Courtesy of the e-commerce and click-and-collect boom during Covid-19, omnichannel fulfillment has never been more imperative for retailers. But getting inventory management right in an increasingly cross-channel world requires real-time visibility. In the fourth quarter of 2020, e-commerce sales were up 32 percent year-over-year, according to data from the U.S. Department of Commerce. And it wasn’t just direct-to-consumer shipments that climbed. Buy online, pick up in store (BOPIS) had been growing even before Covid, but safety concerns related to going inside stores caused the curbside fulfillment model to surge.
“One thing we saw with the global pandemic was that retailers reacted very fast to change in the retail environment and swiftly developed new fulfillment capabilities to continue to serve their customers,” said Simone Peinkofer, assistant professor in the Department of Supply Chain Management at Michigan State University. “Establishing processes and infrastructures that allow for flexibility and can be reconfigured to evolving fulfillment options will be key.”
Even before the pandemic, delivery timelines were speeding up, necessitating fulfillment that is closer to the consumer. Ken Morris, managing partner at Cambridge Retail Advisors, says that many of his clients are shipping upwards of 75 percent of their digital orders from nearby stores instead of centralized fulfillment centers.
Although omnichannel has been retail’s aspiration for years, most merchants are still running legacy systems that manage bricks and clicks separately. Michael Ryba, partner and director at Boston Consulting Group, noted that when retailers began selling on-line, they realized that their legacy tech stack couldn’t handle the e-commerce business. Instead of migrating everything over to new systems, they attached dedicated e-commerce stacks to their existing enterprise resource planning (ERP) systems—a work-around that was expedient but limiting.
“We’ve got to become dramatically better at predicting demand.” — Kasey Lobaugh, Deloitte Consulting
“You end up with two distinct views of inventory, meaning you have one stack with e-commerce and whatever inventory dedicated to e-commerce, then you have a parallel stack for the core retail business,” said Ryba. “They don’t talk to one another. Because if you want them to be integrated or talk, you need either a system integration or complex interface.”
This lack of communication is compounded by delays in inventory information. “Almost every retailer today is working with yesterday’s data,” said Morris. “Most people update their inventory nightly, which means that their inventory is not accurate.” To make up for the one-day delay in getting actual numbers, these retailers subtract a certain number from their inventory figures to estimate the current figures. With this lack of real-time visibility, they end up buying more inventory than they need to guard against stockouts. This could leave them with up to 20 percent excess inventory that needs to be discounted at the end of the season.
Aside from the potential erosion of margins due to surplus or safety stock, this delay in inventory pulses creates hurdles in fulfillment. When an online order comes in, a retailer’s systems need to decide whether to fulfill from a distribution center or a brick-and-mortar store. For instance, a two-day delivery might come from a centralized distribution facility, while a nearby store could be chosen to push out a same-day order.
Since inventory levels can change dramatically in mere hours, the data can quickly become out of date. For instance, the system might say that a store has multiple units of a SKU in a particular size and color. If an associate goes to pick that item and it’s not there on the store shelf, this means that the order has to be rerouted to another fulfillment channel—which could make it late—or the purchase might be cancelled.
To create an accurate real-time view of merchandise, retailers could use tracking technology such as RFID. “RFID tags are license plates that track merchandise, much like your car on a toll road, as it makes its way from manufacturer to your door,” said Morris. “Merchandise is tracked entering a distribution center, to the store back room, to the store floor, to the dressing rooms, through the register and out the door. You know what you have, where it is, what is being stolen and even what is returned.”
Precise planning
Visibility is one piece of the puzzle for unified inventory, but another element needed to improve omnichannel fulfillment is more accurate forecasting.
According to Kasey Lobaugh, principal at Deloitte Consulting, fulfilling online orders from stores is a sign that a retailer did not effectively gauge demand. “When somebody buys something online and it gets shipped from the store, the reason we’re doing that is because we’ve got the wrong product in the wrong place,” he said. “We’ve got to become dramatically better at predicting demand.”
Improving planning includes delaying channel-specific decision making. Using the analogy of streams, Lobaugh noted that the current omnichannel model includes two separate rivers of inventory that flow to either the direct-to-consumer or brick-and- mortar channel. Once one of these streams is dried up—or a channel has a stockout— then the order will be fulfilled from the other channel. This is an improvement on the previous model, in which an out-of-stock item couldn’t be fulfilled from another channel, but Lobaugh considers this version of omni- channel retail to be a “Band-Aid.”
In an ideal scenario, he says, a retailer would have “one river that flowed as far downstream as you could possibly get, and only at the last moment would you make decisions about how to deploy that inventory to the right destination.” This delayed differentiation model could have helped retailers avoid their inventory issues during store closures early in the pandemic. As locations suddenly shuttered, apparel and footwear sat in stores, while online shopping continued.
Aside from guarding against spikes or dips in demand, avoiding sending inventory to the wrong channel improves cost efficiency. Picking and packing from a sales floor can tack on costs to fulfillment compared to sending direct-to-consumer shipments from a warehouse, since a retailer is paying to have items folded or hung on fixtures and then paying again to have them pulled and packaged up for an online customer.
To get better at predicting demand, retailers should change what data they are consulting. One Deloitte client was forecasting for an apparel category by looking at weather and past sales. When Deloitte analyzed these figures against performance, there was little correlation between sales and this data. Instead, information such as consumers’ employment status, life events and their spend with competitors could tell retailers more about expected demand.
“Traditionally, these decisions were driven by humans with big spreadsheets, with very little real-time data that would drive their decision-making,” Lobaugh said. “They’d have a lot of historical data and they might group a bunch of stores into four or five collections of stores and then kind of treat them all the same. But today you can be so much more precision oriented.”
“Companies need to carefully evaluate which inventory strategy fits best to their business model.” — Simone Peinkofer, Michigan State University
There are also opportunities to automate more of the decision-making. “Now we have omnichannel buying teams, but the next step as we really start to pursue data science to make these decisions is how far down that path of removing humans from those decisions can we get,” said Lobaugh.
Along with enhanced forecasting, Ryba suggests retailers adopt a distributed order management (DOM) system. This can automate the math of fulfillment, choosing the ideal channel for a particular shopping cart based on a combination of costs and time.
Driving efficiency
By leveraging existing distribution centers or stores, retailers can make these facilities more productive. “This could translate into a more efficient use of their established workforce since more volume could be processed through a fixed-cost facility,” said Peinkofer. “Most importantly, retailers should see lower inventory levels in their network, which will translate into additional cost savings.”
In the past, when e-commerce was a small portion of a retailer’s total sales, companies could have store associates pick online orders quickly at the beginning or end of their shift, but this has changed. “At the moment, e-commerce revenue exceeds about 10 percent of a store revenue, then it starts to dramatically impact labor scheduling and it’s impacting the customer experience, because you have associates walking the aisles and basically clogging the aisles with carts and bags to fill orders for consumers,” said Ryba.
One option to improve efficiency is creating a mini distribution center in a store’s back of house. Here, workers could fulfill orders for online purchases off the sales floor. Ryba explained that for frequently replenished items that typically have a lot of stock, merchants could hold some inventory in the back for online orders. However, some items that have smaller quantities will likely need to be merchandised on the sales floor.
Automation and technology can also help make fulfillment more efficient. For instance, Ryba pointed to software used in grocery stores that sends associates’ carts multiple orders to pick at the same time and provides them with an optimal route to cut down delivery travel time.
With any system overhaul, there are costs involved. “Companies need to carefully evaluate which inventory strategy fits best to their business model,” said Peinkofer. “Changing an inventory strategy is not an easy task and often involves significant financial investments for example, so there is a trade-off.”
In addition to financial investment, establishing a truly omnichannel supply chain can require a cultural shift.
“Even though the term omnichannel has been around for a while, in practice, you still have dedicated groups and you could have misaligned practices between core retail and e-commerce,” said Ryba. “It’s a challenge from a change management standpoint to teach both sides how to work together in a unified manner.”
This article was featured in our Inventory Management report. To download the full report, click here.