Management overview
The new market conditions are causing customer behaviour to change fast. While commentators are quick to point out the downside, there are some real opportunities which few retailers have, as yet, been able to respond to adequately.
Retailers want to maximise sales across each channel, but they are constrained by existing supply chain processes. Physically ring fenced stock for each channel in the warehouse, separate systems for each channel and a lack of real time online sales information are all acting as a brake on retailers’ ability to capitalise on the multi-channel revolution.
Most organisations cannot dynamically reallocate stock to meet customer demand across different channels, and they cannot easily process sales across channels (e.g. purchase online and return at the store). As a result, they are not delivering a consistent and joined-up customer experience across every channel. Typical problems include product fragmentation, costly inter store transfers and a lack of available stock for the increasingly successful online channel. A sticking-plaster solution is to overstock the channels; this may increase customer satisfaction, but at the cost of big increases in mark down losses.
The unhappy combination of escalating costs, lost sales and higher mark downs can be resolved by introducing a coherent integrated channel approach that keeps stock holding to a minimum while maximising full ticket price sales across all channels. By properly integrating every sales channel, creating a consolidated stock holding and using real time information and automated business rules, retailers can meet the objectives of improving the customer experience, reducing costs, maximising warehouse space and reducing picking resources.
New focus
For the past decade fashion retailers have enjoyed expansion through innovation, adding new stores, fascias and ranges to boost revenues. And with booming sales, few retailers have felt the need to really hone operations – from replenishment to store management to channel integration.
But those days have gone: retailers are forced to refocus attention on core business processes to reduce costs and address diminishing margins. Yet at the same time, many are finding supply chain costs spiralling as they embrace new multi-channel strategies.
Fashion retailers need to pay serious attention to detail in a bid to maximise the value of every piece of stock, to drive extraneous cost out of the business and create an efficient multi-channel operation.
Multi-channel
With the phenomenal rise in customer demand for eCommerce, fashion retailers now recognise the need to deliver a consistent customer experience across every touch point – and make every product available online as well as in store.
But, without massive manual intervention, few have the back-end supply chain processes in place to support this objective. Furthermore, many are now so focused on the eCommerce channel that they don't have the resources to focus on core in store processes such as a reduction in stock fragmentation through more intelligent replenishment.
An effective channel management strategy requires a rethink not only of the supply chain processes, but also of how best to ensure every channel delivers the best possible customer offer.
Separate systems
Underpinning the problems faced by retailers is the way supply chain management has evolved during a time of channel expansion. The majority of retailers are running each channel on separate systems, often as almost separate businesses, and stock for each channel is still being physically ring-fenced in the warehouse.
This creates a massively inefficient warehouse operation and constrains retailers from delivering a truly effective multi-channel customer offer.
Lack of agility
Retailers need to respond rapidly to changes in customer buying behaviour to maximise sales and minimise mark downs. But, today, if a retailer decides to reallocate stock from the retail to the eCommerce channel, it can take days, or even weeks for the warehouse staff to move stock from the ‘retail’ part of the warehouse to the ‘eCommerce’ part due to lack of space or resources. During this time the stock is not available for sale across any channel – creating a significant risk of lost sales.
Compromising customer experience
Retailers increasingly want the customer experience to be consistent across shop, online and call centre. If an item is not available in the right size in store, staff should be able, with confidence, to tell the customer it is available online. But running separate physical stock holdings for each and requiring manual sales tracking and intervention to ensure consistent stock holdings across the mix is proving to be challenging and expensive. As a result, customers are not yet receiving a consistent experience across the brand.
Escalating cost
By opting to run what are effectively several separate businesses within the warehouse, retailers are not always utilising warehouse space efficiently. For those operating 3rd party warehouses and paying by the square foot this is an immediate tangible cost. For those running their own warehouse operations, improving the utilisation of warehouse space is a key consideration to minimise the longer term costs associated with business growth.
Retailers are also adding unnecessary picking resources and warehouse management time to handle stock kept in different parts of the warehouse. Stock that remains unsold has to be moved to another part of the warehouse at the end of the season – wholesale stock, for example, has to be reallocated to retail for the end of season sales. This physical stock shift demands significant time, resource and cost from the retailer.
Stock inaccuracy
With retailers typically raising different orders for each channel to the same supplier, warehouse operators often struggle to ensure the right goods are allocated to the right section of the warehouse. Many are using colour coding in a bid to ease the situation and improve goods accuracy. However, as stock takes often reveal, increasing the number of channels has a significant impact on the level of misplaced goods across the warehouse.
Increased wastage
By opting to ring-fence stock for each channel, which is then manually reallocated throughout the season to maximise sales opportunities, retailers are increasing the risk of goods being damaged, lost or intentionally removed: each additional stock movement increases the risk of wastage significantly.
In store product fragmentation
Poor replenishment processes are resulting in additional costs related to inter store stock shifts and undermining the credibility of the customer offer. Organisations are failing to implement the most sophisticated replenishment strategies to stores which, despite the escalating demand for eCommerce, still represent the major revenue stream for the majority of the UK’s fashion retail organisations. A key, yet counter-intuitive strategy for maximising full price sales is to adopt a store replenishment approach that is based on minimum in store stock levels.
The ability to drive efficiency and improve stock availability across all channels is compelling. Retailers need to look seriously at every aspect of the supply chain, from warehouse to in store replenishment.
Channel management
In the new multi-channel world, no successful retailer can afford to address one channel in isolation. To maximise sales requires excellent insight into customer behaviour, backed up by the processes and systems that enable an organisation to implement rapid change and have agile business processes across every channel.
Those, few retailers that have put robust multi-channel processes in place are now able to prioritise stock for a specific channel – particularly eCommerce. Taking this approach, the business can reallocate stock from retail to meet online demand – and this happens in real time as a result of automated rules setting and integrated supply chain processes.
Yet while the majority of UK fashion retailers are now firmly aware of the customer demand for eCommerce, very few were prepared for this trend in advance and many are still unable to respond effectively. Too many are reliant on separate, or at best loosely coupled systems, which do not provide real time information: stock information is not up-to-date, creating out of stock issues and a lack of real time insight into online performance.
Poor customer experience
So while retailers may claim to prioritise stock to the eCommerce channel, because the online orders are not received in real time, by the time the warehouse is told to fulfil the customer order the stock may well have been replenished out to the stores. The result is not only an unhappy customer, informed of the problem via a time consuming manual telephone call or email, but also a lost sale: there is of course no guarantee that the stock will then be sold in store.
Furthermore, stock information is spread across different systems for each channel. There is no single source of stock information and no visibility of stock levels versus sales across the entire organisation – goods that could have been sold through one channel end up being marked down in another, whilst sales opportunities in one channel are lost despite stock availability elsewhere in the business. Retailers simply have no effective way of maximising the multi-channel operation.
Fashion retailers are not only losing the economies of scale and flexibility that multi-channel retailing can bring, but by running what are effectively separate businesses the purchasing process is also inherently inefficient, with buyers focusing on individual channels rather than the collective business needs.
Intelligent replenishment
Poor stock management processes within the warehouse are exacerbated by store replenishment processes that are actually undermining sales and leading to unnecessary out of stock situations.
The majority of fashion retailers have good processes for allocating new season stock to stores, typically opting to allocate up to three quarters of the total stock available at the beginning of the selling season. This produces a strong display in each store, with a full selection of sizes and ranges to entice the customer. Items sold are replenished on a like-for-like basis to maintain this strong display and to ensure there is sufficient stock available in store to meet the higher levels of demand usually experienced early in the season.
Problems arise as retailers hit the middle of the selling season when warehouse stocks become depleted. Because such a high proportion of the season’s total stock has been allocated to stores in the first instance, and replenishment has maintained these high store stock levels, warehouse stock usually runs out half way through the season.
Product fragmentation
Once a business loses the ability to replenish stock, variation in rates of sale across stores and sizes soon results in product fragmentation. Although there is still plenty of stock held in the business, each shop finds that their ranges are missing sizes. This not only reduces sales but, at the same time, leads to customer dissatisfaction.
And this issue can be exacerbated by the growing trend to prioritise stock for the eCommerce channel, making it even harder for the retailer to maintain a credible offer across the estate.
The typical result of stock fragmentation is either expensive mark downs to clear stock, or inter store transfers to consolidate ranges. However, transferring product between stores is labour intensive, increases product shrinkage and means that product is unavailable for sale while it is being relocated.
The most effective way to minimise stock fragmentation is to reduce mid-season store stock levels before warehouse stock is exhausted. There is usually plenty of potential to reduce a product’s store stock levels from the initial high levels that were designed to create a strong display and accommodate high initial demand. Reducing stock towards a minimum credible display ensures more stock is retained in the warehouse for longer during the selling season.
Prolonging warehouse stock availability enables the retailer to respond to actual sales variations across the estate that may be based on a variety of factors, from competitors’ promotional activity in one town to the simple statistical variation in sales that occur in the fashion & lifestyle sector.
It may feel intuitively wrong to leave stock in the warehouse when it could be on display to customers, but this strategy can result in up to an extra 5% of store turnover without any associated extra cost, which translates directly into a big increase in bottom line profitability.
Integrated supply chain
The underpinning foundation that will improve channel management and the ability to maximise sales across every channel is an integrated supply chain. A strategy that delivers a consolidated view of stock across every channel of the business can transform operational performance: warehousing staff can pick for multiple channels simultaneously, significantly reducing costs and improving efficiency. Similarly, with aggregated information across every channel, merchandising staff can make better decisions and gain efficiency benefits from consolidated purchasing and by maximising the use of each product consignment.
Key features
Single source of information
A single system that holds all information – from the original order docket through to fulfilment provides complete, cross channel visibility of sales, stock levels and operational performance.
Real time updates
With sales and stock levels updated in real time across every channel, the fashion retailer can make informed decisions about stock reallocation to maximise sales opportunities.
Streamlined processes
The goal is to streamline the supply chain whilst also ensuring that buyers and merchandisers have full access to information by channel. For example, when raising order dockets to suppliers, merchandisers should be able to simply raise one docket which states both the complete order and how much of that order is to be apportioned to each channel. Whilst this information is irrelevant to the supplier and, in a centralised warehouse, to the warehouse operators, when the order is delivered, the proportions of stock for each channel are automatically allocated by the system.
Automated business rules
The use of automated business rules removes the need for complex and time consuming performance analysis. Changes in the decision making process can be handled manually if required but the emphasis is on management by exception to drive costs down and performance up.
Benefits of an integrated supply chain include:
Efficient warehouse operations
By consolidating all stock within the warehouse and removing the physical ring-fencing, retailers can significantly reduce the amount of warehouse space required. Leveraging bulk storage, retailers can speed up picking, reducing staff levels and costs.
Indeed, when warehouse processes are streamlined and simplified staff do not need to know which channel they are picking for, they can focus on picking the right products. Furthermore, when stock arrives it is all stored together (e.g. stock for multiple channels will be found in the same bin, the stock isn't labelled by channel because the system knows what is going on). There is no need for warehouse staff to check dockets to ascertain which proportions of the orders should be allocated to which channel. And by minimising stock movements around the warehouse, retailers will significantly reduce wastage through error, intent and damage.
Critically, with no need to physically move any stock, goods can be instantly reallocated to another channel to maximise sales opportunities. There are no lost sales, there is no additional warehouse overhead and there is no need to handle stock twice and risk damage or wastage.
Combining effective warehouse processes with real time order placement and stock updating ensures customers are never offered unavailable goods – there is no chance of a customer buying a product that has already been sold or allocated to another channel.
Furthermore, the use of automated business rules enables retailers to set stock allocations across channels based on forecast sales. These rules can be set at many levels, not just stock keeping unit (SKU), e.g. the rule may say that a particular product group must not fall below a critical level in a given channel. Retailers can then match rules to business objectives, for example prioritising orders placed over the telephone or via the website since they are guaranteed full price sales.
Improving the level of automation enables supply chain experts to focus their efforts on planning, supplier performance, shipping and fulfilment rather than constantly trying to manually juggle the diverse and competing stock requirements of each sales channel.
Maximising in store sales
As most fashion products have low rates of sale, and retailers are replenishing their stores 3-5 times per week, merchandisers can in theory afford to reduce mid-season stock levels quite aggressively for most stores. But to do so, they need to have confidence in the accuracy of stock information at both company and store level, and by both line and size profile.
Most merchandisers are also planning the next two seasons while managing the complexities of this season’s replenishment, so today the cost of managing replenishment to this level of detail is just too difficult. However, with adequate systems that deliver accurate information to determine the appropriate stock levels for each store merchandisers can ensure that lower stock levels do not result in missed sales.
It is crucial that merchandisers have access to accurate stock information and software systems with replenishment algorithms that can automate most of this process. Retailers can then opt for a variety of strategies, including sales reactive replenishment where stock holdings are increased in a successful store – and reduced in a less successful store – or simply replenishing back to an ideal stock level as before, but reducing that stock level progressively throughout the season.
With confidence in the accuracy of stock information, sound replenishment processes and good algorithms to automate those processes, retailers can transform both the operational costs associated with replenishment and significantly increase the proportion of full price sales.
Conclusion
Today, successful fashion retailing is as much about integrated back office supply chain processes as it is about creating a consistent and excellent customer experience. It is only by leveraging stock visibility across every part of the business and automated business rules to deliver intuitive, cross channel replenishment that retailers will be able to achieve significant sales increases, reduce marked down stock and address declining margins.
With a properly integrated supply chain backed up by intelligent replenishment and an efficient warehouse operation, fashion retailers can transform business agility and meet the objectives of a consistent customer experience whilst also driving down operational costs and increasing profits.