Using stores as Web warehouses
Better inventory management systems help some retailers close online sales, keep stocks low.
By Eric Kulisch
As the holiday shopping season approaches, retailers are taking an extremely conservative approach to their inventory levels because of the uncertain economy and consumer demand. Some have backup replenishment plans in case certain goods start to move off the shelves.
A handful of retailers could benefit from recent efforts to integrate their online and physical store inventories to improve customer service and efficiency. New logistics processes are enabling them to fulfill an online order directly from a store if a product is out of stock at its dedicated e-commerce fulfillment center, potentially making it easier to juggle a lean inventory strategy and offer customers the selection they expect. But trying to operate as a single entity instead of separate channels is not easy to achieve, according to retail logistics analysts.
U.S. retailers are anticipating further growth in online sales this holiday shopping season. Retail e-commerce spending was flat at $130 billion for 2009, according to digital market researcher comScore Inc. Online sales fell for the first time in 2008 when the recession was in full swing after increasing at a double-digit rate in previous years.
Shoppers spent $29.1 billion on the Internet in the 2009 holiday shopping season, up 4 percent from the previous year.
Online sales, however, still only represent about 4 percent of all retail activity.
Nordstrom, the Seattle-based department store with a reputation for strong customer service, last fall upgraded its inventory management system to check its stores if its online fulfillment center in Cedar Rapids, Iowa, is out of stock. The Nordstrom.com Web site will display in a single view the available merchandise in its stores and online warehouse. The new functionality builds on the company's longstanding ability to directly ship an item to a customer from another store if the local outlet is sold out, spokesman Colin Johnson said.
'We have the ability to fulfill online orders either from our fulfillment center or any of our 114 stores, but the bulk of online orders are being handled from the fulfillment center. The idea is to open up our inventory so customers have access to our entire merchandise, but the focus is on the center to fulfill online orders,' he said, downplaying any suggestion of a full-blown store-based fulfillment model.
Nordstrom's shared inventory platform, providing visibility to both online and store products in stock, contributed to a 9 percent increase in same-store sales during its anniversary sale, the company said in its second quarter earnings report. Multichannel, same-store sales increased 9.9 percent during the three-month period compared to last year.
Jones Apparel Group Inc. also has enhanced its automated systems and is processing online orders from its stores, such as Nine West, Anne Klein, Bandolino, Easy Spirit, and Jones New York, according to a January news release from VendorNet, the maker of the StoreNet Live cross-channel, order management system used by the retailer. The system enables sales clerks to access pick lists through a Web-based portal, confirm the picked quantities, print out UPS shipping labels and invoices, and transmit the manifest notifying the carrier that packages are ready for same-day pickup.
StoreNet Live acts as middleware between a company's existing Web storefront, order management and inventory management systems to enable store shipment and pickup. The system uses customized business rules to route orders to a retailer's best available store, or supplier for a direct-drop shipment, when there is a stock-out in the warehouse.
'VendorNet's technology is helping us improve service to our customers by showing Web shoppers inventory across all channels, and capturing demand that may otherwise have been a lost opportunity,' said Ron Offir, president of e-commerce at Jones Apparel, in the release. He told the Wall Street Journal in May that, depending on the brand, 30 percent to 50 percent of orders are now shipped directly from the company's stores.
Exposing store inventory online can increase top line sales by as much as 25 percent to 50 percent because most consumers compare prices or find items online before shopping in a physical store, VendorNet claims.
Jones Apparel said scheduling conflicts prevented anyone from being interviewed on the subject. Fiona Dias, executive vice president of strategy and marketing for GSI Commerce, told the paper that shipping products from stores to online customers would speed up delivery and be desired by all retailers, but most industry observers disagree with that conclusion.
GSI Commerce, which runs Web sites for companies and bought VendorNet this year, refused to make anyone available for an interview.
Retailers have long talked about multichannel sales and logistics integration, but most have still not figured out an effective way to achieve that goal, retail and logistics industry analysts say.
Having an integrated inventory system once helped a retailer serendipitously recover from a major forecasting mistake, but trying to package and ship orders from stores is generally not recommended, said Bryan Eshelman, managing director for retail at corporate turnaround and management specialist Alix Partners.
The client had overbought merchandise for its stores and bought too little for its Web store, but was able to sell the products through the alternative channel at near full price rather, preserving margins and making online customers happy, he said.
'It was a rare situation where two wrongs make a right, but it's not something to build a business plan around.' The better option is to correctly buy in the first place, he said.
| Government and industry reports indicate the level of inventory in the retail supply chain during 2010 is at or near an all-time low. The U.S. Census Bureau said inventory-to-sales ratio in June was 1.26, which is even tighter than the 1.37 ratio a year earlier. The figures show companies are maintaining inventories at much lower levels than at the beginning of 2009, an indication that the modest recovery in freight shipments and consumer demand during the past 10 months has been achieved on lower levels of inventory. The disciplined supply approach is keeping down costs, but could cause problems if there is a spike in demand. |
The idea of filling online orders from a store because the distribution center is out of stock or a store is geographically closer to the customer sounds good in theory. But it turns out that stores are not very good at handling e-commerce orders.
Store clerks are not trained to pick, pack, label and ship products and the cost of shipping individual parcels with express carriers is much higher per unit, experts say. And stores often do not have the backroom space for packing shipments.
Shipping 'is not their primary responsibility so it tends to get overlooked. It gets done when they feel like it or have time and it's very inconsistent in terms of how the product arrives at the consumer.' Meanwhile, fulfillment centers are attuned to that process and can arrange for pre-sorted bulk pickups that skip parcel zones, Eshelman said.
A store-fulfillment process, for example, can be disconcerting for a customer who orders multiple items at one time and receives separate shipments on different days instead of all together, he explained.
Meeting customer demand by being able to deliver products from any location and doing it in a timely fashion is also complicated by the fact that most companies lack a single view of inventory that allows call center staff to interact in an intelligent way with the customer, said Leslie Hand, research director for IDC Retail Insights.
'Retailers really have not architected their systems for this sort of integration. It requires identifying the technologies that can pull this together or having to reconfigure your existing systems,' she said.
The extra expense associated with store-based shipments means it will only be an infrequent logistics practice, she added.
Nordstrom's may be the exception to the rule because it has experienced store staff, sophisticated systems and experience with intra-store transfers, said Morgan Day, chief technology officer of Quantum Retail.
Quantum Retail is a supply chain software that helps companies optimize forecasting and order planning, merchandise assortment and replenishment.
Using stores as shipping centers may be more conducive to small-scale, specialty-type retailers that may only have a handful of expensive items that sell once or twice a year in store displays and are not suited for warehouse distribution, Day said.
'If something is selling all the time you want to handle it through a fulfillment center. If something is sparse you may look at opportunities to move it from the store. It depends on the type of store and infrastructure they have in place,' he said.
The crossover between local stores and online stores, Day said, is coming more from in-store kiosks where a customer can make special orders, or order online for in-store pickup.
Having computer stations in stores to place orders is tied to the cost-cutting trend of rationalizing merchandise selection so that stores only keep fast-moving goods on their shelves, according to Lorcan Sheehan, senior vice president of marketing for ModusLink Global Solutions, a supply chain management, reverse logistics and e-commerce outsourcing firm based in Waltham, Mass.
Retailers are cutting down on the range of products they physically carry in stores to account for the uncertainty in demand and pushing customers online for other sales. 'That way they can still provide the variety and choice, but keep the inventory in the brick-and-mortar stores pretty lean,' he said.
In addition to maintaining more variety online, retailers this year are keeping inventories low by collaborating much more with vendors and providing more flexible forecasts with a range of expected orders instead of a fixed amount, Sheehan said.
'That helps brand owners position in that range and manage their own inventories back into the supply chain,' he said.
The difference this year, according to Hand, is that retailers are now moving from talking about inventory reduction strategies to execution. Many of the techniques employed are the same as in the past, but there is more emphasis now on actually implementing variable capacity, whether it's cross-docking smaller shipments into store-bound truckloads, more carefully planning routes, using backhauls and distributors to fill orders, taking more control of sourcing, or postponing final orders and store packaging until the last possible moment.
'It's like a no-excuses mentality. It's about surviving,' she said.
The delay tactic is partially manifested by the increasing use of air freight this year, said Paul Svindland, managing director of Alix Partners' transportation and logistics practice.
Retailers are willing to pay more for air transport to give them the flexibility to carry less inventory, rather than over-ordering and shipping by the slower ocean mode. The shorter transit time gives shippers up to four extra weeks to make a buying decision.
Air freight can be five to eight times as much as ocean shipments, but is still less than the cost of carrying inventory, product obsolescence and markdowns for merchandise that doesn't sell, he said.
Merchandisers are holding buying decisions 'until the last possible moment they need to bring products over.'
Eshelman, Svindland's colleague, said Alix Partners is helping some shippers strategically use air cargo. Capacity is arranged ahead of time to handle orders of products that are selling well rather than making last-minute decisions to book air shipments. The strategy, which also involves coordinating with contract manufacturers, allows retailers to buy more thinly across their product mix and only issue follow-up orders for fast-selling items.