Fulfilling omni-channel demand Introduction Module 6 Video 1 Fulfilling omni-channel demand Introduction

Intro First we focused on perspective of the customers Customers represent demand that retailers want to serve Now we focus on how to fulfill that demand That is the role of the retailer’s supply chain. Introduce the retailer supply chain Discuss how it should be tailored to the value proposition and the nature of the products offered by the retailer Specific challenges posed by omnichannel demand.

What is a supply chain A supply chain is the set of resources and processes involved in moving products from the suppliers to the customers. When thinking about supply chain structure, it is helpful to think about four different elements: Facilities Inventory Transportation Sourcing In each of these elements, retailers will have to make strategic decisions

Facilities Physical locations in the supply chain network where product is assembled, fabricated or stored. For retailers, these include distribution centers and stores. Retailers will have to decide on number location capacity type of each of those facilities Should we have only one distribution center, or many? Should we use the same distribution centers to ship orders directly to customers and to send products to the stores?

Inventory Retailers will have to think about whether they want to run with high or low inventory levels. There is a tradeoff here. Running with higher inventory levels will increase the likelihood that customers will be able to obtain the product they are looking for. However, the price to pay will be a loss of efficiency. Retailers will also have to decide where to hold the inventory. Should they centralize it in distribution centers? Or should they carry most of it in stores? Should they have a large backroom in their stores or should they display all the inventory they have?

Transportation There are different options to move inventory from point to point in the supply chain and to the customer. Faster transportation allows greater responsiveness but lower efficiency, so there is going to be another tradeoff here

Sourcing Retailers are going to have to decide which vendors to source from. For example, if you are an apparel retailer you may be able to decide whether you want to source your product from factories that are near your markets or from distant countries. Sourcing from local markets shortens the lead time and increases the responsiveness, but it is often cheaper to source from countries with lower production costs such as those in South East Asia.

Elements are Interconnected For example, if we have more stores we will need more inventory. If our distribution centers are far from customers and stores, our transportation costs will be high. Using fast modes of transport will raise responsiveness and transportation cost but will lower the inventory holding cost. Sourcing from distant countries will increase the inventory needs and the transportation costs. So we will have to think about all those elements holistically.

Strategic fit We have to make many strategic decisions in the elements we just described. How can we guide these decisions? What is the goal of our supply chain? The goal is to support the delivery of a value proposition to the customers We can think about different factors Price response time Variety Availability The ideal structure of the supply chain will be very different depending on what I am promising my customers. If I am promising my customers very low prices, I will have to make decisions that allow me to run very cost- effective supply chains. If I am promising my customers high variety or convenience, my decisions may be different. Keep in mind it is not feasible to promise customers to be excellent in all dimensions. We need to structure our supply chain to best support the value proposition we are offering.

Strategic fit (Example) Consider Seven-eleven vs Costco. Costco promises low prices. They can achieve that by having large stores in suburban areas that offer limited variety, for example in terms of package sizes. Stores have a lot of inventory so they enjoy economies of scale. Seven-eleven offers convenience so it will have many stores that are closer to their customers. These stores will be smaller and have low inventories, but they will have to be replenished very frequently. This implies very different decisions in terms of facilities, inventory, transportation and sourcing for these two companies.

Efficient vs Responsive supply chains A useful distinction we can make is between responsive and cost-efficient supply chains. Responsiveness - the ability of the supply chain to react quickly to changing conditions Cost-efficiency - the ability to deliver products to customers at low cost. There is a tradeoff between these two dimensions. Being responsive is costly What dimension is more important for our value proposition? Understand the constraints imposed by the type of product that we are selling. For example, it is very different to be in the fashion industry or in the consumer package goods industry. Fashion products will have a lot of demand uncertainty and we will be constantly introducing new products. In contrast, in consumer package goods such as breakfast cereals, demand is less uncertain.

Efficient vs Responsive supply chains (cont.) Products with higher demand uncertainty will be better handled by responsive supply chains, while companies offering products with low demand uncertainty can more directly focus on the cost efficiency. Breakfast cereals will be easier to forecast and will have lower out-of-stock rates. They will also command lower margins. When we think about the supply chain structure, we can think about where we would like to be in terms of the responsiveness/cost-efficiency tradeoff. This will depend on our value proposition and the nature of the product we are selling. Once we know that, we can make decisions on aspects such as facilities, inventory, transportation, and sourcing that will help us achieve that goal. For example, Apple may decide to use air transportation to get new products quickly to the market. This is a very different mode of transportation from the one Target will use to replenish their breakfast cereal.

Omnichannel retail is not B&M retail on steroids Thinking about Supply Chain issues in an omnichannel context is even more challenging First, using multiple channels increases the uncertainty of demand. Remember that it is easier to forecast demand for the entire company than for each of the channels. Even more importantly, in an omnichannel context we may be serving customers with different expectations. You are going to have orders that are picked up in stores, and orders that are delivered to the customers. Those have different expectations and costs, and put different requirements on the supply chain. One possibility is to keep those online and offline channels independent. That is what retailers did for a long time. However, as we have seen, that is not how customers think about the company, and they increasingly want to interact with the different channels in a seamless way. In addition, duplicating many aspects of the organization does not seem like a good idea. Retailers are increasingly adapting their supply chains so that they can handle any type of demand. This is a push towards increasing the responsiveness of their supply chains.