Omnichannel. This buzzword has a myriad of meanings and implications, from how marketing is performed to how customers shop to how retailers fulfill demand. The desire for seamless interaction with customers is the key impetus to omnichannel — and a key reason to strive for flawless execution.
For retailers that grew into maturity with physical stores, there is an absolute imperative to ensure brick-and-mortar investments are leveraged to the fullest extent. There are substantial labor and real estate costs associated with keeping existing stores open — and tremendous customer benefits, including the ability to offer personal, face-to-face shopping experiences, instant gratification of fulfillment and the ability to see, touch and feel merchandise before making final buying decisions. These represent compelling and valuable reasons to keep physical stores running.
Traditional limitations of store inventory
A key challenge of running a traditional storefront is the fact that inventory is inherently scattered across the stores. Retailers are forced to place bets on how an item will perform, but even when based on solid forecasts — often driven by complex forecasting solutions — they are bets nonetheless. These bets are not just on item sales, but also on where those items are most likely to sell. Higher fashion and trendier items entail even bigger bets, because allocations of these types of products are based on prior histories of similar items, as opposed to tried and true replenishment (based on sell though) of an exact same item.
Essentially, significant retail resources are tied up in getting merchandise into stores and in front of customers. This merchandise is conceivably just footsteps away from the customer who may or may not make the trip into the store to buy. The hope is that customers buy early in the season, when item margins are intact. In some cases, an entire season’s worth of merchandise is pre-distributed; in others, only a portion is allocated, and sell-through dictates the balance. Either way, the product is ultimately pushed to the store, resulting in limited flexibility with that inventory.
Unless an alternative plan is in place.
Using Stores as Warehouses
What if stores could act as a node in the retail supply chain, serving both brick-and-mortar and online customers? What if there was a way to satisfy all customers — albeit perhaps not all instantly — instead of turning them away (and to the competition)? As soon as seasonal sales begin to materialize, out-of-stocks also become a reality. In addition, customers may forego the physical experience of shopping in stores and choose to buy online or via the phone, yet still expect a near real-time fulfillment timeline. Internet pure-plays realize the fact that they can’t offer “instant gratification” and they’ve addressed that shortcoming by offering same-day delivery in many markets. But that flexibility requires investment and necessitates getting products close enough to customers to make same-day fulfillment a viable and cost-effective option.
There are two compelling reasons to “convert” stores into nodes in the retail distribution network:
• The ability to leverage existing investments in inventory. Maintaining the highest possible margin means maximizing that investment.
• Significant potential savings in transportation costs. These savings are realized if the origination point is very close to the destination point.
Extending the capabilities of stores beyond their current ability to serve only customers in the physical channel extends the value of the retail fleet and keeps brick-and-mortar relevant in today’s omnichannel retail environment.
A different world
Distribution centers (DCs) operate much differently from stores. Specifically, they are insulated from the day-to-day impact of customer traffic. Inventory remains tightly controlled thanks to warehouse management systems and associates measured on speed and accuracy. By contrast, labor and inventory in a store environment is much more fluid and can create challenges in the following areas:
Accuracy — In a true warehouse, merchandise does not “move” without some sort of system directive. Moreover, when it does move, the movement is closely tracked via system transactions, leading to accuracy levels well in excess of 99 percent within most modern retail DCs. Stores don’t have that luxury. Normal customer shopping activities cause merchandise to flow all over the store — usually without visibility (abandoned baskets, dressing rooms, etc.). In addition, most retailers employ only the most basic inventory management system within the store (notably, inventory is “in the store” or not). When managers attempt to validate quantities, they often do so without being able to see their entire inventory — resulting in erroneous adjustments and exacerbating poor inventory accuracy. Without accuracy, fulfillment systems are likely to send orders to a store for inventory that doesn’t actually exist — or possibly withhold an order from a store because the system indicated a level too low to fulfill — missing the opportunity to close a sale.
Location — Another hallmark of any DC is the fact that every “place” where product can be stored or kept for any reason has a location address assigned to it. That not only enhances the ability for the DC to be more accurate, it also provides the systems running the DC with a critical piece of information — precisely where to go to obtain the merchandise required to fulfill an order. This concept has begun to trickle into retail stores, but primarily those with fixed aisles and shelves (general merchandise and grocery). The world of “4 ways” and “rounders” that move as the seasons change make this difficult to achieve — but not impossible. If stores are to be used as warehouses, associates will need to know not only what to pick, but from where.
Volatility — This goes hand in hand with accuracy. Because stores are not “sterile,” controlled environments, inventory is almost in perpetual motion — especially when the store is open for business. This volatility comes in different forms, both from pending sales (items in the basket, but not yet processed through POS), shrink that has not yet been discovered or simply the need to recover and return merchandise to its “home” location due to normal customer activity. These factors create moving targets and difficulties for order management systems to attempt to allocate orders to the store. Moreover, the situation can change between the time allocation occurred and the merchandise is secured to fill the order. For these reasons, a buffer must be used to prevent reserving inventory to an order once the on-hand quantity has dipped below a “safe” level. The fulfillment process should also include a backup plan to continue to fulfill that order if an issue is discovered after allocation has been executed. To make this even more of a challenge, rarely is it an exact science — typically varying from product to product within the same store.
Timeliness — This challenge overlaps with the other three challenges. It specifically relates to the fact that inventory transactions often lag the physical movement of store merchandise. This can occur on the “front side” — when the inventory is still in transit to the store (or tied up in the receiving process) or when it has been sold via POS, but that transaction is not yet available to upstream systems. Remember, in a DC, things only move with a pre-delivered directive. In a store, the customer dictates those directives — with no warning. This challenge must be addressed on the front side by knowing not just what is in the store, but also when it should get there (and become available). Addressing the challenge of volatility with those points will also address the issues found with transaction lag.
Consequently, there are many moving parts to successfully redeploying stores as distribution nodes in an omnichannel strategy. Some are at the macro level (i.e., outside of the store), but most require thoughtful implementation of process, technology and organizational change within the four walls of the store itself.
At the macro level, there are two key elements:
Order Origination Points — Where will customers be allowed to access store inventory? How will this capability be enabled? Consider the following possibilities:
• Via online or phone orders — meaning, when the customer is not physically in the store. In this case, the customer won’t have direct knowledge (or concern) that a store is processing fulfillment. Many retailers are already at this point.
• Within the store itself — this is allowing customers to buy online while shopping in the store itself, using their own mobile device or with associate help at a kiosk, mobile device or front end. This “never lose a sale” strategy provides the ability to locate a specific size or color at an alternative location in a retailer’s network. There are many variations on this — including being able to “sell” at another retailer with branded items that are offered in your competition.
Distributed Order Management — The “back end” fulfillment optimization processes are critical to ensuring the lowest possible fulfillment costs. Order management solutions access inventory across every “node” (store or warehouse) in the network and determine the optimal location from which to source the order. Inventory quantities and shipping costs are assessed to determine the fulfillment location. In addition, solutions can “re-allocate” an order to another node in the event the first location is unable to fulfill the order. This capability is critical, given the volatility of inventory in stores, as outlined above.
The next set of considerations is within the four walls of every store and addresses impacts to field operators. Items to include in planning store warehouse strategies include:
Store Systems — Outlined below are capabilities required of store-level systems to enable a strategy that leverages stores as fulfillment centers. The most basic way to enable many of these is via barcode technology. Advancements in Radio Frequency Identification (RFID) can further enhance both accuracy and ease of execution.
• Inventory Location — Inventory must be located so a picker can find it. Whether in the back room or on the sales floor, inventory locations must be much more granular. Implementing this capability can actually drive dramatic improvements in overall inventory accuracy and in-stock position.
• Picking Precision — Store associates must know exactly which item to select when they get to the sales floor — style, color and size. This process must be absolutely precise, and the software has to prevent choosing the wrong item (e.g., through the use of scanners).
• Packing — Enabling software must have the ability to print packing slips and shipping labels. This also leads to potential hardware requirements (although many vendor return workstations already have this capability).
Store Associates — The correct type of associates to handle additional fulfillment tasks must be considered. Commissioned sales associates may not react well to new tasks involving picking, packing and shipping orders — especially when the store is busy with “regular” customers, and retailers should not universally assume customer service associates should handle these activities. Changes to existing roles and/or new roles must be assessed, and careful consideration must be given to designing new processes, realigning incentives, updating training and implementing change management to respond to store associate needs. Additionally, forecasting the labor requirements for in-store fulfillment is key to determining the proper labor model to perform these activities.
Layout — Most stores are built to maximize space on the sales floor. With store fulfillment of digital orders, there must be adequate space in the back room (or elsewhere) to pack and stage outbound orders, as well as accommodate for increased shipper traffic. This is especially important in mall or other high-rent stores. The requirement to allocate proper space to process orders should not be underestimated — primarily to ensure accuracy is not compromised.
Metrics — This is possibly the most important consideration because it will directly impact the behaviors of store operators and associates. Fill rates from each store must be considered — this is impacted by a combination of inventory accuracy as well as response time to orders. Fill-rate metrics are important because they directly impact customer service in both timeliness to fill an order and the ability to fill it. Another metric to determine is how to “credit” stores (and possibly individual associates) for their involvement in order fulfillment. In a true omnichannel environment, stores must be in solid partnership with each other — and to ensure that partnership is embraced, each will expect their share of sales credit.
The rewards for leveraging investments in existing stores to drive omnichannel strategies are significant. The ability to use stores like warehouses to fulfill orders from online channels and other brick-and-mortar locations has gained ground in recent years and many retailers have begun to realize success (although not without some hiccups). Higher turns and stronger sales along with greater gross margin all lead to higher profitability. Customer satisfaction should also receive a boost with decreased customer disappointment resulting from out of stocks.
However, careful consideration of many factors and thoughtful planning are vitally important to achieve these benefits and to avoid disappointing the same customers retailers are striving to please.
Rob Oglesby is an associate partner at Parker Avery. His insights come from more than 20 years of retail and consumer products experience, both as a consultant and working in operations with some of the largest retailers in the world. Rob specializes in the retail supply chain, with a focus on store operations. He can be reached at email@example.com.
The Parker Avery Group
The Parker Avery Group is a boutique strategy and management consulting firm that is a trusted advisor to leading retail brands. The firm specializes in merchandising, supply chain and the omnichannel business model, integrating customer insights and the digital retail experience with strategy and operational improvements. Parker Avery helps clients develop enhanced business strategies, design improved processes and execute global business models by combining practical industry experience with proven consulting methodology to deliver measurable results. For more information visit: www.ParkerAvery.com; firstname.lastname@example.org; 770-882-2205.