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Optimizing Your Supply Chain for Omnichannel Retail

Contributors: Scott Shaw David Patterson

Omnichannel in the retail industry has evolved significantly since 2019 when we first featured this piece. Today, we’re revisiting these discussion questions with an updated perspective from Scott Shaw, principal consultant and supply chain services leader, on how retailers can better optimize their supply chains when moving to an omnichannel world.  

Once retailers get omnichannel fulfillment in place, what are some of the big considerations or impacts to the supply chain that they should be focusing on?

Omnichannel brings retailers broader reach and offers different ways of connecting and building relationships with your customers. It also gives your customer more flexibility in how they shop. But this flexibility brings complexity to your business as well. It’s important to structure your systems, processes, and supply networks in a way that lets you leverage the advantages that omnichannel retail brings while managing the additional complexity. Three areas that retailers should be focusing on are demand planning, demand sensing, and their overall inventory strategy.

And while this discussion focuses on retailers, manufacturers expanding their omnichannel capabilities have some of the same opportunities and challenges, although the solutions may differ. For example, manufacturers will need to focus more on logistical capabilities at distribution centers (DCs) to be able to manage parcel shipments. This presents very different operational requirements both in terms of picking and packing and in terms of carrier scheduling from shipping truckloads of pallets to retailers.

Demand planning is all about having the right product in the right place at the right time. What do supply chain leaders need to do differently when they move to omnichannel retail?

Demand planning is about predicting what your customer will want. This is traditionally based on a statistical forecast, which uses sophisticated algorithms to analyze historical demand and use that to extrapolate future sales. The challenge that omnichannel brings is now multiple demand streams need to be managed. While many retailers have designed and implemented fulfillment processes to meet this demand and deliver product where the customer wants it, capturing the demand for forecasting and analytical purposes is a different story. It’s important to capture both the item being requested but also the source of the demand.

Capturing the item requested means understanding what the customer originally wanted to buy. If your customer substitutes a similar item because that’s what you have in stock, you still make a sale, which is great – but the demand for the original item is unfulfilled. Likewise, if your customer goes to a store for an item and finds that it’s out of stock, your omnichannel fulfillment processes may enable you to ship it from another store or from a DC directly to the shopper’s home. Again, fantastic, because you still make the sale. However, if you record the demand history based on where it’s shipped from, you’ve overreported the demand for that location or delivery channel, and underreported the demand at the store that the customer visited. If you use the substitute item or the substitute location as historical input to your statistical forecast, you’ll end up with a forecast that predicts more of what the customer didn’t ask for, and less of what they did. It’s important to have a mechanism to capture what the customer really wanted – and where they wanted it – in order to create a better statistical forecast for the future.

Analysis of volume spikes of adjacent products when certain items are out of stock can indicate potentially missed demand. Website analytics can also provide significant benefits here – for example, reviewing traffic trends on the product display page and analyzing abandoned shopping carts can yield insights on what the customer was looking for when they didn’t actually purchase.

You mentioned demand sensing as another area of focus. What can companies be doing in this area to best handle omnichannel?

Omnichannel can bring a wealth of information that can improve demand plans. POS data and website searches can provide near real-time information on what your customer is looking for. Other inputs – like social media, feedback on advertising campaigns, even weather forecasts – can be used to refine near-term demand plans. Comparing this data to your already-created forecasts can tell you when actual demand is likely to differ from what you projected. Having demand-sensing solutions that can rapidly identify these differences, determine their significance, and recommend changes to your replenishment plans can help your top-line by getting the right product to the right place at the right time to support demand and also help your bottom-line by limiting product that might go unsold.

Omnichannel retail impacts the overall inventory strategy – but in what ways?

Traditionally, inventory is kept where it has the most flexibility and still meets customer demand. This has often meant regional DCs that are close enough to retail locations to replenish on a regular basis. That way, inventory doesn’t get stranded at some stores, while other stores run out of stock.

With the flexibility of omnichannel retail, however, it’s important to reconsider the design of your supply network. In some cases, it might be better to keep inventory at retail locations and develop agile solutions to ship between those locations (or direct to consumers) as demand dictates – limiting (or eliminating) stock held at regional DCs. In other cases, more frequent replenishments from DCs – and reverse logistics to take back unsold product – might be called for. In all cases, the increased velocity and variability of demand in an omnichannel retail world should push you to ensure your supply network is lean and agile enough to meet your consumers’ demand.

It’s also important to consider returns as part of the end-to-end omnichannel experience. Retailers need to make the returns process as simple and frictionless as possible for their shoppers. This means:

  • Enabling in-store returns, including products that aren’t sold or stocked at that particular store, because the store closest to the customer may not be where the product was purchased
  • Providing easy shipment options for the customer, like printable or pre-printed package labels as well as package pick-up/drop-off options
  • Parcel receipt capabilities at DCs, so that returns shipments can be received, assessed, and processed appropriately

Navigating the Omnichannel Retail Journey

Bridging the various divides among sales channels is no simple task. While technology platforms have made great strides in recent years to allow retailers to fast-track execution of omni strategies, it’s important to evaluate all operational impacts to the organization. Strategies to optimize the entire supply chain remain paramount for those retailers and manufacturers looking to create frictionless omnichannel experiences for their consumers. Regardless of where your organization is in your omnichannel journey, Clarkston’s team of seasoned retail experts is available to help.

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Tags: Logistics Consulting, Retail Planning and Execution, Specialty Retail