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Omnichannel Profitability Starts with Advanced Inventory Insight
Inventory management is notoriously difficult to get right because there are a lot of moving parts. Raghav Sibal looks at how emerging technology is making this traditional pain point more manageable for businesses operating in the cross-channel space.
Not long ago, retailers had a clear differentiation in sales channels. Inventory located in a store was only consumed through that store. And inventory located at a warehouse was only consumed through the catalogue, phone, or perhaps an online site associated with that warehouse. In the past, companies sunk significant funds into extra inventory called “safety stock.” But the rise of warehouse management solutions, RFID, mechanical automation, and robotics has raised inventory accuracy to 99 percent and eliminated the need for safety stock.
Stores have traditionally been notoriously poor at inventory accuracy, often hovering down around 60 to 70 percent. This is because there are a lot of moving parts. Potentially hundreds of people have access to the items, and they can be moved (or removed) with little obviation. In the past, the chaos of inventory in stores caused inefficiencies, but the effects on customers were limited. If an item they wanted was there, they picked it up. If it wasn’t, then they went in search of it elsewhere. Since they didn’t expect the item would be there, even if they left empty-handed, they didn’t feel deceived. Their experience wasn’t negative, and the consequence to the business was minimal.
Changing Retail Expectations
The retail world has changed significantly in the past five to 10 years. Forbes is reporting that now, 98 percent of consumers believe purchases, deliveries, and returns should be easily available across multiple channels. According to Aberdeen, companies with omnichannel engagement strategies retain 89 percent of their customers, compared to just a 33 percent retention rate for companies without that engagement.
However, the execution of omnichannel is proving to be difficult, with nearly eight out of 10 retailers not delivering a unified brand experience across their channels – even though they believe it’s the top innovation that drives digital growth.
Omnichannel Doesn’t Always Mean Profitable
Modern retailers know they need to move to an omnichannel operations model to compete for the connected consumer. Enabling the store network as a distribution point for inventory should be an advantage against online competitors that have no physical footprint. However, without investment in technology specifically designed for omnichannel, the workarounds required to deliver on the customer promise actually drag margins down.
Some recent research has found that when the average apparel retailer provided in-store shopping and delivery, it was quite profitable. When it sold online and delivered from the warehouse, it also did well. However, when it began utilising its network of stores for pickup and distribution, things changed. Inefficiencies, lack of in-store fulfilment tools, and the inability to source inventory from the most profitable location started to erode margins.
Identifying the Challenges
So how can we create the same level of accuracy and efficiency with an online order fulfilled at a store as we get with an online order shipped from a distribution centre? The first thing to recognise is that the store is not simply another distribution centre. It is far more complex. Not in automation or mechanics, of course, but in the flow of people, processes, and chaos. When a member of a warehouse fulfilment team is going through the tasks of picking items for shipping, no one ever taps him or her on the shoulder and asks, “Can you help me with something?” But that happens all of the time to store associates who have to fill multiple roles at once. This dynamic highlights the difficulty of inventory sourcing in stores.
Back when online orders were fulfilled from warehouses only if you trusted the inventory accuracy, it was pretty easy to decide which facility to source from. As online selling has become more prevalent, and inventory levels more real-time, advancements like selling against inbound inventory or inventory located at third-party drop-shippers now make the process more complex.
To truly thrive, retailers’ omnichannel selling and fulfilment capabilities require multiple levels of visibility.
Global Inventory Visibility
Let’s start with the most basic capability retailers need to enable omnichannel operations – global inventory visibility. Think of it as knowing where everything is, all of the time. Consistent inventory accuracy is a major need as retailers begin to expand the number of ship nodes available in their network. By enabling the store to become a point for pickup or shipping, new factors come into play – some of which are pros and others which are cons.
Remember our associate who was picking items for an online order when an in-store customer asked for assistance? That’s just the beginning of the complexity a store adds to the fulfilment network. Stores do much more than just fulfilling digital orders. They’re also handling requests from in-store shoppers. Acting as brand ambassadors. Dealing with customer service issues. So, we have to consider those demands when using stores to source inventory for other channels or stores.
Constrained Inventory Availability
The second stage of maturity for an omnichannel retailer is constrained inventory availability. It’s said that you can’t sell what you can’t see. At the same time, with omnichannel fulfilment, you shouldn’t always sell everything you can see. Let’s look at an example: Suppose we have a customer using our website to shop for a medium, navy blue, crew neck sweater. Let’s also suppose he needs gift wrapping and to get the item in one day for a party tomorrow evening. If we show this customer every medium, navy blue, crew neck sweater in our network, he might go to pick it up in a store that has no gift wrapping. Or, he might buy it from a location that can’t deliver in time for his party. The transaction would end in significant frustration.
To ensure the customer gets exactly what he wants, how he wants it, we need constrained inventory availability to provide a view of our global inventory that is filtered in real time to the e-commerce engine. The blue sweater is a simple example of how omnichannel enterprises need to be able to create and dynamically deliver the right views to the appropriate channels to ensure positive experiences. They can be based on customer needs – such as an overnight delivery requirement – or a network impacts – such as reduced store labour capacity. But accounting for them is essential to omnichannel success.
Real-Time Inventory Sourcing Optimisation
Over 75 percent of retail CEOs think the next three years are more critical than the past 50 years. They know omnichannel services are needed to compete. But being able to deliver them profitably is what’s needed to survive. Currently, only 10 percent of industry leaders believe they can make a profit while fulfilling omnichannel demand. The reason is technology. Retailers are trying to deliver very sophisticated capabilities with older solutions. Because the software was never built with omnichannel in mind, it requires a tremendous amount of effort, baling wire, and scotch tape to compensate. And every appeasement and workaround erodes profitability.
While a view of inventory, corrected for needs and capabilities, can help us fulfil promises to the customer, it does not necessarily help us determine the most profitable way to do so. The third, and perhaps most crucial, phase of inventory maturity for an omnichannel retailer is real-time inventory sourcing optimisation.
With many hundreds of sourcing options available for a retailer, there is no way for a human to determine which one is the most profitable for a given item or order. Even when using constrained inventory availability capabilities, there may still be dozens or hundreds of options to choose from. So how do we decide? Real-time inventory sourcing optimisation automatically considers thousands of potential options and chooses the one that maximises profits.
Consider our earlier example of the blue sweater that needs gift wrapping. We may physically have that item in a store close to the customer, and that store may provide gift wrapping. But what if blue sweaters in that store (or region) are selling at full price, as fast as we can stock them? What if in another region we’re having to mark down blue sweaters because they aren’t selling? It may be more profitable to source from the markdown stock and pay a slightly higher shipping cost to meet the delivery timeframes. Now, what if there are 300 other potential combinations of that scenario to consider? Real-time sourcing optimisation can help you make the most profitable decision for that transaction and every other one. It’s a capability that is fast becoming critical for omnichannel merchants who are trying to maximise their margins while delivering great customer experiences.