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Distribution Systems in Omni-Channel Retailing

Introduction

The share of online sales in retail is growing globally. It is driven by an increase in sales in existing online channels, as well as by the ongoing market entry of bricks-and-mortar retailers into e-commerce. As retailing develops towards a seamless omni-channel (OC) shopping experience, the distinctions between physical bricks-and-mortar stores and webshops will vanish. This OC revolution was triggered by the recent reaction of bricks-and-mortar retailers to the new service offers from pure online retailers. The majority of bricks-and-mortar retailers, therefore, now serve customers via multiple sales channels. Additionally, distance retailers, such as pure online players, are establishing physical stores to expand their service offerings.

The growing number of channels also increases complexity from a logistics point of view. The fulfillment process is no longer linear, because bricks-and-mortar retailing is increasingly overlapping with distance retail. Before, supply chain management was responsible for delivering goods to a retail store. The store was the end point of the transaction. Online retailing has now placed distribution systems on the front line, since retailers need to offer a variety of options for finding, buying, and returning goods across bricks-and-mortar stores and webshop. Bricks-and-mortar stores today are only one of a set of channels. With this new set of channels, retailers must simultaneously accommodate and anticipate demand and ensure availability, meet varying lead-times, and keep costs down for each channel.

Essen and Leeuw show in their global report of 1000 webshops that product flows and logistics systems are not yet fully linked across channels. For example, less than 40 % of webshops that belong to a retailer with bricks-and-mortar stores offer the possibility of returning orders to the store. Similarly, store pickup of online orders is not provided by about 70 % of the retailers with multiple channels. These relatively low shares of cross-channel connections may not be surprising, as even the simplest form of cross-channel fulfillment leads to multiple challenges. For example, if a retailer offers buy online and pick-up in-store, it needs answers to questions such as where inventory will come from and will the products be picked in-store, in an e-commerce distribution center (DC) or in a bricks-and-mortar DC. Retailers rapidly find themselves descending into the midst of a strategic review of their entire supply chain network. Moreover, customers demand perfect order fulfillment and are unwilling to listen to excuses. This requires "real-time, channel agnostic visibility" across the distribution systems. It is not surprising, therefore, that four of five retailers believe their supply chain does not fit the purpose of OC retailing, and requires re-engineering of its physical product flows.

This requires OC retailers to set up connected physical flows of goods and operational structures across channels without sacrificing their business model due to growing complexity. Thereby retailers are increasingly facing the challenge of re-engineering their processes to enable seamless logistics across all channels. The Vice President SCM of an electronic retailer formulates this in the following way:

    "Some rules of the game we had to learn in bricks-and-mortar business do no longer apply with the advent of e-business. We can no longer think in the bricks-and-mortar business model".

To complicate matters, return logistics capabilities must be built up to manage the relevant volume of returns, because most online customers demand an easy and convenient way for returning their products. All this requires distribution systems for forward and backward processes that serve customers in stores and simultaneously offer personal deliveries, e.g., store pickup and home deliveries, as well as in-store return of online orders. Integration across channels is changing and the challenge is to implement it in the most effective and efficient way, rather than deciding whether or not to do it.

Due to these recent and ongoing transformational challenges, retail research and practice lack a structured view of the design options for OC distribution systems, because delivery and return options, and customer preferences are evolving over time. In particular, the field requires the generic systematization of goods distribution within multiple retail channels.

This includes an analysis of operational challenges, service impacts, contextual factors, and application areas for OC forward distribution and return concepts developed in retail practice. Practitioners are seeking guidance on how to merge these structures. Kozlenkova et al. conclude from a literature review that multiple channel research is needed to optimize the system of different distribution configurations.

This paper, therefore, lays the groundwork for OC distribution systems and extends the literature, because it is the first study to provide a comprehensive perspective on OC distribution based on empirical data. The term "comprehensive" in our context refers to an overall perspective of the major OC retail sectors and all the subsystems in forward and backward distribution. We discuss the advancements in and the advantages and requirements of these concepts. Theoretical insight is gained from demonstrating how the addition of a new distribution channel can alter our understanding of retail logistics management.

To streamline distribution issues, we focus on non-food distribution, which differs fundamentally from food distribution in terms of its requirements. Nowadays non-food is still the main sector for OC concepts. Non-food distribution is characterized by made-to-stock and non-perishable items that can be shipped regardless of freshness and temperature constraints. Non-food home delivery in Europe is usually fulfilled by carrier, express, and parcel providers (CEP), and without customers having to be at home. As online retailing also displays country-specific patterns and shopping behavior and because of the different international delivery models, we concentrate on the largest European retail market, i.e., the German-speaking countries. This also allows a comparison of (national) logistics systems between retailers.

The remainder of this paper is organized as follows: Sect. 2 elaborates the setting for OC distribution. Afterwards Sect. 3 presents an overview of related literature and identifies the need for further research. We then present the methodology, the research process we employed, and the interview sample in Sect. 4. Sections 5 to 7 present the findings, identify relevant areas, systematize and discuss OC forward distribution and return concepts. Sections 8 and 9 summarize findings, relate them to the literature and discuss further areas of research.