Building a metropolitan commerce ecosystem will require retailers to reimagine the value chain and embark upon a transformation across strategy, operations, risk, financial, tax and legal. Here are three areas for retailers to consider:
1. Team for last-mile success
The last mile is the most noticeable retailer-customer connection and critical for direct customer access.
Fast, planned delivery of goods to a customer’s door requires retailers to set up their supply chain to be able to deliver multiple times a day to guarantee not only short delivery times, but also favorable delivery slots for as many customers as possible. Yet, most retailers lack sufficient sales volume, even in densely populated metropolitan areas, to offer personalized, same-day delivery cost-efficiently.
One option to achieve last-mile success is to collaborate with neutral third-party players, such as logistics service providers. Partnerships of this nature will require contractual and performance parameters that consider service level ambition, compatibility in terms of logistics and handling requirements, geographical coverage, customer behavior and existing supply chain setup. For reasons of both efficiency and cost, retailers will benefit if existing hub and logistics structures — including IT systems — are compatible.
In addition to selecting the right partners and hammering out targeted customer service levels, retailers need to consider route planning, such as frequency of distribution, maximum delivery times and targeted delivery windows. Artificial intelligence and learning algorithms can help partners in the metropolitan commerce ecosystem to constantly adapt and optimize route planning for maximum effect. This could include creating integrated route planning and delivery loops whereby partners can share open delivery slots on each other’s delivery routes.
2. Cooperate on fulfillment for efficiency and profitability
Optimizing the last mile with partners gives the retailer the key to the consumer. However, serving customers profitably requires more than fleets of delivery vehicles and route planning. It takes merchandise. While this is not a necessity, vertical integration is a logical next step in the evolution of the metropolitan commerce ecosystem.
No matter how efficiently the last mile is organized — whether it is fed by merchandise feeders, round trips or pickup campaigns — a supply chain filled with the right merchandise at the right location from the start will always be superior. However, this massive undertaking involves high investments in infrastructure and inventory. This requires a shared fulfillment strategy.
A nationwide hub structure has been a strategy used almost exclusively by the global online giants. Smaller retailers will need partnerships that support the joint use of decentralized warehousing and logistics structures. This will allow retailers to share both the costs and the risks.
However, to achieve fulfillment success, retailers need to know where their last mile starts and how merchandise can get to where it is needed for distribution efficiency in a metropolitan region. Retailers have three options:
- The milkman: Using this scenario, delivery partners visit partner hubs at clearly defined intervals to collect the goods and, ideally, distribute them in the same run.
- The shuttle: Goods are driven from individual distribution centers or warehouses, or partner stores, to a common departure point, which is where the end customer tour would begin.
- Joint fulfillment: This option relies on a dedicated infrastructure that can fulfill the delivery promise to the end consumer and meet the partners' assortment requirements. Partners can either use or build on existing structures or establish a new one.
3. Take things to the next level with integrated inventory management and demand planning
Once metropolitan commerce ecosystem partners have found alignment and successful execution around last-mile delivery and profitable fulfillment, they may want to take the partnership another step further. While last-mile partnerships are low-hanging fruit, offering a certain level of reward with minimal risk, they may fall short of delivering full value.
To achieve the full benefits a metropolitan commerce ecosystem can bring, ecosystem partners will want to explore joint demand and inventory optimization — and the integrated planning that may be required to achieve them. There is also an opportunity at this level of ecosystem maturity to have brands within the ecosystem play a more prominent role. This may include depot models for multiple consumer-facing retail outlets.
Retailers achieve a much deeper commitment when jointly stored inventory also becomes shared inventory with open access. This step requires a massive amount of trust among partners as it infringes on individual retailer DNA and core competencies — yet the upside in terms of efficiency is significant.
Using this approach, partners would jointly manage not only fulfillment and last mile, but also share large parts of the inventory. This would allow retailers to reduce risk and safety stocks in individual warehouses and hubs, thereby lowering purchasing volumes and reducing the capital commitment for each partner. Supply and demand fluctuations also can be balanced jointly. This can be particularly valuable in times of high volatility, such as the current COVID-19 pandemic.
Given the high degree of transparency and trust required, ecosystem players would benefit from implementing and adhering to a clear set of rules that offers a fair distribution of opportunities and risks, while avoiding misconduct.
When demand peaks for individual products, there still might be substantial strain. Ecosystem players will need to navigate and resolve such issues as who profits from unsustainably low inventory levels and which customers will not receive the product or experience they expect.
Because inventory plays a key role in joint fulfillment, retailers within the ecosystem will want to engage in joint planning and inventory control. In times of ever faster action and reaction cycles, especially in the online channel, this is a challenge. For the synergies of joint inventory to work most effectively, retailers will want to establish allocation principles as part of the planning. There will then need to be a “carrot and stick” approach to execution. Retailers will need to outline the incentives for fostering fair behaviors as well as the penalties for individual planning errors that have a negative impact on ecosystem partners. Ecosystem partners may also want to consider hiring a “trustee” that can aggregate planning and clear transactions.