Retail supply chain leaders are facing business model changes and increasing logistics costs as a result of omnichannel fulfillment. The structural shift in freight costs towards an increase in parcel shipments, and away from bulk, all stem from the need to compete with eCommerce providers.

The delivery pressures imposed by retail customers are formed by their expectation for second day, next day, and even same day service offered at little or no extra charge. As a result, there has been a convergence of B2B to B2C workflows such that all levels in the supply chain are in the retail business, from the store, retailer DC, distributors, and even back to the manufacturers.

Omni-Channel Pressures: Areas of Change

The following are issues that retailers are dealing with from a distribution perspective:

  • More challenging and complex fulfillment requirements: eCommerce and multi-channel or cross-channel demand impacts 87% of companies.
  • Increase in direct-to-store shipments: 65% bypass their own DCs and ship direct-to-store via others (suppliers, 3PLs, break-bulk).
  • Increase in direct-to-customer: 61% have direct-to-home delivery models.

The following are issues that retailers are dealing with from a freight flow perspective:

  • Shipping to or through a traditional distribution center: Currently, 60% of companies utilize this model. Two years ago this was at 75%-80% — a definite decline.
  • Shipping direct-to-customer: Currently, 61% of companies utilize this model. Two years ago this was less than 50% — a significant increase and we expect this trend to continue.

For most of these freight flows, the issue is that parcel shipments direct-to-customers are replacing bulk shipments to stores, at a premium that is 3x–5x the cost of bulk. The other increases are due to an additional shipment leg that is completely incremental to the customer for any of the “ship from store direct-to-customer” options.

Retailers and distribution operations are also struggling to get a clear view of their true costs due to the lack of segmentation capabilities and/or proper allocation of costs (Figure 1). Segmentation enables visibility into the real changes in demand volume. Without that visibility, the shift in channels, customer behavior, and demand patterns, will not be clear. The Best-in-Class are 97% more likely to have this critical capability, a significant competitive advantage. Only 40% of All Others indicated that they have this ability, meaning the majority are not in a position to understand how their business is changing.

Another area of major concern is in the ability to track total landed costs. The Best-in-Class are 57% more likely to have this capability compared to All Others, who are only 37%. If retailers bringing in product from overseas don’t know what their landed costs are, it would be very difficult to determine whether they can effectively evaluate pricing or even afford some of the premium freight options being demanded by end customers.

This issue rears its ugly head when looking at the cost-to-serve modeling capabilities where even the Best-in-Class are at 35% in their ability to model their cost-to-serve at the customer, item, or product level, while All Others are only at 10%. Knowing that costs are increasing structurally, shifting from bulk to parcel rates, and not knowing the resulting cost-to-serve puts retailers in a tough position as they try to tackle omnichannel issues.


Table 2 shows that freight costs are in fact increasing, which is likely to continue to an even greater extent as direct-to-customer volume grows. The additional metrics indicate that Best-in-Class companies are in better control of their carriers with compliance rates that are 30% higher than that of the competition. This is another potential source for improvement, in addition to the cost-to-serve capabilities, where All Others could potentially improve their position with tighter management and control of their carriers.


The situation presented identifies that logistics are structurally rising as a result of increased direct-to-customer shipments. All companies are struggling with understanding their true costs, although, Best-in-Class companies better understand the omnichannel picture through their segmentation and stronger cost-to-serve capability. The question is how do companies offset these structural cost increases?