onse, the majority still have a way to go. It’s difficult to put a figure on the total value of the Australian retail supply chain industry, but in 2010, Australia’s entire transport and storage sector was valued at $60 billion by the Logistics Association of Australia, or five per cent of GDP. Antoinette Ienco, director of retail at Capgemini Australia, says it is widely acknowledged that Australian retailers lag behind their European, UK, and American counterparts. A large part of this is to do with Australia’s late adoption of omni-channel. Ienco believes our delay in embracing multi and omni-channel operations is due to the small contribution of total sales e-commerce generates. “I have a personal opinion that many retailers are not taking it seriously because it’s such a small percentage of their overall sales,” says Ienco. “Online still sits at around an average of six per cent of total sales, so when you look at the bigger scheme of things, you concentrate your efforts on the 94 per cent of your revenue – which is the bricks and mortar stores.” Despite this, the impact of technology, encompassing both the introduction of e-commerce as well as the evolution of software products and data analytics, on the retail supply chain should not be underestimated. While some Australian retailers are yet to re-strategise in this new operating environment, there are many others who are taking steps to transform their retail business for maximum omni-channel efficiency, which will be required of successful operators in the years to come. Others will be forced into the change as consumers are increasingly exposed to global retailers in the vein of Amazon and Walmart, who are already offering same day and flexible deliveries. “There is a growing expectation of Australian retailers by consumers, and the Australian retailers are now realising that. I just think they are still struggling with what they need to do to actually meet that expectation,” says Ienco. Steve Thompsett, VP of business development at DHL Supply Chain, said in his work he sees a growing number of retailers “wrestling with the whole thing”. “They’re saying ‘how do I set up my domestic infrastructure to most efficiently service my stores and the growing channel of online?’,” he said. “All of the big retailers now have appointed multi-channel managers or board members in charge of multi-channel retailing, and I think the biggest challenge they face as a retail sector is how they set up domestically to meet both market demands and understanding those markets,” says Thompsett. Perhaps another reason for Australia’s reticence when it comes to retail supply chain is the lack  of experienced professionals in the field, with an apparent skills shortage in Australia. Ienco says the changing nature of the skills required to service the industry and the requirement for leadership skills is not being catered to. “Most people who are in logistics and third party logistics tend to fall into it by accident rather than by design,” Ienco says. “A lot of people are leaving the  market for jobs that are paying more, and that’s becoming an issue right down to truck drivers.” The game has changed To start with the right foundations to succeed, retailers must first invest in a system that captures both store and online orders. “There’s a physical infrastructure need that says – actually, the way I service my stores yesterday and tomorrow probably hasn’t really changed – it’s still by department and more of a bulk pick and processing of orders through the warehouse – whereas the way I service my internet orders is a lot smaller,” says Thompsett. “For online, instead of 80 to 100 lines replenished instore everyday, you’ve got an average of 1.2 or two order lines per order, therefore, it’s a far more intensive process.” Dependent on a retailer’s profile and stage of maturity, this can mean potential investment in automation or physical infrastructure to make tasks more efficient. “While there’s no silver bullet to any one of those challenges, it’s always a combination of understanding your customer and what that means in physical tasks in the supply chain,” he said. According to Ienco, supply chain technology is becoming more sophisticated and cheaper to implement. “Things like RFID have been around for a long time, but they’re finally at a point where they are cheap enough to be implemented,” she says. “It’s not just from a logistics perspective, it goes back to the whole planning. There’s a lot more sophistication around order management and order fulfilling and profitable order promising.” Order promising by retailer marketing teams, whereby guarantees are made to customers regarding online delivery time frames, can be self destructive and unrealistic, the experts warn. This problem is most common with retailers new to online who are often keen to have products to the customer quickly in order to make a splash in the market. “In the omni-channel world, the fulfilment of e-commerce orders could become expensive if retailers don’t have the right strategy, from how they are managing their inventory, how they are buying for that channel, and how are they processing through the warehouse,” says Raghav Sibal, MD at Manhattan Associates. “The final one, which is critical, is how they are delivering the goods to the customer and the cost associated with that. That’s the area where there is a lot of focus now. “The expectation is that customers get a delivery date, and that goes down to a time of the day commitment or promise. “Right now it’s coming at a very high cost to keep that promise and there needs to be a lot of investment to keep it, because if a customer has been told they’ll receive their item on this day or time and it’s not there, the impact to the customer satisfaction and the business is pretty large,” says Sibal. “Retailers are doing everything they can to be able to make and keep the promise, and that is coming at a price.” That price may be staff overtime in warehouses when several large or late orders come in in one day. The solution to this being that the more lead time a warehouse is given to fulfil the order, the more efficient it can be. Says Thompsett: “In the early days of retailers going online, costs are a key thing because they may not make a profit for one or two years, yet their marketing team are saying ‘I need it there next day to make a statement’. “Sometimes these businesses are making that statement not considering the efficiencies they may leave behind.” Location of warehouses can also be critical to ensuring delivery promises are upheld. “Some retailers are just offering (fast delivery) metro, and some are going national,” says Thompsett. “Obviously the challenge with national is that in a country Australia’s size,thoselead times if they are goingtogobyroad train can be seven or eight days – you take Broome from Sydney. “It’s about knowing that physical challenge and if your strategy is marketing led, or marketing and logistics led in terms of what can you physically deliver.” Best in class According to Gartner research, Woolworths has the most sophisticated and efficient supply chain of all Australian retailers, with one of the highest return on asset performances in Asia Pacific. Woolworths is well underway in its reconfiguration of its warehousing and logistics, with its Mercury 1 program a decade ago designed to increase supply chain efficiencies across procurement, distribution, order consolidation, inventory management, merchandising, and instore stock availability. Mercury 2, valued at $1 billion, is currently underway, a phase in Woolworths’ evolution that will see the multi-brand goliath drill further down in its advanced analytics direct selling, which has been bolstered by its part ownership of data analytics company, Quantium, and the acquisition of direct selling business, EziBuy. “Woolworths’ Mercury 2 program is all about their logistics and redesigning their supply chain to meet customer expectations around same day fulfilment and flexible fulfilment. Third party logistics are doing the same thing,” says Ienco. A third party logistics (3PL) can be useful for retailers in many respects, but for retailers with few supply chain skills inhouse, they may be the difference between a happy customer, and lost sales. Thompsett, from 3PL provider, DHL, says the main proposition of a 3PL is incremental sizing. “If you are a retailer and you come to me and you say you want just enough space in Perth to cover what is 10 to 15 per cent of customer orders, it may not make sense for a big physical investment. “We can help to make the investment a bit smaller and a bit more palatable,” Thompsett said. “Retailers often want to spend every dollar they can on their stores or marketing and website design, and may not want to spend it on a warehouse, pallet racking, or forklift trucks. “It’s very much the experience of the people in those retailers and what they are used to and what they are comfortable with.” Ienco says retailer relationships with 3PLs are now starting to develop further. “While Australian retailers are still lagging, they do recognise they need to do it, and they are starting to think about how they need to do it. “It’s very rare that you speak to a retailer that isn’t in some capacity doing something around their supply chain and looking at their relationship with 3PL providers, because it’s known that there are benefits to be gained. There’s reductions in costs through the supply chain, including reduction of costs in inventory.” Warehouse vs store While options such as store fulfilment and click and collect are expected to grow in popularity in the coming years, both Sibal and Ienco think there is a place for both warehouse and store fulfilment in the retail supply chain landscape. “I don’t expect the central warehouse to disappear on the basis that the cost of processing an order is lower from a distribution centre than from the store, especially at an aggregate level,” says Sibal. “At the same time, we are seeing an increased trend to have the flexibility to be able to fill orders from stores.” Sibal sites a recent example by one of Manhattan Associates’ US customers on the role instore fulfilment can play. Just before Christmas, the retailer increased stock levels and labour instore, expecting high footfall. A severe turn in weather resulted in multiple snow days, which forced shoppers to stay inside, but resulted in a sudden and drastic spike in e-commerce orders instead. “They had all the foundation systems in place and were able to divert a lot of the e-commerce orders to stores where the orders were coming from, so the delivery was local and more efficient, but it also utilised the stock and labour allocated to the stores, which was otherwise just going to sit around,” said Sibal. “It turned into a very profitable scenario for the retailer.” Ienco says a combination of warehouse and store fulfilment will be the way forward. “Looking at multi-branded retailers who have apparel through to whitegoods, dropship flow paths can also be useful for some products – so going directly from consumer to supplier and bypassing the warehouse or the store altogether,” she said. “There’s no one size fits all. Organisations, especially the larger retailers, are looking at it holistically by category and choosing the best fulfilment for that particular category. “It’s all around meeting those customer expectations – how to get it to the customer quicker and meet the requirements around how they say they want it.” This article first appeared in Inside Retail Magazine’s October/November 2014 issue.