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 prod- uct 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 season-
al 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 replen-
ishment 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
