What is our supply chain network strategy?
This is a big question evaluated by many retailers this year, with a sharpened focus on efficiency and flexibility, amidst the digital sales boom sparked by the pandemic.
The question of a fulfillment network strategy involves numerous nuances – from customer promise times to site costs and inventory allocation – making it overwhelming to know where to begin.
Customers, more than ever, demand convenience on their terms, resulting in network complexity due to the variety of ordering methods and heightened expectations of service levels.
As digital order volumes continue to grow – albeit at a lesser pace than during the pandemic – a key takeaway for many supply chain executives over the last few years is the value of flexibility to respond to market changes or customer demands.
E-Commerce Retail Sales as a Percent of Total Sales
Supply chain flexibility to enable faster speeds, rather than merely looking at the lowest cost to serve customers today, is an important principle for retailers setting a fulfillment network strategy. This approach also minimizes investment risk as markets shift and customer expectations change.
With that in mind, it is imperative to establish a “North Star” for customer promise times, serving as a guide to answer questions related to the fulfillment network.
To establish this guiding principle around the fulfillment network strategy, important questions to consider include:
- What will our customer’s expectations of service speed be over the coming years?
- Where do we think the market/competitors will go in the next five years?
- Are we missing out on sales (increased conversion) if we don’t offer faster service speeds for digital orders?
In relation to the last question, a frequently cited Jeff Bezos-ism when envisioning the next 10 years is not to predict what will change, but rather, what will not.
This insight has prompted Amazon to pursue faster delivery times for customers and compelled the rest of the industry to keep pace. Many customers now shop at retailers that can have orders ready for pickup at the store or delivered to their doorstep within two hours.
If customers are already shopping this way, regardless of the retail segment, won’t they expect it in other (more discretionary) categories over time?
This insight has led many retailers – like Walmart, Target, Macy’s, and many others – to pursue a store-based fulfillment strategy. The approach offers greater flexibility around service speeds by ensuring inventory is close to the customer.
Moreover, this model is less capital-intensive than building a large number of fulfillment warehouses, as it utilizes existing assets and identifies specific markets where additional capacity is needed to support greater fulfillment throughput.
As retailers look ahead, accounting for evolving customer expectations on speed will be critical in building the next generation of fulfillment networks, which will undoubtedly look very different from those of the past.