The problem can be stated as follows: How to best use inventory in an Omni Channel environment to maximize order fulfillment whilst minimizing end of life or obsolete inventory as well as working capital investment.
What characterizes an omni-channel business environment? Over the last few years the transition from single channel shopping to omni-channel environment has transformed the retail and brand industry. In an omni-channel business environment all components of customer interaction and selling activities are integrated and networked; that is the main characteristics of an omni-channel. This transition came at the same time as a decline in customer loyalty for a brand and a preferred channel, and many retailers and brand companies are now struggling with the retention of customers and their loyalty. The cost difference between customer acquisition and customer retention can be a factor of 3 to 5. If the product is not available, the risk of losing the sale to another brand is much higher in today’s competitive landscape than in a traditional retail environments, where it was easy to substitute due to the fact that a customer was captive in a single channel!
As a consequence, having inventory at the right place to rapidly fulfill demand is of paramount importance in an omni-channel environment in order to protect sales and customer loyalty and hence customer retention. We will deal with the customer retention issue below.
An Omni Channel Business Architecture
Before we start tackling problem of flexible inventory, let us briefly first review the basic business architecture required in an omni-channel business environment. The business architecture contains 4 layers:
- Channel User: In order to allow anyone access from anywhere, a customer needs to be connected to the sales platform, enabling basic connectivity through any device, service or media.
- Sales Platform: The experience of a customer through his/her journey is of paramount importance. Hence the way customer information, content for the customer, merchandise information related to products desired or substitutions available as well as handling the ordering process efficiently is the task of the sales platform layer. The attention and patience span of a customer is short, particularly in today’s competitive world. Providing fast, accurate and relevant information to the customer is therefore a key success factor.
- Resources: Resource provide key information in 2 directions. First, to service the sales platform with relevant customer, operations and product information. Second, it provides the entry point into the supply chain layer to ensure both product availability and perfect order fulfillment.
- Supply Chain: The key component to ensure product availability is inventory planning and management. This combined with transport and warehouse management provides the basis for perfect order fulfillment.
Perfect Product Availability and Order Fulfilment
The key to responsiveness and perfect order fulfillment is to plan and use the network inventory to fulfill customer demand anywhere and everywhere. Many networks protect inventory by way of ringfencing, either at the sales channel level or even deeper down at sales contract level. This however, flies in the face of flexibility.
Flexibility can be introduced into the inventory network through various means, each of them a layer of protection against lost sales:
- Use inventory in the last mile, either in the store network or to establish stores as mini-hubs thus guaranteeing short lead times and exploiting the natural over- and understock situations in the store network
- Use ringfenced inventory in a DC. Opening rigid ringfencing mechanisms such as sales contracts can be replaced by more dynamic mechanism such as virtual warehouses, with using reallocation on a daily basis to rebalance the inventory where needed.
- Allow customer orders to search all stores and DCs and thus allocate inventory to the customer order. Reserve it and provide multiple services to allow order fulfillment, from customer pick-up in store to direct delivery to the customer’s destination of choice.
- The last resort is to include factories in the protection mechanism, either by directing a shipment directly to the customer or by replenishment inventory in the DCs or stores through short lead time programs.
The Customer Journey and the Retention Issue
The customer journey or experience is a focus of this business architecture. Below is an example of one of our projects. There are many factors where a customer journey can be disrupted, we explore only the aspect if there is an issue when inventory is not in place to fulfill the customer request.
Customer retention is cheaper than customer acquisition. A satisfied customer is more likely to come back for more, hence a customer life cycle contains many order life cycles. In today’s world customers have almost endless choice and the ability to instantly compare products, services and availability; having inventory to protect perfect product availability and order fulfillment is key to retaining a customer. Studies and many of our projects have shown that nothing is more frustrating to a customer than when a product is “greyed” out ie not available. Nothing is more frustrating to the internal service teams if they know, that the product exists in the network, but is protected for another channel or customer. In many cases the product allocated to the customer order, and then replenishment in short lead time is a perfectly reasonable approach.
The role of order management and order management system is the key to the above. Connecting the different channels and fulfillment systems into a closely integrated platform.
Adding more Choices for the Customer
Two factors are putting even more pressure onto retailers and brands, as traditional boundaries of borders and channels disappear. More choice stresses the management of inventory in the network even more. We explore 2 trends here, the first is called O2O (online to offline) and the second one is cross border which applies in particular to markets such as China.
- O2O (online to offline): Opening up all inventory to the online or offline customer request needs to go hand in hand with the strict reservation policy and mechanism of inventory protection in the source location and the ability to protect order fulfilment from anywhere. The two biggest issues are the reservation mechanism and the internal financial compensation. The former must guarantee that the inventory is not used for something else. The later must guarantee that the store financial target is not negatively impacted by sales of its inventory to online customers.
- Cross border e-commerce: These models are used in the China market and many of the issues discussed above apply to these models. Inventory becomes easily ringfenced in these relationships and set-ups. Contractual obligations and the low risk approach by both ecommerce and trading partners to inventory pose a significant risk to the brands with regards to obsolete inventory and lost sales.
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