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Wednesday, May 14, 2014
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by Dwight D. Hill, The Retail Advisory LLC
Merchandise availability continues to be one of the most important challenges within retailers today. As the customer is demanding a consistent shopping experience across all channels, retailers are forced to innovate and redefine how merchandise is distributed to customers in the new paradigm of "digital convergence."
Figures 1 and 2 illustrate the step change retailers are facing as their customers shift away from the traditional brick-and-mortar channel to the increased convenience and personalization of the e-commerce channel. The retail environment has also continued to be one of relative malaise as retailers have recently suffered a combination of the shortest holiday season since 2002, several winter storms, and a tepid first quarter with Easter shifting into April. As a result, managing an inventory model that supports multiple channels effectively has become a top priority for most retailers.
Some leading retailers however are developing innovative approaches to inventory management in this new paradigm of digital retail. From sharing inventory across channels to creating "virtual stockrooms," several retailers stand out as harbingers of the future.
Zulily: An apparel and gifts e-commerce retailer that targets busy Moms with targeted one-day to 72-hour sales. The trick? Zulily doesn't hold inventory but orders merchandise only AFTER all orders have been received – and sometimes merchandise isn't even produced until all orders are placed. This strategy can be a challenge in periods of high demand however as recent headlines have borne out – with customers complaining due to lengthy delivery times.
Modcloth: A women's and juniors' e-commerce retailer offering customers a "voice" in their assortment decisions through a program called "Be the Buyer." This feature allows customers to vote and express opinions on merchandise they would like to see. For a fast fashion retailer this is a great way to stay on trend and keep up with customer preferences. Could this be a refresh of the model Zara perfected many years ago?
Need or Needlifestyle.com: A men's apparel e-commerce startup retailer offering a SINGLE outfit with accessories each month. Talk about a highly edited assortment, Need presents a single shirt, trousers or jeans, and shoes that are coveted by customers from London to San Francisco. Most merchandise sells out in the first week! A scalable model? Time will tell.
Macy's: A great example of a localized assortment model. Macy's has 69 buying teams strategically spread across the U.S. that focus on building "local" assortments for groups of stores, usually 8 to 15. Is buying power minimized? Possibly, but Macy's has proven this to be a profitable model and one their customer has welcomed.
The Container Store: An early and clear leader in customer-focused inventory management. Through a singular channel-agnostic view of inventory across the supply chain, customer-focused merchandising teams, and a focus on in-stock awareness, The Container Store serves customers confidently across channels.
The Gap: An example of inventory visibility, The Gap has created an algorithm that allows customers to "see" if items are in stock at local stores and reserve them for pick up at a later time. Certain stores are actually set up for ship from store capability.
While there is no "one-size-fits-all" approach to inventory management, especially across multiple channels, the following checklist of considerations that can serve to guide an inventory management program in the complex environment of multiple channels.
Your merchandise plan is the roadmap that should clearly define an inventory strategy. The numbers tell a story – make sure your inventory plan flows according to your channel-specific sales and GMROI strategy.
Establish a consistency around the process of planning. Define a proper set of inputs appropriate for each channel and team, be it historical sales, customer, or industry data. Likewise, define the correct set of outputs, including the assortment plan with pricing, open to buy, and inventory flow timing. In addition:
Institutionalize the enablers. Insist on clean data, one version of the truth, and participation and thoughtful analysis from all stakeholders in the process.
Monitor in-season! Include an in-season review process that occurs periodically to ensure sales and inventory objectives are being met. Don't always rely on autopilot!
Institutionalize planning leadership. Establish a planning organization that can own and drive this process with clear reporting lines that include both e-commerce and stores.
Determine the correct organization structure. Should e-commerce planning function as a separate planning organization, with a dotted line to traditional brick-and-mortar planning, or be an integrated function? Both models currently exist at leading retailers and can be successful depending on the business model.
Consider a singular view of inventory. Certainly not a new concept, but a must in a world where the customer can interact with your brand across multiple channels. To begin this journey, first consider how inventory should be held between stores and e-commerce – a single repository, divided among channels, or a hybrid? While the answer will vary based on business type, considerations should include your brand's service promise, technology capabilities, and organizational structure. Leaders in this approach include Nordstrom, Aerosoles, The Container Store, and now The Gap.
Build a plan to capitalize upon the new paradigm: e-commerce = brick-and-mortar = e-commerce. This "mash-up" is occurring throughout the industry, and is visible across traditional brick-and-mortar (Macy's, Marks & Spencer, Burberry) as well as e-commerce retailers establishing physical locations including Bonobos and Warby Parker. Be aware, your stores are not necessarily "natural" distribution centers; new processes and training will be required to ensure your customers are served as efficiently and cost effectively as possible.
While extensions of inventory across channels can fragment budgets and strain planning teams who may not understand the dynamics of each channel, establishing a strategy flexible across channels is table stakes in the new paradigm of digital convergence.
Dwight D. Hill, whose background includes leadership roles with Neiman Marcus and Deloitte LLP, is Founder and Retailer Strategist, The Retail Advisory LLC. Dwight can be reached at firstname.lastname@example.org.
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