In an ideal world, complete visibility across the supply chain would be a given. Forecast accuracy would always be 100% perfect with real-time insights into precise demand at every sales point across various channels. However, the reality is often far from ideal.
Today, retailers must navigate intricate omnichannel landscapes. Given that a ‘typical’ retail supply chain is inherently multi-channel, it becomes imperative to ensure efficient supply chain planning across all levels of the operation.
However, with so many links in the chain (DC, regional DC, subsidiaries, retail branches, webshop, and third-party e-commerce platforms), making sure that inventory is available at the right time and in the right place across all channels is a complicated task.
But this complexity also makes achieving operational excellence in an omnichannel setup all the more important. Creating an agile supply chain, not only provides a strong competitive edge but also ensures customers enjoy a better shopping experience.
Omnichannel strategy and its nuances
Every company has its unique operational characteristics. However, in this article, we will explore 3 critical elements for effective supply chain planning within omnichannel environments: Product management, allocation, and replenishment.
Dynamic allocation and replenishment in omnichannel environments
The success of an omnichannel supply chain lies in striking a perfect balance between customer satisfaction and financial efficiency (for example, working capital invested in inventory).
The goal is to attain the highest possible level of availability to hit the service level target without locking up invaluable financial resources in stock; all while considering the risk of obsolescence.
Many businesses share this objective. However, to attain the right balance of inventory within an omnichannel network, some key factors must also be considered:
E-commerce players often boast a wider product assortment compared to their traditional retail counterparts. This is particularly true for pure players – who typically offer extensive product catalogues.
The same can also be said for retailers who have expanded beyond the confines of physical stores. In the event of such a scenario unfolding, it significantly disrupts the product allocation dynamic as the retailer must be able to satisfy demand quickly, no matter which channel it comes from.
Different levels of service depending on the channel
An omnichannel retailer sells its products through the physical channel (which may include different types of shops: Flagship stores, Outlets, Pop-up Stores…), online shops, third-party marketplaces, directly on social networks…- and hybrids models such as click & collect. Each channel and each point of sale may have a different level of service. Consequently, inventory must be allocated and replenished accordingly.
Broader geographic scope
E-commerce channels can cover a much wider geographical area. Therefore, an omnichannel retailer may need to fulfil orders from far-reaching locations. Yet they must be able to do this in a timeframe that is acceptable for the customer.
Reverse logistics and returns
An omnichannel retailer must deal with returns from the different channels it serves, both those coming from the physical shop and those coming from the online channel (whose return rate tends to be significantly higher).
Don’t forget to click and collect
Click and collect is the perfect example of omnichannel management, where the purchase is made via an eCommerce platform, but the product is collected from the physical shop. In terms of allocation and replenishment, this implies the need to have a significantly decentralised inventory to be able to deliver it quickly to the different collection points.
Profitable omnichannel product management
E-commerce players depend on their wide-ranging selections to draw in customers. However, this dynamic compels omnichannel retailers to expand their product offerings even further, encompassing a greater number of niche items than traditional brick-and-mortar stores would typically carry. But what factors should be considered when making critical product management decisions in omnichannel environments?
The costs of increasing the assortment
How much does it cost to add a new product to your assortment? An initial purchase has to be made to stock the product, the ordering process of the product has to be managed and space has to be made in the warehouse. Supply chain planners should not overlook this fact. Adding a new item to the portfolio costs money, and therefore the return on investment must also be considered.
Management of long-tail products
As noted above, omnichannel retailers’ assortments are often extensive. This can often mean that the 80/20 rule sometimes moves more towards a 90/10 rule. However, the “long tail” of the assortment also brings value because, due to the much lower price competition for these items, much higher margins can be achieved.
The strategic vision
For each new product that is added to the range, a multitude of considerations must be taken: what the desired level of service will be, where the stock of this article will be located in the distribution network, minimum and maximum stock levels for replenishment… All of this requires effort and resources and, therefore, the addition of a product to the portfolio must make strategic sense.
The assortment dispersion rate
The Assortment Dispersion Index (ADI) is an important indicator. It is calculated by multiplying the number of SKUs by the number of stocking locations. In the case of an omnichannel retailer, we will find an index that will be high. This means that managing each item and location manually is, in practice, impossible. Therefore, to deal with this planning teams should consider the following:
Manage items by category:
Product Family management involves grouping products that have similar characteristics or belong to the same category to simplify management and improve operational efficiency.
Deploy AI-enabled planning tools:
The amount of data collected will be enormous, so you must be prepared to process this information with intelligent AI-enabled supply chain planning tools.
Automate product lifecycle management:
With a high assortment dispersion rate, inventory managers must rely on advanced supply chain management systems that automatically determine product lifecycles and provide the information required to attain the optimal inventory level for each SKU at each stage.
Collaboration with the other links in the chain:
Creating visibility over supplier performance and customer behaviour will allow you to fine-tune product management decisions to minimise risk and ensure improved availability.
Responsive omnichannel supply chain planning
To optimise supply chain planning in a multi-channel environment, visibility is key. As mentioned at the beginning of the article, in an ideal scenario all the necessary information would always be available to each of the stakeholders involved throughout the end-to-end supply chain. However, this is not always the case, so to ensure a continuous and smooth flow of goods, a lot of information needs to be exchanged between each point of the network (purchase orders, demand, stock levels, delivery times, etc.).
The level of visibility and accessibility of this information will determine the degree of accuracy in forecasting and order generation. Broadly speaking, we can define 3 main methods for effective omnichannel strategy:
1) Top-down planning
This is a method applied in companies where there is a notorious lack of access to data and information. For example, information on lead times and stock volumes is only available at the central level, and inventory planning is calculated based on historical demand from the central warehouse, without taking into account any input from “downstream” points.
Thus, when forecasting, only the independent demand from the central warehouse is taken into account. No information from other locations or levels will be used, which may expose the company to the bullwhip effective where the amplification of demand fluctuations along a supply chain, results in increased inventory and operational inefficiencies.
2) Distribution Requirements Planning (DRP)
The focus here is on the replenishment needs and lead times for the different stocking locations and levels across the network. Decisions are based on historical demand and the replenishment needs of the lower levels of the network.
Communication plays a key role in this scenario: the exchange of information between the links in the chain can reduce the bullwhip effect significantly. In contrast to the first scenario, forecasting is also improved by considering the replenishment needs of the different channels and locations’ However, we still do not consider the demand of our end customers (usually because we do not have the data).
3) Omni-channel planning (integrated supply chain planning)
For this method, we assume that we have full visibility at all levels of the chain. The planning here is based on transactional Point of Sale (POS) information. With this data, an optimal allocation and replenishment plan can be calculated for both central and regional DCs. As a result, the risk of overstocking is minimised.
However, this model requires access to granular levels of information and the use of advanced planning tools. Therefore, for this method to be correctly deployed, information from the lowest levels of the network must be up-to-date and reliable.
But which method is best? Companies should think carefully before deciding which model to adopt. The most advanced does not necessarily have to be the one that offers the best results. The characteristics of the chain (number of subsidiaries, internal lead times, irregularity of demand, etc.), the information available and the optimisation objectives must be balanced. The following table shows the main criteria to be considered for each scenario: