The traditional distribution model has evolved quickly, with growing demand for two-day and same-day shipping and a seamless shopping experience for customers. At I.CON West, June 6-7, 2019, in Long Beach, California, experts will share the key characteristics of effective omnichannel distribution networks, how to meet consumer demands while remaining efficient and cost-effective, and what we might see in the distribution network of the future.
To get his perspective, NAIOP interviewed Chris Sultemeier, board member with Duke Realty Corporation, and visiting lecturer at the MIT Center for Transportation & Logistics Supply Chain Management Master’s Program, who recently retired after 30 years with Walmart leading the logistics division of the company.
NAIOP: How has the distribution supply chain evolved since you’ve been in the business?
Sultemeier: Everything is changing incredibly fast. Amazon has defined free two-day delivery, and that is forcing inventory locations to be closer and closer to consumers, and a greater assortment of inventory to be closer to consumers. It’s causing a lot of in-market urban fulfillment options that didn’t use to exist, including stores themselves becoming the fulfillment center.
However, I saw changes taking place well before Amazon was the dominant player. One of the first transformations was retail moving from a more traditionally “push” environment, where the company dictates the assortment and inventory, to more of a “pull” environment, where consumers’ choices became a bigger and bigger piece of the equation.
There have also been increasing degrees of automation as technology continues to make its way into the physical buildings. New innovations are allowing distribution and fulfillment centers to both reduce the number of workers and also reduce the amount of manual labor. Early on, it was improving the picking process with the use of conveyers, and as technology continues to become more advanced, we’ve moved to ancillary storage and retrieval systems (ASRS), and deep storage where things are brought out from a dense matrix of pallets.
Technology has changed not only the amount of work but the type of work; it is becoming a more skilled workforce instead of an unskilled one. Lot of lines are being blurred in terms of job function in the distribution center of the future.
NAIOP: How can companies balance the demand for faster fulfillment with the need for efficiency and profitability?
Sultemeier: If, for example, a retailer tried to serve the entire U.S. from one fulfillment center in Chicago, there’s no way it could meet the demand for two-day delivery without express overnight shipping everything. Obviously there’s no way that’s sustainable from a cost perspective.
Retailers need inventory in at least five nodes to cover 95 percent of the U.S. to eliminate the need to express-ship to meet the demands in this two-day parcel world, but even that is still expensive to do. So the question becomes, do retailers start pushing out to even more inventory nodes to get closer and closer to the customer? Or do they leverage existing physical stores to do that? Walmart is within seven miles of 95 percent of the U.S. population. So how can it use that presence to reach the consumer in one or two days at an expense that is reasonable? That’s what is constantly being tweaked, that balance.
NAIOP: What does the future of omnichannel distribution look like?
Sultemeier: One thing is already happening now: Fulfillment centers are stores and stores are fulfillment centers. No longer should the consumer or the analyst think of them as different. The fulfillment center is processing orders directly from online. Stores are fulfilling online orders. There is an intermingling of channels, and it’s mind-boggling how quickly the consumer is responding to opportunities for a seamless shopping experience.
Retailers are still looking to find ways to aggregate the customer – whether that’s through in-store pick up or a neighborhood collection point – since delivering directly to the customer’s front door is the most expensive leg of the supply chain. Companies are exploring new ways to deliver goods directly to consumers, like having Uber drivers serve as third-party providers who deliver for a nominal fee, or having employees leaving the retail store after their shift bring packages home and deliver to others in their area.
Whatever it takes, retailers want to serve the omnicustomer, because they know the value proposition is much greater. The omnicustomer is shopping online and in person, so their lifetime value to the retailer is 10 times what it would be if they were a customer of the physical store only.