Dive Brief:

• Target handled 80% of its online fulfillment through its own retail locations in the first quarter of 2019, which is up 60% from the same quarter in 2017, according to numbers provided by Target to Supply Chain Dive.
• A recent DHL survey found 65% of respondents shipping from business to consumer plan to leverage multiple fulfillment methods for e-commerce orders in the next three to five years. Fulfilling from a physical store, as Target is increasingly doing, remains the least common approach with just 39% of respondents saying they plan to use this practice. Another survey by Logistics Management from 2018 found just 2% of respondents planned to use a combination of retail stores and distribution centers (DCs) to handle e-commerce fulfillment.
• Fulfillment from brick-and-mortar retail locations is likely lower because fewer respondents in the survey have these assets to utilize, but it is very important for those that do, Jim Gehr, the president of retail North America at DHL Supply Chain, told Supply Chain Dive.

Dive Insight:

Deciding on the right fulfillment method for e-commerce comes down to figuring out what would give the best response times and allows for inventory to be moved around in the most cost-effective manner, Gehr said.

Retailers are increasingly figuring out how to leverage their physical stores in the new e-commerce economy and fulfillment has been part that process. Logistics operations historically deliver large quantities from DCs to retail stores, so switching to small customer orders can be a difficult transition. But "shipping from a store can also soften" this impact on the distribution operations as the channel between the DC and store will go largely unchanged, according to Modern Materials Handling.

Target is one retailer that has famously made this transition and it recently announced it was able to cut costs 40% as a result. The retailer has been highlighting these changes for more than a year now, including after the recent holiday season.

Making the transition can be difficult, especially if the retailer is experiencing a high volume of online orders, which requires either significant labor investment or mechanization, Rafay Ishfaq, a professor at Auburn University's Department of Systems and Technology, wrote in the 2018 paper "Evaluation of Order Fulfillment Options in Retail Supply Chains."

In his paper, Ishfaq built a model to determine the best fulfillment option — retail stores, DCs, direct-to-customer fulfillment centers (or a dedicated e-commerce facility) or shipped directly from the vendor — and tested it on "a large retail firm operating more than 5,000 stores in the United States." The anonymous company sells name-brand and private-label goods and most of its items go through a network of 12 distribution centers, according to the paper.

In-store fulfillment can be convenient for orders that are geographically close to the retailer, but "this fulfillment option requires pushing inventory to stores where real estate costs and employee wages are higher compared to the off-site locations of DCs" and costs can end up being about 30% higher than DC-based fulfillment, according to research cited by Ishfaq.

These geographical considerations can be important for retailers when considering last-mile logistics in a world where shipping standards are being compressed into shorter and shorter timeframes.

"To respond to these pressures, many retailers see an opportunity in leveraging their store network to position inventory close to their customers," Ishfaq​ said in an email to Supply Chain Dive. "This speeds up fulfillment and helps control last-mile logistics costs."

Many of the retailers currently undertaking this fulfillment model are larger brands with "with expansive store networks," Ishfaq​ said in the email. Smaller retailers can also use this fulfillment model if merchandise is fairly standard across the store and online marketplace, and margins are large enough to pay for last-mile logistics while remaining profitable.

Rearranging DCs to handle store and e-commerce fulfillment or building a direct-to-consumer facility also incur a cost. Ishfaq found the direct-to-consumer option was about 7.5% less expensive for the focus retailer in the study compared with traditional DCs. Meanwhile, the order processing and delivery fees were often too high to make vendor fulfillment the best option, the study found. Store fulfillment saw an even larger reduction in cost (a more than 18% drop) as a result of lower last-mile cost, but shipping and inventory cost did end up being higher and this drop required that the combined order fulfillment and delivery charges be under $10 per order, according to Ishfaq's model.

Achieving a combined fulfillment and delivery cost that is this low makes in-store fulfillment difficult, which is one reason why the paper concluded that DCs or direct-to-consumer facilities were the best options for the focus retailer in this study.

These direct-to-consumer facilities, though, require a high-volume of e-commerce activity to be considered as a reasonable option, according to Gehr. "That is not generally the approach for most sellers," he said.

Ishfaq's paper concluded that stores can be more costly fulfillment options compared to DCs, but retailers can cut store fulfillment costs with better processes and training.

"While our research shows that store fulfillment has some profitability hurdles to overcome, its these elements that amplify stores’ strategic value and competitive advantage for retailers," Ishfaq​ told Supply Chain Dive. "Thus, it makes sense in an omnichannel environment to forge ahead and undertake necessary adjustments to make store fulfillment option work."