E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
By fulfilling orders from any store or warehouse, retailers can boost sales, service and efficiency.
Flooring products retailer iFloor.com has a long history of taking orders from online customers throughout the U.S. and routing them to the distribution center that can fulfill the order in the fastest and cheapest way.
It's a strategy that iFloor is getting better at all the time, sharply reducing both the time and the number of workers required to process incoming orders in a way that best serves customers while efficiently managing inventory stocks and ensuring expedient shipping.
"We're now shrinking costs and growing our business with a strategy we had not been able to support before," says Rick Altenhofen, technical and finance manager of iFloor, the doing-business-as name for Longhua USA, a subsidiary of China-based Mysymo LLC. Mysymo operates iFloor.com and a growing number of sister sites including DIYFlooring.com and Overstockfloors.com.
IFloor is continuing to perfect what fulfillment experts consider the ideal of order management—or more technically, distributed order management—where orders from customers are quickly routed to the most appropriate source of inventory. Orders are forwarded to the distribution center, drop shipper or, in the case of retail chains, to one of a retailer's physical stores based on business rules set by the retailer. Those rules may dictate routing the order to the source closest to the customer for the fastest and cheapest delivery, or to the location most heavily stocked with the ordered item that may need to move more of that particular SKU to clear up space for new products.
"Ultimately, the goal is for the consumer to be able to buy any available inventory from any selling channel, anywhere and at any time," research and advisory firm Retail Systems Research wrote in the report released earlier this year, "Omni-Channel Fulfillment and the Future of Retail Supply Chain."
Such a system benefits both consumer and retailer. The online shopper is likely to get faster delivery than if the retailer had only relied on the inventory at the warehouse supporting its web site or, in the case of a customer in a store, the stock in the store's back room. The retailer gets to capture sales it might have lost if the desired product was out of stock in a given store, and also gets to move inventory not selling in a particular store, freeing up space to take in the hottest-selling new products.
"Our customers want flexibility in how and where they shop," says a senior executive at an international multichannel retailer that uses GSI Corp. and its subsidiary, VendorNet, to route orders received online, in stores and via contact centers to the most appropriate source of inventory, including stores, distribution centers and drop shippers.
The executive, who asked to remain anonymous because his company did not want to disclose the details of its order management system, says his company has set up close to 100 stores, and plans to soon include the entire chain of several hundred stores, on VendorNet's Internet-hosted StoreNet system, which integrates with GSI's e-commerce and online order management technology. The combined GSI and VendorNet systems route orders to the most appropriate distribution center, drop shipper or store for fulfillment.
As customers place orders online for products not currently available in an online warehouse—including web orders placed on in-store terminals if a store is out of stock of what a shopper wants—the StoreNet system will automatically route the order to the store best suited to the fulfill the order. "We can tweak the rules whenever we want," the executive says. The retailer might set a rule to say, for example, that the store closest to a customer will fulfill the order in order to use the shortest and least costly shipping route.
But if retail managers know that certain stores are selling a lot of a particular item, they may have the StoreNet system automatically choose another store that has both the desired product and a good location for shipping. Deploying the VendorNet system requires an average set-up fee of about $100,000, plus a per-transaction fee of about 1-3% of incremental sales, says VendorNet president Sharon Gardner.
The ability to fulfill online orders from stores also brings other advantages. It frees a retailer from having to maintain a costly level of safety stock in a warehouse dedicated to fulfilling online orders, for example, and it may let the retailer avoid having to mark down or liquidate merchandise in stores that otherwise may have gone unsold. "It's too early for us to tell other benefits," the retail chain executive says, "but among the benefits we expect is capturing incremental sales by shipping some orders from stores—that's an easy win for us."
In addition, he says, the option of fulfilling online orders from stores frees the retailer up from having to maintain full safety stock levels in distribution centers. "A 100% in-stock level can be cost-prohibitive, but now if a distribution center goes out of stock we can still recoup those sales because we have products in stores we can ship to customers."
While there are clear benefits, running distributed order management systems can be a difficult task without the right technology platform and properly trained staff, experts say.
Moving outside of in-house
IFloor for years had used a system developed in-house to manage orders and inventory. It built into the system an algorithm and business rules that helped to determine which of its warehouses or drop shippers were best suited to quickly fulfill a customer's order, figuring both delivery time and cost.
But as helpful as the system was, it was only a partial solution, Altenhofen says.
"We had developed good logic in the system, but didn't have enough technology to support it," he says. As a result, iFloor had to rely on a team of six or more fulfillment experts who spent five to 10 minutes on each order to contact individual warehouses and suppliers by phone or e-mail to confirm inventory availability and shipping details.
"Those minutes add up when you're doing hundreds of orders," he says. "It becomes a huge issue, with human errors in data entry, etc."