Your Customer is Going Omni-channel. What is the Impact of Omni-channel on the Supplier?

Ready or not, manufacturers are being pulled into the Omni-channel world by the evolving needs and strategies of the retailers they serve. As retailers explore, experiment, and implement Omni-channel, many models are emerging on how to capture customer demand (multi-channel marketing and selling) as well as how to fulfill orders. Through this process they are realizing that underpinning all their aspirations to serve the customer there is a lot of change. Many issues have not been thought about or their impact understood.

The real core—and challenge—of Omni-channel is about the fulfillment. What happens behinds the scenes, the consequences of decisions and precision (or not) in execution become delightfully or painfully aware to the customer. All this is changing retailers’ thinking about a range of issues from inventory policies to fulfillment. Omni-channel investments are top of mind. But also high in the investment areas are Transportation and Warehouse—for the retailer. (See chart)  As the retailers’ ecommerce sales grow, they think about questions such as to whether to centralize inventory in a DC for web orders vs. allocating all merchandise to the store vs. increasing the supplier’s expectation for more services. They also think about new ways to serve customers with new retail models: home deliveries, online to pop-up stores, showrooms (with no merchandise) and so on.

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Retailers are more analytical than ever. They are using data to understand their customer—who is also your customer. Yet many manufacturers do not avail themselves of the opportunity to access data about the end customer, relying on a capricious partner—the retailer—to provide demand data.

The end consumer is changing, too. Today, they are more interested in understanding the game of supply chain. They want fulfillment their way. They want to understand the source market—where it was made, the labor and other practices of the manufacturer, and so on. They want product details and advanced features in everything from running shoes to dishwashers. All these put extra information and fulfillment burdens on the manufacturer.

These changes then impact the traditional supplier/retailer relationship. What are some of the areas retailers are considering and what impact might these have on the supplier? This blog post only offers hints at what some of the issues are. So here are a few considerations.

Demand Considerations:

As retailers experiment with new types of retail experience and channels, these may change demand and consumption patterns of products.

  • Product by channel—Retailers’ channel offerings may vary. For example, the new outlet strategy may require unique product offerings for that channel. There may be assortment planning changes: different volumes and richer assortments. Those new products also come with new supply chain policies and a probably more stores to ship to with new types of schedules, introducing additional designs, inventory, logistic coordination and costs.
  • Channel specific promotions—Retailers often vary their promotions by channel. These may change promotion execution and pricing strategies. For example, web-only sales, outlet-only coupons, and so on. Free shipping or other trade promotional costs may be passed back to the supplier.

Replenishment Strategies:

  • Allocations—With Omni-channel, retailers are beginning to develop a more nuanced allocation strategy. In this new world where customers are channel jumping and retailers are experimenting, they may not know which item will be purchased from which channel. They may not want the full allocation shipped to store, but rather some inventory held back at their DC or with the supplier.
  • Inventory Policy—Stocking levels and inventory polices differ by channels and fulfillment centers, shifting inventory levels between DCs and stores. VMI policies are impacted; how much and with whom and where to store inventory becomes the question.

Fulfillment/Logistics:

In the dynamic environment of multi-channel customers shop differently today with new fulfillment options. Fulfillment is a challenging area where retailers and suppliers have told me that they are still sorting through not just process and information but serious policy and financial issues. Let’s look at a few of these:

  • Shop online, pickup in store (aka click-and-collect)—This is a rapidly growing area for retailers. It allows them to offer more inventory without stocking in the store. For the customer they can emulate the shopping experience of ‘inspecting’ before they actually own. If the customer chooses pickup in store, that might be coming from the retailer’s own stock from their DC. But what if that is being shipped by the supplier? Does the supplier shoulder the burden of the shipping cost to the store? What if then the customer decides they don’t want the product? If it is not a standard stock item in the store, who owns that product now—the retailer or the supplier? Is this now a return and shipped back to the supplier? That’s a lot of logistics costs and a lot of coordination and labor. We see this debate emerging in categories like home/hardware, furniture, appliances, and electronics.
  • Configure and deliver—in the above categories (electronics, furniture, etc.) consumers often visit a store to configure or design their personal version of a product, then have it shipped to and installed in the home.  Though this is not a new model, the level of these orders coming through ecommerce channels has significantly increased. Although the retailer may be the sales channel, the question becomes who executes the logistics and services associated with the order. The retailers may be looking to the supplier to have a more local presence to provide services and time definite/short lead time deliveries.  This exposes a fundamental question of the supplier/retailer relationship and their traditional roles and what value the retailer is—or not—playing in this scenario. [1]
  • Smaller more frequent orders—Suppliers may have to ship from warehouse to the store more frequently and at lower quantities to support these new models. Retailers may request drop-ship options from the manufacturer direct to consumer. Thus suppliers may need more stock in ‘sales ready’ inventory. This may change their pick/pack/shipping operations or warehouse design to support consumer-oriented orders (one each) vs. case/pallet, as well as adding parcel and/or LTL carriers to the roster.

Changing channel strategies impacts package, pricing, products and fulfillment methods. This surely means suppliers need to rethink their distribution network to be more responsive to the dynamics of the retailer and the consumer. Should the supplier centralize the DC to ensure control or regionalize to ensure more responsiveness? Do they find regional partners to manage logistics or build these themselves? How will these additional costs be offset?

Sorting through these models—which works/which doesn’t—and how to manage them as part of a seamless operation will require major changes in process, facilities, technology, and often, people. A cautionary note is to avoid impulsiveness yet keep the urgency for change high. Impulsive actions by some organizations have led to reduced margins. Yet no action leads to loss of competitive position.  Some change is always required with dynamic and thriving businesses. But always the goal is to make money while doing it!

There are more considerations for manufacturers. Read the second installment – Omni-Channel is Not Just For Retailers – now!


[1] We will come back to this issue, which is selling direct and by-passing the retailer later in the series.

  2 Comments   Comment

  1. Sandeep Gupta

    Hi Ann
    Great post. Thank you. A few questions I am trying to explore are:
    1. How does an organization measure the success of going Omni? Is there emperical evidence of sales actually growing (and sustaining) post going Omni?
    2. What is the impact of Omni / E-Com on Inventory turns? My gut feel suggests that the inventory turns reduce when organizations go Omni / E-Com. Any research based evidence you can offer to prove / negative this view?
    Regards
    Sandeep

    Reply
  2. Hi Ann! I resonate with the challenges and likely solutions you have listed for the omnichannel retail environment. Consumers are experimenting too with many channels offering them shopping options, attractive discounts etc. Operations are backbone of any enterprise and refining them to scale up their efficiency is a must in omnichannel markets. No action is indeed loss of position in the market, which otherwise could have been used to create an impact in the market. Excellent work!

    Reply

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