Traditional retailers struggle to keep up

Today, omni-channel fulfilment is one of the main trends in retail. However, in a few years from now we will again be talking about ‘fulfilment’, leaving out the omni-channel annotation. Giving customers the possibility to be served through any channel will be the norm; we’ll even see discount grocery retailers going online, if only for some categories.

Before reaching that state, however, a lot of retailers have considerable work to do and only now are they starting to see the sense of urgency. Several retailers are finding themselves in challenging conditions (e.g. ManfieldBlokker), facing a combination of increased presence of online platform retailers (think Amazon acquiring Whole Foods) and an internal lack of agility and speed. Indeed, some retailers have simply been too late in dealing with the changing market conditions (e.g. V&D), while others may still have the opportunity to catch up.

Several e-fulfilment initiatives are launched in food retail

In food retail we see various e-fulfilment initiatives with existing brick and mortar retailers showing differences in maturity. In the Netherlands, Albert Heijn has been online for at least 10 years, with a premium positioning and offering wide product ranges, but is still not profitable when it comes to home delivery service. Other cheaper positioned food retailers are just starting their first e-fulfilment pilots. And several new pure players, like Picnic, are becoming more mature, which will eventually hurt existing brick-and-mortar retailers. Picnic doesn’t charge any delivery cost, and is cheaper than market leader Albert Heijn. This is possible since Picnic only sells a range of fast-movers on a make-to-order basis, and delivers with small electric trucks only in selected areas to optimize fulfilment routes. Following this strategy, Picnic is even set to achieve bottom-line profitability by the end of 2017.

In food retail, e-commerce has its own specific challenges

Despite the overall shift to e-commerce, a lot of traditional food retailers are still hesitant when it comes to launching an online service.  There are many questions that need to be answered when bringing a traditional grocery store online, such as:

  • Do we offer our full product range, or only fast movers?
  • What would be the optimal fulfilment setup (e.g. in-store fulfilment, via a dark store, or via a central DC)?
  • Which locations do I choose for my distribution centers?
  • What lay-out should my online distribution center follow?
  • Can our existing assets (i.e. brick-and-mortar shops) be used to our advantage, or are they only a burden?
  • Are we using our own vans or do we outsource last-mile delivery?
  • Can we make a profit, even if only in the medium to long term?

Developing an e-commerce fulfilment strategy for a leading food retailer

To address the aforementioned questions, amongst others, Capgemini Consulting was recently asked by one of the main Dutch food retailers to develop an e-commerce fulfilment strategy. This client had already deployed an e-commerce platform based on in-store order fulfilment, which however only operated in a limited geographical area. The initial scope of the client question was to define the optimal future e-fulfilment setup, for which five different design alternatives were defined:

  1. In-store fulfilment, distribution directly to customer
  2. Fulfilment in dark stores[1], distribution directly to customer
  3. Fulfilment in central DC, distribution directly to customer
  4. Fulfilment in central DC, distribution to stores, from store to customer
  5. Fulfilment in central DC, distribution to hubs, from hubs to customer

 

1. Selecting the right fulfilment setup

To identify the most preferable setup, we developed a financial model that incorporated multiple parameters (e.g. order mix, productivity, driving distances), cost drivers, revenue streams and required investments, all subject to various demand scenarios, network configurations and last-mile delivery options. For each of the five potential fulfilment setups, the financial model calculated the impact on overall profit and loss as well as on cash flow. In addition to this financial evaluation, we also considered qualitative criteria related to the product proposition and to operational aspects (e.g. flexibility, implementation effort).

Figure 1: E-commerce supply chain setup model

Based on both the quantitative and qualitative evaluations, we advised the client to go ahead with the dark store fulfilment setup. Though less ideal for click-and-collect, dark stores offer great scalability and flexibility, and enable this retailer to offer a full product range to its customers, which is not the case for regular in-store picking. In comparison to in-store picking, there are also significant efficiency gains, in addition to a possibility for (limited) automation. Finally, dark stores minimize the required investment (as existing infrastructure can be repurposed) as well as associated risk.

2. Defining the location and product range

In the next phase, we specified the optimal locations of the dark stores. This was done by aggregating sales data per market area and then performing a center of gravity analysis, determining the optimal location based on its geographical coordinates (see Figure 2). Furthermore, in order to facilitate the definition of the dark stores’ optimal internal layouts in a later stage, we conducted a portfolio analysis at SKU level. This gave us the required insight into the target product range for the e-commerce activities and the number of inventory days.

Figure 2. Center of gravity analysis (conceptual illustration)

3. Designing the dark store layout

The final part of the assignment entailed the design of the layout for the dark stores. First, various options for warehouse automation (both man-to-goods and goods-to-man) were evaluated. As initial volumes were expected to be sufficiently low, we opted for a design with regular shelves and order-picking trolleys, allowing for batch picking of up to 6 customer orders simultaneously. Consolidation at outbound was designed to make sure ambient, fresh and frozen products are merged to single customer orders at the last moment. Analysis of required inventory and storage equipment subsequently yielded the target size of the dark store. This ultimately resulted in an (ideal) design, which was then matched with existing space constraints.

Scenario modeling for omni-channel insights

With many potential risks and contingencies affecting an omni-channel fulfilment setup, determining what an additional channel would bring in terms of revenue, cost and margin is no easy task. But there can also be other factors at play; for example, what is the importance of additional fulfilment options, apart from cost and revenue, to the brand customer experience? If online grows to 5% of total sales, what will happen to my distribution model? And what can we expect from technological developments in the omni-channel fulfilment domain over the years to come?

If you’re interested in answering these kind of questions, Capgemini Consulting can support with our proven methodologies and best practices to develop and help you realize your omni-channel fulfilment journey.

[1] 1A dark store is a dedicated warehouse which is set up like a normal (grocery) store with shelving and products on the shelves. However, it is not open to the public (and hence ‘dark’) and is used exclusively to fulfil online orders, with pickers collecting the goods ordered by customers for home delivery.

 

About Authors

Maurice Uiterweerd

Maurice Uiterweerd is a Managing Consultant at Capgemini Consulting. He is specialized in Supply Chain Management and has a focus on the Retail market

 

Vincent de Wolf

Vincent de Wolf is a Supply Chain consultant at Capgemini Consulting, specializing in logistics and procurement. His primary focus is on clients within the Retail and Aviation sectors.