Exploring the Strategic and Operational Tradeoffs in Internet and Physical Store RetailingPublished: February 14, 2007 in Knowledge@Emory
As retail stores begin to restock shelves of candy canes with new shipments of candy hearts for Valentine’s Day, the post-Christmas holiday news on consumer spending is equally as sweet. According to economists, the nation’s retailers enjoyed the strongest back-to-back sales gains in almost a year at the end of 2006, brightening the outlook for the U.S. economy. More shoppers are also choosing to fill their carts—and their credit cards—from the convenience of their own homes and offices. Americans shopping for the holidays over the Internet spent 26% more than they did a year ago. Online sales in November and December jumped almost $25 billion, Reston, Virginia-based ComScore Networks reported on January 3.
For those consumers who are even the slightest bit computer-savvy, online shopping is incredibly quick and painless—a few mouse clicks and you can check yet one more item off your holiday to-do list.
The behind-the-scenes process is not necessarily so seamless. As the pressure mounts for traditional retailers operating through physical stores to also offer product for sale over the Internet—otherwise known as multi-channel retailing—so too do the operational challenges. Retail over the Internet and traditional retail have vastly different drivers of demand, product variety issues, optimal inventory configurations, cost structures, supply chain structures and delivery mechanisms. Cost is a particular issue in terms of distribution and warehousing, for example. Firms either have to have their supply chain set up to have high transportation costs if they are dealing with Internet delivery or very low transportation costs if they are dealing with a traditional retail store delivery. The two don’t mix. Ultimately, designing a supply chain to serve both traditional and Internet retail channels well is difficult.
“Clearly as we move into the Internet Age, grocery stores and retail stores have to be on the Web,” suggests Richard Metters, an associate professor of decision and information analysis at Emory University’s Goizueta Business School and co-author of the paper, Strategic Supply Chain Choices for Multi-Channel Internet Retailers. Metters collaborated on the research with Steve Walton, an associate professor in the practice of decision and information analysis. “But the operational choices for grocery stores and retailers are not good. We were trying to find a way out for these retailers, something that would keep all the benefits of the Web—a much larger product assortment than a retail store—and nevertheless have the benefits of the retail store—where somebody can actually feel the goods and get a sense for them. But these two things are incompatible. So, although it makes a great deal of business sense for firms to have a physical and Web presence from a marketing point of view, from an operational point of view, these things are in conflict. This paper is about how to resolve those operational and marketing conflicts about both having a retail presence in a physical store and one over the Web.”
Building from their thesis that moving to a multi-channel Internet purchasing option with an existing physical store network can create significant operational challenges, Metters and Walton set out to explore the operational issues involved specifically in delivery and warehousing and distribution and to present some strategic supply-chain alternatives for multi-channel Internet retailers. The premise of their research first and foremost, notes Metters, is that a magic bullet does not exist. No Internet strategy of shipping and inventory will satisfy all possible strategic goals of a firm. Companies must pick and choose from various strategies.
The paper addresses the relevant differences between the electronic and physical environment that make the design of a multi-channel supply chain more difficult. Issues include the level of safety stock and the number of stocking points, the accuracy of inventory records, the breadth of the product assortment and the pattern of returns from the customer. For example, physical store inventory is limited, whereas Internet retailing allows for greater product assortment. Metters and Walton use the example of Blockbuster Video, which carries 5,000 movie titles in its physical store and 50,000 online. “The implications to back-office warehousing of this marketing promise are two-fold,” write Metters and Walton. “Products sold on the Internet again cannot be picked from retail stores—as the products are not in the retail assortment—and there is a further issue with returns. A product purchased over the Internet that is merely the wrong size or not desired because of color cannot be returned to a retail store of the same chain and restocked.”
In their discussion of the strategic and operational tradeoffs inherent in both Internet and physical store retailing, the authors emphasize that multi-channel Internet retailers must consider their strategic objectives as they determine the most appropriate supply chain configuration. Supply-chain choices come down to managing inventory and managing shipping to customers. Companies can either decide to share their inventory between their Web and traditional retail business in a so-called integrated approach, or they can keep the inventories segregated. In terms of shipping, they can either ship in bulk or ship single items as they are ordered.
All approaches come with advantages and tradeoffs. “These are strategies based on the two axes here: which advantages make sense for a company and which don’t?” explains Metters. “The North-South axis is this idea of pooling of inventory. Does it make sense for you to have inventory that’s segregated—having your Web inventory on a totally different system than your traditional inventory? Or do you want all that stuff together? The strategic advantage of having it integrated is that you can have lower costs because everything can be in the same warehouse and can ship everything together. One disadvantage of an integrated strategy is that you can never offer anything that you don’t offer in your retail store.” The second axis to which Metters alludes, his so-called East-West axis, is the choice to ship in bulk or to ship to customers a single order at a time. Single orders can be very expensive, whereas bulk distributing is less expensive, notes Metters. Even so, bulk distributing can lead to longer delivery times to the customer.
The authors develop four prototypical distinct strategies that multi-channel retailers can adopt. The four strategies are “cost minimizing,” choosing to ship bulk orders from an integrated inventory; “professional shopper,” fulfilling the retail order from the inventory at the retail site; “dedicated systems,” the JC Penney-like approach that keeps the catalog/Internet business as a separate reporting line and requires entirely separate warehouse and distribution systems for each of the two channels; and “transportation sharing,” which allows for centrally picked orders to be bulk shipped to decentralized retail outlets for final customer delivery.
The authors stress that the goal of their paper is to present a typology that has implications for the broader corporate strategy of an organization, not to conduct an empirical analysis. They are presenting how things should be within an Internet environment that is still emerging, not how they are. What’s more, no one strategy is correct. “By considering the strategic drivers the company faces, and the operational outcomes the firm desires, a company can match its multi-channel Internet supply chain with its strategy,” write Metters and Walton.
This raises the very real question: Are Internet product sales a command performance for all retailers? “The popular press has said, ‘Be on the Internet or die,’” notes Walton. “The appropriate Web presence is determined by the strategic positioning of an organization. If you’re about low delivery costs, then a Web presence delivering individual items directly conflicts with that strategic position. To choose not to be on the Web is a strategic choice. To try to impose a single frame on all the different ways companies can compete is not realistic.”And yet as evidenced by this holiday retail season, Internet sales are constantly increasing. “We know that Internet sales are going to become a larger and larger portion of the economy,” Metters adds. “Even as they become larger, these firms are still going to have to make tough choices on how the operations behind these Internet sales flow.”