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The Ideal Inventory Optimization Approach for Omnichannel Retailers

By Scott Fenwick,
Ideal Inventory Optimization Approach

Previously, we described how to fluidly align ship-from-store best practices with store operations. In this article, Scott Fenwick, Manhattan’s senior director of product management, describes how to take inventory optimization in an omnichannel environment to the next level.

Is there anything better for delighting customers than robust omnichannel retail experiences? There are many reasons why: When the distribution center (DC) is out of something displayed on the website, it can be fulfilled from store inventory. Or, when an item is needed right away, like a last-minute-birthday gift, a customer can browse store inventory, pay for an item, and pick it up the same day. And when a merchant has a single record with customer information and orders regardless of channel, store associates and call center representatives can deliver consistent high levels of customer service.

Welcome the Superconsumer

Delighting customers keeps them engaged. And in this age of experience, consumer engagement is worth holding onto. There’s a name for the most engaged customers: superconsumers. Superconsumers aren’t just frequent buyers. Instead, they’re defined by their passionate attitude toward products and brands. One estimate pegs superconsumers at about 10 percent of a brand’s total customers. And they account for 30 percent to 70 percent of sales1.

What do superconsumers have to do with inventory optimization? Since they account for so many sales, their consumption of inventory leaves breadcrumbs. Those breadcrumbs—or demand signals in inventory terms—can lead the way to stronger forecasts and a better pooled inventory strategy.

Aligning Inventory Optimization and Order Management

Advanced omnichannel retailers have been leveraging pooled inventory for fulfillment of walk-in, online and catalog orders for some time. From this, they have a valuable source of data about customer behavior. That’s the catalyst and here’s where the alchemy happens: retailers can use this data to develop a keen understanding of how inventory gets leveraged by channel. In turn, merchants leverage this information to reduce the total amount of network inventory on hand. And at the same time, keep walk-in and online customers happy by positioning it in the right places at the right time.

To reduce inventory levels, increase profitability and satisfy demand across all channels, two functions need to work together in lockstep—order management and inventory optimization:

  • Distributed Order Management software owns real time order fulfillment orchestration. With it, a retailer need not forfeit any sales opportunities. It also provides a single version of the truth necessary for outstanding customer service.
  • Inventory optimization software generates forecasts and balances supply needs based on demand and sku-level item profiles. It uses “what-if” scenarios to evaluate   different inventory strategies.

Inventory Positioned at the Right Places for the Right Times

With inventory optimization and order management aligned, a merchant can take a systematic approach that orchestrates real-time execution and provides a stronger forecast for inventory utilization. For example, if a merchant knows that it can rely on inventory positioned at various spots to meet demand from a particular channel, it doesn’t need as much inventory on-hand in aggregate across channels.

To plan inventory, the merchant needs to understand the flow of demand by channel. From there, inventory can be positioned to meet service levels and the needs unique to that channel. For example:

  • Stores - Enough inventory on store shelves for walk-in customers
  • E-commerce – More units of a promotional item in the DC so a rapid burst of online orders can be fulfilled
  • Next- or same-day shipping items – Items housed at retail locations or DCs closer in proximity to customers. This is especially helpful for merchants in competition with Amazon’s Prime Now service.

If inventory optimization is approached in a systematic way, filling online orders can be done at the best cost with reduced inventory levels. Without enough stock on store shelves, a disappointed customer and a lost sale can result. Without enough inventory in the DC, margins stand to take a hit. Order management and inventory optimization working together reduce the chance of either of these scenarios happening.

The Bottom Line

Companies that understand demand by channel have an opportunity to align inventory with fulfillment strategy. As a result they get lower fulfillment and delivery costs from stores and DCs alike. They also avoid overstocking in store locations. Besides lower logistics costs from channel stocking, they can keep all customers engaged while combating product margin erosion.          

1https://hbr.org/2014/03/make-your-best-customers-even-better

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