Omnichannel navigator

The advent of omnichannel commerce is changing almost every aspect of how retailers serve their customers—from the way they take customers' orders to how and when they fill and deliver those orders.

Omnichannel commerce refers to retailers' efforts to seamlessly integrate their store and e-commerce selling channels. By doing so, they enable customers to shop by any channel they choose and even use more than one channel to execute a single transaction. As retailers begin to simultaneously serve the Internet, catalog, and store sales channels, some are discovering that they must change their distribution operations to meet the unique supply chain challenges associated with that strategy.

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Among the supply chain professionals who have successfully navigated those challenges is Kerry W. Coin. To restart his consulting practice, Coin retired from his position as senior vice president and chief logistics officer at Ann Inc. While at Ann Inc., a U.S. $2.5 billion fashion retailer operating more than 1,000 stores under the Ann Taylor and Loft brands, he worked on the development of a supply chain strategy for serving four retail store channels and two e-commerce sites.

Coin has a broad background in supply chain management. Over the course of his career he has worked in apparel, retail food services, consumer products, and management consulting. His consulting firm, The Kerma Group LLC, is dedicated to helping clients in the retail sector.

In a recent interview with Editor James Cooke, Coin discussed some of the issues facing retailers when they get into omnichannel commerce, and how they can adapt their supply chains to support an omnichannel strategy.

Why are so many retailers pursuing an omnichannel commerce strategy these days?

One of the largest investments any retailer makes is product inventory. However, no matter how adept its planners 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, which 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 provides 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 is a true customer-centric strategy that facilitates a win-win relationship between the retailer and its customer.

What changes must a distribution center (DC) make to its operations to serve both brick-and-mortar stores and online orders?
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—brick and mortar stores, Internet, and catalogue. 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 seasonal stores is to migrate from a primarily "100-percent push" model 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 basic 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. They maintain that this approach can mitigate the rapid growth in direct-to-consumer fulfillment. Although I can't see how to make that work out financially, there are indeed some real benefits to this approach other than those mentioned above. 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 replenishment inventory as well.

What changes do retail stores have to make in their operations in order to pick items off the shelf to fill online orders?
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, which allow them to source the item from an alternative 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.

Does an omnichannel strategy require a retailer to work differently with its suppliers? If so, how?
Typically, there are a few strategic supply chain partners that need to be fully engaged in the retailer's omnichannel initiative. As described above, the parcel partner is integral to the effectiveness of the retailer's initiative. Similarly, on the software side, a few providers have emerged as leaders in the management of brokering and parsing orders to fulfillment locations. The near real-time availability of inventory by location being so essential, your systems integration partner—and, of course, your internal information technology team—will undoubtedly be called upon to help work through the synchronization of inventory views across the store and DC locations. If you utilize third- party logistics partners as part of your current fulfillment solution, they, too will need a seat at the table, as omnichannel will impact their operations, particularly where reverse logistics is concerned.

How do distributed order management systems help retailers gain inventory visibility? Are there any drawbacks to using this type of software?
The visibility to and management of cross-network inventory is essential to a successful omnichannel effort in a multiunit retailing network. Whether this capability is accomplished via purchased software or internally developed applications, it is a necessity.

I've always looked at the distributed order management application as a "user" of one's cross-channel inventory management application. Historically, multiunit retailers have had separate inventory management systems and practices, which for accuracy's sake are specific to the channel requirements. For instance, in the Internet channel, SKU-level, real-time accuracy is an absolute requirement for fulfilling a customer order, and systems and processes have evolved that routinely assure accuracy in excess of 99 percent. Not so in the retail store environment, where accuracy at the SKU level is far, far lower.

So, the dilemma comes when a retailer believes that there is inventory available at a location and it is not—or, just as bad, thinks there is no inventory and there is. This is one of the major reasons for the renewed interest in radio frequency identification (RFID) technology for retail locations. Retailers simply cannot rely on semiannual or annual physical inventories as the assurance of inventory availability in an omnichannel world.

And, a word of caution here: Please begin this journey with the end in mind. That is, carefully plan how to address the overall cross-channel inventory and order management requirements of an omnichannel strategy up front. This is not one of those initiatives you should undertake with a piecemeal design.

Can retail store workers be expected to fill orders with the same degree of accuracy as distribution center workers? Can store picking ever achieve "perfect order" metrics?
I may be a bit of a contrarian here. Those of us in supply chain operations frequently underestimate the abilities of store workers. Given the proper positioning of the initiative or customer focus; well thought-out processes such as scan and pack validation; incentives such as labor hours and bonus considerations; and training, store workers can certainly fulfill orders as accurately as DC staff—but not necessarily as cost-effectively.

How do you think retailers will handle same-day delivery for online orders?
Personally, I don't see the same-day delivery requirement as being as important as do some others in retailing. Of course, most of my experience is in the branded specialty retail sector, where seasonal allotment of inventory may preclude the feasibility of this capability.

What advice would you give a supply chain executive who has been assigned to set up an omnichannel strategy?
My advice would be, first and foremost, to make sure your entire executive leadership is aligned on the importance and necessity of the initiative. This starts with the chief executive officer (CEO), whose vision and support is essential. Given support from the top, make sure the initiative has the proper governance. Rigorous and candid project management through your project management office is a must. Since an omnichannel program by its very nature touches almost every functional area of the enterprise, a senior executive steering committee is a necessity. The project team must be built from the "best and brightest" from your supply chain operation, information technology group, store operations, change management organization, Internet operations, finance, and those key partners described above.

Of course, any initiative of this size and scope is best implemented incrementally, via a series of pilot projects before full rollout. It's always best to validate the business impacts of these sorts of strategic initiatives, and to confirm and refine plans based on the real-world impact of just how all the moving parts align. Experienced, outside support can be helpful.