History of Omni-Channel Part 7: When Demand Breaks

This is part 7 of an on-going series on the history of omni-channel. Part 1 addressed the point when customer centricity and “cross-channel” (the early days of omni-channel) first merged and became the foundation of what most people mean when they say omni-channel today. Part 2 talked about the tipping point of executive awareness, when online sales become big enough that they become more than just the online equivalent of a large or flagship store – and the implications this had on executives looking after the store business. Part 3 looked at the point when retailers realized the store was in trouble. Part 4 focused on mobile’s tipping point. Part 5 focused on the shift from learning about omni-channel to doing something about it. Part 6 covered the implications of that shift on supply chain.

When it comes to omni-channel, retailers are feeling the heat in supply chain today. But any retailer worth his or her salt knows that supply chain is just execution. The plan – what they’re executing against – comes from merchandising. In part 6 of my omni-channel history I mentioned that ship from store is causing retailers to ask themselves hard questions, like, “If I’m shipping this from a store to meet demand, why did I send it to this store in the first place? Why didn’t I send it to where the demand actually was?”

IntelFreePress / Flickr

IntelFreePress / Flickr

I’ve heard this question, or a variation on this question, a lot over the last nine months or so. In fact, just last week, I was talking to a former merchandise executive-turned-vendor who said that for the apparel company he worked for, the return on investment for ship from store was bigger than they had expected – much bigger. Then he said the magic words: “I guess our service levels in stores weren’t as good as we thought they were.”

This is the key to ship from store ROI. You can figure out the ROI fairly quickly – on the surface, it’s simple math. What is my store’s service level today? Let’s pretend it’s 90%. That means, at any given time my store may be out of stock on 10% of the items it carries. If you enable cross-channel inventory and ship from store, you have an opportunity to maybe capture 5 of that 10% in lost sales because of out of stocks. A 5% increase in sales, yes perhaps at a reduced margin and with some additional shipping costs tacked on top. That is nothing to sneeze at.

But the retailers who are doing ship from store are finding that they’re recovering a heck of a lot more than just that 5, or even 10, percent of sales they think they’ve been losing all this time. How is that possible?

Well, one, just because the inventory record says that you are 90% in stock does not mean you are actually 90% in stock. Macy’s, in some of their trials around RFID, found that inventory accuracy degrades remarkably fast after a cycle count. I’ve heard numbers on the order of 10% a month up to 10% per week. So your 90% could easily be 50% before you know it.

Two, there is your service level, and there is the customer’s perceived service level, and these are two different things. I saw a study a long time ago from a university – I can’t find it anymore, but I think it was from Kellogg – that tracked the difference between actual and perceived service levels. If a customer walks into a store and can’t find what they’re looking for, they think the store is out of stock, whether the inventory is actually there or not. In one case, they found that the in-store service level was 92%. The perceived customer service level, because they couldn’t find what they were looking for, was 70%.

Before omni-channel, the customer would probably either wait if it wasn’t urgent, or would switch to another product. If it got bad enough, a customer would consider switching to another store. Now, the customer pulls out her smartphone and orders it. If you’re lucky, she orders it from you. But think about the supply chain consequences of that decision – demand that was legitimately in a store ended up getting shifted to online because she couldn’t find what she was looking for (even though the store actually had the product). Online, of course, wasn’t allocated enough inventory to take on this shifted demand, and so is out of stock. And in order to save the sale, the retailer ends up shipping from store. And a merchandiser somewhere is looking at all of this activity and scratching her head: why did I put this inventory in the store in the first place?

And finally, we’re talking about apparel for the most part when it comes to ship from store, and “in stock” in apparel is a bit more nuanced than it is for other verticals, because of color/size combinations. You may show that you have six black jackets on hand, so check the box – you’re in stock! But if you don’t have the size 8 that the customer is looking for, then guess what? You’re out of stock. So at what level are you actually measuring your service level for stores? At the black/size 8 level, or at the jacket level?

Merchandising plans are based on either historical activity, or (hopefully) some forecast of demand. Demand. The customer’s expressed intent to buy. But most retailers I know don’t plan by customer. They plan by location. By channel. But there are so many ways that this can go awry, as I just demonstrated. If you’re too aggregated, then you’re missing out on the nuances of local demands. And if you have no store employees to help customers, then you may be forcing them into a different channel to get what they need, even though you’d actually put the inventory in the right place to begin with. And if you don’t have an accurate picture of your on-hand inventory, you have no clue if you’re actually meeting customer demand or not.

Locations don’t actually demand anything. Customers do. And customers have more ways – channels, locations – to express demand than ever before. But when demand gets disassociated from location, all of the processes that depend on demand are impacted. In other words, when demand breaks, merchandising is not far behind.