Crawl scenario for Omni Channel – pre-requisites for Omni strategy in Retail

There are a number of reasons to consider omni channel retailing and most retailers are in the process to varying degrees. There are a number of white papers extolling the virtues and promise of Omni Channel Retailing. This post is not about why retailers should consider omni channel but what it will take to get there. The focus is on IT and back end support (both systems and people) to enable the execution required for Omni channel. There are various degrees of capabilities required to achieve the full potential of the omni vision that is being painted in Retail. This post is about the foundational capabilities that are prerequisites to start the crawl towards Omni Channel Retailing.

Common Item Definition (product hierarchy)

To present a common view of an item to a customer in all channels, it becomes essential to have a common product hierarchy between the brick and mortar and online channels. The organization of items into categories and classes and the organization of the items for presentation online need to be aligned. This in itself is a huge change/challenge to many retailers with strong online presence. Over time the different businesses have evolved to have either completely separate product hierarchies or have different branches within the hierarchy branching off at some level. In the absence of a common hierarchy and items, it becomes essential to have a Master Data Management system that can map items between the two channels. It is likely that items will be considered only for one channel or the other (or may be certain sizes are available only online for e.g.). Therefore, an additional qualifier of some kind (an attribute perhaps) will be needed to tag items for one or both channels. This will necessitate all planning and execution systems to be able to not only deal with the common hierarchy but account for the attribute — in planning logic or execution logic.

Handling returns

One key aspect of multi channel are returns. Returns can be made either back to the purchase location or to a different location. Returns will cause two problems — how to handle reversing the sale and what to do with the inventory. In addition, returns to different locations from the purchase location will cause the assortment at that location to break down. It is possible that item returned to a store was not in the original assortment for that store. When returns occur there are four possibilities to handle the returns 1. Ship them to the original purchase location 2. Put them on the shelf in the return location 3. Leave them in the back room of the return location 4. Ship them to a warehouse Options involving intra company shipping will incur shipping costs and increase the probability of damaging the merchandise before it is sold. Putting it on the shelf in the return store makes sense if the item was part of the original assortment but can cause problems if the item was not in the original assortment. Options to hold the inventory at the return location could lead to weird results. When returns are received, sales adjustments are posted back to the location of the original sale. But inventory is incremented at the return location. If there are large number of returns, this could cause the sales to be negative at the return location. In addition it is important to know the true demand at any location to be able to properly assort and plan for inventory. Properly adjusting sales and returns while accommodating the integrity of the stock ledger is crucial.

Merchandise locator capability

It becomes extremely important to know where inventory is available so that when a customer shows up at one of the channels, a quick search can be made across the enterprise locations for availability. This will help fulfill the customer order directly from where the product is current located — this could be a store or a warehouse.  The ability to search for specific inventory in all holding locations is a key capability.

Shipping capability

Not all locations have the ability to ship. There is training and certain capability required to be able to ship depending on the type of products that need to be shipped. There will be a need for inspection and efforts to restore the returns to a new product state before they can be sent to another customer.  Developing Ship from Store or intact, ship from any location is a capability that will be required – especially if returns are not moved back to the warehouse.

Negative sales? Book-keeping impact? Incentives?

If the internal structure of the organization is that there are two separate teams – one managing brick and mortar stores and another managing online store — then there will be a proliferation of sales measures. Each team (depending on how they are incented) will demand different sales and inventory measures. Stores teams will not want online bought returns to effect their sales numbers. Who do you give the credit for the sale to? What happens when the product is returned to a different channel? Sales can be reversed but what about inventory? Stock ledger and its association of inventory to a location means that there could be locations with negative sales to balance on hands with sales. Very soon, there will be a need to have a number of inventory measures that adjust/compensate for the cross channel returns. Different measures of sales will also be required to be to understand the true demand at any location for better Assortment Planning in the future. It is important to have a process in place that covers systems, planning, measurements and compensation to deal with the challenges that will be presented. I would to hear from you on the above issues and any other that you will add to the list as pre-requisites to think about before you getting to amazing opportunities that Omni channel retailing will afford.

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5 comments

  1. We already see the problems with omni-channel returns. this problem is only going to get bigger. For all 4 options you describe for returns it becomes very important on how soon can use the inventory for sale again.

    • Yes. I agree. The fastest way to make the inventory available will probably be to be able to ship it directly from the return location. But it will need capabilities like a inventory locator and packaging & shipping. Of course, it depends on the type of merchandise and the packaging it involves and what it takes to make the returned product “like new” again.

      There are other issues the returns pose – do you put it on display in the store to improve the odds of selling it? what does that do to your assortment? Do you have storage in the back?

  2. Yes. I agree. The fastest way to make the inventory available will probably be to be able to ship it directly from the return location. But it will need capabilities like a inventory locator and packaging & shipping. Of course, it depends on the type of merchandise and the packaging it involves and what it takes to make the returned product “like new” again.

    There are other issues the returns pose – do you put it on display in the store to improve the odds of selling it? what does that do to your assortment? Do you have storage in the back?

    Also, I am seeing more labels asking not to take returns back to the store but deal directly with the manufacturer. I wonder if this has something to do with the returns problem you are describing?

  3. Jayaraman Parameswaran

    Slightly tangential thought on the subject, specifically around book keeping and incentives. If retailers want to take the omni channel path, shouldn’t they get away from the tradition of accounting sales by channel and start looking at it more holistically (global view of inventory) ? Shouldn’t inventory in the supply chain be considered an asset(like mentioned in the blog being able to make this product available at the desired location for customers) to meet end customer demand with customer satisfaction being the end goal? I would think this in addition to other things, will be requirement for retailers to claim support for omni channel retailing.

    • Jayaraman,

      You are correct in that the customer should be the focus. There may be many reasons as an organization you want to track the channels separately. For example, you want to better understand the profitability of a channel or better understand the ROI on a specific investment you are making. There are also other business reasons to track things at a channel level or a “profit center”. But when the internal reasons get in the way of meeting customer needs, you have a problem.

      The challenge for organizations is to be able to come together to deliver the Omni Channel promise no matter what the internal organization structure. Executives have to find a way to have the teams pull in the same direction and ensure that they are not setting up blocks (in how they get measured for e.g.) that cause the teams to pull in different directions. The longer term solution is to do as you say create a holistic approach to focus on the customer. There are things that retailers are beginning to do – like giving a buyer responsibility for a category for all channels. This enables the teams to buy the proper width and depth while also positioning inventory in-season at the most profitable channel.

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