In an apparent reversal of the post-pandemic “new normal,” retailer inventory levels are slowly rising again amid a variety of factors, including inflation, some consumer slowdown in spending and, more generally, a return to pre-COVID shopping habits. Rising inventory levels mirror the Bullwhip Effect, which demonstrates how small fluctuations in customer demand cause progressively larger changes throughout the supply chain. This effect is magnified in longer lead times for businesses, most notably apparel and home furnishings, because of the lag between each step in the supply chain.
How do you combat these challenges, particularly in an omnichannel world with inventory fulfillment across many sites to meet demand?
This question is addressed in the third pillar of the omnichannel fulfillment strategy – Systems. By focusing on systems that enhance demand planning, inventory allocation and real-time inventory, you are well-positioned to drive omnichannel fulfillment operations.
Demand planning: How much product should you buy?
Central to a great fulfillment system are timely and accurate forecasts to predict consumer demand so you, in turn, know how much product to buy. A great demand planning system ensures there is enough product in your supply chain to keep the shelves stocked but not too much such that you later discount product or have lots of cash tied up in unsold merchandise. This is the balance every retailer has eternally juggled.
Demand planning and forecasting are critical functions but vary in approach based on your retail segment. Businesses that require extended lead times, such as apparel and home furnishings, rely on forecasts that are much further out – by as much as 9-15 months – and often volatile – due to changing manufacturing or transportation conditions. This uncertainty is balanced, however, by higher gross margins, which provide flexibility in discounting.
Grocers, at the other end of the spectrum, have shorter lead times but lower margins to contend with when forecasting consumer demand.
So, what makes for a great demand planning system? We have come across homegrown systems, as well as third-party solutions (such as Blue Yonder) that get the job done. The key to any system, though, involves processes that allow teams to proactively address any changes in demand signals from the system and make those changes accordingly.
Three easy ways to understand the effectiveness of your demand planning systems and processes are to:
- look at your non-clearance product sell through,
- compare your forecasted demand with actual demand and
- consider your in-stock rates.
Using these three metrics may spotlight opportunities for improvement.
Inventory allocation: Where should you place your product?
If demand planning helps you identify how much product to purchase, your inventory allocation system helps you identify where to place that inventory.
In a world of omnichannel fulfillment – where stores act as both sales channels and fulfillment nodes – an allocation system that considers how to best distribute your product based on digital and offline sales is critical.
Like demand planning systems, allocation systems can be homegrown or rely on third parties to distribute product across your sites based on anticipated sales.
Similar to demand planning – but evaluated at a fulfillment or sales node level (vs. in aggregate) – three metrics that can help you understand the effectiveness of your allocation systems include:
- non-clearance product sell through
- in-stock rates and
This information should highlight where your allocation process may have challenges and could be further optimized.
Real-time inventory: Is your product available to local customers?
Real-time inventory is foundational to rapid omnichannel fulfillment, which allows customers to order product via their preferred delivery method – BOPIS, Curbside Pickup, Same-Day Delivery, etc. – based on what is available locally.
Of the three systems, real-time inventory is the latest addition to the stable of tools used by retailers since demand planning and allocation have been core business processes for decades (if not centuries, perhaps). After all, having product to meet forecasted demand is the central premise of any retailer.
With advances in technology – such as RFID (Radio Frequency Identification) – retailers now have a way to understand their inventory by SKU within fulfillment nodes. While not every retailer employs a real-time inventory system, having an accurate read on the inventory in a fulfillment node is critical to rapid fulfillment and to ensure a consistent customer experience.
If you offer rapid fulfillment to your customers, consider evaluating your order cancellation rates and substitutions, then look at your customers’ NPS (Net Promoter Score) – tracked via digital ordering – to identify opportunities based on your real-time inventory solution.
The sum of the parts: do you have product in the right places to deliver a great customer experience?
There are many different systems used by retailers to deliver a great customer experience through omnichannel order fulfillment.
However, keeping in mind your three key pillars – demand planning, allocation and real-time inventory – can help you identify opportunities to drive improvements for customers that, in turn, drive more sales.
What opportunities have you addressed via systems to enhance your customers’ experience?