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Is Inventory Optimization a Key to Omnichannel Survival?

By Jeff Bodenstab17 May 2016

For multi-channel retailers, it’s getting increasingly difficult to survive in “the Amazon jungle”. Bob Ferrari of Supply Chain Matters recently pointed to The Sports Authority bankruptcy as one indication.

As Amazon invests relentlessly to boost its agility and drop its costs, retailers are also looking for ways to raise their game. Industry analysts have pointed out an obvious fit with inventory optimization. If retailers optimize their inventory—dynamically aligning their supply chains to changing customer preferences and behavior—they can position inventory to satisfy demand at the lowest possible cost.

In a recent research note, analyst James Cooke of Nucleus Research explained the underlying problem. He says that the majority of omnichannel retailers use a hybrid strategy—filling online orders from both stores and distribution centers. Picking items to fill online orders from a common pool of stock spread across their stores and DCs. Cooke points out, however, that this overlooks the much higher picking costs at the brick-and-mortar sites. Here’s why.

Distribution centers are designed for receiving, warehousing, and shipment. Product is organized for rapid access; stock pickers get their instructions via wireless communication, directing them along efficient storage and retrieval paths for more productive yield.

Stores are set up for customers; their layout is not designed for efficient, distribution-center-like operations, and time spent grabbing items for online orders takes retail workers away from in-the-flesh shoppers. Nucleus says labor costs per unit to pick from the store are typically six times higher than in a warehouse.

That’s never going to compete with Amazon—not only its existing footprint, but in light of its new investments in logistics that include localized fulfillment sites, global trade services, and even sea and air cargo transport—like its May 5 announcement of plans to double its fleet of leased Boeing 767 freight jets for package deliveries.

Cooke says that Amazon could be on track, via warehouse automation, to have a worker pick up to 600 items per hour—in contrast to a store associate that picks 10-15 items hourly. In a March 9 Supply Chain Matters blog, Bob Ferrari cites an EKN Research and Aptos study that finds retailers spend 18 cents of every dollar of revenue satisfying customer expectations related to omnichannel fulfillment. Eighty percent of those retailers indicate these order management and fulfillment costs increased from the previous year by an average of more than 5%.

Cooke recommends leveraging demand planning software that can anticipate orders better than traditional forecasting tools to lower fulfillment costs and increase responsiveness by stationing more inventory at DCs.

Demand planning software can disaggregate the forecast down to the stock keeping unit level. Combined with POS store data and frequent online sales updates, it can predict by channel– what stock needs to be in the store for on-site customers and in a distribution center for online shoppers. These analytics flow to the software’s multi-echelon inventory optimization component to place the inventory by location and SKU—favoring the DC location for predicted online demand.

“Omnichannel retailers without inventory optimization (IO) tools are running out of time in their battle with Amazon as the e-commerce giant continues to invest in technology to lower costs,” Cooke says. “To stay competitive, traditional retailers can no longer hesitate when it comes to using software intelligence to stage most of their inventory for online sales at the DC level.”

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