirements.
2or bulk; or perishable
products= such as furniture
and food= ilt goes be;ond
outsourcing suppl; chain
operations 7hile o7ning the
inventor;. nstead=
the e(tailer utilies drop
shipping= in 7hich the
products are sent out b; the
manufacturers from their o7n
7are( houses. n so doing= ilt
never ph;si( call; touches or o7unsold inventor; in these produ
categories and reduces the numb
of stops that items make bet7ee
manufacturer and consumer .
Model $& Multichannel(Shared
In-Hou)e Su**l' Chain
#ecause traditional and online
retail make different demands on
their suppl; chains= combined
fulfillment and distri( bution
operations serving both channe
are generall; not optimal for
either. #ut there are cases 7hen
shared= in(house suppl; chain is
fact= the best and
onl; optionfor example= 7he
online orders account for a ver;
small shareof sales.
9hat 7as the situation at one
large supermarket chain= 7hich
set up a s;stem in 7hich online
orders are routed to one of a
select set of stores based on
customers< locations. At these
sites= inventor; for online and
retail purchases is shared.
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6mplo;ees filling online
orders pick from the same
shelves as retail customers=
and the supermarket<s trucks
deliver orders to consumer
homes. Across the small
number of online orders from
each geographic location=
demand for specific $Ks is
highl; variable. $o the
supermarket includes online
purchases in the sales reports
that are used for
determining in(store
inventor; to make sure
that the shelves are
stocked 7ith sufficient
items for both online and ph;sical store orders.
#uilding a dedicated
distribution net7ork
for its minimal online
busi( ness 7ould have
been an expensive
undertaking for the
supermarket 7ith ver;
little return. #ecauseman; grocer; products
are perishable and
are expected to be
delivered relativel;
Guickl;= the supermarket
7ould have had to set up
a large net7ork of
fulfill( ment points as
close as possible to
customers 5ust for onlinesales= and it 7ould have
had to maintain separate
inventor; for this channelE
both are costl; ventures.
9he adaptations reGuired to
pick online orders from stores
designed for customers< use
are minimal. Customers<
basketsthe number and
value of items the; bu;@are
substantiall; the same online
and in(store. 3espite charging
a fee for delivering orders
under a minimum value=
the supermarket still is7illing to s7allo7 a net
loss
on online fulfillment. 9his
loss is the rule= not the
exception= for ph;sical
supermarkets 7ith online
businesses.D Fere its online
business to gro7 larger = the
compan; might attempt
greater scale economies in picking. Fere it to gro7 much
larger= these economies
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7ould reGuire dedicated
facilities. 2or the online
business<s current stage ofdevelopment7here the
densit; of online orders from
an; one geograph; is lo7@a
shared model is cost(effective
and not disruptive to the
store<s
primar; business.
Model "&
Multichannel(,edicatedIn-Hou)e Su**l' Chain
Fith this approach= the
suppl; chains that serve the
online and ph;sical parts of
the business are maintained
separatel; to meet the
distinct opera( tional
reGuirements of each
channel. $eparate net7orks
and inventories
involve incremental costs= so
the results must be 7eighed
carefull; to deter ( mine
7hether the benefits are
7orth these costs. Ine luxur;
apparel retailer tried this
strateg; b; establishing t7o
distinct distribution centers in
the same region of the nited
$tates. 9he results 7ere
not Guite 7hat a discount
e(tailer 7ould like= butthe; 7ere satisfactor;
in comparison to those
of competitors in the
high(endNluxur;
categor;B Irder
processing took about ,0
hours= and
the free shipping
threshold 7as up7ard of
Q)**. Although these
numbers are not best in
class 7hen it comes to
fulfill( ment efficienc;
and pricing= the; 7ere
more than offset b; the
benefits gained b;
customiing the suppl;
chain to each channel<s
uniGue operational needs.9he t7o dedicated suppl;
chains ensured
that luxur; service(level
reGuirements 7ere met in the
stores= 7here stock ( outs ofsuch high(margin products
are ver; costl;= 7hile the e(
commerce sites had the 7ide
and varied assortment of
products that customers have
come
to expect from e(tailers for
goods at an; price.
$eparate= dedicated suppl;chains
are preferable 7hen a
capabilit; like customer
service is more important fo
some channels than others.
Ho7ever = this approach
makes economic sense onl; i
both the ph;sical and online
sides of the business are siab
enough
to operate at an efficient scal
and if the savings from
combining the channels 7ou
not be significant.
Model &
Multichannel(Shared
Out)ourced Su**l' Chain
3ell tried this model and
learned that it should be
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adopted onl; if the retail and
online sides of the business share
man; of the same characteristics
relating to meeting customer
needs and logis(
tics reGuirements. n 3ell<s case=
the demands of its online and
store(based sales components
couldn<t have been much more
different.
3ell made its name and fortune
on selling custom(built
computers directl; to consumers
over the nternet. At first 7ith anin(house suppl; chain and
later rel;ing on third(part;
manu( facturing and
operations= 3ell had
become extremel; adept at
customiing individual products for consumers and
shipping them efficientl; and
rapidl; to people<s homes
and offices. sing this
model= the computer maker
7as ver; profitable and
earned a 7ell(deserved
reputation for being one of
the most innovative e(
commerce companiesin the 7orld. ts online
suppl; chain 7as especiall;
admired for its demand
shaping capabilities= its
abilit; to manage
complexit;= and its
excellent 7orking capital
metrics. #ut b; )**1=
competition and price 7ars
in the PC industr; had
intensified and margins had
tightened. 3ell 7as
compelled to 7iden its
distribution model b; selling
its computers through retail
channels.
n making that decision= 3ell
also made another difficult
choiceB to use the exist( ing
direct(to(consumer suppl;
chain to produce and ship
products for retailers.
9hat turned out to be
problematic. 2or one thing=
3ell made most of its
computers in Asia= deliveringthem directl; to consumers
around the 7orld b; plane
and bur;ing the shipping
costs in the price of the
machine. 3ell<s suppl; chain
7as optimied for flex( ibilit
in manufacturing= inventor;=
and transportation= as the
custom model reGuired= but
did not have the demandforecasting capabilities that
7ould
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allo7 the compan; to build in
the extra time needed for the
more economi(cal ocean shipping reGuired
b; retail<s raor(thin profit
margins for PCs. Moreover=
7hen 3ell tried to re5igger its
suppl; chain to satisf; high(
volume retail orders=
production in the direct(
to(consumer side of the
business slo7ed considerabl;
and customers 7ere
forced to endure dela;s before
their computers arrived. More
recentl;= the compan; has
made significant efforts to
increase the efficienc; of its
retail(facing suppl; chain
operations b; expanding
ocean shipping and improving
product planning andforecasting. 9hese moves
to7ard dedicated suppl;
chains for
each channel illustrate that
a shared multichannel
suppl; chain capabilit;
is suitable 7hen business
reGuirements are similar
across channels but not 7hen
the; differ dramaticall;= as
the; do in 3ell<s case.
Model +&Multichannel(,edicated
Out)ourced Su**l' Chain
Companies that are adept at
traditional retail suppl;
chains ma; not have the
innate capabilities alread; in
place to put together a
successful e(commerce
suppl; chain. 9he differences
bet7een the t7o channelsare Guite starkE in par (
ticular= the online
component reGuires the
rigid order processing=
picking=
and parcel shipping accurac;
aligned 7ith first(class
customer service= 7hile
ph;sical stores reGuire
strong inventor;
management= consumer deman
fore( casting= and order planning
capabili( ties to keep costs lo77hile ensuring that products ar
available on shelves 7hen
customers 7ant to bu; them. 2or
these reasons= having separate
suppl; chains for each channel
in(house
for the stores and outsourced fo
the ne7 e(commerce function
can make sense= particularl; if
compan; is unfamiliar 7ith the
nuances of online retailing and
dares not risk compro( mising a
7ell(functioning retail suppl;
chain 7ith the additional
complexit; of fulfilling the onli
channel through it.
Falmart= the undisputed suppl;
chain king in the retail sector= cato this conclusion= and has
benefited greatl; from it. Fhile
still using its massive clout as a
purchaser to drive advanta( geo
procurement programs throug
out the organiationboth in th
retail channel and online
Falmart chose
to outsource much of the
inventor; management and
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logistics aspect of its e(
commerce business. Fhen
imple( menting this choice= the
compan; emphasied that it
7anted a fulfill( ment and
distribution partner that
could keep costs lo7 7hile
meeting the service
reGuirementsprompt fulfill(
ment= expedited shipping
options= and package tracking
that customers
have come to expect of online
retail. ltimatel;= Falmart
found a third( part; providerthat has a 7ide 7are(
housing and distribution
footprint. 9he provider
has been able to 7ork
7ith
the retailer to set up programs that offer
customers convenient
options such as being
able to pick up or return
items ordered online at
Falmart stores.
Falmart<s case illustrates
that third( part;
fulfillment firms can offer
boththe advantages of
outsourcingsuch as
flexible capacit; for use
during the bus; holida;
seasonand man; of
the services associated
7ith managing dis(
tribution in(house.
Although Falmart<s
distribution capabilities
are 7orld( reno7ned
and Falmart.com
attained the scale to
5ustif; in(house
distribution Guite Guickl;= it
has little reason to rush to
bring distribution in(house.
2reGuentl;= companies
choose one of these six
models b; default or 7ithout
careful consideration of
7hether the approach the;
pick 7ill fit 7ell 7ith their
current suppl; chain setup or
the particular t;pes of
customers the; are serving@
often 7ithout kno7ing
7hether it 7ill benefit theircompanies or not. 9hat<s a
shortsighted approach that
can cost a retailer market
share and= for the largest
companies= billions of
dollars in lost profits.
Although
there isn<t a single right
multichannel approach for all
retailers= there is a correct onefor each retailer depending on
its business model= value
proposi( tion 7ith consumers=
and existing set of
operational capabilities.
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Picking the Right Multichannel Approach
2or man; retailers= the decision about 7hich multichannel
strateg; to choose can be difficult= because the; lack a clear
set of rules to follo7 to determine the best path for7ard. 9o
mitigate this hardship= #oo : Compan; has created a
diagnostic program that can identif; the capabilit; gaps
that retailers need to address in order to succeed in
multichannel environments 7ith the most effective suppl;
chain strateg;.
9he diagnostic begins 7ith a soft launch during 7hich
executives and others in the compan; are intervie7ed in an
effort to aD understand corporate strateg; and the
compan;<s desired customer value proposition= bD design
a 7orking plan for the operational reGuirements needed todeliver that customer experience= and cD launch data
gathering for the diagnostic and market anal;sis.
After this step= the first phase is devoted to a capabilities assessment and
market(back anal;sis in order to evaluate the follo7ingB
R Current capabilities
R $tructural options and economics
R Customer segments
R Ke; processes= s;stems= and customer experience break points
R
Competitive landscapeR $ervice levels
R Capabilit; gaps
R $ie of multichannel opportunities
Phase t7o of the diagnostic is devoted to developing
recommendations= as follo7sB
R Iperations vision and strategic priorities are defined.
R A long list of opportunities and differentiating capabilities is created.
R Priorities are set for 7hich capabilities need to be addressed first= based
on ease ofimplementation
and potential impact.
R Priorit; items are translated into recommendations for strategic initiatives
that deliver the operationsvision.
R A business case is developed for the strategic initiatives.
R A draft road map for multichannel suppl; chain strateg;
is produced that includes implications for capabilities=
organiational structure= decision rights= s;stems=
processes= and investments.
Phase three of the diagnostic is reserved for finaliing the multichannel
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suppl; chain road map. 9his stage includes the follo7ingB
R terating the road map and incorporating stakeholder feedback
R 2inaliing the case for change 7ith an emphasis on the business case
R Iutlining ke; success factors and implementation risks
R 3rafting the governance structure and high(level implementation plan
to execute
initiatives
RFriting and presenting the final report
9his diagnostic and strategic development program is a
targeted and step7ise approach that can provide a uniGue
perspective on the direction a retailer needs to take to
succeed in the multichannel environment. More than
an;thing= it provides a road map for Guickl; identif;ing the
capabilit; gaps that must be closed and the operational
strategies that should be embraced.
T ATCH revenue becomes an
increasingl; large share of a
must be appropriatel; located
near ma5or cities.stream= retailers 7ill have to not onl;
choose and execute their suppl; chain Greater e$phasis on drop
strategies 7ell but also respond to Retailers have generall; used drop
ne7 trends and economic conditions. shipping to provide products
n our vie7= over the next fe7 ;ears= that 7ere out of their traditional
three critical trends 7ill pla; essential orbit that is= bulk; or reGuiring
roles in determining the contours of refrigerationD. #ut as retailers
multichannel suppl; chainsB 7iden their sales channels and= in
the process= increasingl; turn to
Shorter delivery ti$es( !ed b; third(part; logistics providers to
Amaon and its remarkabl; efficient handle fulfillment= drop shipping
overnight and t7o(da; shipping 7ill become more popular because
programs= online customers are it achieves three valuable resultsB
expecting Guicker processing and t expands product assortment
faster deliveries. 6ven luxur; retailers= virtuall; instantaneousl;= allo7ing
7hich traditionall; haven<t had to retailers to reach longer( and
meet these rapid(fire standards= are tail customers 7ithout increasing
not going to be able to ignore the inventor; carr;ing costsE it transfers
need for speed in nternet retailing errors and omissions risk to the
7hile offering this service virtuall; for third(part; logistics firm= 7hich is
free. 9o remain competitive= retailers especiall; beneficial 7ith expensive
7ill have to implement forecasting and perishable inventor;E and it
s;stems that provide a high level reduces inventor; holding cost and
of accurac; to minimie stockouts obsolescence risk for the retailer .
and keep inventor; at a reasonable 9o successfull; execute a droplevel and simultaneousl; embrace shipping program= retailers 7ill
innovation in picking= packing= and sophisticated vendor management
shipping so that packages can s;stems that help ensure strong
TR EN,S
As the multichannel landscape continues to evolve and as online
rapidl; depart an increasingl; dense net7ork of distribution centers= 7hich
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As the $ultichannel landscape continues to evolve,
retailers will have to not only choose and execute their
supply chain strategies well
but also respond to new trends and econo$ic
conditions)
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oversight of suppliers and
logistics firms and a
consistent customer
experience across all brands
and product lines. n
addition= 7ell( functioningelectronic links bet7een
retailers and suppliers for
sharing sales and financial
forecasts are necessar; to
decrease stockouts
and failures in order
processing and shipping.
9he trend to7ard drop
shipping makes aspects of
their suppl; chain
operations easier for
retailers= 7hile it gives
product manufacturers an
opportunit; to differentiate
themselves as first(rate
shipping and logistics
partners for retailNe(tail
outfits.
*yper+ocal -istribution
Centers( $hipping time is one
of the biggest challenges for e(
commerce companies.
Consumers 7ant instant
gratification= or as instant as
possible. And the thought of
7aiting even three da;s
for a deliver; can turn a
7ould(be customer into ano(sho7as does the
thought of having to pa;
for
t7o(da; shipping. Fhile
Amaon and others have
perfected free t7o(da;
shipments= same(da;
deliver; is the next
frontier in online
fulfillment
and 7ill create a huge
competitive advantagefor retailers that can
meet that promise
before others. 9o do
this= h;per(local
distribution centers are
a possible ans7er. #ut
these are extremel;
difficult and expensive
to establish. Hard
Guestions must be addressedB Ho7 can
distribution centers be
located close enough to
the lion<s share of
customers to effectuate
same(da; deliver;S s
demand forecasting
sophisticated enough to
enable a compan; to
have on hand locall; the
products that customers
7ant= 7hile not creating
excessive inventor;
carr;ing cost across the
suppl; chainS Can the
higher costs of operating
a h;per(local
distribution
center be passed on tocustomersS
And can the order deadline bflexible
enough to attract consumers
Most of these Guestions and
the constraints are more
relevant to pure(pla; online
retailers= 7hich have no
inherent local presence in
consumer communities. n
contrast= multichannel
retailers are in a more
advantageous positionE the;
can use their retail outlets anthe logistics infrastructure th
feeds these ph;sical stores to
serve as local distribution
centers. #; building
neighborhood fulfillment
capabilities 7ithin existing
stores= 7hich includes investi
in sophisticated inventor;
management s;stems to mak
sure that storeshave sufficient amounts of
popular products in stock=
multichannel retailers can
offer same(da; in(store or at
home deliver; of products
purchased on the Feb or on
the gro7ing number of
mobile channels.
As described in our Model &
shared in(house operationsD
retailers can effectivel; turn
each of their stores into a loc
distribution center capable
fulfilling e(commerce orders
#oo : Compan;
))))#oo : Compan;
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9o facilitate this highl; distinctive
capabilit;= s;stems
need to be designed to improve
inventor; accurac; and create
product transparenc; and
visibilit; throughout the suppl;
chain and all retail outlets so
items can be moved Guickl; to7here the; are most
needed. n addition= staff training
and incentives encouraging
emplo;ees to fulfill online orders
during in(store do7ntime are
important. 9here are
a number of tangible gains from
this model= including improved
margins as better inventor; control
ensures that less online or in(store
merchandise
has to be sold on sale. And eGuall;
important= the retailer can resell
long(
tail $Ks returned to stores
7ithout the expense of
sending these items back to
the main distribution
center .
Amaon has begun to
experiment 7ith its o7nans7er to h;per(local
deliver;. 9he e(tailer is
putting lockers in some 1(
6leven stores in $eattle and
!ondon and Rite Aid
pharmacies in 8e7 Lork at
7hich customers can pick up
their Amaon orders using
a barcode and P8 sent to
their smartphones. 2or
people in urban areas= these
distribution outlets=
generall; open late if not
),N1= are a convenient 7a;
to get the products the;
purchased Guickl; perhaps
even the same da; orderedD=
especiall; if the; are not at
home during the da; to receive the items from P$
or 2ed6x. 9his pilot
program illustrates that
7ith innovations
surrounding h;per(local
distribution= the most scaled
online(onl; retailers ma;
even be able to compete
against ph;sical retailers in
offering almost immediate
gratification for consumers
over
the last mile 7ithout the
expense of opening actualstores. 9he precise financial
arrangement that Amaon
is setting up 7ith 1(6leven
and Rite Aid outlets has not
been disclosed.
#ut since the stores 7ill get
additional foot traffic and=
hence= possible incremental
sales from the presence
of the lockers= Amaon 7ill
likel; be able to persuade
retailers to 5oin this program
7ithout pa;ing them much
or even an;thing. Ince rolle
out= it is possible that
Amaon 7ill provide this
service for a fee to other e(
tailers as an enhancement of
its business(to( business e(fulfillment offerings= and its
acGuisition of Kiva $;stems
could be a smart path7a;
for scaling up regional
operations to service retail
locker deliveries.
#oo : Compan;
)&
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ESTA.LISHIN% A
MULTICHANNEL
SU//LY CHAIN
2or multichannel retailers=
these models and trends pose
important Guestions thatreGuire insightful anal;( sis of
the business and its customers.
9n the consumer front*
companies must understand
their customers< expectations
of service levels= channel and
shopping dimensions=
product offerings= pricing=
and convenience= and also
anticipate changes in cus(
tomer behavior. 9hese
assessments
of consumer attitudes and
prefer ( ences@and
assessments of ho7 the; ma;
change@must be 7eighed
against the suppl; chain and
operational reGuirements andcosts to implement a
multichannel inventor;=
logistics= and deliver;
net7ork.
9n the strategic front*
companies must understand
7ell the competitive
landscape and its d;namics
and then chart a course to
outrun the competi( tion b;creating a better customer
experience and a
differentiated
online or ph;sical retail
environment. Armed 7ith
this plan= companies can then
pinpoint the suppl; chain
and operational capabilities
the; need to succeed.
1o build a good
multichannel suppl& chain*
companies must determine
7hich suppl; chain
capabilities are most critical
to their customer value
proposition for each channel
and optimie their suppl;
chains for these capabilities=7ithin cost constraints.
Fhether the optimal suppl;
chain
is in(house or outsourced
depends primaril; on the
compan;<s scale= existing
capabilities= and operations
strateg;.
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CONCLUSION for all retailers to develop7inning multichannel business models enabled b;sound multichannel suppl;chain ca pa bilities.
Clearl;=multichannel
retailing is a
business
model that
cannot be
ignored b;
established
or ne7
retailers.
ndeed= it is
the gr o7th
area for all of
retail.
Customer s
alread;
expect
multiple
or der ing
and deliver;options. As
digitiation
becomes more
ubiGuitous in
the lives of
consumersas
their
smar t phones
and tablets
integrate further
into their da;(
to(da; existence=
offer ing 7a;s
for people to
purchase items
7herever the;
are and
7henever
the; like@it7ill becomecr itical
9here is no
universall; right
or 7rong
approach to
establishing a
multichannel
suppl; chain.
Fhether dedicat
or shared= intern
or outsourced= t
appropriatesuppl; chain
depends on a
com pan;<s
customer s<
expectations= its
cost trade(offs= a
its existing
capabilities. Afte
these three issue
are considered
along 7ith ho7
future trends 7i
impact them @ a
retailer can mak
clear(e;ed choic
about 7hich of t
six suppl; chain
models delineate
in this Per s pectiv
is the right one to
adopt.
#oo : Compan;
)+
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About
the Author
s
RichKauffel
d is a partner7ith
#oo
:
Com
pan;
based
in
8e7
Lork. He
devel
ops
suppl;
chain
strate
gies
and
sup(
porting
capabi
lities
to
enable
gro7t
h
and
effi
cien
c;
for
con
su
mer
pro
duc
ts
co
mp
a(
niesand
reta
iler
s.
HenningHagen is a princi pal7ith
#oo
:
Co
mpa
n;
base
d in
Hou
ston.
He
spec
iali
es in
the
digital
ecos;
stem=
includ
( ing
corpo
rate
strate
g;=
suppl
;
chain
strat(
eg;=
and
retailopera
tions=
as
7ell
as e(
tail
and
retail
marke
ting
and
sales
produ
ctivit;
.
Alex
andr
a
Conr
ad is
an
asso
ciate
7ith
#oo : Compan;
based in $an
2rancisco. $he
7orks across a
range of
industries=
primaril; on
suppl; chain
logistics and
distribution.
#oo : Compan;
)/#oo : Compan;
)/
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