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December 30, 2011

The Real Headline for the 2011 Holiday Buying Season- Need for Balancing Retailer Online and Fulfillment Process Investments

Guest Post by

Bob Ferrari, the Founder and Executive Editor of the Supply Chain Matters Blog, and a periodic guest blogger on the Infosys Supply Chain Management blog.

In late November Supply Chain Matters penned a guest commentary on the Infosys Supply Chain Management blog that outlined our belief that retailers should anticipate different supply chain fulfillment capabilities for the upcoming 2011 holiday buying season. Because of the reality of a rather challenging year of supply chain disruptions in 2011, we warned on the possibility of retailers not having the most popular and desired products the consumer wanted because suppliers would fall short of meeting holiday demand spikes.  We further noted that the upcoming 2011 holiday buying season would once again drive home the premise that MCO and responsive supply chain inventory management are often the best complement to effective multi-channel and online commerce plans.

While retailers were anticipating a muted amount of overall holiday sales, online sales were expected to be a much more popular option for consumers.   As we approach the latter stages of the 2011 holiday buying season, the uptick in online buying has indeed occurred.  Recent estimates from comScore indicate that online sales are tracking up 15 percent thus far in 2011. Of more interest, seven individual shopping days surpassed one billion in online consumer orders, with peak volumes experienced on Cyber Monday, the Black Friday weekend, and in fact, every Monday leading up to December 15th.
There were many considerations motivating consumers to online channels. Free shipping, aggressive pricing and popular electronic and jewelry items lured consumers to place their online orders. Many retailers were perhaps celebrating that increased investments in online commerce capabilities are paying off in 2011. But high visibility glitches in online fulfillment may spoil the overall headline of online commerce this holiday season.
The most visible headline involves the world's largest electronics retailer Best Buy.  The retailer utilized aggressive price promotions and free holiday shipping for online purchases to lure customers back from rivals such as Amazon. Sales among all of Best Buy's channels rose for the first time in six quarters and included a 20 percent increase in online sales, particularly during the hyped Black Friday and Cyber Monday shopping periods. Unfortunately, the retailer has now had to issue a rather public apology to consumers because it was unprepared for the crush of orders that were booked online, and Best Buy was forced to cancel some customer orders just prior to the Christmas holiday.
According to multiple published news stories, angry consumers posted their displeasure on online forums at having been informed too late to respond with alternative holiday buying purchases. Even popular blog Tech Crunch took some advantage of Best Buy's embarrassment and penned a commentary, Best Buy, the Grinch that Stole Christmas. While Best Buy indicated that the snafu's involved less than one percent of orders booked during the Black Friday weekend, negative consumer reaction was far more pronounced.  A Best Buy statement noted the following: "There was an unacceptable delay between order confirmations and cancellations, and for that we are very sorry.  The challenges related to this situation are being addressed."  For those who practice supply chain fulfillment, that statement equates to inventory and proactive demand management issues, either not having the inventory allocated at the time of order booking, or hoping that suppliers or manufacturers could augment any inventory shortfall in a rather quick period.  It also misses the complete objective of having to ability to fulfill all transacted customer orders vs. the timely notification of order cancellation.
While Best Buy's snafu may ultimately turn out to be the most visible, it was not the only retailer or online commerce provider that experienced inventory fulfillment snafus.  In our household, my daughter is just completing a major refurbishing of a home, and placed a rather significant appliance order with home improvement retailer Lowe's, involving the purchase of a refrigerator, stove, washer and dryer all involving one particular manufacturer.  Three important criteria motivated this order, product features, price and availability to meet a targeted move-in date.  A similar pattern occurred.  Lowe's was promoting rather aggressive Black Friday promotional pricing on the line of a this appliance manufacturer, and at the time of booking, my daughter and her husband were assured that all items were in-stock, only to discover a week before planned delivery that the stove was out-of-stock, and delivery may not occur until late January or early February.  When this retailer was queried as to the specific reason for this sudden change, the response was, of course, we thought that the stove was available from the manufacturer, but that turned out to be not the case. Instead, the particular stove model is backordered by the manufacturer.
In the view of Supply Chain Matters, these incidents once again point to the obvious fact that retailer investments in the most sophisticated or attractive in-store or online commerce tools need to be also balanced with investments in multi-channel inventory and fulfillment execution and predictive demand management tools.  Too often, marketing and sales teams tend to gain the prioritization of investment, and retailers discover once again, that online fulfillment is only as strong as the weakest link of associated supply chains that support each fulfillment channel.
The real headline for multi-channel operations supporting holiday sales in 2011 is the critical importance of balancing commerce tools and product offering with advanced backend fulfillment and supply chain intelligence processes. Knowing as soon as possible that multi-channel or direct ship inventory is not sufficient to support current existing and future orders, leads to proactive customer response and service needs.

December 29, 2011

Scheduling 'Order Release Process' Intelligently

A standard retail sales order goes through four main processes during its fulfillment cycle. They are order sourcing, order scheduling, order release and finally order shipping & delivery. Order sourcing process finds the optimal node from which order can be sourced; whereas scheduling determines when the order can be shipped or delivered. Order release process releases the order to warehouse management application in order to allow its processing in warehouse. In other words, order release process transfers order control from order management system to warehouse management system. Hence, timing the release process astutely, is extremely important. A mistimed release process can lead to undesirable outcomes and may prevent realization full OMS implementation benefits. Today, I would like to share one such experience with you...

Sometime back I was involved in implementation of Order Management system for one of the retailers. The retailer delivers customer orders using own fleet of vehicles. Hence, in addition to four order fulfillment processes discussed earlier, client has one more key process of route optimization to be performed on order. Route optimization process determines the sequence in which orders are delivered to customer, so as to reduce overall cost of transportation. This process was performed after order scheduling and before order release process. Since, customer orders were route optimized prior to their release, two unique problems were encountered.

The first problem was that of underutilized capacity. During the release process, if sufficient inventory is not available, order used to get backordered. The capacity booking corresponding to such backordered orders remained unutilized since, route (of the load which contains backordered order) had already been optimized. The second problem was around Brocken Promise Management. After route optimization, call center executive used call customer to communicate delivery date of order. If customer order happens to backorder after release transaction, call center executive had to call customer again to inform that order would not be delivered on delivery date communicated earlier. This, Broken Promise, had to be managed by giving goodwill discount resulting in loss to retailer. Both the problems were resolved by simply moving order release process ahead of route optimization process.

However, it may not always be so easy to reschedule release process. The order release process should be timed strategically considering various factors like, warehouse processing time, delivery date, fulfillment method, and inventory considerations.

Depending on business policies, retailer may allow order placement only against on hand stock, on hand & future inventory or pre-ordering. If customer orders are taken only against on hand inventory, then it makes sense to release them as soon as they are scheduled. This allows WMS sufficient time to deliver the order within stipulated time. However, OMS should ensure that orders are validated for fraud before they are released to warehouse management system. Likewise, Next Day Delivery orders and Expedited Delivery orders should be released as soon as they are scheduled as they are mainly taken against physical on hand inventory.

Preorders should be released as soon as they are taken into the system subject to fraud check. Preorders are taken into the system without checking inventory. So, possibility of order getting back ordered is more. When preorders are released as soon as they are taken into the system, it gives supply team more time to arrange inventory for backordered orders. Similarly drop-ship orders also can be releases to third part vendor as soon as they are taken into the system, to allow supplier sufficient time to delivery customer order.

Timing order release process is probably most difficult, when retailer is taking customer order against both on hand & future inventory. Since, orders are taken against future inventory, they cannot be released as soon as they are scheduled or taken. One possible approach is to consider delivery date, warehouse processing time and time required to deliver order from warehouse, while slotting release process. An order can be released to WMS x days prior to its delivery date. The value of x would depend on warehouse processing time and time required to deliver order from warehouse. This would ensure that orders are not released before future stock turns into on hand inventory, thus avoiding incorrect backordering.

Do you think of any other factors to be taken into account before scheduling order release process?

December 23, 2011

Fulfillment Options - Recent Trends

Typically, retailers have provided their customers a standard set of fulfillment options i.e. the different ways in which the order could be delivered to the customer. E.g.: Standard Delivery (2-5 day delivery), Expedited (Next day delivery), Store Pickup etc.

Increased competition has compelled these retailers to provide services that differentiate them from the rest of the pack. And fulfillment options are one area where they are pulling out all stops to woo the customer. An interesting battle is on among retailers that have an online presence in addition to traditional brick & mortar stores pitted against those that have an online presence only.

For the holiday season of 2011, Toys 'R' Us offered an interesting variation to the store pick up service. The ability for the customer to designate a person (other than himself) who would collect the order at the store once it is ready to be picked up. Clearly, the retailer does not want to lose a sale where the customer may not be able to pick up the item and hence does not order.

Similarly, amazon.com, which has no store presence, is currently doing a pilot project where store pickup would be offered as a fulfillment option. Which store, you ask? A neighborhood store such as 7-11 or Rite-Aid. Amazon has setup lockers at a few stores in select cities in the US and in London, England. Customers choosing this method of delivery receive an email that contains a code that unlocks the locker holding the package. (The customer can choose a locker during checkout.) Of course, the email is sent only after the package has been delivered to the locker by the carrier.

Interestingly, it is not just the retailers who seem to be feeling the need to differentiate. Carriers, used by online retailers for deliveries, are also innovating and offering newer services. UPS recently announced that it was collaborating with a few retailers to offer a MyChoice program which lets consumers, for a fee, subscribe to alerts (emails, text messages) on their package progress OR choose a two hour delivery window within which they would want their package to be delivered. The two hour delivery slot has been offered by retailers (typically grocery retailers) that run their own delivery fleet; it is interesting that a carrier such as UPS also now offers this choice.

There seems to be increased pressure, in this world of uncertainty, to offer a differentiator service that will help add new customers and retain existing ones. What will we see next?

December 9, 2011

Delivering the Goods in Online Grocery Business

A number of grocery retailers are enthusiastically embracing online initiatives. Some enable a buy-online-in-store-pickup approach while a few expand their reach to include home deliveries and the usage of dark stores. But one look at the online grocery landscape reveals that a successful strategy is not really linked to any of these.

In a recent blog on Supply Chain Matters, I lay out the true platform for successful adoption of online operations by grocery retailers. I argue that what is needed is an understanding of linkages across the true view of consumer desires, alignment of retail grocers, and perspective of solution providers. The entire blog can be accessed here.

December 8, 2011

Fraud vs Customer Centricity - III

In my earlier posts Part - I here and Part - II here, I discussed about how we could utilise the features provided by payment gateways intelligently to reduce the exposure against credit card failures.In addition to that, another key area in the battle towards reducing exposure against non-payment is the optimisation of the Order Lifecycle itself.A good business process should always have control points and a proper feedback loop. This applies to the Order Lifecycle too.Let me elucidate.

In my opinion, the Order Management system should take care of two things to reduce loss of revenue. One is to make sure that the retailer has the Order covered in terms of ring-fenced credit (in other words, a valid authorisation) before the order is shipped and the second is to make sure that the payment is processed as soon as possible once the order is shipped.

Unfortunately, at many of the retailers that I have been associated with, I have noticed somewhat of a haphazard and organic growth across channels. This has essentially meant that the business processes and IT systems have quite often been patched up to make it work in the shortest possible time thereby cutting some corners. Among these, the biggest area of concern that I have come across is the lack of timely feedback in the Order fulfilment lifecycle. Many of these retailers have started small with quite a few processes which do not support exceptions too well. One example is sending out fulfilment requests, especially to their drop-ship suppliers (Direct to Customer suppliers) through email with no confirmation on the actual fulfilment till the supplier raises an invoice for those items.  Such processes mean that retailers either charge the customer upfront and then handle any fulfilment failures manually or charge the customer 'x' days after the request sent to the suppliers which degenerates into complete chaos as the order volumes go up.

This is where standardisation of process would come into play. I tend to go in with a recommended standard model which could then be tailored for each retailer's specific process peculiarities. 

The included Fig 1 depicts the schematic process for In-stock products with minimal handling times (< 2 days). 

 

Figure 1.jpgThe process essentially provides for a feedback for the retailer to charge the customer's card before the shipment takes place. This would provide coverage for the retailer in terms of a valid authorisation covering the shipment. This process aims at the optimal mix of covering the retailer while keeping the ring-fencing on the customer's card to a minimum.

 The included Fig 2 depicts a similar schematic process for products which have longer lead times. These could include products which are either made to order or replenished to order.

Figure 2.jpg 

The key difference here is an additional update from the Fulfilment system when the Order is ready to be fulfilled. This would act as the control point for the retailer to authorise the card before the shipment process goes through.

 These are very high level schematic processes and there are a lot of challenges faced in each implementation to converge to such a process, but these would at least provide a good starting point.

While I will try and collate some of the challenges and potential solutions in another post, I would be delighted to hear from others on the challenges they have faced too.

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