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Building the Retail Supply Chain Network of the Future

March 20, 2020

Dan Gilmore


Supply Chain Digest

The retail landscape continues to change literally right before our eyes, roiled by ecommerce generally and Amazon specifically, while consumer behavior continues to rapidly evolve – with more changes sure to come as a result of the coronavirus crisis.

To thrive in this challenging and dynamic market, retailers must transform in many ways, notably in terms of their supply chain networks, according to a recent article by several consultants at McKinsey.

The article notes that while apparel trails industries such as electronics and sporting goods in ecommerce penetration, the number of people shopping for clothes and shoes online is rising rapidly - up 18.5% in 2018 alone, to more than one-third of all apparel sales that year.

Supply Chain Digest Says...

Traditionally, supply chain network design has been a quantitative-focused exercise that can take a long time. That approach may not work today.

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Of course, ecommerce fulfillment is much more complex than traditional brick-and-mortar or wholesaler fulfillment.

McKinsey says an on-line order' s cost per unit can easily be four to five times higher than traditional brick-and-mortar replenishment and ten times higher than wholesale fulfillment - all while customers demand a seamless omnichannel journey.

With that backdrop, McKinsey offers a number key "building blocks" retailers should consider when crafting new supply chain networks, summarized below:

Put the customer's needs first: While McKinsey says that companies need to adopt a granular perspective of what the customer really wants, today and in the future, it acknowledges that there are many unknowns.

"As such, serving the customer of the future requires unprecedented agility, quickly adapting to changing customer expectations," McKinsey adds.

Forget one size fits all: A deep understanding of customer desires should be the foundation of defining the strategy and building various customer segments based on preferences, product categories, and locations.

"This segmentation recognizes that a one-size-fits-all approach is a waste of resources," McKinsey argues. It says this will help retailers avoid mistakes such as "offering convenience at a premium to customers that care more about price or building offerings that quickly become outdated."

Be fast and collaborative: Traditionally, supply chain network design has been a quantitative-focused exercise that can take a long time. That approach may not work today.

McKinsey says one best practice is to develop the future supply-chain network in a workshop-based environment. "In practice, this means determining the fulfillment options suitable for each customer, product, and location segment and defining the required product flow," it says. Once a solution for each segment in each location is defined, it must all be combined into one comprehensive service network.

Seek partnerships and share resources: McKinsey says that leading retailers are actively seeking partnerships, not only along their own value chain but also with players from other industries. For instance, a player operating department stores may offer in-store pickup services to ecommerce companies, and ecommerce companies can offer online order fulfillment to department stores.

Look for innovative fulfillment options: Retailers should consider that products can also be shipped directly from the production facility or dark stores - non-customer-facing mini-warehouses usually within a city, where products are stored, picked, and shipped directly to consumers. Pop-up nodes are another option, McKinsey says. For example, a container placed at a major sports event or a truck, van, or bike driving around a city holding inventory and delivering products to customers who order via an app.

"Enabling a truly end-to-end omnichannel experience requires a new way of supply chain thinking," the article concludes.


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