Complexity in Managing OmniChannel Inventory for Retailers

What's selling where?

For years retailers have invested in systems that answer the question “what’s selling where”. Based on the above answer they would forecast future demand and would make (or buy) just enough products and stock them at stores so that they maximize sales, while keeping the carrying costs low.

Over time, with more data and better availability of advanced analytics, they invested in advanced inventory optimization solutions that operated in a context where demand was generated at stores and product movements were made from vendors to warehouses to physical stores to ensure availability of products to end customers.

Advent of Online Retail.

It happened gradually over the last decade, but specifically exasperated over the last 2-3 years.

When online as a channel started getting few orders (but not large enough to worry anyone), the first approach taken by retailers was not to disrupt existing supply chain systems and set up an independent channel.

A natural investment here was in an online website and an order fulfilment system with order fulfilled from one (or few) central warehouses. The inventory for this ‘online’channel was often carved out separately and operated in all practical purposes like another store.

Things were completely fine, till a time they started feeling the heat of Amazon. It happened gradually over the last decade, but specifically exasperated over the last 2-3 years.

Amazon effect.

Customers can think of a product that they need and have that product delivered to their home within the same day, or within the next day.

As Amazon gained prominence and reach over time, demand started moving online. As more and more orders started moving online, retailers started losing store traffic and competing against Amazon became critical for survival. The last 10% revenue for retail stores is very critical, as that makes or breaks profitability of stores.

Buying online on Amazon also led to significant changes in customer habits. With their focus on customer obsession Amazon has invested in millions of square feet of fulfilment space all around the country to get products to customers faster. Customers can think of a product that they need and have that product delivered to their home within the same day (56% of times) or within the next day (89% of times).

Need for Store Led Fulfilment.

The relevant options to move closer to the customer were to either operating more warehouses or converting existing stores into warehouses.

Retailers very quickly realized that in order to compete and match Amazon’s promise, they need to fulfil orders faster to customers. The relevant options to move closer to the customer were to either operating more warehouses or converting existing stores into warehouses.

The last mile delivery costs in retail are very high. While Amazon can manage these costs at their scale and operate at razor thin margins, retailers found it very hard to operate their own network of warehouses and manage last mile delivery profitably. For retailers that have a large store foot-print, a viable option.

Complexity of Store Wise Fulfilment.

Customers can think of a product that they need and have that product delivered to their home within the same day, or within the next day

With the inventory in stores now catering to both online and offline demands, the inventory problems suddenly changed. Suddenly retailers need to start asking questions like “Where does demand originate from?” and “Where should that demand be fulfilled from?”

While the order was bought online, retailers need to know what happens to inventory when it’s fulfilled in the store. There needs to be a means to make sure there’s enough inventory in the stores to fulfil orders that originate via the website, as well as support foot traffic.

Suddenly, retailers are also deliberating on aspects like:

●      “How do I keep inventory in sync between two different systems”

●      “Do I need to block inventory for a channel or shall I keep the inventory combined”

●      “If my store staff focuses on packing and dispatching online orders, how will that impact service of my retail stores?”

●      “Where is online demand coming from. Are these offline customers or are these new customers?”

●      “I don’t want to run out of stock for walk-in demand, when shall I take the products out from the online website and vice-versa”

Right hand needs to talk to the left hand.

There is only one customer and there is only one inventory which has the sole purpose for fulfilling customer demand.

Retailers can’t operate in silos anymore. There is only one customer and there is only one inventory which has the sole purpose for fulfilling customer demand. At the same time, they can’t maintain poor service levels in both online and offline channels.

The online traffic strategy needs to talk to the inventory placement at stores. Imagine if there is a promotion planned on the website which offers a  20% discount on purchase of 500$ or more in Women’s Footwear which leads to a surge in online demand. If the stores are not beefed up with higher inventory before starting the offer, customers walking in the stores will be seeing empty shelves. Or let’s say due to spike in traffic if the store staff is busy in packing and dispatching online orders, they will not be able to attend offline customers.

Need for understanding the demand origination is also important

The current systems used by retailers are geared to only forecast demand increase or decrease of demand.

The current systems used by retailers are geared to only forecast demand increase or decrease of demand (can be online or offline) using different types of statistical models. They can’t suggest inventory placement strategies based on where the new online demand is originating from. For example, the inventory placement strategy in the following 2 cases will be very different:

●      Case 1: The new online demand is coming from a new customer which you have been able to acquirebecause of online channel (customer farther away from the store, who may not be awalk-in customer)

●      Case 2: The new online demand is converted from offline to online demand. Customer that stays in a nearbyarea.

In the first case, the demand is coming from a new customer acquired and the system should suggest increasing inventory at stores, while in the second case the system should not increase any inventory at the stores.

Need for a New Inventory Optimization System in the Omnichannel paradigm.

...need to optimize inventory placement in the network to cater to both online and offline demand to customer...

The new systems need to optimize inventory placement in the network to cater to both online and offline demand to customers, and ensure the two channels work at minimum service levels. The system needs a better understanding of where the demand is originating from to better align inventory placement.

Needless to say the system objective still remains the same – optimize sales and increase service levels to customers while maximizing system sales.