Love it or hate it, omni-channel is here to stay, says Srinidhi Rao, an Apprentice Leader at analytics and data science firm Mu Sigma. He argues that as the world becomes more and more connected, retailers and their customers will ‘touch’ each other via a multitude of channels.
Understanding and accepting those challenges and acting upon them could do more than keep you afloat, it could push your business toward new growth opportunities. Here he talks us through how to be informed as use data to drive your decisions.
There are two unique attributes of an omni-channel world that most of the traditional brick-and-mortar (B&M) world previously lacked:
- More signals from the customer, giving access to more information than ever before
- A greater number and more diverse points of fulfilment, increasing the complexity of supply chain dramatically
As a retailer, you have two options: You either manage the new complexity and run your business the traditional way that keeps you afloat; or you take advantage of the new reality and thrive. Most people would clearly advocate the latter, yet too many are failing to do so, as highlighted in the recent ‘Omni-Channel Retail 2014: Double Trouble’ report.
Unique Challenges of B&M and online
Both B&M supply chains as well as new online supply chains carry challenges that are unique to them. B&M stores face the traditional issues of stock-outs/over-stocks, inventory turnover problems, lead time issues, forecasting challenges, rising inventory cost, etc. e-Commerce businesses, on the other hand, face issues like high delivery costs, the inability to meet delivery times and service level agreements (SLA) with customers, high return rates that need an efficient reverse supply chain, lack of coordination with other channels, to name a view.
Many companies look at B&M and e-Commerce as two different supply chain systems, flowing at different velocities and catering to different customer needs, which can exacerbate the problems of each. While some supply chain managers recognize the interdependent nature of these channels and have adopted specific strategies/tactics to create efficiencies, there is no retailer in the world that can claim to have maximized the opportunities an omni-channel approach can offer in terms of supply chain efficiencies.
Paradigm Shift: Need for an integrated view
Looking at an omni-channel approach as a supply chain opportunity and leveraging these potential efficiency savings needs a paradigm shift. Most retailers have an independent or inter-dependent view of channels. However, the truth is that it is one customer that you are fulfilling via various channels, and to make these efficiencies happen you need to look at supply chain as one integral entity, not in silos.
If you truly believe in the integrated paradigm, it will reflect across the supply chain from procurement, warehousing, human resources, infrastructure to fulfilment and reverse supply chain. Below are some of the manifestations of such a paradigm:
- Integrated IT systems that track demand and supply across channels, giving across-the-board visibility to all stakeholders and analytics supporting globally-optimum decisions
- Employees trained in cross-channel fulfilment
- Identified stores acting as warehouses and supply chain having the flexibility to change the choice of those stores based on optimal points every year
- Optimization of the number and location of pure Delivery Centres (DCs) + pure stores + ‘Warehousing Store’ as points of fulfilment as opposed to optimizing each of them separately
- Integrated demand forecasting across channels by region rather than forecasting across regions by channel
This is not an exhaustive list but hopefully illustrates how a supply chain architect should ideally think.
Advantages of the Integrated Paradigm
With effective use of analytics and big data, retailers can reap rich benefits from an integrated view of their supply chain.
- Demand Forecasting: Online channels provide significantly more signals about the demand, trends and customer behavior than B&M stores could have ever hoped, that can be leveraged in accurate forecasting at the level of granularity never thought of before.
- Inventory Turnover: Opportunistically chosen stores can act as DCs for e-fulfilment (online order fulfilment), addressing the inventory turnover and over-stocking problems in an elegant way.
- e-fulfilment Cost: Cost of e-fulfilment can reduce since the most optimal store or DC can be chosen for fulfilment, after taking into account shipping costs, taxes, labor cost, etc., rather than blindly having one or two dedicated DCs for online orders.
- e-fulfilment SLAs: For the same reason as above, retailers will be in a better position to cater to the timing and other SLA needs of online customers.
- Logistics Cost: Integrated truck routing would be better optimized than routing for stores and online individually. Moreover, common fleet can be used and economies of scale better leveraged.
- Procurement Cost: Procurement cost can be reduced overall and especially for categories sourced locally, due to economies of scale at store level
The need to design and implement better omni-channel strategies is a common problem among retailers across the globe. The Mu Sigma team recently optimized the cross-channel supply chain for a major big-box retailer helping them to identify which stores should act as e-fulfilment DCs for which regions, making huge efficiency savings in the process. The choice of these stores is re-visited every year taking new demand patterns into consideration so strategies can be updated accordingly. And for the clothing department of another major retailer, we are helping identify seasonal fashion trends to help the business optimize their stock up store inventory by studying search trends on their ecommerce site.
How to get started
How retailers embark on this journey is important to minimize hurdles and reap benefits faster.
- Start top-down: In most companies, online and B&M are functioning as two separate organizations and have real people having real career growth needs. Any integration efforts would die a fast death unless it comes top-down.
- People first, systems next: The biggest cost hurdle that companies face today is that of integrating the systems. They start there and stop there. However, the reality is that people came first and machines came next. If you want to get the new paradigm right, first invest in training people; they will find ways to work even with partially supporting systems, while technology implementation catches up. Next-gen systems with untrained people is going to prove inefficient at best.
- Invest in online: To reap the benefits of scale and the real advantages of omni-channel, it is important for your online business to gain a critical mass. You should strategize and invest in getting that critical mass – till then online will be a liability.
Omni channel has disrupted traditional retailing business in an irreversible way. ‘Adapting to’ and ‘managing’ are sub-optimal strategies to deal with this opportunity. Retailers should therefore key in Big Data and analytics capabilities that look at all channels together as one supply chain, invest in getting a critical mass in each channel that can then allow the business to optimize global decision making to the max.