The cost of doing business keeps going up in retail. While this last year was a breakthrough of sorts when it came to sending the consumer to channels other than the store, the byproduct was a series of unexpected expenses. And many retailers have still not come to terms with just how much it can cost to fulfill orders in a way that makes the experience seamless for the consumer. In large part, this is because there are several hidden costs to fulfillment that can get overlooked when the primary goal is to get the product into the hands of the consumer. The result: orders are maybe less profitable than they seem.

And as the consumer shift to digital channels sustains beyond the pandemic, retailers will need to do more than finding stop-gap solutions to this problem. Consumers have been trained over the past year to shop online, a trend that is unlikely to reverse once the pandemic is over—instead setting a new floor of channel sales mix going forward.

figure 1 may 2021 retail viewpoint chart v02

While industry leaders have continued to raise the bar on omnichannel capabilities, this has led to steadily increasing consumer expectations from every retailer, including curbside pickup within a few minutes of arrival in many categories. Meanwhile, the cost of shipping is also going up. Van spot rates have increased 48% to record highs since June 2020.

Let’s take a look at some of the hidden costs of omnichannel fulfillment, and how retailers can solve for them:

The hidden cost of misplaced inventory

To avoid this, allocate inventory based on local omnichannel sales forecasts, specifically ensuring that analyses include data on which store or distribution center will fulfill which order. Review order logic to balance in-stocks items with fulfillment costs. Reassess rules around your safety stock and reserve inventory to better balance the cost of going out of stock with having to run clearances or markdowns.

This may also mean holding stock centrally and flowing it to specific locations based on sales performance.

The hidden cost of overinvesting

Not all stores may need to have complete omnichannel capabilities. Assess whether a certain geographic area can instead be covered by one omnichannel hub, which would be a new tier in the supply chain that centralizes actions such as ship-from-store. Other stores can continue to focus on optimizing buy-online-pick-up-in-store options and fulfilling within local trade areas.

The hidden cost of suboptimal store labor

Omnichannel fulfillment must be thought of as a critical part of all store associates’ job role and may require cross-training employees. Ensure that your labor model appropriately credits stores for these sales, allowing associates to be allocated to completing this work. Potential tradeoffs may be required to enable this.

The hidden cost of poor store configurations

Prioritize changing the way stores are configured based on the omnichannel volume expected over the next few months. In some stores, parts of the backroom can be designed as a mini distribution center that allows associates to operate more efficiently and quickly. This may require adding fixtures such as packaging machines, label printers, shipping supplies, and dedicated technology like PDAs that won’t disappear to other parts of the store. Such an area will ideally be located close to where parcel freight is picked up. You may also need to create second-home locations in the backroom for top-selling items to reduce time spent on picking these.

The hidden cost of accepting and processing returns

According to CNBC, return rates can be as high as 40% for online orders. And the potential loss to margin can be as high as eight times the cost of processing returns. To minimize this, consider investing in quality-of-life technologies on your website, such as True Fit, to enable customers to buy the right items upfront, especially in apparel and footwear categories. Additional levers can include:

  • Packaging that is designed to enable easier trials and faster returns-to-shelf with the goal of preserving resale value
  • A clear decision tree for how to handle returned items that aren’t in that store’s assortment. In some cases, it may be cheaper to mark the item down on the salesfloor than sending it back to its distribution center
  • Strategic decisions about how best to receive returns: ship back with a prepaid label, pool into shipments with a logistics partner (for example, the UPS-Amazon partnership), or return in a store

Acknowledging that the industry has experienced one of its toughest years ever, it is now time to make some lasting structural changes in operations. This, of course, will come with recognizing that it’s both critical to play in the omnichannel universe while making choices that are right for your business and your consumer. This is an opportunity to make enduring change and build for the future but demands a thoughtful assessment of available resources and processes.