Managing Order Costs and Velocity: A Route to Dynamic Order Management

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1 Industry Point of View Sponsored by Managing Order Costs and Velocity: A Route to Dynamic Order Management

2 EKN 2 INTRODUCTION Managing omnichannel orders across channels as quickly as possible and at a reasonable cost is a significant challenge for retailers. Moving orders from point A to point B in a retailer s ecosystem is no longer a siloed event in the online, store, catalog or call center domain. It is an enterprise-wide problem that requires a defined roadmap, investments and change management. The reasons range from an explosion of order and delivery channels (online, catalog, call center, mobile and store) to an increase in the order complexity or rising expectations of consumers. 18 For every dollar that a customer spends on an order, retailers are spending an extraordinary 18 cents in total order lifecycle cost Source: EKN 4th Annual Analytics in Retail Survey, 2015 EKN has found that rising operational costs and order complexity is due to increasing order volumes and shipping agility needs (i.e. next day, same day shipping etc.) for 6 in 10 retailers. Additionally, 4 in 10 retailers process both business-to-consumer (B2C) and business-to-business (B2B) orders that further complicates order management processes. Due to growing order costs, agile order management needs and an expanding base of B2B and B2C orders, success in retail requires transformation of organizational, technology and process capabilities. Data from EKN s recent Omnichannel Order Management survey indicates that for every dollar that a customer spends on an order, retailers are spending an extraordinary 18 cents in total order lifecycle cost. In many cases, this high cost per order exposes retailers to lost margin as indirect order management and variable fulfillment costs are not entirely addressed in cost of goods sold upfront. This indicates a strong need for retailers to address escalating cost per order in addition to the ongoing challenge of order veracity, velocity and end-to-end order visibility. Through this report you will learn how increased cost per order is more than just a margin leak for retailers and understand what can be done to address the deficiencies in the current omnichannel order management processes to increase order accuracy, margin per order and perfect orders. Survey Demographics Retail format Annual Revenue Business function 8% 4% 4% 26% $100 million to $499 million 8% 8% 22% 10% 34% 18% $500 million to $999 million 10% 10% 20% $1 billion to $4.9 billion 10% 26% 14% 16% 36% $5 billion+ 16% Grocery/Convenience Home & Furniture Supply Chain Marketing Apparel, Accessories & Footwear Specialty retail Online Electronics & Applicance General Merchandise Others Merchandising ecommerce Others Stores Procurement

3 EKN 3 KEY TRENDS RISING ORDER COSTS AND NEED FOR MARGIN PROTECTION: Order costs are made up of varied direct and indirect labor, equipment, systems, handling and shipping costs. Retailers across the board are in agreement that managing order management systems and fulfillment processes is becoming more multifaceted and complex. Compounding this challenge are the narrowing of order processing windows (i.e. cycle time) and intensifying customer demands. As we all know, competitors such as Amazon and Zappos have forever skewed customers expectations for order delivery. As retailers gear up to comply with the heightened peak-time demands around Black Friday weekend, Holiday season, and other seasonal sales events there will likely be an increase in the costs to meet end-to-end 5.07 % Average year-on-year increase in fulfillment cost Source: EKN 4th Annual Analytics in Retail Survey, 2015 order management requirements. EKN has found that for every dollar that a customer spends on an order, retailers are spending an extraordinary 18 cents in total order lifecycle cost. 8 in 10 retailers reported an increase in the order management and fulfillment costs compared to last year, with an average year-on-year increase of 5.07%. This number is substantial and a drain on margins that are already slim in the case of many retailers. Average year-on-year increase in the following cost-related KPIs 3.2 % 3.5 % 5.1 % Shipping cost per order Fulfillment cost as a % of sales Shipping cost per unit Source: EKN Omnichannel Order Management Survey, 2015 The key to order management success lies in executing a game plan that reduces order errors and latency, increases shared order management with partners, and ensures integrated inventory visibility across channels. The data shows that retailers are planning to introduce several process and system enhancements within the next 12 months some of the key capabilities that can reduce cost per order fulfilled include: Creating one view of orders: This may mean shedding some legacy applications and processes that do not allow retailers and their partners to see end-to-end order management, order capture to delivery, and order return logistics

4 EKN 4 Integrating inventory across channels: This is one process re-engineering area that seems easy at the front-end but difficult to execute. This requires substantial legacy inventory change management processes including store and supply chain use-case development, web inventory development, and inventory virtualization Order-splitting, routing and combining orders between online, store distribution centers and stores: This includes creating detailed front and back-end order process management, split order, routing and back order reduction processes for non-peak and peak-time customer service that is located close to strategic sales clusters THE CHANGING NATURE OF ORDERS/ORDER MANAGEMENT: As stated above, nearly half of retailers process both B2C and B2B omnichannel/ecommerce orders in today s environment. Both online and omnichannel order volume is undoubtedly on the rise. In fact, between 2013 and 2016, online and mobile revenues are expected to increase by 13.9% and 22.6% respectively, whereas, store revenue will decline by 4% 1. In order to manage these orders, retailers require a defined, streamlined and standardized workflow for each order type. More than a third of retailers do not plan to clearly define workflow for each order type. Compared to specialty (23%) or general merchandise/grocery (19%) retailers, 55% of apparel & accessories retailers do not plan to clearly define workflow for each order type. Not defining the workflow for each order type leads to inconsistencies in order processing and management across the entire order value chain from warehouse all the way to delivery. While the basic nature of B2B and B2C orders is different, there are elements such as customization, real-time inventory availability, cycle time, interactive catalogs, customer reviews etc., which are just as important in a B2B environment as they are in B2C environment. However, automating order capture and processing, integrating inventory and standardizing order management from different order types across channels remains a major challenge for 40% of the surveyed retailers. Use of legacy ERP systems and spreadsheets for handling orders creates a disjointed view of orders. Retailers and their partner ecosystem can create one view of order and inventory by enabling web and mobile process workflows for accurate and uniform real-time information flows related to sales order capture, inventory counts, and purchase order management. Following which, retailers need deeper coordination internally and across external partners to manage a flurry of B2B and B2C orders that are needed to fulfill omnichannel demand. Key process changes that retailer plan to undertake within order management 74 % 73 % 64 % 62 % 47 % Source: EKN Order Management Survey, 2014 Integrate inventory across channels Create one view of orders Build a unified order fulfillment process Standardize order fulfillment across all channels Combine online DCs with store DCs 1 RIS-EKN 7th Annual Cross-channel Tech Trends Study, 2013

5 EKN 5 PRESSURE TO IMPROVE ORDER MANAGEMENT AND SHIPPING VELOCITY: As we ve referenced, many retailers are trying to compete with Amazon that has been offering same-day delivery since Nordstrom has offered same-day delivery for USD 15 since 2011 and Macy s is expanding same-day delivery to several new U.S. markets in EKN doesn t see this trend slowing down anytime soon. An anytime-anywhere order management approach will impact all areas of the business including store, ecommerce/mobile, store and supply chain operations. This will require a more agile and visible order management process and technology strategy. This in turn means retailers have to improve efficiency and speed across all aspects of order management from order capture, views, change/add to an existing order, split order, order picking, back order and other delivery-related processes. If an order doesn t get to the consumer when they expect it, the entire experience turns negative. While more than 8 in 10 retailers are currently offering standard, expedited or second day order delivery to their customers, same day shipping is still offered by only 4 in 10 retailers. However, looking ahead, another 32% of retailers are going to offer same day shipping in the next 12 months, totaling close to 75% by the end of While we believe this is overly optimistic this is still a huge number and one that will be watched closely. We know that offering same-day order delivery to consumers is not an easy task. Even if retailers operations can process an order within hours, one of the main obstacles is locating sufficient inventory to ship it out on time, and for all the order management system nodes to update order status and inventory status for all stakeholders in an automated manner. Which order shipping speeds do you currently offer or plan to offer your customers (next months)? Currently offers Plan to offer within next months No plans Standard (should arrrive 3 to 10 business days after shipment) 93% 3% 4% Expedited (should arrive 3 to 6 business days after shipment) 91% 5% 4% Second day (should arrive 2 business days after shipment) 91% 9% Next day (should arrive by the end of the business day after shipment) 73% 23% 4% Same day (should arrive within a few hours on the same day after shipment) 46% 34% 20% Source: EKN Omnichannel Order Management Survey, Order It Online, And Voilà, WSJ.com

6 EKN 6 ORDER MANAGEMENT PROCESS CHALLENGES When calculating cost of goods sold, free shipping is usually a big cost burden, and in fact consumers expectation of free shipping is the leading order management-related business challenge for 4 in 10 retailers. However, the reality is that for retailers there are 3 order management process-related cost drivers that are of higher concern: Key challenges related to order management 45 % Need to improve order cycle time 44 % Lack of visibility across order functions and processes 41 % Inventory, order and supply chain operations are not aligned Source: EKN Order Management Survey, 2014 A higher than planned order cycle time is due to lack of effective order planning workflows and poor order management integration between the distributed order management system, POS, inventory planning and warehouse management systems. Order cycle time is critical to decipher overall timeliness of delivery, order accuracy, product sell through and internal-external collaboration. However, only 4 out of 10 retailers are measuring leadtime or order cycle time year-on-year performance 3. In order to reduce order cycle time, retailers are focusing on better inventory control (52%), improving end-to-end order management visibility (48%) and reducing lead-time from receipt of order to delivery (34%) 4. On the other hand, improving shipping agility (same day/next day) and adopting new omnichannel KPIs and metrics (36%) are the key investment focus areas related to order fulfilment. 3 EKN Retail Innovation & Technology: Viewpoints on Merchandise Innovation Study, EKN Order Management Survey, 2014

7 EKN 7 Top strategic investment areas related to order management in 2014/2015 Better inventory control % 52 Improve end-to-end order management visibility Reduce lead-time from receipt of order to delivery % % Source: EKN Order Management Survey, 2014 SECRET TO END-T0-END ORDER FULFILLMENT AND MANAGEMENT CAPABILITIES More than 6 in 10 retailers define a perfect order as either end-to-end order management that supports all channels of sales and service and meets customer expectations or as an order workflow that keeps the customer order promise irrespective of fulfilment channel. Meeting the new age consumer s increasing expectation of speed and convenience is forcing many retailers to revamp their order management and fulfillment-related processes. Almost 8 in 10 retailers have automated order capture and processing as well as inventory update processes across channels or will do so in the next 12 months. This will help retailers connect on-hand or in-transit inventory with order captures as they happen in the channels. This type of automation also helps maintain an updated system to reconcile inventory as soon as the order has been processed. While just 3 in 10 retailers have built a unified order management-fulfillment process or have standardized order management-fulfillment across all channels currently, an equal % of retailers plan to implement these changes in the next 12 months. Order management and fulfillment go hand-in-hand for retailers. A distributed order management system does a true hand-off to the warehouse, store, shipper carriers, and transportation and supplier teams to execute the most efficient fulfillment option for the customer. More retailers who have currently implemented the key capabilities to successfully manage and fulfill orders such as the ones cited above have reported an increase in the year-over-year performance of various order and fulfillment efficiency related metrics such as order cycle time, orders shipped complete, fill rates, among others.

8 EKN 8 Key process changes that are being currently undertaken or planned within order management Currently undertaken Planned in the next 12 months No plans Automate inventory update process 61% 23% 16% Automate order capture and processing 52% 29% 19% Integrate inventory across channels 40% 34% 26% Defined workflow for each order type 38% 28% 34% Standardize order fulfillment across all channels 31% 30% 38% Grow supplier network for direct-drop shipment 28% 24% 48% Create one view of orders 28% 45% 27% Build a unified order fulfimment process 28% 37% 36% Source: EKN Order Management Survey, 2014 Technology Systems While ecommerce order management and distributed order management systems are some of the most widely adopted systems used by retailers to process omnichannel orders, high complexity, lack of scalability and poor speed to market of such solutions have always over-shadowed the business value of these systems. Retailers should not waste their precious resources in running separate systems for ecommerce, call center order management, catalog/special order, mobile and store order management-fulfillment. A single, centralized and scalable distributed order management system that is linked to unified POS, WMS, ERP, inventory management, supply management and business intelligence is ideal for retailers. A proven area of ROI from distributed order management is end-to-end order visibility that reduces order cycle time, provides timely inventory updates, improves sell through or available inventory to sell. When implemented correctly this system also provides retailers with the ability to process/fulfill more orders from stores and customer proximity sales clusters. As a result, retailers can save valuable resources that can be deployed towards other areas in the business.

9 EKN 9 Retailers must also weigh the comparative value of on-premise and cloud-based order management systems. Our qualitative data reveals that on-premise systems even though robust can take up to 2 years or longer to deploy depriving retailers of valuable time to market on an enterprise-wide system that can create order, shipping, customer service and inventory efficiencies. Ideally, order management systems should be deployed and operational within 1 year or less so that omnichannel teams can start to improvise on processes, introduce rapid change management and on-boarding benefits from a business user and consumer perspective. Adoption timeframe of the following order management and fulfillment technology systems Currently use Plan to use in next 12 months No plans ecommerce order management system 56% 16% 28% Warehouse management system 55% 15% 30% Distributed order management system 34% 19% 48% Cross-channel order management system 31% 25% 44% Transportation management system 28% 23% 49% Mobile-enabled purchase order management system 21% 19% 60% RFID-enabled inventory/order management 20% 18% 62% Geo-coded barcode inventory tracking system 19% 21% 60% Source: EKN Order Management Survey, 2014 CONCLUSION Omnichannel retailing is changing retailers order management and fulfillment models by requiring order anywhere-fulfill anywhere service, faster delivery etc.. In the past, supply chain models were more linear an item was sourced and fulfilled in one place. Today, mobile, web-based kiosks and other customer touch points are creating new pressures on the supply chain and fulfillment. Moving products through the supply chain is no more a muscle-memory for most retailers. Retailers have to deal with rising order costs, rapidly changing nature of orders and the need to improve shipping velocity, while ensuring efficient and profitable order management and fulfillment. In order to stay competitive and deliver orders in the time consumers expect, optimizing operations is critical for retailers. Every major business initiative requires a detailed roadmap that outlines the changes needed in terms of internal processes, technologies, personnel, strategic alignment and costs. The next sections outlines detailed recommendations related to technology solutions, change management and strategic alignment to help retailers improve their order orchestration and fulfillment practices.

10 RECOMMENDATIONS ST S h o r t T e r m ( 0-6 m o n t h s ) MT Medium Term (6-12 months) LT Long Term (1-2 years) 0 Elevate seamless omnichannel order management as a business strategy and enterprise-wide execution pillar that enables ease of shopping and customer satisfaction across all channels. Establish common order management KPIs for ecommerce, store, distribution center and call center teams. Include order fulfillment cycle time, picking accuracy, orders shipped complete, on-time delivery and order accuracy. Short Term 6 Establish order accuracy & timeliness of delivery as two of the leading business levers across all channels. Build a system, internal channel/dc process and a performance Ensure a complete review of order-fulfillment process/infrastructure every year including total measurement strategy to support these business levers. order volume, fill rates, orders shipped, order errors, order cost, average order value, total DCs, systems, equipment and personnel. Medium Term Create inventory visibility across channels via secure web-based virtualization of inventory meta data, data update cycles, data back up and item master. Establish one view of order from payment, processing, picking, change/add order to fulfillment, delivery and re-conciliation. Use POS or warehouse automation as 12 the system of record to track order workflows across multiple attributes. Reduce order fulfillment cost by enabling end-to-end order visibility, inventory control, direct supplier process intervention and store delivery/fulfillment. Aim for complete point-to-point automated order tracking and traceability for all internal and external stakeholders as well as customers. Prepare for mobile and device-agnostic mobile delivery of real-time order tracking and status Long Term information. 24

11 About EKN Our research agenda is developed using inputs from the end user community and the end user community extensively reviews the research before it is published. This ensures that we inject a healthy dose of pragmatism into the research and recommendations. This includes input of what research topics to pursue, incorporating heavy practitioner input via interviews etc., and ensuring that the blend of research takeaways are oriented towards a real-world, practical application of insights with community sign-off. For more information, visit us at EKNinfo@edgellmail.com About Aptos In an era of virtually limitless choice, sustained competitive advantage only comes to retailers who engage customers differently by truly understanding who they are, what they want and why they buy. At Aptos, we too, believe that engaging customers differently is critical to our success. We are committed to a deep understanding of each of our clients, to fulfilling their needs with the retail industry s most comprehensive omni-channel solutions, and to fostering long-term relationships built on tangible value and trust. More than 500 retail brands rely upon our Singular Commerce platform to deliver every shopper a personalized, empowered and seamless experience no matter when, where or how they shop or have their orders fulfilled. Learn more: Disclaimer: EKN does not make any warranties, express or implied, including, without limitation, those of merchantability and fitness for a particular purpose. The information and opinions in research reports constitute judgments as at the date indicated and are subject to change without notice. The information provided is not intended as financial or investment advice and should not be relied upon as such. The information is not a substitute for independent professional advice before making any investment decisions. Copyright 2015 EKN Registered Office: 4 Middlebury Blvd. Randolph, NJ Ph: (973)