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Optimizing Your Supply Chain for Omnichannel Retail

I had the pleasure of attending the annual Council of Supply Chain Management Professionals (CSCMP) EDGE Conference in Nashville last week. While there, I was interested to see how often the word “omnichannel” was popping up. Being a frequent attendee of retail conferences, the topic has died off a little as omnichannel retail has lost its buzzword status – it’s table stakes to remain relevant in the modern customer-centric retail environment.

Retailers have realized a very powerful tool at their disposal when building out their reach – their stores. Stores are no longer only for selling, they serve as mini-distribution centers or pickup points for customers that are ordering online or from other stores. Buy online, pick up in store (BOPIS) has taken off as of late as 69% of customers will purchase more when in store to pick up an online purchase. Pairing that with ship from store (SFS) functionality, and retailers have effectively enabled a customer to have access to every item in their inventory regardless of purchase point.

What I heard at EDGE though was that while the distribution and fulfillment side of omnichannel retail is a long road, most retailers have gotten through that gate and are now working internally to optimize their supply chains to support the new omnichannel business. This is a big challenge for companies, so I sat down with Scott Shaw, Supply Chain Services Leader at Clarkston Consulting, and asked him a few questions about 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 greater flexibility for your customer, but it 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.

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 relies on understanding what your customer will want. This is typically based on a statistical forecast, which uses historical demand and sophisticated algorithms to project future demand. The challenge that omnichannel brings is now multiple demand streams need to be managed. While many retailers have designed and implemented fulfillment procedures to meet this demand, 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. Again, fantastic, because you still make the sale. However, if you record the demand history based on where it is shipped from, you’ve overreported the demand at that location, 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 with 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.

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. Comparing this data to your already-created forecasts can tell you when actual demand differs from what you projected. Having demand sensing systems and processes 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 typically meant regional DCs 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 be agile enough to ship between those locations 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 customers’ demand.

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Coauthor and contributions by Scott Shaw

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