Omni-Channel Profitability Through Inventory Optimization

Fenwick on Omni-channel ProfitabilityThe challenges involved in achieving omni-channel profitability are not new. By now, the difficulties of executing on the omni-channel retail promise are well-known, as is the importance of delivering on this promise for consumers whose demands continue to rise. E-commerce advances, both in terms of market share and technology, have created the expectation that consumers can receive their purchases when and how they want them, no matter what they’re after – “out of stock” is an unacceptable concept. In today’s shopping environment, a retailer’s ability to deliver a true omni-channel experience is becoming a differentiator, and as the industry continues to advance, this ability will make or break a retailer’s chance at survival.

For shoppers – and employees for that matter – an omni-channel retail experience means access to a retailer’s entire network of inventory, no matter how they choose to engage with the brand. Customers want what they want, when they want, how they want, and they expect their retailer to deliver. From a retailer’s perspective, delivering on the concept of omni-channel means breaking down the silos of brick and mortar versus e-commerce to offer one pool of accessible inventory across the network. So, no matter where the product is located, it can be delivered to the customer expediently. While this creates advantages for the customers and increases online conversions, it presents an immense inventory challenge for retailers, and it completely changes the fundamentals they’ve relied on for inventory management.

The Way it Was

For decades, retailers have focused on multi-echelon inventory optimization (MEIO) as a way to squeeze every bit of inventory out of the network while maintaining high levels of customer service. With the advent of omni-channel retail, however, those who plan and buy the inventory are often left blind to how it’s ultimately being used across the network. The introduction of new services such as “ship from store” or “buy online, pick up in-store” are having a significant impact on the demands of store inventory – and these services show no signs of going away. In fact, at the most innovative retailers, the list of “omni” services available to customers continues to grow. In short, as fulfillment needs continue to change, retailers’ approach to optimizing their inventory must also evolve. Enter omni-channel inventory optimization (OIO).

The Way Forward

It’s a given that retailers want to make their inventory investments as productive as possible; they don’t want to fall short and disappoint customers, but they also don’t want to overbuy and get stuck with a surplus. Omni-channel inventory optimization offers an evolutionary new approach to inventory optimization by accommodating for the complexity brought by the myriad purchasing and fulfillment methods available to today’s shoppers. This approach takes advantage of network inventory, channel-specific demand patterns, and inventory strategies to better deploy assets across the enterprise and improve a retailer’s total return on inventory investments.

Omni-channel inventory optimization is critical because it aligns forecasting and replenishment objectives with the retailer’s omni fulfillment strategies, enabling inventory levels to be better tuned based on all the new ways it will be leveraged across selling experiences. This provides retailers insight into what demand is forecasted to sell via e-commerce versus demand from brick and mortar, even if those sales draw from the same physical pool of inventory. This intelligence is important because inventory demand simply isn’t the same across channels – each could have its own seasonality, trend, frequency, promotions, etc. Planning for demand across an entire network, therefore, yields inaccurate results, which means retailers are more likely to either face an inventory deficit or surplus, negatively impacting service levels and/or profitability.

Another key to omni-channel inventory optimization is the ability to fine-tune inventory strategies for each selling channel. Inventory investments made to protect the consumer from variability in the supply chain, i.e. safety stock, tend to represent a large portion of working capital invested in inventory. The ability to set differentiated service level targets by selling channel allows retailers to align their propensity for risking an out of stock situation with the omni customer experience they are attempting to provide. For example, if a customer walks into a store and can’t find the item they’d hoped to buy, the retailer has likely lost that sale and possibly a loyal customer. If, however, the e-commerce warehouse is out of the same item, an omni-channel enabled retailer could have numerous ways to fulfill an online order and prevent a negative customer experience. Being able to tune inventory strategies based on these insights into the retailer’s fulfillment capabilities represents opportunities for significant savings for the retailer practicing omni-channel inventory optimization.

Avoiding Omni-Channel Risk 

For retailers looking to achieve a profitable omni-channel operation, inventory optimization is a critical component. Large nationwide enterprises, as well as smaller brands looking to expand fulfillment offerings, must gain a firm grasp on inventory needs across channels if they hope to deliver the coveted omni-channel experience. Those that aren’t making omni-channel inventory optimization investments can jeopardize the success of an overall omni-channel program.

For example, if a company implements “buy online, pick up in-store” as a new delivery option without considering the impact it will have on its inventory across locations, it could negatively affect its normal walk-in customers. Conversely, without channel specific insight, retailers might be investing in more inventory than is necessary to make new programs like these work, which can also result in financial losses. The addition of omni-channel inventory optimization as part of larger inventory management strategies helps negate these risks and sets retailers up for true omni-channel success.

As retail continues to evolve, the pressure to deliver on customer expectations and demands regardless of channel grows ever greater. To win in this environment, retailers must have a fundamental understanding of how their inventory is being used and sold across channels. A unit of inventory sitting on a store shelf is not just for the store anymore, and thinking about it from this dated perspective prevents true omni-channel – and ultimately true retail – success. The rules are changing, and retailers who aren’t taking an omni view of inventory are not only behind, they risk missing out on long-term success in today’s highly-competitive, ultra-complex retail world.

Scott Fenwick is a Senior Director of Product Strategy at Manhattan Associates and has been with the company for over 21 years. Scott has direct responsibility for Manhattan’s Inventory solutions. This includes Demand Forecasting, Replenishment, Planning and Sales & Operations Planning. Scott has responsibility for establishing and executing product strategy and go-to-market plans for Manhattan’s Inventory portfolio. Prior to Manhattan, Scott held senior technical roles at Sara Lee Corporation and Amerisource Drug Corporation.

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