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Perspective Rich Kauffeld Henning

H a g e n A l e x a n d r a C o n r a d

ndate for Multichannel Retail Evaluating Supply Chain Models

T h e M a

Contact Information Amsterdam Marco Kesteloo Partner marco.kesteloo@boo .co m #ehdad $hahsavari Partner %&'()*(+*,('-,, behdad.shahsavari@boo .co m Beirut .abriel Chahine Partner %-/'('(-0+(/++ gabriel.chahine@boo .co m Chicago Curt Mueller Partner %'(&')(+10(,+'1 curt.mueller@boo .co m D sseldorf Roman 2riedrich Partner %,-()''(&0-*('/+ roman.friedrich@boo .co m Michael Peterson Partner michael.peterson@boo .co m Frankfurt Andreas Spne Partner andreas.spaene@boo .c om !ouston .eorge Appling Partner %'(1'&(/+*(,',& george.appling@boo .c om Henning Hagen Principal %'(1'&(/+*(,'/+ henning.hagen@boo .c om "ondon 3oug Hardman Partner %,,()*(1&-&(&+&) douglas.hardman@boo .c om 4ohn Potter Partner %,,()*(1&-&(&1&/ 5ohn.potter@boo .c om Melbourn e $imon Mumbai Abhishek Malhotra Partner abhishek.malhotra@boo .c om #e$ %ork Matt 6gol Partner %'()')(++'(/1'/ matthe7.egol@boo .c om Rich Kauffeld Partner %'()')(++'(/+0) richard.kauffeld@boo .c om Christopher "ollmer Partner %'()')(++'(/1-, christopher.vollmer@boo .c om San Francisco 8ick Hodson Partner %'(,'+(/)1(,)1/ nicholas.hodson@boo .c So Paulo !ui "ieira Partner lui .vieira@boo .c om S&dne& 9im 4ackson Partner %/'()(-&)'('-)& tim.5ackson@boo .c om 'ienna Harald 3ut ler Partner %,&('(+'0())(-*, harald.dut ler@boo .c om

#oo : Compan; ''

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& across mobile* 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 $ill ha+e to decide bet$een independent and shared suppl& chains* and $hether to build them internall& or through outsourcing1hese 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; ''

THE MULTICHANNEL 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 digiti ation= virtuall; ever; retailer@no matter ho7 strong its ph;sical stores are or= indeed= 7hether it has an; ph;sical stores at all@ must no7 respond to this si able and restless digital consumer base. At 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 Csee 2)hibit 5DE some categories@food 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 shoppers are 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 Cand site(b;(siteD product comparisons on
the Anternet 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 Csee 2)hibit 6* page 7D. 8ot surprisingl;= considering ho7 inno( vative and entrepreneurial the Anternet 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 optimal multichannel 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, Online Growth s Shi!ting Sales Online H.$. I8!A86 $HAR6 I2
#oo : Compan;

I"6RA!! R69AA! $A!6$ )*'*J)*'+ 2orecast '*K ' CA.R


' /

' ' K

Ke;( ''' ,

overall retail sales are stagnant= online sales 7ill gro7 at a CA.R of '*K

i n

fluenced revenues in retail $ourceB 2orrester ResearchE Morgan $tanle;E #oo : Compan; anal;sis

$ome categ ories like food and beve rages = 5e7el r;= and healt h and beaut ; are gro7 ing about '+K ;ear( over( ;ear onlin e

) * ' * ) * ' '

) )) )

Actua l 2orec ast

#oo : Compan;

( Multichannel customers have significantl; higher lifetime values than bricks(and( mortar or online(onl; customers ( An addition to online sales= digital channels influence an even larger percentage of retail sales Cfor example= through online research= mobile couponing= or location(based offersD ( Retailers that fail to put in place effective multichannel capabilities 7ill lose out on '+K to &*K of revenue in their categor; b; )*'+= and struggle to compete effectivel; for digitall;

Exhibit " #hat Custo$ers #ant !ro$ Multichannel Retailers "AR9HIH$ CLC!6 I2 CH$9IM6R 6MP6RA68C6 $tages and Potential #reakdo7ns
!

Ho7 the Customer 6xperience Can 2ounder $tore shoppers don<t have access to revie7s and ratingsE sales reps don<t use product information that can be found online
$tore does not offer online long tail of assortment 8o option to revie7 in(store inventor; online Atem out of stock in store can<t be ordered for home deliver; from store Anconsistent online and offline pricing

Post($ales

Research !

! # #
#

" 3eliver ; Purc hase $h op #

$ Channel(specific promotions can cause bu;er<s remorse 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 and online 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( i ed products that the retailer ships from a central 7arehouse or supplier inventor;. Ir consider the difference in logistics costsB 2or retailers= transportation costs are kept 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; parcel carriers Csee 2)hibit 7D.

Exhibit % $uppl; Chain A Co$parison o! Operating Models in the &raditional Retail and Online Retail Environ$ents
9raditional Retail ( Retailer<s 5ob is assortment selection to fill limited shelf space= cut long tail ( Atems are procured and negotiated in bulk and 7ill get sold through the channel ( Anventor; exists at up to three levelsB distribution center= regional distribution center= and store Inline Retail ( !ong(tail or virtuall; unlimited assortment is a ke; value proposition of online retail ( $lo7(moving Clong tailD items ma; be procured in ver; small Guantities ( Anventor; onl; exists at one levelB distribution center ( Anventor; value is mostl; driven b; scale of assortment

Procurement

Anventor;

Management Farehouse Iperations 9ransport !ogistics:

( Anventor; value is mostl; driven b; stock levels of $KHs ( !o7er number of orders= stable throughput ( need for small order si e pickNpacking ( !imited 2orklift and pallets to trucks ( Iften compan;(o7ned fleet that delivers bet7een distribution centers and to stores ( !ogistics costs per item are lo7 ( Return to store can create reverse logistics complexit; ( Return up(sell to store creates additional touch point to retain and ( High number of orders= high throughput gro7th ( need for small order e pickNpacking ( $ignificant High degree of manual labor or si smart automation Ce.g.= KivaD ( 2reight carrier picks up large number of shipments from distribution center ( !ogistics costs per item are high ( Return b; mail Cor store for some multichannel pla;ersD returns item faster to sellable inventor; ( Iften extensive service levels and generous policies

Post($ale $upport

$ourceB #oo : Compan;

STRATE%IC CHOICES
9here are six different suppl; chain models that retailers can deplo; to maximi e 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 Csee 2)hibit 8D. Model !& Online-Onl'(InHou)e Su**l' Chain Ama on.com is the best( kno7n pro( ponent of this approach= 7hich relies on extensive product sales forecasting and inventor; management s;stems to fulfill orders Guickl; at a high rate of accurac; 7hile optimi ing shipping times to customers. Andeed= because

of its aggressivel; innovative= inter( nall; developed e(commerce suppl; chain= Ama on 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 Ama on= 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 Ama on

Exhibit ' Supply Chain Strategies !or Online and Multichannel Retailers Pros ! ( Ama on ( Ouid si An(House ( Papp up Iutsourc ed # ( .ilt $et .rou pe Cons Inline Inl;

Multichan nel + 3e di cat ed $cope ( !ux ur; Ap par el R et ail er $ourceB #oo : Compan;

$ $h ar ed " ( $u per ma rke t C ha in

$hared ( 3ell # 3edicate d ( Falmart

( 6nables operations( based competitive advantage


( Keeps investments lo7 and offers

( !ong learning curve before advantages ma; be reali ed ( 9;picall; cannot scale for h;pergro7th ( Anfrastructure and processes t;picall; poorl; matched to e( commerce ( Potential s;nergies and existing expertise often overstated ( Cost plus third(part; logistics pricing model passes inefficiencies back to retailer ( Challenging to create multichannel experience

( 6liminates distraction from other areas of business $


( Creates potential s;nergies such as

reduced overhead= though difficult to full; reali e

" ( Maintains complete control ( 6nables operations( based competitive advantage


( !everages preexisting relationship 7ith

vendor

service(level options ( 6liminates distraction from other areas of business

( Keeps investments lo7 and offers

to collect vast Guantities of data= 7hich can in turn be mined to improve all aspects of 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 Pappos designed a proprietar; suppl; chain that could provide a best(in(class returns polic; and Guickl; place returned items back into inven( tor;. Pappos 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@ Pappos made the at(home trial period uncomplicated and overcame consumer resistance to

making shoe purchases online. As a result= rather than competing on price= Pappos provides great service= enabled through its suppl; chain@its differenti( ating advantage. And because Pappos has such high volume concentrated in a single product categor;= b; manag( ing distribution in(house the e(tailer can develop and control speciali ed 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 for Pappos= in(house suppl; chain management is economical because large volumes of ver; similar products 7arrant and support investments in highl; special( i ed infrastructure and processes. 9o reduce 7arehousing costs= an inven( tor; management s;stem determines the minimum amount of product that needs to be on hand in the compan;<s three regional distribution centers b; assessing customer life c;cle and order freGuenc; trends= 7hich are highl; predictable for Ouidsi<s products. 9o minimi e shipping expenses and 7aste= proprietar; packaging algorithms select the optimal box si e for each order. Fhile shopping= consumers are offered additional items that= if purchased= could help optimi e logistics costs. Productivit; is

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;= Ama on acGuired Pappos in )**and Ouidsi a ;ear later in part for their efficient= innovative= and scalable

in(house operating s;stems. An March )*')= Ama on announced the acGuisi( tion of distribution center pioneer Kiva $;stems= 7hich speciali es in building 7arehousing s;stems for online and multichannel retailers. 9his acGuisition 7ill help Ama on substantiall; improve its o7n fulfillment capabilitiesE in the process= Ama on 7ill be able to better control its fulfillment costs as a percent( age of revenue and also Guickl; build highl; effective distribution centers in man; additional locations. C9o avoid having to charge sales tax= Ama on has not established a ph;sical presence in man; states= a situation that 7ill likel; change soon as state legislatures exempt online retailers from this

reGuirement.D Model #& OnlineOnl'(Out)ourced Su**l' Chain #; turning over suppl; chain manage( 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= an activit; that depends on strong marketing and promotion of .ilt<s site as 7ell as providing a compelling

product line. An addition= procurement is considered a differentiating capabilit; 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;= si e= and 7eight. As .ilt<s sales profile shifts 7ith changing market opportunities= out( sourcing provides the flexibilit; to scale distribution operations up Cor 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;. Anstead= the e(tailer utili es drop shipping= in 7hich the products are sent out b; the

manufacturers from their o7n 7are( houses. An so doing= .ilt never ph;si( call; touches or o7ns unsold inventor; in these product categories and reduces the number of stops that items make bet7een 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 channels are generall; not optimal for either. #ut there are cases 7hen a shared= in(house suppl; chain is= in fact= the best and onl; option@for example= 7hen online orders account for a ver; small share of 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.

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 $KHs 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. #ecause man; 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 online sales= 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< baskets@the 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 is 7illing to s7allo7 a net loss on online fulfillment. C9his 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

7ould reGuire dedicated facilities. 2or the online business<s current stage of development@7here 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(,edicated In-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 Hnited

$tates. 9he results 7ere not Guite 7hat a discount e(tailer 7ould like= but the; 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; customi ing 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 of such 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 for some channels than others. Ho7ever= this approach makes economic sense onl; if both the ph;sical and online sides of the business are si able enough to operate at an efficient scale and if the savings from combining the channels 7ould not be significant. Model & Multichannel(Shared Out)ourced Su**l' Chain 3ell tried this model and learned that it should be

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. An 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 Anternet. At first 7ith an in(house suppl; chain and

later rel;ing on third(part; manu( facturing and operations= 3ell had become extremel; adept at customi ing individual products for consumers and shipping them efficientl; and rapidl; to people<s homes and offices. Hsing this model= the computer maker 7as ver; profitable and earned a 7ell(deserved reputation for being one of the most innovative e( commerce companies in the 7orld. Ats 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. An 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= delivering them 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 optimi ed for flex( ibilit; in manufacturing= inventor;= and transportation= as the custom model reGuired= but did not have the demand forecasting capabilities that 7ould

allo7 the compan; to build in the extra time needed for the more economi( cal ocean shipping reGuired b; retail<s ra or(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 and forecasting. 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 channels are 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 demand fore( casting= and order planning capabili( ties to keep costs lo7 7hile ensuring that products are 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 for the ne7 e(commerce function@ can make sense= particularl; if the 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 online channel through it. Falmart= the undisputed suppl; chain king in the retail sector= came to this conclusion= and has benefited greatl; from it. Fhile still using its massive clout as a purchaser to drive advanta( geous procurement programs through( out the organi ation@both in the retail channel and online@ Falmart chose to outsource much of the inventor; management and

logistics aspect of its e( commerce business. Fhen imple( menting this choice= the compan; emphasi ed that it 7anted a fulfill( ment and distribution partner that could keep costs lo7 7hile meeting the service reGuirements@prompt fulfill( ment= expedited shipping options= and package tracking @that customers have come to expect of online retail. Hltimatel;= Falmart found a third( part; provider that 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 both the advantages of outsourcing@such as flexible capacit; for use during the bus; holida; season@and 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 their companies 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 one for each retailer depending on its business model= value proposi( tion 7ith consumers= and existing set of operational capabilities.

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 CaD understand corporate strateg; and the compan;<s desired customer value proposition= CbD design a 7orking plan for the operational reGuirements needed to deliver that customer experience= and CcD 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 landscape R $ervice levels R Capabilit; gaps R $i e 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 of implementation and potential impact. R Priorit; items are translated into recommendations for strategic initiatives that deliver the operations vision. 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= organi ational structure= decision rights= s;stems= processes= and investments. Phase three of the diagnostic is reserved for finali ing the multichannel

suppl; chain road map. 9his stage includes the follo7ingB R Aterating the road map and incorporating stakeholder feedback R 2inali ing 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 R Friting 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 O

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revenue becomes an increasingl; large share of a retailer<sretailers revenue 7ill have to not onl; stream= choose and execute their suppl; chain strategies 7ell but also respond to ne7 trends and economic conditions. An our vie7= over the next fe7 ;ears= three critical trends 7ill pla; essential roles in determining the contours of multichannel suppl; chainsB Shorter delivery ti$es( !ed b; Ama on and its remarkabl; efficient overnight and t7o(da; shipping programs= online customers are expecting Guicker processing and faster deliveries. 6ven luxur; retailers= 7hich traditionall; haven<t had to meet these rapid(fire standards= are not going to be able to ignore the need for speed in Anternet retailing 7hile offering this service virtuall; for free. 9o remain competitive= retailers 7ill have to implement forecasting s;stems that provide a high level of accurac; to minimi e stockouts and keep inventor; at a reasonable level and simultaneousl; embrace innovation in picking= packing= and shipping so that packages can

must be appropriatel; located near ma5or cities. Greater e$phasis on drop shipping( Retailers have generall; used drop shipping to provide products that 7ere out of their traditional orbit Cthat is= bulk; or reGuiring refrigerationD. #ut as retailers 7iden their sales channels and= in the process= increasingl; turn to third(part; logistics providers to handle fulfillment= drop shipping 7ill become more popular because it achieves three valuable resultsB At expands product assortment virtuall; instantaneousl;= allo7ing retailers to reach longer( and longer( tail customers 7ithout increasing inventor; carr;ing costsE it transfers errors and omissions risk to the third(part; logistics firm= 7hich is especiall; beneficial 7ith expensive and perishable inventor;E and it reduces inventor; holding cost and obsolescence risk for the retailer. 9o successfull; execute a drop shipping program= retailers 7ill need sophisticated vendor management s;stems that help ensure strong

TREN,S As the multichannel landscape continues to evolve and as online rapidl; depart an increasingl; dense net7ork of distribution centers= 7hich

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)

oversight of suppliers and logistics firms and a consistent customer experience across all brands and product lines. An addition= 7ell( functioning electronic 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 a no(sho7@as does the thought of having to pa; for t7o(da; shipping. Fhile Ama on and others have perfected free t7o(da;
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shipments= same(da; deliver; is the next frontier in online fulfillment and 7ill create a huge competitive advantage for 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 As 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 to customersS And can the order deadline be flexible enough to attract consumersS Most of these Guestions and the constraints are more relevant to pure(pla; online retailers= 7hich have no inherent local presence in consumer communities. An contrast= multichannel retailers are in a more advantageous positionE the; can use their retail outlets and the logistics infrastructure that feeds these ph;sical stores to serve as local distribution centers. #; building neighborhood fulfillment capabilities 7ithin existing stores= 7hich includes investing in sophisticated inventor; management s;stems to make sure that stores have 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 & Cshared in(house operationsD= retailers can effectivel; turn each of their stores into a local distribution center capable of fulfilling e(commerce orders.

)) ))

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; to 7here the; are most needed. An 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 $KHs returned to stores 7ithout the expense of sending these items back to the main distribution center. Ama on has begun to experiment 7ith its o7n ans7er to h;per(local deliver;. 9he e(tailer is putting lockers in some 1( 6leven stores in $eattle and !ondon and Rite Aid pharmacies in 8e7 Lork at 7hich customers can pick up their Ama on orders using a barcode and PA8 sent to their smartphones. 2or people in urban areas= these distribution outlets= generall; open late if not ),N1= are a convenient 7a; to get the products the; purchased Guickl; Cperhaps even the same da; orderedD= especiall; if the; are not at home during the da; to receive the items from HP$ 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 actual stores. 9he precise financial arrangement that Ama on 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= Ama on 7ill likel; be able to persuade retailers to 5oin this program 7ithout pa;ing them much or even an;thing. Ince rolled out= it is possible that Ama on 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.

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ESTA.LISHIN% MULTICHANNEL SU//LY CHAIN

2or multichannel retailers= these models and trends pose important Guestions that reGuire 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 and costs 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 optimi e 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;.

CONCLUSION

for all retailers to develop 7inning multichannel business models enabled b; sound multichannel suppl; chain capabilities. Clearl;= multichannel retailing is a business model that cannot be ignored b; established or ne7 retailers. Andeed= it is the gro7th area for all of retail. Customers alread; expect multiple ordering and deliver; options. As digiti ation becomes more ubiGuitous in the lives of consumers@as their smartphones and tablets integrate further into their da;( to(da; existence= offering 7a;s for people to purchase items 7herever the; are and 7henever the; like@it 7ill become critical 9here is no universall; right or 7rong approach to establishing a multichannel suppl; chain. Fhether dedicated or shared= internal or outsourced= the appropriate suppl; chain depends on a compan;<s customers< expectations= its cost trade(offs= and its existing capabilities. After these three issues are considered@ along 7ith ho7 future trends 7ill impact them@a retailer can make a clear(e;ed choice about 7hich of the six suppl; chain models delineated in this Perspective is the right one to adopt.

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About the Author s Rich Kauffel d is a partner 7ith #oo : Com pan; based in 8e7 Lork. He devel ops suppl; chain strate gies and sup( portin g capabi lities to enable gro7t )/ )/

h and effi cien c; for con su mer pro duc ts co mp a( nies and reta iler s. Henn ing Hage n is a princi pal 7ith #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 retail opera 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.

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