Inventory Planning/ Optimization
Inventory Strategy Is the Key to Profitable E-Commerce

Analyst Insight: Omnichannel customer expectations continue to drive complexity in inventory planning and management. Expectations for faster fulfillment and free shipping, coupled with pressure to minimize inventory carrying cost, are driving companies to rethink inventory strategies to profitably service customers and ensure inventory is deployed in the right quantities to the right place at exactly the right time. But omnichannel flows like ship-from-store and buy-online-pick-up in-store (BOPIS) are complicating things and creating a new threshold for inventory planning requirements. - George Swartz, vice president, Fortna Inc.

One of the primary benefits of omnichannel fulfillment is improved inventory performance and capital expense reduction from reducing safety stock. Market leaders are investing in order management and planning systems to make better use of inventory and working capital. But many companies are still struggling with the up-front work of establishing a good inventory system of record and processes that support inventory accuracy across all nodes.

The “which channel gets credit for the sale” debate must be settled and primary focus given to the customer. If not provided the proper incentive, store associates will often resort to protecting inventory for walk-in customers without fully understanding the impacts to overall cost and profitability. A balance is needed between maintaining store inventory for the walk-in customer and maintaining reserve stock for both e-commerce orders and retail replenishment.

Using stores for e-commerce fulfillment requires real-time inventory visibility, which is a challenge at the store or branch level where systems and processes have not historically been designed for that level of accuracy. Taking advantage of software tools, such as distributed order management (DOM) and enterprise order management (EOM) to optimize inventory, reduce costs and improve service, requires point-of-sale and inventory systems of record that support real-time visibility and accuracy.

Many companies initially outsourced e-commerce fulfillment to 3PLs, but now that online sales are growing by double digits, they are considering bringing e-commerce fulfillment in-house. This often creates difficulty in obtaining full visibility to accurate inventory and historical data on which to base inventory planning decisions. Even where historical data is available, omnichannel behaviors have shifted demand patterns such that history is only one of several indicators of future demand.

Inventory analysis may help identify the root cause of problems and determine whether a simple process change or a larger alignment effort is required. Are you being pushed by customers to shorten lead times? Are suppliers/partners pushing inventory up or down the supply chain in your direction? Do store processes and point-of-sale systems support inventory accuracy? Which omnichannel flows are customers using? Which ones do they want to use more? Any attempt at an omnichannel inventory strategy will fail until you understand what’s causing inventory to fall out of alignment with the business.

Over the next three years, companies should strive toward putting an accurate inventory system of record in place (ERP and WMS), achieving greater visibility and accuracy across the network and defining their omnichannel strategy. As part of the overall strategy, business leaders must decide whether the customer promise will be best cost or service leader. Rules for inventory deployment should flow from that. With these building blocks in place, you can begin configuring inventory management and planning tools and EOM systems to ensure you optimize inventory and get the most from your working capital.

The Outlook

Beyond 2020, retailers will continue to see volatility from e-commerce growth. This will continue to create uncertainty around where to place inventory and how much to deploy. Companies will need to consider investing now to build systems and processes that support omnichannel inventory visibility and accuracy. With B2B e-commerce growth outpacing B2C, wholesalers in particular need to sharpen their focus on upgrading and/or replacing older systems (WMS, ERP). Inventory can be the single-largest capital investment for the business, and how you choose to harness it will determine success.

One of the primary benefits of omnichannel fulfillment is improved inventory performance and capital expense reduction from reducing safety stock. Market leaders are investing in order management and planning systems to make better use of inventory and working capital. But many companies are still struggling with the up-front work of establishing a good inventory system of record and processes that support inventory accuracy across all nodes.

The “which channel gets credit for the sale” debate must be settled and primary focus given to the customer. If not provided the proper incentive, store associates will often resort to protecting inventory for walk-in customers without fully understanding the impacts to overall cost and profitability. A balance is needed between maintaining store inventory for the walk-in customer and maintaining reserve stock for both e-commerce orders and retail replenishment.

Using stores for e-commerce fulfillment requires real-time inventory visibility, which is a challenge at the store or branch level where systems and processes have not historically been designed for that level of accuracy. Taking advantage of software tools, such as distributed order management (DOM) and enterprise order management (EOM) to optimize inventory, reduce costs and improve service, requires point-of-sale and inventory systems of record that support real-time visibility and accuracy.

Many companies initially outsourced e-commerce fulfillment to 3PLs, but now that online sales are growing by double digits, they are considering bringing e-commerce fulfillment in-house. This often creates difficulty in obtaining full visibility to accurate inventory and historical data on which to base inventory planning decisions. Even where historical data is available, omnichannel behaviors have shifted demand patterns such that history is only one of several indicators of future demand.

Inventory analysis may help identify the root cause of problems and determine whether a simple process change or a larger alignment effort is required. Are you being pushed by customers to shorten lead times? Are suppliers/partners pushing inventory up or down the supply chain in your direction? Do store processes and point-of-sale systems support inventory accuracy? Which omnichannel flows are customers using? Which ones do they want to use more? Any attempt at an omnichannel inventory strategy will fail until you understand what’s causing inventory to fall out of alignment with the business.

Over the next three years, companies should strive toward putting an accurate inventory system of record in place (ERP and WMS), achieving greater visibility and accuracy across the network and defining their omnichannel strategy. As part of the overall strategy, business leaders must decide whether the customer promise will be best cost or service leader. Rules for inventory deployment should flow from that. With these building blocks in place, you can begin configuring inventory management and planning tools and EOM systems to ensure you optimize inventory and get the most from your working capital.

The Outlook

Beyond 2020, retailers will continue to see volatility from e-commerce growth. This will continue to create uncertainty around where to place inventory and how much to deploy. Companies will need to consider investing now to build systems and processes that support omnichannel inventory visibility and accuracy. With B2B e-commerce growth outpacing B2C, wholesalers in particular need to sharpen their focus on upgrading and/or replacing older systems (WMS, ERP). Inventory can be the single-largest capital investment for the business, and how you choose to harness it will determine success.