Is your Indian supply chain ready for omnichannel delivery?

  • July 25, 2023
Man using laptop and credit card payment shopping online

Going omnichannel can be a major source of repeat customers. But can your supply chain keep up with increased consumer choice and volume? And, while your top line may look promising, what about the bottom line?

The customer is the “omnipresent” king (or queen)

Times have changed. Today’s consumers have many choices. They can purchase in-store or online and opt for delivery or pick up from a retailer or drop box. And, depending on the day of the week and the product concerned, they can choose the most convenient delivery mode at that moment.

With greater options, consumers have become “omnipresent.” They can buy from any place and have it delivered anywhere. Their physical or digital location makes no difference. Yet, there are preferences among the different generations:

  • Baby Boomers (born before the mid-1960s) and Gen X (born before 1980) still prefer buying from traditional brick-and-mortar stores.
  • Millennials (born before the late 1990s) comfortably explore and switch between purchase and delivery options — and demand a greater variety of both. Their attitudes are also influencing Gen X consumers as those more mature buyers expand their shopping horizons.
  • Gen Z (born before the early 2010s) are maturing as consumers and their shopping preferences will push sales forward into the 2030s and beyond.

Enabling omnichannel for the omnipresent

Overlapping competing channels strive to attract customers wherever they happen to be. Businesses must respond accordingly. The lines dividing traditional retail and online are vague. Each encroaches on the other’s territory. Online vendors offer one-to-three-day delivery for most fast-moving consumer goods (FMCG), with some offering 15-minute delivery for their top sellers. Retailers have responded by establishing their own ecommerce operations or working with existing online platforms.

While the pandemic decimated conventional retail, sales rebounded quickly. These businesses still have substantial market share — attracting a healthy number of repeat customers. Their mature supply chains help keep costs under control. Having seen these benefits, online retailers are now pursuing in-store display opportunities and even stores of their own to convert offline shoppers into customers.

New hybrid business offerings

These parallel approaches have led to hybrid business models: Customers can choose from an in-store or online selection and take it home or have it delivered, according to their preferences. It’s been a terrific way to reach new customers and make up for lost sales.

Also, with Millennials’ rising incomes and aspirations, deeper demographic penetration is creating a more diverse consumer cohort. Consequently, many retailers are introducing offerings that appeal to a wider range of potential customers in dense metro areas. In the next one to two years, market developments will motivate retailers to extend these offerings. The goal is to secure additional market share from online consumers from across India. So, it’s critical that well-established, reliable supply chains support these initiatives. Otherwise, negative customer outcomes will undo your hard-won market share gains.

Integrating for omnichannel distribution

Conventional practice has been to manage multi-channel distribution through separate organizations. However, dismantling silos, integrating available distribution options and choosing the channel that best serves specific customer needs is what an omnichannel distribution system is all about.

Omnichannel distribution integrates business systems so you can align and streamline the flow of information and products dynamically. Omnichannel is a customer-centric approach. The initial focus of the merging process is developing a customer-facing infrastructure. Be it venture capital-fueled startups, ecommerce giants or established retail companies, the overriding goal is successful market entry and revenue generation.

This integration promises a seamless experience for the customer and promotes repeat business. But going omnichannel can be a double-edged sword. It demands substantial infrastructure investment. It also requires a keen eye on the operations side of the business to manage cost, complexity and supply chain efficiency challenges.

Visualizing an omnichannel supply chain

Traditional retail companies have years of experience perfecting efficient distribution networks. They manage usually stable and predictable demand using push strategies and competitively priced transportation modes. Maintaining appropriate levels of inventory — and safety stock — at strategically placed distribution centers further optimizes distribution.

Their established warehousing operations rely on a productive workforce equipped with modern material handling equipment (MHE). Despite these distribution techniques being limited to major cities, order sizes continue to increase. It allows retailers to maintain positive bottom lines through economies of scale.

In contrast, today’s ecommerce companies have substantially disrupted conventional supply chain management. By focusing on individual customers, they’ve optimized their supply chains to facilitate home delivery of single-item orders. This approach uses a variety of fulfillment centers that bring inventory closer to customers and the critical last mile at the price of higher per-order costs.

Indian distribution networks are moving forward

With favorable economic, demographic and technological indicators, India is poised to become increasingly affluent and productive in the coming years. Initiatives like “Make in India” and the National Logistics Policy are quickly improving national infrastructure. Production and logistical costs are set to decrease as efficiencies increase. With Indians’ rising income levels, paying a premium for fast delivery of small orders is more desirable and affordable. These developments will also reduce the substantial costs of online supply chains.

Aspirational customers increasingly seek higher-priced premium goods, even when it comes to daily-use products. Despite price and cost cap increases, ecommerce vendors now offer more FMCGs and groceries. These developments have traditional retailers broadening their offerings to maintain their customer base. And despite decreasing costs, online companies are trying to boost their offline presence to offset cost trade-offs.

The complex relationships between Store and Online sales and profits in an omnichannel environment.

The complex relationships between the associated profit levels of Store and Online sales in an omnichannel environment.

To manage online and offline offerings, both are often handled in tandem. The challenges include:

Complex demand patterns

Order sizes are smaller and purchases more frequent as orders shift from conventional retail to online and direct to households and individuals. The resulting variability of online orders is inherently high. But combined with retail’s more stable demand, it yields more accurate forecasts. This is particularly true for fast- and medium-moving SKUs. Long-tail SKUs would benefit from more sophisticated forecasting techniques. Such models better predict demand for these slow but steadily selling items.

Prevailing demographic conditions also influence demand patterns. India has a vastly diverse geography that affects shopping behavior. Even though shopping preferences are moving in the same direction, the speed of change and economic conditions vary by region, city, town and village. These disparities affect supply chain design, and you must factor them into any omnichannel strategy.

Inventory allocation across the network

Ecommerce deliveries range from three days to 15 minutes. To achieve desired order-fill rates, you need more DCs closer to customers, each with a much shorter service radius. This separation leads to increased inventory and a wider selection of SKUs per warehouse. Conventional retail warehousing has standardized networks and bulk deliveries to fixed destinations. It requires fewer locations with fewer SKUs in inventory. The conventional method would have separate warehouses and transportation networks, online and offline channels. An omnichannel approach leverages hybrid strategies. For example, using cross-docks not warehouses and using existing stores as both delivery and buy online, pickup in-store (BOPIS) touchpoints.

You must analyze whether inventory aggregation — leveraging common resources — would offset the additional cost of ecommerce home delivery in the supply chain. Other hybrid options include warehousing long-tail SKUs in a smaller number of strategic locations while keeping a few days’ worth of fast-moving SKUs in DCs at more locations. A network of this configuration should result in lower inventory carrying costs.

Warehousing costs

Online orders have higher operating costs per unit due to the increased labor involved in small order picking and more complex sorting requirements. Partial or full process automation will lead to higher throughput and faster order shipping, lowering per shipment cost. Similarly, storage automation can bring the same sort of savings to offline inventory handling. Aggregating offline and online channel inventories has the potential to reduce operating costs that can outweigh the capital investment. It also makes a compelling argument against managing both channels separately.

Transportation costs

Smaller order sizes, multiple sorting requirements and last-mile delivery costs result in high transportation costs for ecommerce orders. But charging a delivery premium could alienate potential customers. Combining online and traditional retail orders, where service levels allow, can break down online delivery into a longer leg. It can also put bulk cargo with lower last-mile delivery costs at the far end. Depending on the types of products you deliver through the last mile, your fulfillment center/cross-dock/dark store locations may vary.

Going with omnichannel distribution is a significant strategic decision. It redefines the distribution goal for your entire supply chain. It also forces you to balance being dealer/business/franchise-centric and end-customer-driven. The concept must be ingrained in your business philosophy and percolate through all planning and distribution levels. You must overcome the status quo of siloed departments and a mentality of “that’s the way we’ve always done it.”

— By Ankit Gupta and Ruchita Surve

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