In the past few years, companies across sectors have struggled with supply chain challenges. One of the most counterintuitive approaches I have seen comes from an apparel retailer, whose solution is to turn competitors into collaborators and customers.

Most brick-and-mortar retailers are still catching up with the massive shift to e-commerce, which has accelerated during the COVID-19 pandemic and may well account for a third of all retail sales by 2030. When you’ve built an extensive network of stores, shifting to a business model in which you receive half of your sales from an online channel is a structural challenge. Suddenly, the old approach—all of your inventory was landlocked in a distribution center in the middle of the country—doesn’t make operational sense. 

Many retail chains started dealing with this problem a few years ago by shifting significant inventory to their stores, in effect turning them into mini e-commerce order fulfillment centers. This model works when orders contain only one item, and that item is close to the person who made the purchase. In most retail operations, the cost to pack a single item during downtime is seen as acceptable. But most retailers have learned that orders typically contain two or three items (or more) that usually aren’t available in the same location. The cost of paying multiple salespeople to pick and pack an order—as well as the added shipping costs for that multiitem order—adds up quickly. Making matters worse, forward-deploying inventory to hundreds or thousands of locations made it harder for retailers to keep up with unpredictable customer demand, which is something of the norm in fashion. 

This apparel retailer decided it could do better by restructuring its supply chain. It opened more than a half-dozen smaller fulfillment centers around the country. Even accounting for changes in fashion, these small centers had virtually all the inventory that the retailer’s stores and online customers needed and could deliver it in a hurry. The centers were located in areas of lower-cost real estate. Those regions had a more flexible labor market, and the centers could deliver inventory to stores or online orders as needed. By replicating a model more common in fast-moving, highly predictable consumer goods, this retailer reduced online order costs by 15% per order. That’s just one of the benefits. The company also slashed working capital by pulling seven weeks of inventory from stores and selling more goods at full price, since it didn’t have to mark down items stranded in stores. 

This is where the story takes an interesting twist. Once the retailer saw how well its new supply chain network was working, it realized that it had landed on a possible new business. Nearly all of its competitors faced the same problem and a future of supply chain costs accelerating faster than revenues. Why couldn’t the retailer apply its new expertise to a cooperative model providing scale benefits and inventory balancing that only the largest big-box retailers can achieve? The math suggested that the retailer would need 250 businesses of its own size to match the scale economies of the larger multicategory retailers. Could it further evolve the model with technology, robotics, and analytics to offer “supply chain as a service” to its competitors? 

It’s early days still, but the answer seems to be yes. This retailer bought two online logistics companies that had helped it establish the network and found ways to aggregate orders from different businesses to save parcel costs. The net result is $1 in savings per order, which is meaningful for midmarket retailers. It’s a “frenemy” strategy that encourages and creates incentives for open-source collaboration among competitors. 

By now, so many of us take online ordering and speedy delivery for granted. But I believe their continued acceleration will roil the retail industry for a long time to come, even when COVID-19 is a distant memory. In our research, this is one of the top issues facing retail executives today. Creative retailers like this one are finding ways to turn a fixed-cost, high-capital challenge into a technology-based growth opportunity. Pretty novel. 

ABOUT THE AUTHOR

Jennifer Spaulding Schmidt is a senior partner in McKinsey’s Minneapolis office.

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