Don’t Wait for the Inevitable in Omni-Channel Retailing

It’s amazing how many macro trends such as changes in demographics shape and impact the future of supply chains and supply chain performance. Equally amazing is that many of these macro trends are right in front of us. But, we don’t respond to them until the pain from these shifts is woefully obvious and there is less ability to make a difference. Omni-channel retailing is one of those macro trends.

Last week we hosted a conference in London on Omni-channel retailing where LCP Consulting presented some of the findings of a study of over 150 retail executives in the US and UK. One of the most poignant points was that, as more retailers adopt Omni-channel retailing and move to a greater percentage of online business, their margins will actually decline. At the same time, they also stated that “bricks and clicks” retailers really had no choice. It’s the proverbial “in between a rock and hard place”.

LCP: Omni-channel Margin Analysis Example:

Source: LCP Consulting (www.lcpconsulting.com)

The implicit implication behind this analysis is that retail supply chains are optimized for the store and out of balance driving costs. They must dramatically change to protect operating margins and help avoid the commoditization that on-line shopping can bring. This “perfect storm” in retailing is an excellent opportunity to raise the level of discussion to the C-level of the importance of the supply chain to a retailer’s overall health and success. Most importantly, it points to the sense of urgency that must be put into investing in supply chain capability now, not when the balance of revenue has shifted. Let’s face it, most retail executives don’t come out of the supply chain world and struggle with understanding supply chain investment, costs and complexities. However, they do get margin erosion and especially that the inevitable shift to more on-line sales that they are pushing will drive lower margins. Here’s the chance to tie the supply chain cause to one of the most important macro level issues facing retailers.

The challenge in having the Omni-channel and margin discussion is not to turn it into cost reduction only exercise. Yes, you need to get your supply chain costs down, but you cannot forget the need to improve service and more importantly use service to drive product sales and generate incremental services-based revenues. The supply chain is one of the few places in an online business where you can make a measurable difference to the customer. There are enough examples now to show that purchase price has become “table stakes” and customers will pay for additional value-added services and increase their loyalty to those retailers that deliver with excellence.

For the manufacturers and distributors that supply retailers, the Omni-channel phenomena should also be a wake-up call. The pressure on retailer margins will get more intense as they sell more on-line. The goal is not to get in the same cost reduction trap (e.g. product pricing).  Instead the opportunity is to look at your own supply chain to see how you can lower the cost of the retailer’s supply chain, improve their service and help value-added services.

Supply chain flexibility, speed, retail ready product and information visibility are key enablers for retailers as less of their sales will be delivered through traditional store channels. The ability to inject your product further into the retailers supply chain and directly to the customer will help retailers cut out network costs and delivery times. For example, next day and same day will put tremendous pressure on retailers to be more reactive, but carry as little inventory as possible. Retail ready labeling will be critical to streamline goods through the network at any point and information visibility critical to ensuring reliable operations and greater flexibility.

Omni-channel retailing is a global trend that is changing how retailers and their supply chains operate. Its impact on margins provides an excellent platform for taking the importance of the supply to the highest levels within a retailer and a competitive advantage for the manufacturers and distributors that can help make their retailers perform better.