The Case of the Disappearing Margin

By Scott Fenwick,
The Case of the Disappearing Margin

Forecasting was a more straightforward process before omnichannel commerce disrupted the natural order of things. The inventory forecasting process before omnichannel and one that still persists consists of using at least two measures: The first is based on what products were sold last year, quarter or another period of time. The second is based on estimates of what would have been sold if inventory had been available.

So what needs to change? Inventory Planners need to know which channel, such as online, retail store or catalog, gets credit for surfacing demand.

An on-point, overall inventory forecast alone isn’t good enough for companies looking for better margins for omnichannel fulfillment. This is because retailers need to know the source of demand so they can ensure inventory is at locations where they can fulfill at the best margin. For a walk-in customer, it’s from the store shelves. For an e-commerce customer, it could be from the DC or from a store nearby, especially when it comes to expedited shipping. And if enough inventory isn’t on store shelves, retailers run the risk of disappointing loyal shoppers.

Find Clues at the Source of Demand

While simple in concept, the data needed to systematically analyze demand is anything but simple to gather or track. It’s no surprise, then, that retailers filling online orders from stores are wondering: how do we measure the source of demand when fulfillment can be from a store or DC?

The answer to that question gets more complicated if the merchant has adopted a common pool of Inventory strategy, in which online orders are picked, packed and shipped from distribution centers and retail outlets. Decisions a retailer’s system makes on a fulfillment location is often based on stock availability alone. In other words, inventory may be disappearing from a store, but it’s not due to any in-store customer demand. It’s because the store has an item in stock that has been depleted in the DC.

Companies need to keep in mind that demand forecasts have historically not taken into account the sales channel. Forecasting and measuring past performance are further complicated by overlapping promotions that traverse e-commerce and stores. After all, if actual sales irrespective of the channel match the expected demand, then the forecast was correct.

Solving the Mystery

To advance the sophistication of planning and buying to maximize the fulfillment efficiency opportunity of omnichannel, retailers need to take into account historical demand, by sku and channel; the effects of promotions on inventory; and expectations for future demand.

That way, a pooled inventory forecast that aligns inventory positions with channel demand can result in lower fulfillment costs for online orders. Retailers also can improve the customer experience by reducing understocks in-store locations. Added together, the missing margin mystery is solved.

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