Modern-day omnichannel businesses spout the mantra ad nauseam: the customer is king. The secret of success rests in making sure that product is always on the shelf or in the warehouse. Don't dare disappoint a buyer who would be perfectly happy to switch to a rival seller if you don’t have the right item at the very moment it’s desired.

That’s nonsense, of course. Retailers can’t possibly satisfy the demands of potential buyers in every single instance. No forecast is accurate 100 percent of the time, and you can’t correct the error with excess inventory.

To the other extreme, retailers engage in elaborate inventory-optimization strategies that lean out warehouse racks and retail shelves to the barest minimum of product. Then they pray that what’s left is precisely what the fickle customer wants. We’ve all seen how that goes. Hence the online merchant with product on backorder the moment its seasonal catalog is released.

Clearly there’s the need for retailers to balance the necessity of inventory with the cost of keeping it around. Both extremes entail a certain amount of risk, although sellers seem to feel that the worse option is to be out of stock on a popular item. Lost sales mean lost customers – possibly forever.

“People would rather be more cautious, and risk [overstocking],” says Brandon Levey, chief executive officer of Stitch Labs, provider of an inventory logistics platform for mid-market, multi-channel retailers. He falls into the camp of keeping customers satisfied year-round. But his solution isn’t to burden the balance sheet with inventory that ends up being returned or sold at a deep discount.

Levey’s strategy is based on the notion of the “virtual warehouse.” Say you’re a retailer that has ordered 1,000 shirts. You know that the actual order is likely to vary from that number in either direction. And it’s too expensive to count every item prior to making the lot available for sale. So you’ll conservatively assume that you received only 975 shirts, and make that number available to your sales channels. The remaining 25 units constitute a virtual reserve that is held back until the stock for sale reaches zero. At that point, counting the remaining items in your virtual warehouse is relatively inexpensive, and you can then move them into the live warehouse for sale.

One Stitch Lab customer, with sales volumes of just over 1,000 transactions a day, recently implemented a virtual warehouse. Now it’s making between seven and 15 “out-of-stock” sales a day, says Levey.

There is, of course, a lag between the time the original stock sells out and the reserve stock gets placed in the channel. Lost sales are likely to occur then. But Levey says the risk of that happening can be mitigated through better inventory planning – the kind that cuts down on the number of times the seller gets to zero on a given item.

Levey says the model works best for high-velocity items. Often they account for a minority of SKUs but a majority of revenue, so they require the best possible controls.

The real world will always conspire to complicate such efforts. Few retailers have sophisticated inventory-management systems that reach across channels. As a result, inventory tends to get siloed. So does information: according to Levey, companies “don’t always share accurate numbers of what they have even if they’re keeping track of inventory.”

A perfect example of that dilemma can be seen in the literal brick wall that separates one company’s fulfillment operations for online and brick-and-mortar sales, according to Levey. Even today, with retailers becoming increasingly aware of the need to serve all channels with equal competence, inventory is often routed through separate fulfillment streams, depending on where it was ordered. (Witness Wal-Mart Stores Inc.’s move to build big new e-commerce fulfillment centers to compete with Amazon.com, instead of relying on its existing network of retail stores and supporting warehouses.)

Which brings us to every omnichannel retailer’s dream: a single pool of inventory for all channels, with instant visibility and fulfillment capability across the network. (Even if inventory is scattered across multiple locations and types of facilities, including retail stores.) How many companies have achieved that dream? Precious few if any, says Levey.

Over half of larger retailers can’t view the location, quantity and associated cost of every SKU, he says. For small and mid-market merchandisers, the number tops 80 percent. And almost no one can determine the future purchases they’ll need to achieve an inventory plan. Manual, fragmented processes continue to dominate.

Levey believes major retailers will quickly adopt the necessary inventory planning, management and fulfillment strategies. “Certainly by the end of the decade,” he says. “If you want to be competitive in the omnichannel world, you’re going to have to implement some technology solutions to automate your business, or you’re going to die.” Time to pull down that brick wall – literally and figuratively.

Comment on This Article