A New Breed Emerges Stores as Fulfillment Centers

A New Breed Emerges: Stores as Fulfillment Centers

Sourcing Journal – The evolution of brick-and-mortar stores in the face of the e-commerce era has seen major retailers merge the two and turn their physical locations into fulfillment centers.

While some observers have questioned whether programs, like buy online, pick up in store (BOPIS) and buy online, ship to store (BOSS) are worth it given higher costs and logistical investments, the merchants claim the rewards are there.

On the one hand, they are saving on warehouse space and shipping costs, while on the other hand the programs drive traffic into stores and answer consumer needs for convenience—which brings in added sales.

A new retail model

Target and Kohl’s have been pioneering the movement, instituting major initiatives to answer omnichannel challenges.

John J. Mulligan, Target’s chief operating officer, told analysts recently: “We find efficiency in our operations to lower overall cost of fulfillment…It took us a number of years and lots of technology and process improvements to go from scrappy to smooth. When we had our Pickup down…we took it to the parking lot, giving our guests the convenience of swing it by the local store without even getting out of the car.”

“Across the board, we’ve put some serious technology equipment and automation behind our delivery methods to make us faster and more efficient,” he added. “This operation could be anywhere, a warehouse in Phoenix, Colorado or Virginia. But it’s a local store in Minnesota, doing the work of our fulfillment center just behind the sales floor. With these kinds of investments in every delivery method, we lowered our average unit cost of fulfillment by 20 percent, driven by our fastest growing fulfillment methods by Shipt from store and Drive-Up.”

By fulfilling closer to the store shelf, adding new delivery options and optimizing operations, Mulligan said Target saved “hundreds of millions of dollars in fulfillment costs in 2018.”

Last year, the COO said Target shipped out the back of 1,400 local stores, noting that order pickup through the drive up option costs 90 percent less than fulfilling goods from a warehouse.

For Kohl’s Corp., CEO Michelle Gass said on a recent conference call with analysts, “We continue to benefit from omni-fulfillment capabilities, with stores able to fulfill as much as 40 percent of digital orders.”

Gass said a key focus of Kohl’s omnichannel strategy has been, and will continue to be, amplifying the role and relevancy of its stores, calling them “a key asset and differentiator for Kohl’s.”

Kohl’s investments in fulfillment options like BOPIS and BOSS “are resonating with our customers and driving increased traffic and higher sales,” Gass said. “We are especially encouraged by BOPUS as it drives traffic into our stores and result in savings on shipping.”

The retailer piloted an enhanced ship from store capability called Omni Power Centers in 10 stores equipped with technology and process enhancements that allow them to be more efficient in fulfilling digital orders. As Gass noted, the successful pilot will lead to a 135 store expansion in 2019 to further leverage stores in the peak digital demand.

Enabling technology

Fulfillment has been top of mind for many in the industry looking to deliver on today’s consumers’ demands.

“It’s amazing how much demand is coming in to us for orchestrating store fulfillment,”John Konczal, omnichannel product marketing lead at Manhattan Associates, said. “The issue is, whether it’s Target or Kohl’s or anybody else, they’ve really anticipated demand, but stores don’t deal well with time. And store fulfillment is a very deadline-driven function.”

For many retailers, Konczal said meeting omnichannel demand and same-day or two-day delivery or pickup required a substantial overhaul of method and systems.

“That pickup event is a new customer event that’s been added into stores,” he said. “The really good retailers are realizing that the pickup event should be treated just like any other customer service even in the store. That’s why many retailers are saying they want to get their stores organized just like a distribution center. Since we have such a massive warehouse business, we’ve been able to look at that and see what learnings and capabilities we can take and scale for the store.”

When Manhattan works with clients on this issue, the focus is on how much risk and uncertainty can be taken out of the promise to, as Konczal explained, help them “keep the delivery promise to their customers.”

Automated order filling, central order management, electronic notification of incoming orders and mobile-based order picking, have been key for some stores. The next step is giving store associates the tools needed for order picking—such as product photos on a phone and RFID on in-store products—and real-time verification of a successful pick.

Jon Slangerup, CEO of American Global Logistics (AGL), told Sourcing Journal that for the industry, the need to adapt the physical logistical infrastructure to meet to the omnichannel phenomenon has been driving AGL’s business in the last 18 months to three years. This, he said, is primarily in the furniture and automotive parts sectors, as well as consumer products.

“We call it 4PL, or fourth party logistics, where you’re helping companies focus on and optimize their supply chains and zero in on how they’re going to dramatically change their responsiveness to market demands,” Slangerup said. “It’s the technology that’s allowing…clear, end-to-end visibility of your supply chain. One of the most important aspects of our technology beyond the tracking and tracing capability is purchase order management. That allows our customers to initiate a order, book that order and to have full visibility into the manufacturing cycle and when it enters and through the transportation stage to the fulfillment center.”

At the top of the list is inventory and fulfillment center management, “where some of the greatest advancements are taking place,” Slangerup said. “It’s really an adapt or die situation for companies today, and we try to help the middle-sized players compete against the large players.”

Zebra Technologies’ 2018 “Future of Fulfillment Vision Study,” found that reducing back-orders was the biggest challenge to reaching omnichannel fulfillment for one-third of respondents, followed by inventory allocation and freight costs.

Retailers are investing in retrofitting stores to double as online fulfillment centers and shrinking selling space to accommodate e-commerce pickups and returns, the survey noted. Among the executives surveyed, 70 percent agreed that more retailers will turn stores into fulfillment centers that accommodate product.

Adding his perspective, John Andrews, CEO of Celect, said there are labor challenges in the transformation of stores to fulfillment centers. Celect helps devise systems for stores that maximize picking times for store employees that also need to service the store floor.

Reverse logistics

Globally, 87 percent of respondents agreed that accepting and managing product returns is a challenge. The increase in free and fast product delivery corresponds with an increase in product returns, a costly concern that retailers struggle to manage efficiently across different purchasing models.

Apparently not Kohl’s, which recently said its units across the U.S. will now accept Amazon returns, expanding on an initiative that began in late 2017. By early 2018, Kohl’s revenue growth in the Chicago region was up 10 percent, compared with 5 percent growth across the rest of the country. The area’s sales, transactions and customer growth outpaced the same metrics nationwide in 2018.

The number of new customers in the Chicago area grew 9 percent last year, compared with 1 percent growth for other Kohl’s stores across the U.S. Kohl’s takes care of the repackaging process, eliminating a step for consumers and adding to the program’s convenience.

The Amazon-Kohl’s partnership solves a pain point for Amazon’s customers, giving them an easier and cheaper option to return Amazon products, Anh Hoang, chief investment strategist at Global Hidden Gems Portfolio, wrote in a research report. At the same time, Kohl’s gets additional store traffic from Amazon’s product returns.

“Furthermore, Kohl’s sells Amazon-branded products in its store, transitioning from the store within a store concept to a wholesale relationship with Amazon,” Hoang noted. “With the overall implementation of the Amazon product return program, Kohl’s store traffic and sales revenue will definitely grow quite fast.”

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Feature Image Source: Target