Retail Inventory Deployment
Ask the Experts
Most retailers are grappling with the challenge of how to most effectively and efficiently deploy inventory through their DCs, factories/suppliers, stores, or a combination of any/all to meet end consumer needs through their various sales channels (brick-and-mortar, e-commerce, wholesale customers, etc.). In this edition of Parker Avery’s “Ask the Experts” series, we tap the deep expertise of Amanda Astrologo, Robert Kaufman, and Rob Oglesby in discussing this challenge in retailers who operate multiple distribution channels and the processes, systems, and organizational tactics that should be employed to most optimally support inventory deployment.
Do most companies have a single demand and supply planning team that addresses all channels (e.g., brick and mortar retail, e-commerce, wholesale) or are they often separate?
Amanda: With companies that are both retailers and wholesalers, we generally see one demand and supply team that takes input from the needs of each business unit. This allows them to consolidate purchases and raw material needs to maximize profits and supply chain processes. Where we see companies potentially separate the supply planning with retail vs. wholesale is in instances where the offerings or product lines may be completely different and there is no crossover. However, the consolidation would still occur on the supply chain side to maximize factory or shipment needs based on point of origin and/or distribution.
Robert: With the consumer demanding channel transparency, retailers are having to adjust and plan holistically regardless of channel. Most companies still have their organizations aligned by channel, though they are transitioning to address the need to break down traditional structures and think differently. E-commerce still has the most frequent separation. However, with BOPIS (buy online pick up in-store), the e-commerce and retail channels are starting to work more closely and beginning to plan supply in terms of units and placement collaboratively.
Retailers are still trying to find the magic formula between inventory management and distribution costs versus speed to the consumer.
Rob: This depends on the roots of the company. Those that started with a product-centric focus (adding retail later in their history) are more likely to have a centralized demand/supply approach. This is primarily because they didn’t start thinking in retail concepts, but rather in production and product availability concepts. For them, adding channels simply added a different source of demand. Those that started with the product AND retail, on the other hand, are often more fragmented. Especially when it comes to the retail channel—and more so, if that channel continues to dominate the volume of the business. This is due to the cyclical approach taken to introduce new products primarily to their stores and the calendars imposed by the retail channel. While loosely aligned with other channels, they aren’t always—and that really makes for a challenge to coordinate supply and demand.
What have you seen at clients that leads you to a perspective that one of these approaches (centralized vs. decentralized) is better? Asked differently, what benefits and drawbacks stem from each of these approaches?
Amanda: With the focus of today’s consumers being around a seamless customer experience no matter how they shop, the approach of a centralized demand and supply team would be where I would direct most clients where possible. Having a holistic view of inventory and strategy enables retailers and wholesalers to have a customer-centric view and develop an inventory strategy that supports the consumer need regardless of where it originates. Generally speaking, I believe any drawbacks from centralization would be related to business processes and ensuring the supply team has all the information needed from each business unit they support—when they need it. Brick-and-mortar, e-commerce, and wholesale could be run differently from a speed-to-market and assortment perspective, which makes overall supply planning challenging. But if the business process can be streamlined enough to support this approach, it can be a major cost and efficiency savings to the organization.
Robert: As noted previously, the benefit is to think holistically with consumer/customer alignment. Mom or her millennial daughter usually don’t think in terms of channels; they know what product they want, and they want to review it on a mobile app, discuss it with friends and followers on social sites, and then purchase it on their phone to be picked up at the store when they are also out to get their latest iPhone at the shopping center. A decentralized approach, which is more traditional, likely provides a unique perspective about that particular channel, but the alignment of each channel’s needs (which sometimes have competing objectives) is essential if decentralization is maintained. So, a hybrid of decentralization with holistic alignment could work, but more often than not, a centralized approach will win out in today’s fast-paced retail environment.
With the consumer demanding channel transparency, retailers are having to adjust and plan holistically regardless of channel.
Rob: First, let’s assume we have a brand (meaning a product, not a banner/storefront) that is common across all channels. By this I mean the retailer sells the “XYZ” brand in their retail stores as well as to online customers and wholesale accounts. In this case, centralization is critical if you are to gain economies of scale with your factories and supply chain. If you allow each channel to plan alone, your costs will be way out of line because you won’t be able to produce in enough volume to drive unit costs to a minimum.
In your experience, have you seen most retailers employ a common inventory pool to fulfill all channels or is the inventory segmented? What challenges and benefits have you seen from each of these approaches? Is there a trend emerging leading more companies to evolve to one approach versus the other? If so, what is driving this trend?
Amanda: If I would’ve been asked this question a year or two ago, I would have said segmented inventory by channel was still commonplace. Today, with the increasing customer demand to buy from anywhere whether it’s mobile, brick-and-mortar, third-party, etc., I would say a common pool is just that…more common. However, retailers are still trying to find the magic formula between inventory management and distribution costs versus speed to the consumer. Instead of seeing distribution centers centralized or limited, they are now being built to support regional areas and increase delivery frequency and speed. No matter what buzzwords you choose: unified commerce, omnichannel, or customer-centric retailing, it’s all about supporting the consumer need as fast, accurately, and as cost-effective as possible.
Robert: Most companies do not have a common pool of inventory, though many wish they did and are seeking to achieve this goal. The reason is related to the earlier discussion of the blurring of channel boundaries. However, each channel (retail brick-and-mortar, e-commerce/mobile, wholesale) likely has a responsibility to accurately forecast their demand individually and are measured on the performance of “their” inventory. Until these measurements are changed, the segmentation of inventory (physical or logical) will likely remain. In other words, how would a buyer’s open-to-buy be measured in a global pool environment? It would be challenging; although with analytical tools supported by a leading ERP solution, it could be accomplished by logically segmenting inventory while maintaining a common pool physically.
There needs to be clear responsibility for setting inventory targets for the company without regard to channel.
Rob: First of all, we have to assume that the retailer in this case actually owns a branded product (or a set of brands) that are sold in other channels. This is important, because you have to differentiate the brand from the banner (even if they share the same name). That aside, my experience tells me that companies set a goal for common inventory: a single pool of stock that can satisfy all demand channels. The clear benefit to this is much higher inventory utilization driving gross margin return on investment for the entire company. Where this gets difficult is actually very complex to answer. In part, because the roots of the company play a huge part. Those that began in retail typically have an open to buy mindset with the actual retail channel—and that means that there will be reserve stock in the DC as well as inbound purchase orders that must be included in those metrics—the only way to continue to manage that way is to segment the inventory in some way (essentially the retail channel becomes a customer of the brand). If the company wants to get to a true “common pool,” they have to think differently about critical management methodologies—and establish new roles and responsibilities that are more centralized and coordinated. There needs to be clear responsibility for setting inventory targets for the company (and each region, depending on size)—without regard to channel. The “common pool” would include adequate reserve planned in, to satisfy demand from any channel. And decisions on shortages would be made with the mindset of overall profitability for the organization as a whole.
Retailer vs. Product vs. Brand
A retailer is a company that sells merchandise to an end consumer. In the purest sense, they exist to provide an environment for consumers to shop and a means to purchase products, meaning the store, website, catalog, or mobile app. However, people often confuse the retail aspect with the product aspect… and the product aspect is really about a brand. In some cases, however, the retailer also has a brand – or even multiple brands.
To illustrate, when The Home Depot or Walmart first opened their doors, 100% of the products they sold were designed and manufactured by other companies… i.e., brands. Both of those businesses served as “pure” retailers – the intermediary between the product producer and the end consumer. While both companies now have very vibrant private label brands as well, those were developed after first establishing themselves solidly as retailers.
Now, how about the opposite approach? For this example, let’s use Nike and Apple (or Microsoft if you prefer). These companies started with products and developed very powerful brands over the years – clearly some of the most recognized and respected worldwide. Both companies also have retail channels today, but more to “showcase” their products since other retailers have been carrying their goods for quite some time. Here, the brand preceded the foray into retail.
Some brands such as ALDO, Kate Spade, and Lilly Pulitzer are an interesting hybrid of the two. They started with the product and the retail storefronts to sell it. Rather than attempt to sell apparel and shoes in other retailers, the companies’ strategy was to operate their own storefronts. So initially the only place to buy these unique products was in the branded stores. The argument could be made that some ‘hybrid’ brands may not have as much leverage as the ‘pure’ product companies who immediately strive to get their products into the mainstream across many different retail outlets – and hence these stronger brands developed to the point that they can dictate terms to their customers because the demand for their products is so strong.
In companies that do employ a common pool of inventory, what role or part of the organization arbitrates allocation of inventory when supply is insufficient to meet demand? Are there periodic meetings that review the supply and demand, like sales and operations planning meetings, or are they typically only addressed as needed?
Amanda: I would say often these decisions are made within a collaborative process like sales and operations planning (S&OP). However, depending on the level of supply and demand, ad hoc decisions may fall to the sales team based on priority and consumer need.
Robert: The next challenge is who arbitrates inventory allocation when supply is constrained. How are priorities determined? Should GMROI always win out? What about the relationship with a key wholesale customer? What if the most profitable avenue is with a channel that planned poorly (under-planned) to avoid end-of-season liquidation challenges? We have seen global inventory management groups formed for this specific purpose. We have also seen representatives from the various channels meeting to work through the questions in an S&OP venue, led by the head of planning and/or the COO. The key to making this effective is ongoing communication. Even if there is a singular group or person who makes the final decisions, input from all affected stakeholders, including senior leadership, is essential. These decisions cannot be made in a vacuum. The benefit of a final arbiter group is that there is a predetermined resource or team whose role is building consensus toward the best decision for the company–and when consensus cannot be reached, making the final decision and communicating to all parties. It is also important that the group or person that arbitrates does not have a vested interest. In other words, their review and bonus should not be affected or biased by the decision. If this is the case, the credibility of the arbitrating group will continually be called into question. It also means this arbitrator/arbitration group has a very senior reporting relationship to a C-level resource who has no channel-specific responsibility but is measured on the success of the whole organization (e.g., COO, CFO).
Rob: Even in companies that haven’t quite “gotten there” the initial elements are in place. I’ve seen S&OP meetings that occur on a very consistent basis as well as scheduled meetings at critical points in each season where very big decisions are made (specifically how much to purchase of each item over the course of the upcoming season). They also have teams in place that are centralized to perform certain functions—but often all roles have not been assigned. In my experience, the way the company grew up is a key factor in how quickly these new concepts and roles have been adopted. Systems also play a role because their capabilities may not fully enable the true centralization and common pool approach. Bottom line: a true common pool means a single supply (in each DC) that is open and available to any channel—governed simply by business rules for the allocation of constrained supply. As I mentioned earlier, there has to be accountability for that inventory without regard to any one channel in order for this to truly become a reality. That role “owns” the decision of much to buy—and whether to buy strictly to demand (just enough or “make to order”) or to take a position in an item by using a forecast (and assume the risk of excess).
In companies that segregate their inventory, are they able to ‘transfer’ from channel to channel if necessary (e.g., goods are selling strongly in the e-commerce channel and retail demand is lagging, making inventory available for reassignment to the e-commerce channel)? In your experience, is this a difficult endeavor?
Amanda: In companies that segregate inventory, many will have the ability to transfer goods as needed but will have guidelines on inventory movement based on profitability. If inventory is serviced out of the same facility this process is obviously a little easier as long as warehouse inventory systems support the change. Once you involve fuel, transportation, and additional facilities, this can become less lucrative of a process. Overall, the movement and management of inventory within the supply chain comes down to processes and how efficient they are for the organization. Sales rely on having the right inventory at the right place at the right time, but with the sales signal constantly changing, the supply chain needs to be flexible and adaptive. Organizations that invest in this space will have the best shot at longevity in my opinion.
Robert: One of the advantages of a common pool is the elimination of the need to transfer inventory across systems or logical channel boundaries. Depending on how these segregated pools are managed, it can be quite cumbersome. Companies sometimes have separate ERP/inventory management systems which require very difficult business and system processes to ‘move’ inventory between channels. Even solutions that support multiple inventory buckets/pools may have difficulty transferring between them. We’ve seen very few solutions that support the segregated inventory pools and allow for reasonably easy movement from one channel to another.
Rob: For the segregators of the world, transfers are always possible—and the degree of pain depends on how they choose to segregate inventory. It can be as painful as having to change the SKU number on products (including product labels, which means extra physical steps) or as simple as issuing a transaction in their ERP. The real question is WHY are they segmenting inventory? To protect certain channels? Or are there other reasons? In my experience, companies who are doing this are actually working hard to undo it—and get themselves to some sort of common pool—even if it isn’t perfect.
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