The Three Levels of Inventory Insight You Need to Deliver Omnichannel Profitably
Not long ago, retailers had a clear differentiation in sales channels – and they did not have that many channels to deal with, either. Inventory located in a store was only consumed through that store and inventory located at a warehouse was only consumed through the catalog, phone or perhaps online site associated with that warehouse.
In warehouses there used to be a term often used called ‘safety stock’, that was used in inventory locations to hold more items than were actually needed to reduce the risk of creating an availability promise to a customer and then realizing the item was out of stock. The major drawbacks of this strategy are that one, it ties up a potentially significant amount of capital, and two, it creates more risk of mark downs or write-offs if the item doesn’t move as easily as predicted. I once worked for a 3PL (third party logistics) organization and there were millions of dollars tied up in safety stock because the inventory counts could not be trusted. But then we saw the rise of warehouse management solutions, RFID, mechanical automation and robotics and inventory accuracy in the warehouse rose to 99% and safety stock, as a concept was abandoned.
Stores, on the other hand have traditionally been notoriously poor at inventory accuracy, often hovering down around 60-70%. There are a lot of moving parts, everything is unpacked and individually displayed, and potentially hundreds of people have access to the items and can move (or remove) them with little obviation. But, in reality, while the chaos of inventory in a particular store might cause headaches and lead to some shrinkage and inefficiency losses, the only ones affected were the customers who came into the store itself. If the item was there, great, they picked it up. If the item was not there, then they went in search elsewhere. But since no one promised the item would be there, even if they left empty handed, they did not leave feeling deceived.
But the world has changed in the past five to ten years, and no industry is more indicative of that change than retail. Forbes is reporting that 98% of consumers believe that purchases, deliveries and returns should be easily available across multiple channels. According to Aberdeen, companies with omnichannel engagement strategies retain 89% of their customers compared to 33% for those with weak omnichannel engagement. However, the execution of omnichannel is proving to be difficult. McKinsey’s Periscope unit found that nearly 8 out of 10 retailers said there was not one brand experience across their channels even though they believe it is the top innovation to drive digital growth.
For most modern retailers, the need to move to an omnichannel operations model is a given in order to compete for the connected consumer. The enablement of the store network as distribution points for inventory should be an advantage against online competitors that have no physical footprint. However, without investment in systems designed for omnichannel from the start, those stores begin to drag margins down instead of raising them up, because of all the appeasements and workarounds required to deliver on the customer promise.
CNBC and research firm AlixPartners found that for the average apparel retailer, when they provided in-store shopping and delivery they were quite profitable. When they sold online and delivered from the warehouse they also did well. However, when they begin trying to utilize their network of stores for pickup and distribution, their inefficiencies and lack of in-store fulfillment tools or insight into the most profitable location to source inventory in real time begins to erode their margins.
"Accurate inventory is the single thing retailers have got to get right for everything else to work…"
- Bill Hardgrave, Auburn University Provost
So how can we create the same level of accuracy and efficiency we get with an online order shipped from a distribution center when we are fulfilling to or from a store? Well, the first thing to recognize is that the store cannot be treated simply as another distribution center. It is far more complex. Not in automation or mechanics, of course, but in the flow of people, process and chaos. When a member of the fulfillment team in the warehouse is going through the tasks of picking items for shipping, no one ever taps them on the shoulder and says, ‘Can you help me with something?’. The dynamic in the store takes inventory sourcing to another level.
Back when online orders were fulfilled from a warehouse or three, and you trusted the inventory accuracy, it was a pretty simple decision as to which facility to source from. You selected the facility that 1) has available stock, 2) is the closest geographically to the recipient, and 3) the facility with the cheapest parcel agreement for the route needed. As online selling became more complex and inventory levels became more ‘real-time’ advancements like selling against inbound inventory or inventory located at third-party drop-shippers became more commonplace.
These capabilities require global inventory visibility, the first level of inventory for a modern retailer. Think of it as knowing where everything is, all the time. Retailers, distributors and manufacturers have been talking about a global enterprise visibility picture for a long time, and it is the most basic capability retailers need to enable omnichannel operations – but consistent inventory accuracy is a major concern when retailers begin to expand the number of ship nodes available in their network.
When we enable the store to become a point for pickup or shipping new kinds of constraints come into play – some pros and some cons. Remember our associate who was picking items for an online order when an in-store customer asked them for assistance? That is just the beginning of the complexity a store adds to the fulfillment network. Since stores are not just fulfilling digital orders but are also filling on-demand requests from in-store shoppers, we have to consider that demand when sourcing inventory from that store for other channels or stores.
If the first stage of maturity for an omnichannel retailer is global inventory visibility, the second is constrained inventory availability. Because while you cannot sell what you cannot see, you should not always sell everything you can see. Let us consider one of those complexities that the store introduces. Suppose we have a customer using our online commerce engine and he is shopping for a medium, navy blue crew neck sweater. And also let us suppose he needs gift wrapping and he needs to get the item within one day for a party tomorrow evening. So he has ‘constraints’ that need to be applied to his view of our global inventory so we do not promise him something we cannot deliver. We would not want to simply show him every single blue sweater that fits his need in our network – because if he went to pick it up in a store that had no gift wrapping or we showed it available in a location that could not deliver in time for his party then we going to cause significant frustration and ire in that customer. So, we instead provide a ‘view’ of our global inventory that is filtered, or constrained, by the other requirements in real time to the commerce engine. While this is a simple example there could be many of these ‘views’ created and dynamically delivered to the appropriate channel based on customer need, such as an overnight delivery requirement, or a network impact, such as reduced store labor capacity.
But while a view of inventory corrected for needs and capabilities certainly helps with the commitment to the customer and fulfilling that promise, they do not, necessarily help us determine the most profitable way to deliver on that promise. Remember our example of apparel merchants enabling store pick-up and shipping options and how they struggled with margin degradation?
The third phase of inventory maturity for our omnichannel retailer is, perhaps, the most crucial – real-time inventory sourcing optimization. It is important to offer omnichannel services to our customers in order to compete, and 76% of retail CEOs feel the next 3 years are more critical than the past 50 years. But being able to deliver omnichannel profitably is needed to survive, and only 10% of industry leaders believe they can make a profit while fulfilling omnichannel demand. The reason is because retailers are trying to deliver very complex capabilities with solutions that were designed when 4 or 5 distribution centers was considered sophisticated. The majority of solutions being used today were never designed with omnichannel in mind, and require a tremendous amount of effort, baling wire and scotch tape to pull off; and every one of those appeasements or workarounds erodes profitability.
There is no way for a human to consider the number of constraints required today to determine the most profitable way to source an item, when hundreds of options are available and many of them are active stores serving a local market. In our situation before of limiting the viewable inventory available to that which meets the needs of the customer, after those limits there may still be dozens or hundreds of options that could meet the customer promise of configuration and delivery or pickup time. So how do we decide where to source the item? Heuristic computer problem-solving creates the opportunity to consider thousands of potential options in real-time to determine the most profitable option. Consider our earlier order 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 we are selling blue sweaters in that store (or region) at full price as fast as we can stock them? Do I still want to source from that location? What if in another region we are marking down blue sweaters that we cannot sell on the store floor? Would it be more profitable to source one of those items, pay a slightly higher shipping cost to meet the delivery timeframes and source from the markdown stock? Probably. What if there were 300 other potential combinations of that scenario to consider? Real-time sourcing optimization is fast becoming critical for omnichannel merchants who are trying to maximize their margins and deliver on their customer promises.
For retailers who are interested in delivering on their omnichannel promises profitably, Manhattan Associates is pleased to offer Manhattan Active Omni, the most sophisticated and technologically advanced ordering, optimization and engagement platform ever created for the retail industry. Cloud-native, 100% constructed with micro-services, and SaaS delivery, Manhattan Active Omni was designed from the ground up with omnichannel in mind. And with Enterprise Inventory for global inventory visibility, Available to Commerce for dynamic views of inventory in real-time, to Adaptive Network Fulfillment, providing real-time sourcing optimization along with integrated Store Inventory and Fulfillment tools, all in a single platform, Manhattan can help you take your omnichannel promises to the next level, profitably. To learn more about Manhattan ActiveTM Omni and all the solutions please visit us on the web or schedule a demonstration today.