Shifting Consumer Behavior and Expectations
Retailers delivering outstanding customer service understand what it takes to provide customers with the product that they want - down to style, color and size – when they want it, where they want it, and at the price they are willing to pay. Of course this problem is easy to solve with unlimited inventory and a willingness to overlook the bottom line. However, this is not a realistic approach. Retailers need to solve this complex customer service problem while minimizing capital tied up in inventory and, at the same time, maximizing margins.
A number of factors have converged, making it increasingly more difficult for retailers to deliver outstanding customer service. These include the emergence of new selling channels and shopping patterns, the price-conscious consumer created by the economic downturn and slow recovery, and the technology and information savvy shopper.
Retailers are facing more competition than ever before, in part due to the evolution of technology that has morphed the traditional shopping experience out of the brick-and-mortar only world and into an omni-channel retailing experience. The omni-channel shopper who uses multiple channels to create a shopping plan and execute purchases is making it more difficult for retailers to predict and plan for consumer behaviour.
Retailers also face fulfilling orders from anywhere, to anyone, at any time. Shoppers now expect to be able to shop online and pickup in store, or shop in store and order online or any combination of shopping, purchasing and delivery options. This increases the complexity of optimizing inventory allocation in order to meet consumer demand and deliver outstanding customer service. Predicting what consumers will do can feel like a guessing game.
The economic downturn changed consumer shopping patterns and many experts predict that these changes are permanent. Consumers are eager to get the most from their discretionary income and are less brand and channel loyal than before. They seek out the best prices, sales and promotions. Combining this desire for deals with the willingness to shop around and change brands using multiple channels and mobile technology has further intensified competition in the marketplace. Armed with smartphones and tablets, consumers can quickly comparison shop on price, selection and merchandise availability, even when they reach the retailers’ store aisles. Digital channels and tools are also fueling consumers’ expectation of instant gratification, putting more pressure on the supply chain than ever before. As a result, it is imperative for retailers to learn how to embrace these solutions as a means of delivering an optimal customer experience during each and every shopping engagement.
Strategies for Success
We offer the following strategies to help retailers deliver exceptional customer service to today’s increasingly unpredictable, less brand loyal, more price conscious and ever more technology savvy consumer.
Strategy #1 Formalize Your Supply Chain Process
Retailers that struggle with how to deliver superior customer service should start by assessing their end-to-end supply chain processes. A formalized process used consistently across the teams involved in predicting and fulfilling customer demand will go a long way toward ensuring consistent customer service delivery. The physical realities of supply chains can be difficult and expensive to change. For instance, consider where your products are manufactured and the lead times to get them from factory to store. Therefore, it’s recommended that retailers mould their process to their supply chain and not their supply chain to their process. By analyzing current processes from supplier to end consumers, retailers can determine where there is room for improvement.
Organizations should analyze top-down financial planning, how assortments are planned, how merchandise is allocated to store locations and how it is managed at individual style, colour and size levels in those locations. If this process is engrained in the organization, the merchandising and buying departments will collaborate more effectively to get the right products where they need to be at the right time and price. The journey toward outstanding customer service starts with a process that guides the entire organization.
Strategy #2 Put Demand in the Driver’s Seat
Traditional push-based supply chains can’t keep up with today’s consumer in the omni-channel world. As a result, retailers need to apply their newfound understanding of supply chain processes to make the transition to a demand driven supply chain - one that pulls product into the stores and channels based on actual consumer engagement data, rather than historical replenishment orders. By focusing on point-of sale transaction and item movement data, retailers can remove variability from the supply chain and flow inventory to where it is needed and stands the best chance of selling for the highest possible price.
Many retailers are still trying to forecast using Excel spreadsheets, but Excel can’t handle the amount of data required for true demand-driven forecasting. Forecasting down to the item and location level also requires understanding the unique characteristics of each SKU and applying the right forecasting algorithm. Applying the best forecasting method to each SKU can dramatically improve forecast accuracy. Advanced forecasting algorithms can account for trends and seasonality, promotions and lost sales. Once you have consensus on the demand-driven forecast you can now move to the next strategy and focus on inventory.
Strategy #3 Focus on Balancing Service Levels and Inventory
Having the right amount of product on hand is the foundation of good customer service. Yet, too often this concept is easier said than done. To ensure they always have product on-hand and available, many companies have historically made a practice of storing extra inventory, or safety stock. However, this is less than ideal because it unnecessarily ties up working capital in inventory and, secondly, marking down products to reduce excess inventory hurts margins and the bottom line. Of course, there are retailers that reduce their safety stock levels to trim costs and cut down on excess inventory. While this practice slashes the amount of credit needed to procure inventory and frees up invested capital, it also increases the chance of causing more out-of-stocks (OOS). In fact, over the last decade, OOS remain at an 8% rate industry-wide, which equates to retailers losing approximately $93 billion due to out-of-stock situations, according to IHL Group.
Retailers need to strive for a balance - having the right quantity of merchandise available to maximize sales, but not at the expense of working capital. Achieving this balancing act takes precision and attention to detail. Many retailers leverage ABC classifications and service level targets to set appropriate inventory levels by product. We recommend using these approaches to differentiate between more and less important products and to ensure you have the right amount of inventory to hit your customer service targets.
Strategy #4 Postpone Committing Inventory
Retailers that want to drive up sales and service by improving cross-channel inventory availability should adopt a ‘hold-back’ or postponement strategy. They will then benefit from higher product availability while reducing excess inventory, improving service levels, lowering markdowns, increasing revenues and margins, and growing market share. To deploy a ‘hold-back’ inventory strategy, retailers must have accurate demand data and visibility across their organization. Oftentimes, the inventory arrives at the retailer’s distribution centre in just one delivery. Although some sort of logic has been used in advance to determine which stores the product will have the best chance of selling at full price, retailers should give themselves some wiggle room. After all, allocation is not an exact science. When possible, retailers should employ a “hold-back” strategy. A week or two after the products start to sell; retailers will have some intelligence on how well their original allocation strategy is working. Holding some inventory back instead of pushing it all out to the market all at once allows retailers to adjust future allocations for that product, taking into account shifts in consumer-buying and store-selling behaviours. Replenishing product based on demand is critical as it’s too costly to try to move it between stores after it’s shipped. And, once stock is in the wrong place, it’s more likely to be marked down while other locations lose out on sales. Overstocks lead to reallocations, fierce markdowns and deep promotions just to move merchandise, often at low margins.
Understanding consumer demand can streamline how much inventory to position throughout the supply chain. This forces the organization to think about inventory from a holistic perspective.
Strategy #5 Increase Open-to-Buy Frequency
In the simplest terms, open-to-buy is a financial budget for merchandise buyers. By understanding inventory needs from a financial perspective, including revenue and margin, retailers gain insight into their open-to-buy process and ensure the organization will not overspend merchandising budgets.
Some industry observers consider open-to-buy a short-sighted process due to the typically monthly nature of the process. We recommend augmenting it with other metrics, such as inventory turnover, sales to stock ratio, SKU behaviour and forecast accuracy by demand point (stores and warehouses). We also recommend moving to a weekly or bi-weekly open-to-buy cycle in order to improve reaction time. This goes back to a very simple manufacturing principle, that work in process inventory is a bad thing. Change is inevitable and the more inventory you are holding the harder it’s going to be to react. By increasing open-to-buy frequency you might increase inbound transportation costs or sacrifice order quantity discounts, but in the end it will be worth it to have inventory flexibility.
Strategy #6 Differentiate through Customer Intimacy
Due to the product assortment, merchandise availability and price transparency caused by online channels, mobile solutions and social media, retailers are hard pressed to differentiate themselves to shoppers. As a result, we recommend retailers create a level of intimacy where shoppers want to return because they can’t get that experience anywhere else.
Apple is a prime example of a retailer that creates an engaging shopping experience. Between its Genius Bar that offers one-one professional assistance with technology issues, mobile POS that keeps associates at the shopper’s side throughout the shopping experience, and an intimate retail space that allows shoppers to “test” all devices and educate themselves about technology, Apple has developed an effective formula for making their customers feel special. Lululemon Athletica has taken a similar approach by featuring free in-store yoga classes, personal shoppers to assist with choosing merchandise and catering to the fitting room experience. The retailer also offers free alterations and a community department, featuring local yoga studios, running clubs and associated discounts.
The end goal is to sell a product, but shoppers yearn for a personalized, pleasant shopping experience and a personal connection with their favourite retailers. Creating this level of connection requires an investment in getting to know your customers and understanding what will keep them coming back for more. Getting there takes effort, but it will move you beyond competing solely on price and availability and it will create a loyal customer base. Retailers that make this connection can often charge a premium for their products and offer fewer discounts and promotions driving up revenues and margins.
Strategy #7 Measure, Measure and Measure Again
Without the right metrics in place, retailers have no way to determine how they are performing versus their plans. Among the metrics to analyze are inventory turnover, sales to stock ratio, forecast accuracy, overall sales, and even customer satisfaction levels. These also should be weighed against historical purchase patterns, sales uplift due to promotions, lost sales due to out of stocks, sales and business trends.
With this benchmark in place, retailers can more easily create a solid foundation needed to improve merchandising, inventory and fulfilment efforts – the keys to improving customer service.
Strategy #8 Think in the Cloud
Employing many of the strategies we recommend requires leveraging leading-edge technology solutions. While there are many options, the focus should be on those that deliver ease of use, smooth user adoption and a quick return on investment.
At the top of the list should be open solutions that can be seamlessly integrated and allow multiple lines of business to share a common data set and end-to-end solutions. More and more, retailers are turning to solutions that are available in the Cloud or as SaaS. These solutions now offer all the robust features that formerly were only available in OnSite versions and advances in security have eliminated most data security concerns. Now line-of-business leaders can select and implement solutions without having to get in the IT queue and fund the investment as a budget expense rather than a capital expenditure.
Taking the Next Steps
Retailers have been strategically investing in supply chain improvements for the better part of the last decade; however, the timing is ripe for these companies to re-evaluate how well they are executing the strategies needed to transition to a demand-driven supply chain that delivers superior customer service.
Ensuring that the optimal inventory is on-hand when the omnichannel shopper visits is crucial. But hand-in-hand with this effort, retailers must leverage new strategies to up the ante on customer service, including:
· Re-evaluating their supply chains and learning how to create more flexible distribution networks that can deliver merchandise when the shopper is ready to make a purchase.
· Adding more open solutions to learn more about shoppers, address faster cycle times and respond to higher volume levels.
· Learning how to minimize inventory levels and have the right amount on hand to meet customer expectations. This includes doing more frequent open-to-buy processes to ensure optimal inventory flow and meeting financial plans.
· Creating more exciting and personalized experiences at the store-level to engage the shopper.
By keeping these elements top of mind, retailers will find themselves improving customer service levels, streamlining inventory levels and increasing sales, and most importantly, building customer relationships for the long-term.
Contributed by: Peter Leith, Director of Product Strategy, JustEnough Software & Jim Barnes, co-founder of enVista
