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Inventory deployment is the new maxim

Stuart Higgins, Director – Retail at LCP Consulting shares research and insight into omnichannel’s impact on the retail supply chain.

The retail sector is going through an enormous transformation. Revolutionary changes in the make-up of our society, combined with the ever-accelerating pace of technological change, continue to impact the sector heavily and have been further compounded by the unprecedented Brexit vote and the lingering uncertainty that continues to surround the UK’s final exit from the European Union. As our recent report, ‘Integrating the retail supply chain’, highlights, the biggest change by far is the way in which consumers shop today. Low shipping costs and the internet have turned the globe into every consumer’s high street, competition is now on an international scale.

The key challenge facing many retail boards is how to prepare a business to cater for ever increasing customer demands and ever accelerating expectations whilst maintaining profitable growth. To future proof their businesses, retailers must keep pace with changing customer demands. To do this, they need to align their business operating model for customer centricity – and then, optimise their end-to-end supply chains to deliver their customer proposition profitably.

Successful retailers of the future will be the ones that best recognise and adapt their business model to respond to these changes. But, first these retailers need to recognise how they’re strategically placed. To help retailers with this process, in 2014 LCP Consulting characterised the retail landscape using the four core archetypes (see figure 1). We find this classification of retailers as pertinent today as in previous years. The archetypes help retailers identify where their businesses are strategically placed – and understand the most appropriate operating model to adopt.

LCP’s Four Retail Archetypes: The four Retail Archetypes© defined by LCP comprise of:

Omnichannel Pioneers – fully committed to transforming front and back end operations to deliver a seamless experience to customers.

Omnichannel Followers – recent converts to investing in Omnichannel retailing without a fully integrated business model. Retrospectively fixing their back-end systems to keep up with Omni leaders, and as a result, running the risk of not establishing the core systems for long-term success.

Optimised Multichannel or Pure-Play Retailers – have made a strategic decision to adopt either a Multichannel or Pure-Play approach – often very effective.

Challenged Multichannel Retailers – trying to adapt to a Multichannel world by bending existing bricks and mortar infrastructure. Clear warning signals that this group is in danger of terminal decline, with lacklustre growth reported.

A DIFFERENCE IN APPROACHES

This year our report reveals that a gap is developing in attitudes towards how different retail archetypes are understanding their customers, and then how the customer driven supply chain is being adapted or built. We found that despite over three quarters (77%) of leading retailers believing that successful businesses put customer service first, only just over a third (39%) are actually talking to customers to understand their needs. Many retailers are making decisions based on gut instinct or their own perceptions of what customers want, rather than talking to them to understand their real likes and needs.

As Simon Ratcliffe, Infrastructure Director at FatFace , comments: “Customer expectations have been evolving at a rapid pace and you must keep up with these changes. It is important for retailers to genuinely understand their customer expectations, or the customers they are trying to capture. At FatFace, we are just as interested in the 85% who don’t buy from us.” In short, not talking to the customer can also be extremely costly, because it means retailers can end up focussing on the wrong areas. Many retailers continue to pursue a ‘faster and freer’ delivery mantra, often in the belief that they need to compete with online pureplay retailers like Amazon . In our experience, if they speak to their customers they may find that the customer doesn’t actually need or value that level of service.

For many customers, what is more important is that deliveries arrive when and where they are supposed to, and that the delivery window is as short as possible so they don’t have to waste the whole day waiting for a parcel. This is where Omnichannel Pioneers (who as a group have increased from 32% to 41% as more retailers recognise that this is the winning archetype) truly differentiate themselves. This year we found that Pioneers saw no increase in premium home deliveries; as their model focuses on servicing the customers’ needs for certainty and convenience, not just speed. They also experience consistent returns volumes, an indication that they have tailored their proposition to better meet customers’ needs. This may be partially explained by the fact that they have substantially increased investment in data and analytics (up 24%) in just twelve months as they further strive to understand channel economics and customer behaviour.

Understanding the customer better has also meant that Pioneers have a very different approach to how they offer a connected service to customers across channels. For instance, the number of Pioneers who see a single pool of stock as a key advantage is up 22% to 40% of respondents. A single stock pool has helped them realise both improvements in availability and working capital reduction. These retailers understand the wider business benefits of integration, and so investments are considered across a number of criteria. Conversely, there is an inertia within the Challenged Multichannel retailers. Resistant to change and reluctant to invest heavily in new business processes and systems, they believe that this will not generate an acceptable return on investment. The gap between willingness and resistance to change signifies the level of uncertainty in taking on the risk of investment, and this directly distinguishes the Pioneers from Challenged Multichannel retailers. Because the evidence is clear: winning archetypes are showing broad, holistic business benefits of integration – and in fact are generating a very attractive return on investment.

CUSTOMER-DRIVEN SUPPLY CHAIN

So, winning retailers (Pioneers) not only see the benefits of truly understanding the customer, they are also reaping the rewards of a fully integrated, customer-driven supply chain. The main drivers for moving to this model remain the same: increased sales and better customer service, but a shift is occurring. While there is still a need to integrate front-end sales capability (whether store or online) with back-end fulfilment capability to deliver fully on the customer promise and ensure service and sales are maximised, retailers are recognising that integration is also considered as an opportunity to improve business operating costs and net profitability.

“At FatFace, we are just as interested in the 85% who don’t buy from us”

This focus has now extended to a much deeper understanding of costs across four areas:

1. Optimising stock availability;

2. Minimising inventory holding;

3. Reducing overall fulfilment costs;

4. Effective returns management.

In fact, from speaking to leading retailers, we have concluded that inventory deployment is the new maxim. And, winning retailers are the ones that are deploying the right stock into the right place at the right time to deliver stock availability and sales across all channels – while at the same time minimising fulfilment costs and the overall risk of markdown and clearance at the end of season. Though this is a new perspective to the integrated supply chain model – it delivers ‘hard’ operational and business benefits.

As more retailers embark on the journey to integration, they are realising many unexpected benefits (as highlighted in figure 2) that previously may not have been considered as part of the business case for change. Despite these operational and business benefits, there are three factors holding some retailers back from the journey towards integration.

First, the goalposts keep moving for retailers. In this ever-changing environment, retailers face a dilemma when it comes to ‘placing their bets’ in terms of investment. After all, can full integration ever really be achieved when customer needs are in flux?

Secondly, some retailers (Followers) are deliberately looking to leverage second-mover advantage.

Finally, many retailers see the technology investment as too great so they focus their efforts on re-configuring their existing systems. They are making tactical ‘bolt-ons’ to give them the short-term capability to take small steps – and hoping they are not outdated when the next shift takes place. So, should retailers re-configure or fully integrate?

While it’s technically possible to re-configure existing systems and processes to an extent, doing this will never realise the same return as a fully integrated business. It is not unusual for retailers to try and make the best of their current systems before making investments in new technology. It can provide a useful testbed for new functionality, and often provides a clearer view of what’s really required from a technological perspective. However, retailers need to remember that bolting-on capability comes at a cost, and one that may stifle their competitive edge in the future.

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