Auburn University study: Changing retail conditions placing new demands on supply chain

Supply chain executives from the nation’s leading retailers are increasing investments in technology, systems development, process improvement and brand building connected to the digital realm—and with good reason. Their survival may hang in the balance.

More than 8,600 retail stores will close by the end of 2017 as shoppers continue to browse and buy goods online. Major retailers HH Gregg, Wet Seal and The Limited announced bankruptcies, closures and layoffs, while once-iconic Sears Holding Corp. reported in a March Securities and Exchange Commission filing that “substantial doubt exists” over its survival prospects. E-commerce giant Amazon’s acquisition of Whole Foods and efforts to expand its Prime membership program through a try-and-buy approach to apparel place even more pressure on retailers struggling to hold on to market share.

As researchers from Auburn University’s Center for Supply Chain Innovation, or CSCI, noted in the seventh annual State of the Retail Supply Chain report, companies are “experiencing the largest shakeout in the retail industry ever.” The report, sponsored by the CSCI and produced in partnership with the Retail Industry Leaders Association, or RILA, and DC Velocity, explores strategies being pursued by retailers with annual revenues exceeding $1 billion. Supply chain executives from 76 companies, including 22 of the nation’s top 100 retailers, participated in the study.

“Adapting to the hyper-competitive landscape requires supply chain capabilities that attract customers and grow the business,” said Brian Gibson, executive director of Auburn University's Center for Supply Chain Innovation and the Wilson Family Professor in Auburn’s Raymond J. Harbert College of Business.

Gibson and fellow Harbert College faculty members Cliff Defee and Rafay Ishfaq conducted interviews with 23 retail supply chain experts. Those interviews, as well as an online survey of executives, revealed the following changes in retail supply chain investments and strategies from 2016 to 2017:

• 63 percent of executives have increased investments in supply chain process improvement

• 55 percent have increased investments in “omnichannel” fulfillment

• 54 percent have increased investments in technology

• 43 percent are pursuing integration across customer service channel

• 35 percent believe they have achieved integration across all customer service channels

Executives also weighed in on hot topics like labor costs, urban fulfillment centers and blockchain—a distributed database that can help retailers respond more nimbly to such issues as product recalls.

“2017 is a banner year for the retail supply chain and this report provides a tremendous benchmarking opportunity for today’s supply chain leaders,” said Lisa LaBruno, senior vice president of operations for the Retail Industry Leaders Association.

The study found that many retailers are still attempting to consolidate operations into a “unified, ominichannel supply chain,” which allows for more nimble control of pricing, inventory management, sales and order fulfillment. As one executive noted, “It doesn’t really matter where the consumer buys it or where they order it from. It’s how do we get it to them in a consistent, efficient and timely manner based on their expectations.”

Increasingly, it seems the “where” involves a website or a mobile app. Shopping mall mainstays like Macy’s, Sears, J.C. Penney, Payless and Chico’s have announced numerous store closures in recent months. American Apparel has filed for bankruptcy, while Bebe has shuttered its store and moved to an online-only model. Credit Suisse recently predicted that between 20 and 25 percent of the nation’s shopping malls will close in the next five years.

As the Auburn researchers noted, this fuels a “race to the bottom” trend. The minimum order value to guarantee free shipping drops, or free standard shipping is promised with every order, as retailers jockey for position against competitors. “Two-day, free shipping is now table stakes,” one executive stated in the report.

Only a handful of retailers have figured out how to serve today’s impulse-driven, “right now” customers efficiently. For most, free shipping and two-day delivery strategies hurt the bottom line. Fewer than 10 percent of the companies involved in the study fully recover their omnichannel fulfillment costs, making it very difficult to maintain strong profit margins.

As retailers seek to find their footing amidst the turmoil, there is no single or simple solution. “Supply chain executives must integrate operations across multiple channels, use analytics to drive supply chain decisions and monetize supply chain capabilities,” Gibson said. “Our report covers these initiatives with extensive discussions and prescriptive strategies for success.”

The seventh annual “State of the Retail Supply Chain” report