21 Apr 4 Critical Steps for Optimizing Omnichannel Order Fulfillment in 2023
4 Critical Steps for Optimizing
Omnichannel Order Fulfillment in 2023
Omnichannel order fulfillment that drives customer experience (and boosts profits)
Consumer expectations have evolved in the digital age, and retailers are now offering a multitude of flexible order delivery methods such as “Buy online, pick up in-store”, “curbside pickup”, “order in store, deliver home” and more.
Although the trend toward omnichannel fulfillment is not new, the pandemic changed many retailers’ business models almost overnight, and these changes are not going away.
The new business model demands a holistic approach to omnichannel fulfillment that considers new expectations of speed and convenience that customers have developed while keeping costs low.
Maintaining margins within business constraints while efficiently providing order fulfillment to customers is a tall order, especially considering each customer purchase requires a real-time fulfillment decision within a shifting context of inventory, demand, returns, delivery times, and shipping costs.
What is omnichannel order fulfillment in retail?
In retail, omnichannel fulfillment is the process of getting products to customers across many different channels (delivery from DC, drop-shipping, in-store pickup, contactless pick-up, etc.).
To understand what omnichannel fulfillment is in greater detail, we need to contrast it to traditional methods of fulfillment.
At its most basic, order fulfillment is the combination of steps required to get products into the hands of customers. This includes everything from storing inventory, processing orders, picking stock, shipping packages, and delivering orders to the end consumer.
Initially, order fulfillment covered a limited number of channels like catalogue and online orders. But more recently, retailers have started to offer new, consumer-friendly fulfillment options like BOPIS (buy online, pickup in-store), contactless pickup, and curbside pickup — all of which have different steps and requirements.
So Instead of optimizing one channel (i.e. direct-to-consumer e-commerce orders), retailers now have to worry about fulfilling orders across multiple complex channels and B&M locations. This is omnichannel (or “all-channel”) order fulfillment.
4 proven steps for driving omnichannel fulfillment ROI
As retailers rush to implement these new fulfillment options to keep up with the competition, how can they ensure their margins don’t disappear due to shipping costs and increased returns?
That’s the billion dollar question.
Robert Hetu, VP Analyst for Gartner’s Retail Industry Services, says:
“Costly levers such as same-day delivery, free shipping, and free returns are annihilating any gains in revenue, leaving retailers in the red.”
And yet, failing to live up to consumer expectations can be just as deadly — especially when retail behemoths like Amazon are gobbling up market share.
So how can retailers offer these options to consumers while lowering their costs?
Or better yet, how can they do so while increasing their profits?
Mark Krupnik, PhD, CEO of Retalon (award-winning advanced retail analytics), breaks down 4 critical steps for maximizing omnichannel ROI.
- Optimize your fulfillment process
- Minimize and optimize returns
- Rationalize dropshipping
- Validate new strategies before committing
Retailers that can complete all 4 steps will make fulfillment their competitive advantage — and those that don’t will see their profits disappear.
1. Optimize omnichannel fulfillment for cost and profit
Optimizing your omnichannel fulfillment process requires reducing costs, automating repetitive tasks, and improving your customer experience.
In other words, it means getting products to your customers at the right time in the most cost-effective way possible.
But optimizing complex, omnichannel fulfillment is very difficult.
Any change to process in one area can have negative repercussions on another. For example, batching your order picking for in-store pickups might provide cost savings, but the additional wait time might discourage customers from ordering from your stores (thus decreasing sales).
This means that optimizing your fulfillment across all channels requires building a holistic process that takes your specific company policies and labour considerations into account, while still finding the cheapest and fastest method for fulfilling omnichannel orders (while keeping your customers happy) — for every order.
How are retailers currently optimizing their fulfillment?
Instead of turning every B&M store into a fulfillment node, some retailers have realized massive cost savings by centralizing fulfillment to a select few locations.
By fulfilling from DCs and only a handful of key geographic areas (determined after analysis), retailers can theoretically limit the complexity and cost of their omnichannel fulfillment programs.
Unfortunately, the analysis required is difficult, and the results are a moving target. That’s because consumer demand, geo-demographics, and the competitive landscape are not static, and will change year to year.
Worse yet, if your presence is national (or even international), a few geographically disparate fulfillment nodes will result in some of your customers having a worse experience than others — creating a competitive disadvantage for you in certain geographies.
While we’ll expand on this section later in the article, some retailers have been able to expand their assortment and fulfillment options without bearing the cost (and risk) of purchasing and holding inventory.
They’ve done this through dropshipping — either by allowing third-party vendors to sell products on their e-commerce platforms, or negotiating arrangements with their suppliers.
While this is a low immediate risk (i.e. no upfront investment into inventory), it may create unforeseen consequences.
For example, because you are entrusting a third party to store and ship inventory — you are allowing another company to be in control of your customer experience.
And what happens if customers begin to return items to your store that were drop-shipped? Will you deny returns at a store level? Will you force your customers to go through the dropshipping vendor to process a return?
As mentioned above, the BOPIS channel (buy online pickup in-store) has become incredibly popular in the last few years, and also offers one of the most effective fulfillment options for retailers.
At its most basic, it only requires integrating live inventory counts from your ERP / inventory management software with your e-commerce platform, ensuring customers can get accurate information about which store has the items they’re looking for (or give them the option to ship to store).
And given its simplicity, it’s no surprise so many retailers have started pushing BOPIS so heavily in the last several years.
By shifting the consumer focus to BOPIS (advertising campaigns, incentives, etc.), retailers may not only see an increase in foot traffic (and opportunities for in-store cross-sells and upsells), but also a decrease in fulfillment costs.
But this is not without risk.
Firstly, a BOPIS model simply pushes the optimization burden to the individual stores — as consumers tend to check individual store stock before ordering. If inventories are not accurate down to the unit, this can lead to poor customer experience.
Secondly, BOPIS can lead to lower in-stock percentages and frustrated B&M shoppers as online orders can sporadically and unpredictably eat up store inventory, leaving shelves empty.
The best way to optimize omnichannel fulfillment in 2021
Unfortunately, while the options above can bring benefits, they don’t address the fundamental challenges of optimizing fulfillment, and they carry some risk of their own.
- What if you centralize fulfillment to certain geographic areas while demand in others picks up?
- How do you account for returns to a drop shipping vendor?
- What if inventory issues turn your customers off from using BOPIS?
- How can you quickly and easily determine the cheapest channel and location to fulfill from?
In other words, while the standard approaches solve some issues, they don’t address the fundamental goals of optimizing for cost, profit, and customer experience.
This is where smart fulfillment can drive a lot of value for retailers.
How does it work?
Smart fulfillment is a new approach to omnichannel fulfillment that uses software and AI to optimize at a level of granularity that humans are not capable of.
While there are several approaches to this, we’ll focus on Retalon’s smart fulfillment solution to explain.
First, the retailer configures the solution by inputting their unique business rules, priorities, and constraints. This includes things like location, time, and cost preferences (if any exist).
Once the rules are in place, the Smart Fulfillment system combines the retailer’s inputted information with available sales histories, current inventories, and planned promotions to forecast demand for walk-in and online sales, as well as how many online sales are likely to be BOPIS (and at which locations).
Even before a customer orders a product, the smart fulfillment solution will begin proactively optimizing, accounting for factors like inventory (warehouse, DC, and stores), demand (where orders are likely to come from), delivery timing and variability, as well as shipping and transfer costs.
And after an order is placed intelligent automation will recommend the best fulfillment option considering all of the above, optimizing for maximum gross margins.
Because this allows retailers to not only be prepared to fulfill orders for every channel but also to optimize each order for cost — this approach allows retailers to improve customer experience, maximize sales, and minimize markdowns.
2. Minimize and optimize omnichannel returns
The growth of online shopping has led to a sharp rise in costs linked to returns.
As such, initial fulfillment is only part of the puzzle for truly efficient order management.
In fact, according to the National Retail Federation (NRF), returns cost US retailers $400B in 2017 — with this number drastically increasing through 2021 as a result of the pandemic (and the subsequent digital transformation that retailers find themselves in today).
Why is the number so high?
A consumer report by Navar Research found one reason was that 38% of consumers don’t replace or exchange the items they return.
When not accounted for, this behaviour can lead to massive overstocks and unnecessary markdowns.
And on top of the fact that returns are costly in-of-themselves, they are also executed inefficiently.
For example, if you bought a pair of shorts in Toronto in late August, and returned it by mid-late September, the weather and therefore demand for this product may have drastically changed in Toronto, and so it may make more sense to return it to a store that still has demand (Eg. Vancouver).
How are retailers currently dealing with return management?
Returns can be incredibly costly for retailers, so some retailers shift the burden of cost onto the customer. This can be a financially effective solution and can also act as a deterrent to frivolous returns. This option, however, sacrifices consumer experience and gives competitors with more liberal return policies a competitive advantage.
Educating the Consumer
To mitigate the number of returns, retailers can provide purchasing guides (such as sizing charts, 3D product renders, instructional videos, and detailed descriptions of the products). By providing educational guides retailers can help the customers make the correct initial purchase. However, educational materials won’t impact returns for every product in the same way, and not everyone will want to use them.
Offering easily accessible customer service such as live chats can help to answer questions that customers have before making their purchase, which can leave customers potentially more satisfied with their initial decision, and decrease the likelihood of frivolous returns.
The best way to optimize omnichannel returns in 2021
Retail AI technology can be used to predict future returns across every channel, and then to optimize the return path for cost and likelihood of resale.
How does it work?
While intelligent returns systems can sometimes be offered as standalone reverse logistics solutions, the most effective way to optimize returns is through a unified fulfillment solution.
As soon as a customer requests a return, the Intelligent Returns system evaluates inventory demand at the location level, shipping cost, and any other user-specified parameters to forecast and suggest the optimal destination for the product.
Damaged products can be treated differently from those that can return directly to the shelf.
So before the customer prints a shipping label, AI can suggest the optimal location to return the product thereby reducing the returns path of a product, effectively saving on logistics, labour time, and cost.
3. Identify the best dropshipping opportunities
Online storefronts can offer deeper and broader assortments, free from the physical constraints of brick-and-mortar stores.
But expanded assortments require higher inventory investments to stock fulfillment centers.
One way to minimize this risk is to dropship orders directly from the manufacturer.
However, dropshipping typically offers lower margins than carrying the merchandise and may also have longer wait times for customers (especially in hard goods categories like furniture). Therefore retailers must carefully consider whether a product is the best drop shipped or carried.
How do retailers currently decide when to dropship a product?
A common solution to figuring out the best options around dropshipping (or any retail problem, really), is hiring a proven consulting firm to do a cost-benefit analysis. This option can be costly and time-consuming, but can potentially provide some enlightening information to make a decision.
Run Recurring Analysis
The most common “in-house” option is to run channel, demand, and opportunity analyses on a consistent basis. Retailers must effectively and routinely track product behaviour to determine which products should be brought in as inventory and which should be dropshipped.
Turn your ecommerce platform into a “marketplace”
A new spin on dropshipping that allows retailers to quickly expand their assortments with nothing but financial upside is the concept of an “ecommerce marketplace.” While this is not dropshipping per-se, it is an extension of the idea. An ecommerce marketplace allows third party vendors to sell products directly to your customers through your ecommerce channel. You don’t have to hold any of that inventory, and you can take a cut of every sale.
The downsides, however, are obvious. It is difficult to control quality of products or customer service, and you run the risk of damaging your reputation by letting the wrong vendors sell on your marketplace.
What is the best way to decide whether to dropship a product in 2021?
A Dropship Rationalization solution helps retailers make smarter decisions about which products make sense for dropshipping using advanced analytics. This means retailers can use the resources dedicated to manually observe data for more important business development.
How does it work?
An effective Dropship Rationalization solution does a robust cost-benefit analysis, taking into consideration the demand forecast (event for new products) and proactively recommends which merchandise makes sense for dropshipping and when is a good time to start carrying the product and fulfilling it from the warehouse.
This allows the retailer to avoid the costly misstep of choosing the wrong products to stock or dropship. Furthermore, it enables a partial drop ship solution by grouping locations by zones of fulfillment options.
4. Validate new omnichannel strategies before committing
Optimizing an order flow for new products is often a trial-and-error process that risks a retailer’s time and money.
Let’s suppose a retailer wants to start fulfilling orders directly from stores, or maybe the retailer decides to add a new fulfillment center in Texas.
Making a decision like this can be difficult and costly.
What if a retailer commits months (if not years) to planning, negotiating, building, and opening a new fulfillment center — only to discover that it would have been significantly cheaper and easier to fulfill from stores?
How do retailers currently validate new omnichannel strategies?
Running a pilot project
Before investing heavily into new order flow routes or infrastructure, retailers can develop smaller, and therefore less costly, versions of the proposed flow.
For example, instead of rolling out curbside pickup across all stores at once, a retailer may choose to test it at a few key locations.
While these pilot projects can provide valuable information about the actual effectiveness of a proposed fulfillment method while minimizing risks, they can still take a significant investment of time and resources.
Moreover, not every project can be effectively piloted (like opening a massive fulfillment center in another state).
Consumer and market research
A relatively inexpensive option retailers have been using is to collect information directly from the customer.
Understanding customer location, behavior, and preferred order fulfillment methods can provide a retailer with supplementary information that can be used in making order flow decisions.
However, while this is valuable insight, it’s difficult to translate demographic and survey data into strategy.
What is the best way to validate an omnichannel strategy in 2021?
You should have noticed a trend by now.
The best (and most cost-effective) method for retailers to validate order flow and fulfillment strategies is technological.
Rather than relying on subjective information or costly pilots, retailers can run order management simulations to test proposed changes in a virtual environment.
This allows retailers to see the ROI of their decisions before making an investment — allowing retailers to pit multiple strategies (including the status quo) against each other in the most cost-effective way possible.
How does it work?
As with the previous analytics solutions, Order Management Simulation models a retailer’s business rules, forecasted demand, and other variables. The system factors in handling and transportation costs as well as other constraints of the fulfillment path.
The retailer is able to easily simulate new order fulfillment flow and perform a cost-benefit analysis. So they can make a decision without bearing the cost of execution or even pilot programs.
Making omnichannel order management your competitive advantage
Retailers looking for a solution to their omni-channel order fulfillment are often using methods that just cannot keep up with today’s sophisticated business needs.
Leading retailers have found that leveraging advanced analytics technology has helped them apply best practices to their business and drastically cut costs associated with the planning process.
Retalon’s Order Management Optimizer creates real-time, advanced analytics solutions for modern omnichannel retailers. These solutions improve GMROI by managing inventory and returns more efficiently.
In addition, automating retailers’ everyday fulfillment and returns decisions frees inventory managers and analysts to take on more productive, higher-priority projects.
Retalon’s team of retail AI experts can give you a personalized tour of our omnichannel order management system and share some of our real-world applications of retail AI. Book a personalized demo with our team.