Does the store backroom need to look like a DC?

As retail goes omnichannel, more vendors are filling online orders from stores. This has big implications for their backroom operations.

By Susan K. Lacefield

The well-known supply chain consultant Jim Tompkins has an analogy for the typical retail store backroom. These backrooms, he says, look like many people's garages, serving as an unorganized storage space, with items and boxes stuffed and precariously stacked in every odd corner.

However, as more and more retailers experiment with fulfilling online orders from their brick-and-mortar stores, backrooms can no longer function this way. In a recent white paper, "Retail Backrooms: A Revolution in Roles and Business Value," Tompkins' consulting company, Tompkins International, argues that the backroom must evolve into a place for picking, packing, and possibly shipping orders. But accomplishing that will require greater organization, more attention to processes, and possibly automation.

In short, backrooms will need to look less like a hoarder's garage and more like a mini-distribution center. As these storerooms start to undergo this transformation, retailers will have to ask themselves the following key questions.

1. WHO OWNS THE BACKROOM?
For a long time, the backroom has been the province of store operations or merchandising; logistics and warehousing folk typically had no visibility into what was taking place inside it. But as the backroom's role expands to include more order fulfillment responsibilities, companies should re-evaluate whether that old organization model still makes sense.

"What do merchants do well? Merchants understand the customer and how to sell product," says Tompkins. "What does the supply chain do well? Supply chains understand efficiency, product flow, and having reliable information. If the backroom needs to focus on the efficiency of product flow, then it makes sense for the supply chain to own it."

Indeed, some leading players are already moving in this direction. Last year, for example, Wal-Mart Stores Inc. shifted reporting responsibility of its 3,288 U.S. "supercenter" backrooms to its logistics division. Those backrooms had previously reported to store management.

2. WHERE SHOULD PICKING TAKE PLACE?
Currently, a little more than a third of companies are fulfilling e-commerce orders from the store, according to a survey conducted by DC Velocity in conjunction with ARC Advisory Group (see "Study: To excel at omnichannel distribution, you need the right stuff," November 2014). Chances are, the numbers will only increase. But where exactly in the store should order picking take place?

Tompkins argues that online customer-direct orders should be fulfilled from the backroom, not from the store floor. That's partly because store floor inventory information is often inaccurate, he says. But it's also because he believes picking from the backroom leads to a more efficient picking/packing process since companies can set up packing workstations in their stockrooms that are dedicated to customer-direct orders.

Luther Webb sees it differently, however. Webb, who is director of operations and solutions consulting for the systems integrator Intelligrated, believes that picking should take place on the floor. "I don't think we'll see backrooms keeping inventory because the whole premise of fulfilling online orders from the stores is taking advantage of inventory the stores already have," he says. "To be honest, most retail stores don't have much of a backroom, because with the just-in-time push that occurred during the recent history of the supply chain, the backroom got very small."

Instead, Webb sees backrooms focusing on steps that come later in the process, such as packing and shipping.

3. HOW ARE YOU GOING TO MANAGE INVENTORY?
When it comes to keeping close tabs on inventory, retail stores still have a long way to go, according to Kim Baudry, market development director for Dematic, a supplier of automated material handling and logistics systems. Most stores don't know where a product is in the store or backroom, or exactly how much they have in stock, she says. That can create difficulties when they go to fill online orders.

In most of these cases, the solution lies in software, says Baudry. "It's similar to what we tell our distribution center customers," she says. "You have to have that basic foundation in place, which in the case of a DC is a WMS [warehouse management system] or inventory control system, so that you know what you've received, where you've put it, when you've picked it, and where you are shipping it to. It's the same thing for the backroom."

The Tompkins report recommends using a location-based inventory management solution for the backroom, coupled with a distributed order management (DOM) solution. DOM software helps companies manage, monitor, and optimize orders across all of their sales channels. It provides a real-time view of inventory and order status, and can help companies decide which store or distribution center to ship the order from.

Intelligrated's Webb agrees that retailers will need two types of solutions, although his recommendations vary somewhat from Tompkins'. First, Webb says, they'll need an enterprise solution that can "look" across the network and determine where to locate inventory based on both financials and customer service considerations. Second, they'll need a DOM solution to help with fulfillment decisions for individual orders.

4. DO YOU NEED MORE TECHNOLOGY?
Right now, the most sophisticated piece of material handling equipment in most backrooms is a hand truck or a shopping cart that's used to move merchandise around, according to Tompkins. However, as stores take on a larger order fulfillment role, they might benefit from incorporating some of the same kinds of technology and equipment typically found in warehouses and DCs, he says.

For example, according to DC Velocity's recent omnichannel distribution study, 71 percent of companies that fill orders from their stores are using a paper-based method to select items. While this may work initially, paper-based selection will not be sustainable as store-based e-fulfillment activity ramps up. Eventually, experts say, retailers will likely have to upgrade to voice or radio-frequency identification technology to direct picking activities.

As volumes swell and stores take on increasingly complicated fulfillment tasks, Webb predicts that some retailers will install small-item sorters in the backroom. If the rooms are large enough, some might even install vertical lift modules or horizontal or vertical carousels to store items being collected for an order or outbound cartons awaiting pickup by a parcel carrier.

Taking this a step further, Webb foresees a day when the customers themselves will interact with this sort of automation in an ATM-like experience. For example, say a customer has purchased something online for in-store pickup. Upon arrival at the store, the customer would swipe his or her card, and the carousel would spin around and present the customer with the item.

Actually, that day may be closer than you think. Baudry reports that Dematic has some grocery industry customers in Europe that have installed fully automated storage and retrieval systems in their stores that allow consumers to come in and collect orders placed online.

5. HOW WILL THESE CHANGES AFFECT THE DC?
As more companies look to increase the efficiency of store employees, Baudry believes the trend toward store-based order fulfillment will only accelerate. And there's no doubt that changes at the store will affect operations further back in the supply chain, like those taking place at the warehouse and distribution center. For DC operations, one of the likely consequences will be a push toward smaller but more frequent shipments to the store.

CHASING THE OMNICHANNEL PROMISE
While the use of stores as fulfillment nodes may be gaining popularity, the trend is still in its nascent stages. According to Tompkins, only a small percentage of retailers are actively using their storeroom as an asset; most haven't even started to think about it.

Indeed, omnichannel retailing is so new that retailers are navigating essentially uncharted waters. No one has figured out a single right way to address the challenge of omnichannel fulfillment or can offer basic guidelines for success. Retailers have been left to answer these questions alone on a case-by-case basis.

"I don't think there have been any best practices established yet," Baudry says. "Instead, as the front end of the business is recognizing the importance of omnichannel, the supply chain is just trying to catch up."