You may think you know your competition, but your traditional competitors may not be the same ones you run up against in the future. One of the most prevalent trends in retail today is the blurring of segments and channels. Companies are entering new markets and enticing new customers to generate additional business growth. Brick and mortar retailers now have web and catalog channels, and vice versa. Wholesalers are opening stores and creating new retail organizations, while retailers are investing in private label products. Do-it-yourself retailers are selling home goods, home-goods stores are selling groceries, and grocery stores are selling gas.

So what does this mean to retailers and manufacturers? How do organizations adapt, wherever they may currently reside in the value chain? Here's how to thrive in what's becoming a vertically integrated world.

Think vertically: One of the keys to not just surviving, but flourishing in this ever changing retail landscape is to think vertically. Traditional vertically integrated companies, such as footwear and apparel companies like Gap or Ann Taylor, have direct control over the product, cash, information, and demand flows within their organizations. More and more companies are joining these ranks, either by organic growth as with Polo and Nike or by acquisition like Supervalu. But what do you do if this isn't an option?

The majority of retailers, wholesalers, and manufacturers are not traditionally vertical and may not be in a position to acquire or organically grow channels like some of the examples above. For these discrete organizations, the answer might be developing networked ecosystems within their value chains, thus becoming virtually integrated. However, there is more than one way to become vertically integrated.

Whether you are vertically integrated or virtually integrated, everyone must be vertical. The more soloed and disconnected an organization is, the farther behind it falls as these trends mount. The more vertically integrated and connected an organization is, the better equipped it is to adapt its organizations, processes, and technologies to take advantage. Vertical, or virtual, integration allows responsiveness to subtle changes in demand or trends by sharing data up and down the extended value network.

Demand-driven retailing Integration points: In this integrated world, companies must understand the critical intersection between the retailer's internal processes and the upstream effect on the partners within the value network. Below, we map these critical intersection points to AMR Research's five demand-driven retailing strategies.

Store and cross-channel operations: Definition: The use of customer insights to deliver consistent, timely, and relevant communications through each stage of the shopping process, regardless of the point of interaction. The three main integration points are as follows:

1. Endless aisle: Retailers are increasing consumer choices in order to ensure they meet demand. However, space constraints on the sales floor and economical constraints in the supply chain are forcing them to find innovative ways to manage inventory and ensure high conversion rates. Welcome to the endless aisle. The endless aisle takes advantage of inventory not physically in a store. It allows retailers to offer an extended assortment beyond the four walls of the store using visibility and flexible order fulfillment systems to call on inventory throughout the network of stores, distribution facilities, and supplier partners.
2. Product data and images: Consumers demand a consistent cross-channel experience. One way to ensure a great experience is to synchronize accurate product content, data, and images among trading partners. This will allow consumers to access the most comprehensive and precise information available regardless of whether they are in a store, on the web, or talking to a customer representative.
3. Customer intelligence: Customer data from point of sale (POS), loyalty programs, e-commerce, and contact center interactions is critical to gaining insights into shopper behavior and affinity, but too often the information gets stuck in the marketing department. This information should be shared with not only merchandising, but also upstream with manufacturing and the supply chain in order to take better advantage of demand signals and customer segmentation.

Consumer-centric merchandising: Definition: The planning, promotion, pricing, space, and inventory strategies, and their coordination, to accurately sense, forecast, and assort for consumer demand. The main integration points are as follows:

4. Assortment management: True vertical and virtual integration will improve the effectiveness of every step in the merchandising process, but the assortment is a key collaboration point between retailer and manufacturers. Traditionally, collaboration stopped at line reviews or category management, but should now include sharing information to improve customer segmentation, size profiling, and store clustering.
5. Lifecycle pricing: Collaboration among lifecycle pricing functions--initial, promotional, and markdown--will result in margin improvements. The sharing of POS data can lead to better decisions for base and regular pricing. A comprehensive view of inventory and customer demand will result in more effective markdowns and a reduction in margin leak.
6. Trade fund and promotions management: Manufacturers and retailers working together can better manage supplier trade funds.  Using downstream-data repositories, manufacturers can access consumer data to target the right customers with the right promotions for the right product. This will allow both organizations to increase unit sales and revenue without just giving away margin.

Product development: Definition: The processes for defining and introducing new products to the market--from concept to development--for vertically integrated retailers to build margin and loyalty through private-label products and for traditional retailers to collaborate with suppliers. Three key integration points are:

7. Demand shaping: Retailers and suppliers should share insights from consumer-centric merchandising activities to shape demand for new products. Collaborative product, design, and demand decisions based on product attributes, true market consumption, and price management principles will lead to more effective product and service innovation and ensure customers get the products they want.
8. Collaborative design: Designers often begin seasonal activities by creating themed storyboards depicting the trends that will influence the line and individual styles. Creating an electronic version as well, usually in a CAD or an illustration application, allows designers, technical designers, and trading partners to review, mark up, and comment on images in a collaborative manner. Creating a virtual sandbox lets partners contribute to the design process more effectively.
9. Vendor compliance: Identify suppliers early in the product development process using cross-functional teams that include procurement and operations. Supplier decisions should be based not only on material quality and costs, but also on supplier reliability and responsiveness. To ensure compliance and performance transparency, vertical organizations are using supplier scorecards accessible throughout the network.

Agile supply networks: Definition: The extended supply chain required to source, manufacture, and deliver products to the actual or virtual shelf, comprising network design, sourcing strategies, supplier management, warehouse management and logistics, and risk management. The three integration points are:

10. Strategic sourcing: To guide sourcing decisions, use scorecards to actively measure supplier reliability. Base metrics on cross-functional input from each group that deals with suppliers: quality, operations, procurement, and product design. Sharing information not only internally, but also with suppliers, should reduce sourcing variability while improving supply network velocity.
11. Design for postponement: Postponement strategies should be actively deployed to approve supply chain agility. Share demand data with suppliers to hedge raw material investments and reserve potential capacity. Design finished goods inventory built on common components to create buffers to balance demand variability.
12. Transportation: Collaborate with suppliers to share forecasts with common logistics providers. This will allow for additional network agility because transportation providers can adapt using different modes of transportation or automatically expedite goods to ensure that inventory is where it needs to be at all times and points in the supply chain.

On-shelf availability: Definition: Balancing on-shelf availability and inventory optimization through the efficient replenishment of ongoing or long lifecycle products from the manufacturer to the customer, regardless of flow strategy. The three integration points are:

13. Demand forecasting: Improve supply reliability and visibility by sharing demand forecasts with suppliers to translate independent demand into a supply forecast. Alerts and exceptions can be used to trigger supplier response to critical demand variations, thereby avoiding out-of-stocks.
14. Replenishment: Incorporate supplier core capabilities by using direct store deliveries (DSD), vendor managed inventory (VMI), and scan-based trading (SBT) as an opportunity to enhance your replenishment network. These alternative forms of replenishment rely heavily on mature perpetual inventory systems and visibility throughout the network, so ensure these prerequisites are in place.
15. Inventory visibility: When actual sales and inventory data diverge from demand forecasts and inventory plans, retailers, suppliers, and transportation providers must all take action. Pervasive visibility into inventory for tracking and managing inventory throughout your supply network will allow each organization within the network to proactively respond to these situations

We just examined 15 different integration points among retailers' various nodes within the supply network. A great way to evaluate your vertical or virtual maturity is to examine the level and sophistication of product, information, cash, and demand flows throughout the extended ecosystem.

Product flow is the most obvious integration point, but too many organizations focus solely on this flow. Mature vertical and virtual organizations or ecosystems see this flow as a result of managing the other flows. Organizations should reevaluate these flows internally and externally; there are plenty of opportunities for tighter integration. For an in-depth look at the design elements of vertically integrated supply networks, see "In Search of World-Class Supply Chain Management."
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