A WINNING Combination

Mar 01, 2003 10:30 PM  By

Three years ago, when Circuit City was puzzling over how to set up its e-commerce fulfillment system, the electronics retailer could have gone in any number of directions. But one stood out more than any other.

“We already had a system in place,” says Stephen Duchelle, the director of e-commerce for Richmond, VA-based Circuit City, which has 600 stores across the country. “So when we set up our e-commerce system, we just tapped into our existing system. The easiest way was to hook into our store inventory.”

But that approach is not one-size-fits-all. What may work for Circuit City may not work for other companies, say supply chain managers and consultants. That’s because there may be as many ways to manage inventory in a multichannel environment as there are channels that require inventory. It’s not so much that there is a right or wrong way — some approaches might seem completely off base to an outsider, but make perfect sense to someone actually managing the inventory.

What there are, instead, are systems based on the combinations of channels that need to be managed, and on the unique needs of the company and the channels. A retailer that needs to manage product for a Web site, catalog, and traditional store is going to take an entirely different approach from that of a business-to-business firm selling through a sales staff and a Web site.

“The devil is in the details,” says David Pyke, a professor of business administration who specializes in supply chain management at Dartmouth College’s Tuck School of Business, where he is also the associate dean of the MBA program. “The problems are not insurmountable, as long as the focus is on what works best in each situation.”

Multichannel approaches seem to offer an almost infinite number of situations and combinations:

  • business-to-consumer, which includes any mix of retail, catalog, or Internet sales;

  • business-to-business, which includes not only distributors and manufacturers up and down the supply chain, but also purchases made through outside sales staffs, call centers, and catalogs; and

  • hybrids, such as businesses that sell to both consumers and other businesses, and reverse business-to-business dealings, which include returns and exchanges.

“One of the things we have found is that our customers can set up the system any way they want,” says Sharon Crawford, international products manager for the Canadian Geac Computer Corporation, which manufactures System21 enterprise resource planning software, a package that helps companies manage inventory throughout the supply chain. That focus means that the product must take into account the various possibilities.

“Most of them prefer to have a common inventory, but if they want to have dedicated inventories for each channel, the software can handle that too,” says Crawford.

Software, not surprisingly, is a crucial aspect of multichannel inventory management. Doctors Foster & Smith was a pet supplies catalog company with an outlet store and a token presence on the Web when the Internet bubble burst in the spring of 2000. Three years later, almost one-third of sales at the $150 million company come from the Web site. Consumers who had used Pets.com, Petopia, and the other failed online retailers had been trained to click and buy, and many migrated to Foster & Smith.

This meant retooling the Web site to handle the volume, even before deciding how to manage inventory for the new channel, says John Powers, Foster & Smith’s vice president. The Web site had to be able to talk to the catalog, and vice versa, exchanging inventory levels, product changes, and the like. Says Powers: “Our culture had to change. We had to accept that the Internet is every bit as important a part of the company as the catalog, and we had to have a commitment from top management to do it.”

Eventually, Foster & Smith decided on a common inventory for all three channels. In fact, common inventories appeal to companies for several reasons. Veterinarian drug and supplies distributor The Butler Company, of Dublin, OH, doesn’t want to operate different inventory systems in each of the 16 regional warehouses in which its inventory is distributed. “An order is an order, no matter where it comes from,” says Jerry Savage, Butler’s vice president for electronic business.

Butler takes orders from three main sources — some 168 sales reps in the field, a 120-representative inside sales force located at seven call centers, and its relatively new Internet site, Access Butler.com, which allows veterinarians to set up accounts and order directly from the company. Currently, 15% of orders come from outside, 83% come from inside, and 2% come through the Web site.

Yet every order is filled by the same set of warehouses. That’s because, says Savage, order sources are tied together through the same back-end system (using the Geac System21 platform), providing real-time inventory levels for each order source. Every sales rep, call center employee, and veterinarian can see if there is merchandise in the regional warehouse to fill their order; can make a request for another regional warehouse to fill it if the local warehouse is out of stock; and can backorder a product. In addition, the system includes rules and procedures for ordering controlled substances.

The goal, says Savage, was not to duplicate effort. “We already had a system that worked for two channels,” he says. “All we did when we added the Internet site was offer our customers another way to do business with The Butler Co.”

Other companies, like Circuit City, not only already have a system in place, but also want to use the strengths of that system to drive a second channel to sell consumer electronics. Circuit City, says Duchelle, wanted to find a way to allow customers to shop at their stores from home and then pick up their purchases, if they wanted, at the store. So there was little reason to offer merchandise through the Internet channel if it wasn’t available at the store.

If the consumer doesn’t want to pick up the item at the store, then the order is picked, packed, and shipped from a Web fulfillment center that is part of one of the chain’s three regional warehouses. It goes out from the warehouse closest to the customer.

What’s important here, says Duchelle, is that the order is driven by the customer, not by the channel or Circuit City. The customer can shop for something else if the store is out of an item, ask to be notified when it’s back in stock, or make a backorder. Whatever the choice, it’s the customer’s decision. There is no e-mail three days later, saying the item is out of stock and won’t be shipped — one of the leading causes of customer unhappiness with Web ordering.

“If we only sell what’s in stock, we can’t exceed expectations for consumers,” says Duchelle. “We won’t sell them anything if we don’t have it in stock at the store, which is the same thing that would happen if they were in the store.”

On the other hand, says Pyke, dedicated inventories also have their advantages, especially for companies with channels where order trends and profiles are substantially different. Picking a book is much the same across various channels, but picking disparate items of widely assorted sizes can present problems when a company uses common inventories.

What happens if the typical retail order is different from the typical mail order or Internet order? Retail shoppers usually buy more at one time than mail order or Web shoppers, presenting yet another variable. So a warehouse would be set up to optimize picking items for the former, slowing down fulfillment of the latter. A better solution might be smaller, separate areas within the warehouse that match the order profiles for the channels.

Or consider the challenges of picking several small items and a large item from a larger, common inventory — pet toys and bags of dog food, for example — to fill an Internet order. Again, it would probably improve efficiency to separate inventories in channels to improve picking, packing, and shipping times. It would also help in restocking inventory, again taking into account the assorted channel profiles.

“There is a clear advantage to keeping your arms around a problem like that,” says Pyke. “You just have to keep in mind the various advantages and disadvantages. On the one hand, there is the pressure to separate picking and packing because it’s more efficient, but the other side is that you can save significant money by mixing channels.”

Separate channels require separate inventories, which might not be a problem for inexpensive or fast-moving items. But, says Pyke, what happens when companies are forced to duplicate expensive or slow-moving items like machinery or heavy equipment? That’s a situation that a clothing manufacturer, which deals in seasonal fashions, would never have to consider.

And then there is the question of picking single items, something that is less common in retail supply chains. Stores order a dozen pairs of pants, not one toothbrush or a package of flower seeds, things that aren’t usual in catalog and Web site orders. It’s in those situations that outsourcing logistics and warehousing starts to make more sense.

“One of the many things that people missed in the dot-com boom was picking single items,” says Pyke. “They looked at Toys ‘R’ Us or Amazon, but what they didn’t look at was everyone shipping one or two small items. Picking small items can drive a company nuts, since they usually don’t have the systems or the people.”

This sort of planning is especially important for business-to-business transactions, says Cosimo Spera, executive vice president for global business development for Vizional Technologies, a supply chain software company with offices in San Mateo, CA, London, Amsterdam, and Tokyo.

“A lot of it comes down to sales trends and forecasts,” says Spera. “You have to make some sort of judgment on predictions and estimates, so that you can divert and reallocate resources without increasing inventory in real time. In that respect, it’s all part of providing the best value-added service for the customer. When they ask for a component, the inventory should be there.”

That’s something that Butler is well aware of, says Savage. “We need to educate our customers so that the nature of the supply chain is reactive instead of proactive,” he explains. “What happens now is that something said by a doctor at a trade show means that we get lots of requests about that new product when the vet gets back. We need to work with the customer for better forecasts.”

Forecasting is also important on the reverse side of the supply chain. At Borders, the nationwide book superstore that includes the Waldenbooks mall chain, it’s one thing to move books into retail outlets, even two distinctly different ones, from publishers. It’s something else entirely to ship unsold books from the stores back to the publisher — returns, as they’re called in the trade, and a crucial part of book retailing.

“The hardest part is projecting how a title is going to do,” says Mark Maloney, Borders’ associate director for common system team distribution. “It’s probably more of an art than a science, and sometimes it’s not any better than an educated guess. You have to guess when a book has hit its peak, when the trend starts going down. When do you anticipate it has reached bottom?”

In the Borders case, inventory management includes managing returns. Each store sends returns to a return center, which consolidates and dispatches them to the individual publisher. That system, says Maloney, works more efficiently instead of each store shipping books to the publisher — or what would be the reverse of a dedicated inventory source.

“It can be complicated if we haven’t planned properly,” he says. “We’ve done some crazy things to make sure there is room for the books if the warehouse gets full. It’s not unusual to rent a trailer, put the slow movers in it, and lock it in the parking lot for a couple of weeks.”

As Spera notes, the important thing is to pick a system that is best for the supply chain. “What you don’t want to have happen,” he says, “is to watch inventory pile up during the life cycle of a product. The more channels you have, the more difficult that gets.”

Jeff Siegel is a Dallas-based freelance writer whose articles have appeared in Forbes, American Way, and a variety of other magazines.

‘Never Again’

Liz Lange was going to go the multichannel route, because that’s what successful companies were supposed to do.

“Never again,” says Lange, the president and CEO of Liz Lange Maternity, a five-year-old New York City-based retailer of maternity clothing. “Managing inventory is what makes or breaks a business, especially a young one. You can’t have too much because you can’t afford it, and you can’t have too little because you’ll annoy the customer.”

Which is what happened when the company, with three retail stores, sold from a branded, outsourced Web site a couple of years ago. The result, says Lange, was a disaster, and taught her that it’s possible to be too small to go multichannel. The irony is that Liz Lange Maternity would seem to be an ideal candidate. The merchandise doesn’t present picking or packing problems, and almost three-quarters of inventory can carry over from season to season.

But that’s not what happened. Instead Lange was faced with:

SHIPPING DELAYS

Fulfillment from one warehouse in New York City was difficult even when everything went well. When there were problems, orders were late and communications with the third-party provider often broke down.

CUSTOMER SERVICE WOES

“With our product, I want a sales associate who knows what the customer is ordering,” says Lange. “We had outsiders doing it, and they were alienating customers.”

INVENTORY MIX-UPS

Lange says her company approaches inventory conservatively, preferring to be sold out rather than carry excess. That approach didn’t sit well with e-consumers, who want what they want when they see it on the site.

The upshot is that Liz Lange Maternity won’t have a Web sales channel. The site will refer customers to a toll-free number, which will ring in one of the New York City stores. That way, a company employee can answer questions and arrange shipping, avoiding the third-party hassles.
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