Product Scarcity and Prioritization Criteria
How Do We Most Optimally Fulfill Omnichannel Demand?
For retailers to satisfy today's always-connected, instant-gratifying, highly-demanding customer, they must be available any time, anywhere. The benefits to retailers are clear: no lost sales and improved customer loyalty. But what is the downside? Retail inventory is traditionally highly distributed: it is in the private label store, in the ecommerce DC, in a third party drop ship location, at a big box retailer, etc. More inventories mean more investment and thus the greater potential for shrink, markdowns and margin erosion. Retailers must therefore carefully prioritize the fulfillment of customer orders to maximize their inventory productivity and profitability.
In this point of view, The Parker Avery Group will take a look at a fictional retailer to explore the key considerations of omnichannel fulfillment prioritization and offer guidance on how to achieve the most optimal outcomes from inventory management, customer and trading partner expectation perspectives.
Jane's Jellies and Snacks
Multi-channel and omnichannel retailers have various options for the locations from which product is allocated to the various channels. In an effort to delay the allocation decision to be as close to the consumer purchase as possible, many retailers leverage a single DC to fulfill all channels – this places added importance to Order Management Solutions (OMS) configuration and is the process we will explore.
Consider the case of Jane's Jellies and Snacks. Jane's offers goods for sale through its own retail stores, website and mobile channels, while simultaneously selling these same goods wholesale to department stores and big box retailers. With this strategy, Jane's is maximizing the availability of its products to its consumers. The company does not have unlimited production capacity and faces long lead times to obtain raw materials, due to the perishable nature of the products. So Jane's does its best to forecast the potential demand of its channels well in advance of the selling season and produces to that forecast. In anticipation of forecast variances by channel, Jane's manages inventory for all channels through a single master DC.
Jane's selling season begins. The company has begun to sell product through its proprietary channels and to its wholesale accounts, but demand is coming in higher than the company initially forecasted. Furthermore, a factory delay caused the company to receive only 90% of its production order. The result is an inventory shortage – Jane's can only fulfill 65% of its total demand. The company wants to provide inventory to all of its customers, but it must make fulfillment decisions based on product scarcity.
Scarcity in product supply and sourcing requires the establishment of clear fulfillment criteria. Prioritization drives profitability and sustains customer lifetime value. For omnichannel retailers, a clear fulfillment prioritization strategy is a must.
Inventory Scarcity and Fulfillment Prioritization
Scarcity is not only an outcome of forecast variance but can also be an inventory and merchandising strategy. Either way, the question is: Faced with inventory scarcity, how should Jane's go about prioritizing order fulfillment to maximize the value of their resources?
Typically, software solutions (Order Management Solutions or OMS) are employed to automate the prioritization process, but it is necessary to guide these tools' prioritization decisions based on filters developed from each retailer's unique requirements.
We propose three criteria to form the basis for the prioritization filter:
• Financial Costs
• Customer Satisfaction
• Channel Strategy
Criteria #1: Financial Costs
As a cornerstone of fulfillment, financial criteria are typically a readily accepted and available means for prioritizing fulfillment. Less common is the inclusion of financial criteria in a supporting software solution. Additionally, each business model may apply a different weighting to the importance or sequence of various financial considerations.
Operational costs. If a strong competitive advantage of the business were operational efficiency, then key financial criteria of fulfillment would be Shipping / Transfer / Re-Work and DC Costs. The same holds true if the business is operationally inefficient.
Margin by channel. The pricing strategy of the business may be flexible in pricing across channels (impacting margin outcome by channel). As a baseline, a solid understanding of margin by channel must be a leading factor in fulfillment prioritization.
Product affinity. This refers to the fulfillment of a product through a channel that drives sales of other products with high affinities, resulting in greater overall Units Per Transaction (UPT) in that particular channel. Companies must be sure to also include halo / product affinity attributes of the scarce product and the channel through which it sells.
Criteria #2: Customer Satisfaction
A second consideration for fulfillment is the impact to customers as a result of the allocation logic. This criterion originates as more qualitative. However, with proper analytics of communication and historical data, it can be as quantifiable as the financial considerations.
Delivery service levels. Stack up delivery times for all channels under different fulfillment scenarios – not losing sight of the value customers place on delivery times in the age of everything 'instant.'
Elasticity of demand. Consider timing of demand and fulfillment and determine which customers will wait for product and which will not.
Lifetime value of customer. Make available for fulfillment criteria some version of lifetime value of customers – remembering not to kill your 'golden goose.'
Criteria #3: Channel Strategy
As a more strategic filter to fulfillment prioritization, target channel mix can help tilt the scales in tiebreaker situations. Target channel mix and strategy can provide the swing vote and bring alignment among potentially competing functions. Do not underestimate the value of your target channel mix. Channel mix is similar to financial capital structure – it is the larger framework that paves the way for daily decisions to drive your company along the path to long-term goal achievement. Leverage the target channel mix in combination with financial and customer impacts in the company prioritization configuration.
All omnichannel retailers will face inventory scarcity in their efforts to fulfill customer demand, and some actually seek to achieve it in order to maximize inventory investments and drive margins. A deliberate prioritization and criteria for fulfillment, determined in advance and potentially as a component of system configuration (i.e., OMS), will ensure today's fulfillment actions contribute to tomorrow's long term success. Key considerations in developing that prioritization include Financial Costs, or the dollar impact of each channel option; Customer Impact, or considerations about customer lifetime value; and Channel Strategy, or alignment of channel mix to a company's long-term strategic objectives.
If you’d like to learn more about our vision or understand how you might take advantage of this strategy, contact us at Contact@parkeravery.com or call 770.882.2205.
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