My to-do list has included one incomplete item since mid-September, one glaring blank spot where a big green checkmark belongs. That to-do item is “Start Christmas shopping.” Typically, my efforts toward buying holiday gifts for friends and family begin near the end of November, coinciding with the American Thanksgiving holiday. Rarely have I attended a Black Friday event on the day, but the commercials and promotions really get me into the holiday shopping mood. This year, I know it’s imperative to start shopping earlier. Why? Because I plan to do 100% of my holiday shopping online – were I will play a small part in a larger shift in consumer behavior. For years, we have seen growth in the digital channel outpace growth in-store. Because of the current global pandemic, there is even more emphasis on online shopping. How will this channel-shift during the busiest shopping season of the year affect and add to the complexity of retail supply chains and how can retail supply chains adapt? There are five key challenges for retailers to overcome this holiday season.
In many regions, indoor shopping hasn’t returned to pre-pandemic foot-traffic levels. This is partly due to max occupancy and social distancing restrictions. Plus, younger generations have quickly adopted in-app shopping, online browsing and ordering, and shopping through social media platforms. But also there appears to have been a shift in preferences in many of those who, pre-COVID, preferred an in-store shopping experience and generally resisted shopping online. Since March, circumstances have forced the holdouts to download apps and use online shopping to acquire food and general merchandise. Those same people are now old pros at using the interwebs for making their weekly grocery purchases. This group is now more likely than ever to also consider online holiday shopping. According to the U.S. Census Bureau, e-commerce spend in the second quarter grew 30% over Q1 this year. We expect to see the highest percentage of online shopping this season, and retail supply chains are not prepared.
The first retail industry challenge we will see is insufficient capacity in outbound distribution to customers. Many retailers have separate supply chains for store fulfillment and e‑commerce fulfillment, and as demand shifts the balance from the former to the latter, the supply chain must adapt. Fulfilling e-commerce orders can be expensive, especially when labor and capacity has been budgeted to include a lower volume than what will be seen this year. Distribution center handling; individual order picking and packing for parcel shipment; and capacity of parcel shippers will be greatly taxed, whereas FTL and LTL movements between DCs and stores will be underutilized. Many retailers have set contracts with third-party providers for warehousing and delivering orders to stores and e-commerce customers. As more volume goes through parcel shipping, bottlenecks will arise within parcel processing and delivery. Shipping to customers will take longer, and estimating arrival dates will become more difficult.
The second challenge will occur in reverse logistics. Retailers typically expect returns after the holiday, given many people will receive gifts that they don’t love. And online shopping has always included a higher-than-average return to purchase ratio. But this year, retailers must consider the potential for a spike in returns prior to the holiday and will have to strategize on how to get those returns back into the available stock to be purchased by another customer. The option to buy multiple sizes and colors of an item to try on at home has become more popular with the e-commerce customer. In this scenario, it’s highly unlikely all items will be kept, and potentially all of the items could be returned. This becomes very costly to retailers. This year, because of the inability to view and compare items in-store, the percentage of returns prior to the giving holiday will likely be higher. Retailers often use third-party services to manage returns of digitally purchased products. Unfortunately, it takes time for that product to return to stock and become available for the next person to purchase and some product never returns to full-price stock.
A third challenge is rapidly shifting consumer preferences. This could wreak havoc on pre-planned product mix decisions. In March, the golden products were toilet paper and hand sanitizer, while now it is difficult to procure kettlebells, bikes and puzzles. There will be a continued focus on at-home entertainment and solo exercise options on holiday gift shopping lists this year. Many retailers have not yet caught up on these demands and definitely didn’t anticipate the need for this product mix when doing the planning and sourcing of goods for the 2020 holiday season. Retailers will continue to have shortages of in-demand products and overages of products previously forecasted to be the “big hit” this year.
The fourth challenge: Retailers face varying labor requirements as they flex to meet demand changes and introduce new delivery methods. BOPIS (buy online, pick up in-store), curbside pickup, home delivery, and e-commerce shipping each require different processes – and also require specifically trained personnel. Retailers need to pivot to having fewer in-store sales associates and more back room, DC and delivery support.
Lastly, retailers are challenged by promotion schedules and targeted marketing campaigns that came up short on their goal to move unsold past-season merchandise. No one could have anticipated the dive retail sales would take during the first six months of 2020, and many retailers are hard pressed to entice customers to buy current inventory to make way for the new in-transit inventory. Promotions focused on moving aging inventory are coupled with efforts to get customers to start shopping now to reduce the strain on the supply chain leading up to the last few weeks of December. For example, Amazon Prime Day was strategically delayed until October 13–14 this year. This was likely intended to tempt customers to start their holiday buying earlier to reduce the strain on a supply chain already pushed to its limits. Two to three times a week, Anthropologie sends a “40% off sale” email; normally Urban Outfitters could count on me for no less than a click through, but not this year. What typically works to move product doesn’t seem to be having the same effect during the pandemic.
What can retailers do to face these challenges?
First, retailers should track consumer actions in real time to feed their decision models. Especially this year, historical information will not be as helpful when trying to predict future demand patterns. Instead, use new data to understand and detect changing consumer sentiment and purchasing and to then adapt quickly – securing new suppliers, determining the right modes of transportation and adjusting labor plans to fulfill demand. Second, optimize inventory across the network to make sure the right inventory is in the right nodes to serve customers. Retailers may also consider turning some closed retail locations into “dark stores” to act as local hubs for quick deliveries or convenient customer pick-up locations. Whole Foods has been exploring the potential of dark stores and recently opened a new mini-DC in Brooklyn to get closer to demand. Lastly and most importantly, retailers need to create and maintain a “digital twin” of their supply chain, one that allows them to test competing scenarios and better understand what will happen if some of these current trends continue post-pandemic. Setting up a decision data model to enable AI and advanced optimization algorithms and simulation solvers to identify, detect and optimize the supply chain is no longer a differentiator, now it’s what retailers need to do to stay in business. While the immediate goal of retailers is getting through the holiday season and back to “normal,” the longer-term goal should be a built-in supply chain resiliency that allows retailers to adapt to potentially permanent pandemic-driven shifts in consumer behavior and to, more generally, an ever-changing retail environment.
Erin Allwardt is a Principal Solution Designer at LLamasoft and has been solving challenges for many Fortune 500 retail and food and beverage customers with complex global supply chain networks. Erin has an extensive background in logistics with a global 3PL and earned her International MBA in Global Supply Chain and Operations. Erin is an active leader on LLamasoft’s Risk Task Force, in the Supply Chain Risk Management Consortium, on CSCMP and in RILA.
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