| VIEW­POINT

Ralf W. Seifert and Richard Markoff be­lieve that to have an im­mac­u­late omni-chan­nel ex­pe­ri­ence, knowl­edge of in-house in­ven­tory is vi­tal

LogisticsNews Middle East - - Contents -

Omni-chan­nel Eene½ts of ef­fec­tive in­ven­tory sys­tems

The term omni-chan­nel is om­nipresent in re­tail sup­ply chain cir­cles these days. It prom­ises an ex­cit­ing ar­ray of con­sumer choices, but also presents unique chal­lenges to sup­ply chain ex­e­cu­tion. One of these chal­lenges is sur­pris­ingly fun­da­men­tal and pre­dates the ecom­merce era. It is the abil­ity of the sup­ply chain to know the on-shelf avail­abil­ity of the prod­ucts on of­fer. That is to say, how much there is of a given prod­uct on the shelf in the store.

Omni-chan­nel is the term used to de­scribe the in­ter­ac­tion with the con­sumer in a seam­less way be­tween on­line and off­line venues and of­fer­ing mul­ti­ple means through which to ob­tain their pur­chases. It en­velopes on­line or­ders from com­puter or mo­bile app, home de­liv­ery, clickand-col­lect in the store and ship­ping from store lo­ca­tions and is of­ten en­cap­su­lated by the ethos of the con­sumer find­ing the prod­uct ‘any­time, any­place, any­where’.

CON­NECT­ING THE PHYS­I­CAL AND DIG­I­TAL SPA­CES

In or­der for omni-chan­nel to suc­ceed, the re­tailer must have the ca­pa­bil­ity to iden­tify the in­ven­tory lev­els in the ware­house and re­tail net­work and iden­tify the best com­pro­mise of or­der ful­fill­ment cost and prox­im­ity to the con­sumer to sat­isfy the or­der, all with­out caus­ing stock-outs for other con­sumers. In or­der to do this prop­erly, one of the key in­puts is the re­li­a­bil­ity of the on-shelf avail­abil­ity. An omni-chan­nel net­work that re­lies on us­ing stores as lo­calised dis­tri­bu­tion cen­ters needs both the prod­uct re­li­ably on the shelf, and also ac­cu­rate in­for­ma­tion about the in­ven­tory lev­els.

This most ba­sic of fun­da­men­tals has proved elu­sive to re­tail­ers. Ef­fi­cient Con­sumer Re­sponse (ECR) es­ti­mates that on­shelf stocks out in Europe range from 7-10%. With omni-chan­nel de­mand now pulling from the shelf stock, this num­ber will likely rise. The con­se­quences of poor on­shelf avail­abil­ity can be dra­matic. In 2014, Wal­mart es­ti­mated that it was los­ing $3bn in

sales due to empty shelves, driv­ing in­com­ing CEO Doug Mcmil­lon to put OSA im­prove­ment among the re­tail gi­ant’s pri­or­i­ties.

As dam­ag­ing as it can be to have empty shelves, the root cause is of­ten that the store in­ven­tory count is in­cor­rect. The re­tailer does not know the shelf is empty, so they are likely not tak­ing rapid steps to re­solve the prob­lem. And more cru­cially, they are promis­ing the omni-chan­nel con­sumer rapid de­liv­er­ies they can­not hon­our, of­ten based on us­ing stores as satel­lite dis­tri­bu­tion cen­ters.

In its ecom­merce bat­tle with Ama­zon, Wal­mart is try­ing to lever­age its ex­pan­sive US store net­work of over 4,000 doors for clickand-col­lect and or­der ful­fill­ment. Ama­zon has re­cently bought Whole Foods in part to use its net­works of stores to com­ple­ment ware­house­based or­der ful­fill­ment. Hav­ing an un­re­li­able store in­ven­tory poses sig­nif­i­cant risks to the con­sumer lead time com­mit­ment. In-store in­ven­tory in­ac­cu­racy has even driven one large UK re­tailer to pre­pare all of its click-and-col­lect or­ders cen­trally and ship them to the stores for pickup, thus un­der­min­ing one of the key po­ten­tial ben­e­fits of the store net­work.

An­other UK re­tailer ad­mit­ted to us that they have so much dif­fi­culty iden­ti­fy­ing shelf stock­outs that they use their omni-chan­nel ac­tiv­i­ties to per­form zero-stock checks. This re­tailer ful­fils on­line home-de­liv­ery or­ders di­rectly from store shelves. When an or­der pre­parer ar­rives at a shelf and finds that there is no stock, the re­tailer cor­rects the in­ven­tory and picks the de­fined sub­sti­tute in­stead. This is help­ful for in­ven­tory ac­cu­racy, but only af­ter an om­nichan­nel cus­tomer will not re­ceive the prod­uct they have been promised.

The grow­ing con­sumer ex­pec­ta­tion for ac­cu­rate in­for­ma­tion is ex­pos­ing this weak­ness in the re­tail sup­ply chain. Many re­tail­ers pro­vide store in­ven­tory on their web­site, both as a con­sumer ser­vice and to steer them to the right store. How­ever, this in­for­ma­tion might not only be in­ac­cu­rate, but it is usu­ally up­dated only once per day, leav­ing plenty of time to get even more in­ac­cu­rate as the day goes on. What was in­tended as a value-add for the con­sumer ends up be­ing a source of frus­tra­tion when the con­sumer ar­rives at the store, does not find the prod­ucts and re­alises they have been mis­led.

THE ROOT CAUSES OF STORE STOCK­OUTS

If omni-chan­nel suc­cess hinges so crit­i­cally on­shelf avail­abil­ity, it’s worth­while to look at the root causes. It’s not hard to imag­ine rea­sons why the store in­ven­tory might be wrong: theft, lost in­ven­tory, and mis­placed prod­ucts are al­ways go­ing to be part of the re­tail chal­lenge. But, per ECR, the most com­mon rea­sons are wholly within the scope of ex­e­cu­tion of the re­tail sup­ply chain: an in­ef­fi­cient store or­der­ing process due to a com­bi­na­tion of poor de­mand plans and sub­op­ti­mal or­der plan­ning cy­cles. Even if the or­ders were planned cor­rectly, the prod­ucts might re­main stuck in the back room and not re­plen­ished to the shelves in a timely man­ner, of­ten be­cause un­der­staffed stores look­ing to keep costs down will leave prod­ucts on the re­ceiv­ing docks overnight.

Clearly, the suc­cess of omni-chan­nel is linked to hav­ing cor­rect in­for­ma­tion about on-shelf avail­abil­ity and ad­just­ing in­ven­tory counts ac­cord­ingly. Yet ac­tu­ally cap­tur­ing the avail­abil­ity of stock on the shelves has proved elu­sive. The most com­mon method is to mea­sure the sell-out POS scans, us­ing the logic that an un­usual dip in sales is likely due to a lack of prod­ucts on the shelf. This ap­proach is ap­peal­ing for those who would use this in­for­ma­tion for big data anal­y­sis. But it has proven to have lim­its to its use­ful­ness if the prod­uct does not have a high sales ve­loc­ity.

The more ex­pen­sive ap­proach would be to hire au­di­tors to ac­tu­ally check the store shelves. Ma­jor re­tail­ers in both the US and UK have re­cently em­barked on col­lab­o­ra­tive pi­lots with sup­pli­ers with the goal of at least try­ing to de­velop an ac­cu­rate base­line of on-shelf avail­abil­ity. We spoke to one hard­ware re­tailer who has staffed key stores with em­ploy­ees ded­i­cated to check­ing the hun­dreds of thou­sands of SKUS in the aisles for zero stock lo­ca­tions.

Man­age­rial in­cen­tive ap­proaches to drive fo­cus on on-shelf avail­abil­ity have led to un­ex­pected con­se­quences. One re­tailer told of the im­ple­men­ta­tion of a bonus pro­gram for store man­agers who main­tained high on-shelf avail­abil­ity – at least per the re­tailer IT sys­tem. Store man­agers then be­gan walk­ing the aisles look­ing for prod­ucts with only one unit re­main­ing. They would take this last unit from the shelf and hide it. This would im­prove on­shelf avail­abil­ity, but at the cost of los­ing the sale of the last unit; cer­tainly an in­tended out­come for the re­tailer.

The im­pacts on omni-chan­nel ex­tended be­yond overly long lead-time or costs and into poorer on­line con­sumer choice. Many ecom­merce re­tail­ers will in­hibit a prod­uct from ap­pear­ing in search re­sults if they know the prod­uct is not avail­able. The root causes for poor on­line avail­abil­ity are more fo­cused up­stream with sup­pli­ers. The prob­lem is start­ing to draw the at­ten­tion of sup­pli­ers and is in­creas­ing pres­sure for col­lab­o­ra­tive so­lu­tions.

LOOK­ING AHEAD

These so­lu­tions seem strik­ingly low-tech in this age of Big Data and Ar­ti­fi­cial In­tel­li­gence. In the same vein as the self-check­out con­cept of Ama­zon Go and Alibaba’s Tao Café, new tech­nol­ogy ap­proaches may fi­nally pro­vide a way for re­tail­ers to mea­sure on-shelf avail­abil­ity and tar­get their ef­forts to ad­dress the root causes. One promis­ing av­enue is to use robotics or store cam­eras, along with recog­ni­tion soft­ware, to re­port an empty shelf space.

Ver­ti­cal sup­ply chains may help show the way to man­ag­ing on-shelf avail­ably. Zara and Adi­das are two prom­i­nent ex­am­ples of com­pa­nies that have im­ple­mented RFID tags on all their prod­ucts. This speeds up in­ven­tory counts, re­duces shrink­age, and can help iden­tify if the prod­ucts have made it all the way to the shelf. Be­ing ver­ti­cal sup­ply chains, these com­pa­nies have not en­coun­tered the ob­sta­cles other re­tail­ers have had in the past when look­ing to im­ple­ment RFID: the ques­tion of who will pay for the tags. Wal­mart, de­spite its enor­mous in­flu­ence, fa­mously did not suc­ceed in con­vinc­ing its sup­plier base to move to RFID sev­eral years ago over cost is­sues.

The ad­vent of omni-chan­nel may change the dy­namic. Hav­ing ac­cu­rate data will help the sup­ply chain de­velop ac­tion plans and mea­sure their im­pacts. One of the hid­den ben­e­fits of the rise of omni-chan­nel is that will help ex­ert pres­sure on all the ac­tors to work to­gether on find­ing en­dur­ing so­lu­tions to this most fun­da­men­tal of prob­lems. This will help build the busi­ness case for in­vest­ing in durable, last­ing so­lu­tions to on-shelf avail­abil­ity.

A mod­ern sup­ply chain evo­lu­tion may turn out to be the cat­a­lyst to re­solv­ing a clas­sic sup­ply chain chal­lenge. Progress in­deed!

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