Omnichannel commerce is changing almost every aspect of how retailers serve their customers—from the way they take orders to how and when they fill and deliver those orders. Omnichannel commerce refers to retailers' efforts to seamlessly integrate their store and e-commerce selling channels. As retailers begin to simultaneously serve Internet, catalog, and store sales channels, some are discovering that there are unique supply chain challenges associated with that strategy.
Among the supply chain professionals who have successfully navigated those challenges is consultant Kerry W. Coin, who recently retired from his position as senior vice president and chief logistics officer at Ann Inc., a $2.5 billion fashion retailer operating more than 1,000 stores under the Ann Taylor and Loft brands. While there, he helped develop a strategy for serving four retail store channels and two e-commerce sites.
Coin has a broad background, having worked in apparel, retail food services, consumer products, and management consulting. Today, he serves as a principal of The Kerma Group LLC, a consulting firm that works with clients in the retail sector. In an interview with Editor at Large James Cooke, he discussed some of the supply chain issues retailers face when they become involved in omnichannel commerce.
Q: Why are so many retailers pursuing an omnichannel commerce strategy these days?
A: One of the largest investments retailers make is product inventory. However, no matter how adept they are at planning and allocating this investment across the various points of sale, they will be wrong. Consequently, they will have too much at location A and not enough at location B, which causes two basic issues: First, a customer will be frustrated, and second, a sale will be lost. Omnichannel can serve as a "safety net," mitigating the risk of allocation error because it lets retailers service cross-channel demand from any source of inventory.
All inventory will be sold sooner or later, albeit at a successive series of markdowns that erode margin. Given the fact that in many businesses, a single percentage of margin can more than cover the cost of shipping and processing, omnichannel offers a means by which a retailer can provide the best possible service at the best possible margin.
The omnichannel strategy becomes even more compelling when you add improvements to customer service to these inventory management and margin benefits. The ability for a customer to buy anywhere and have product delivered anywhere or picked up in a store ... facilitates a win-win relationship between the retailer and its customer.
Q: How must a distribution center change its operations to serve both brick-and-mortar stores and online orders?
A: Depending upon a particular retailer's strategy for implementing omnichannel, a DC may not need to make many, if any, changes. However, many retailers have not yet begun to balance inventory availability across selling channels—stores, Internet, and catalog. Consequently, the migration to an omnichannel capability may highlight the need for a different cross-channel allocation of the retailer's inventory investment.
One approach gaining favor among retailers with seasonal stores is to migrate to more of a demand replenishment model, where some percentage of seasonal product is held back for secondary allocations based upon local store or Internet demand during the season. The key question here regards inventory held at the DC for Internet sales. Since this channel is growing so much faster than the other sales channels, and it is less costly to fulfill a customer order from a DC than from a store, it may be tempting to allocate more inventory to this channel at the risk of cannibalizing store inventory to the point of diminishing store-level selections.
Some smart people have argued for a reduction in DC capacity by effectively replacing the traditional DC with a number of expanded brick-and-mortar stores equipped to service local demand for omnichannel orders. Although I can't see how to make that work out financially, there are indeed some benefits to this approach. For example, parcel carriers can provide one- to two-day delivery to 97 percent of the U.S. population with as few as four well-placed fulfillment nodes. These nodes could be used to service retail locations more promptly with replenishment inventory as well.
Q: What changes do retail stores have to make in their operations in order to pick items off the shelf to fill online orders?
A: Most retailers will need to reorient and train their hourly staff on a new set of operating procedures and systems. There will need to be a change in the processes utilized to accept an order and to assure the inventory is indeed available to fulfill the customer's order. This is the hardest part, operationally, of meeting the commitment to the customer. Retail store-level inventory accuracy is notoriously low due to a number of factors. Consequently, the inventory management system may indicate the SKU (stock-keeping unit) is available at a store when it is not actually available or may not easily be located at the store. In these cases, the retailer must have triage processes that allow it to source the item from an alternate location.
Given even a modicum of success, there will need to be dedicated space for staging, packing, and labeling orders for shipment. Arrangements need to be made with parcel carriers to have systemic capability for processing moderate to large volumes of parcels and for reliable pickup times.
Q: How do distributed order management systems help retailers gain inventory visibility?
A: The visibility to and management of cross-network inventory is essential to a successful omnichannel effort in a multiunit retailing network. Whether this capability is accomplished via purchased or internally developed software, it is a necessity.
Historically, multiunit retailers have had separate inventory management systems and practices, which for accuracy's sake are specific to the channel requirements. For instance, in the Internet channel, SKU-level real-time accuracy is an absolute requirement for fulfilling a customer order, and systems and processes have evolved that routinely assure accuracy in excess of 99 percent. Not so in the retail store environment, where accuracy at the SKU level is far, far lower.
So, the dilemma comes when a retailer believes there is inventory available at a location and it is not—or, just as bad, thinks there is no inventory and there is. This is one reason for the renewed interest in radio-frequency identification (RFID) technology for retail locations. Retailers cannot rely on semiannual or annual physical inventories as the assurance of inventory availability in an omnichannel world.
Q: Can retail store workers be expected to fill orders with the same degree of accuracy as distribution center workers?
A: I may be a bit of a contrarian here. Those of us in supply chain operations frequently underestimate store workers' abilities. Given the proper positioning of the initiative or customer focus, well-thought-out processes such as scan and pack validation, incentives, and training, store workers can fulfill orders as accurately as DC staff—but not necessarily as cost-effectively.
Q: What advice would you give a supply chain executive who has been assigned to set up an omnichannel strategy?
A: My advice would be, first and foremost, to make sure your entire executive leadership is aligned on the importance and necessity of the initiative. Make sure the initiative has the proper governance. Rigorous and candid project management is a must. Since an omnichannel program by its very nature touches almost every functional area of the enterprise, a senior executive steering committee is a necessity. The project team must be built from the "best and brightest" from your supply chain operation, information technology group, store operations, change management organization, Internet operations, finance, and supply chain partners.
Any initiative of this size and scope is best implemented incrementally, via a series of pilot projects before full rollout. It's always best to validate the business impacts of these sorts of strategic initiatives, and to confirm and refine plans based on the real-world impact of how all the moving parts align.
Editor's note: This interview has been condensed. Click here to read the full conversation.
This story first appeared in the Quarter 1/2014 edition of CSCMP's Supply Chain Quarterly, a journal of thought leadership for the supply chain management profession and a sister publication to AGiLE Business Media's DC Velocity. Readers can obtain a subscription by joining the Council of Supply Chain Management Professionals (whose membership dues include the Quarterly's subscription fee). Subscriptions are also available to nonmembers for $34.95 (digital) or $89 a year (print). For more information, visit www.SupplyChainQuarterly.com.