2021 Inventory Management Report by Sourcing Journal

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Contents

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Editor’s Letter

SKU SOS

5 Steps to Optimal Merchandise Management

Moving Local-For-Local to the Top of the Agenda

Winning Strategies for E-Comm

Curbing Fulfillment Costs

Refining BOPIS and Curbside for the Long Haul

Optimizing Omnichannel Fulfillment

Preparing for the Next Disruption

Taking Stock A LOOK AT THE INVENTORY MANAGEMENT PRACTICES AND TOOLS RETAILERS ARE EMPLOYING TO WIN IN THE NEW NORMAL.

etail has always been about delivering the right goods to the right place at the right time. But the challenge of doing so is exponentially more difficult—a fact illustrated by the number of overstocks and out-of-stocks weighing down margins each quarter. It’s a dilemma the industry has faced for years, and it all came to a head with the Covid-19 outbreak. Suddenly stores were closed, consumer demand evaporated and a season’s worth of goods sat untouched. Now as shoppers return and a new normal rises on the horizon, merchants need to apply the lessons learned to the latest tech platforms to establish healthier inventory strategies—for the P&L and the planet. Whether it’s children’s wear, footwear, accessories or apparel, the inventory conundrum persists as retail executives re-assess their practices. In “SKU SOS,” experts share how they’re enhancing visibility into their suppli-

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ers, integrating systems to create one view of stock and employing a data-led approach to design and merchandising. These insights paired with the tips from the retail consultants in “5 Steps to Optimal Merchandise Management” provide the building blocks for sound inventory management. In addition to these measures, fashion executives are starting to realize the solution may require remapping the supply chain for part, if not all, of their product offerings. The long-lead nature of overseas production stands in direct opposition with the buy-now, wear-now immediacy of the e-commerce age. Rather than taking bets on what will be trending 18 to 24 months in advance, retailers are turning to nearshoring as an option to help them create goods closer to need. In “Moving Local-for-Local to the Top of the Agenda,” experts share how retailers can reduce the number of obsolete goods at the end of the season.

The pandemic pushed many retailers to adopt alternative fulfillment methods like buy online, pick up in store, which proved to be a lifeline when consumers were wary of in-store shopping. Now an established practice, stores are learning how to refine their processes to ensure goods will be there when customers show up. It’s a new piece of the inventory puzzle that demands even greater accuracy and agility. “Refining BOPIS and Curbside for the Long Haul” outlines the particular challenges these options present and how retailers can address them. “Preparing for the Next Disruption” takes a look at the lessons retail has learned over the last year and the tools it will need as we all move forward, keeping in mind that the pandemic may have been a black swan, but the potential for disruption is ever present. Caletha Crawford Publisher Sourcing Journal

SKU SOS APPAREL EXECUTIVES SHARE THE STRATEGIES THEY’RE USING TO SOLVE TODAY’S MOST PRESSING INVENTORY ISSUES. LA U R E N PA R K E R

he Rolling Stones’ most famous lyric aside, no customer wants to hear they can’t always get what they want. Unfortunately, during the pandemic, shoppers have been facing an unprecedented level of stockouts in some categories. Meanwhile, retailers are sitting on a glut of unsold goods in other areas thanks to shelter-in-place measures and work-from-home mandates. While the industry could be forgiven for the inability to manage inventory through a black swan event, the reality is fashion has long been plagued by a mismatch in supply and demand. Here, we’ve tapped industry leaders in inventory management to share how they’re overhauling their digital-first strategies, inventory visibility and demand planning to manage inventory volume and availability across channels.

FRANK BRACKEN, EXECUTIVE VICE PRESIDENT AND CEO OF NORTH AMERICA, FOOT LOCKER On what digital-first assortment planning means for his business: We have worked hard to build a true omni-view inventory— an inventory that is visible and committable regardless of where the item physically sits— especially over the past 24 months.

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On improving inventory visibility: Most recently, we re-platformed our entire core retail system to focus on inventory and order brokering to benefit our customers. Essentially now, online transactions can pull from warehouse and store inventory and vice versa. There is no such thing as stranded inventory in our ecosystem. On the most useful information in demand planning beyond historical data: We are entering a new era of demand planning, inventory and supply chain management— all enabled by technology and integrated systems. The collective ecosystem that we create will include data sharing and inventory sharing, all of which will make our customers happy.

CYNTHIA YAO, SUPPLY PLANNING DIRECTOR, TOMS

CHARLIE ROBERTS, MANAGING DIRECTOR, SALES & MARKETING ECHO DESIGN GROUP On what digital-first assortment planning means for his business: Digital-first selling provides us great insight into who is buying and why they may be making a particular purchase. The biggest impact here lies in our ability to feed insight back into our development process. By understanding the steps a customer took before making a purchase, we can make smarter decisions about which aspects of a strong seller are driving a given sale. This allows us to lean into the specific feature, color, motif, message or other aspect of the sale that is resonating most. On improving inventory visibility: The most challenging aspect surrounding inventory visibility is deciding what not to look at, and in this regard, we believe less is more. With so much data streaming in, simplification is critical. While we’re working to increase the data points we collect, we’re simultaneously pushing to consolidate data from all channels. On the most useful information in demand planning beyond historical data: Our demand planning is a blend of art and science. We extensively review historical data, of course, but we also gather forward looking information from various trend services, global travel, customer anecdotes and more. We’ve focused our customer-facing sales teams to have a sharper product focus, making it easier to develop truer expertise. This has resulted in much more effective communication across teams and produced more insightful anecdotal information.

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On what digital-first assortment planning means for her business: Digital-first assortment planning is essential for visibility enhancement and efficiency improvement. Amid Covid-19, we moved lots of meetings to online, and the brand conference meeting couldn’t run very well without some digital technical efforts like 3D shoe review. On improving inventory visibility: We have upgraded the platform for e-comm sales and we have tools for ASN (advance ship notice) EDI (electronic data interchange) which apply to our supply chain. Under the current climate with tight vessel space and constrained containers, for example, many order delivery schedules are delayed. Digital assortments reveal the real impacts in real time, providing quick connections to sales and customers to mitigate the risks. On the most useful information in demand planning beyond historical data: We couldn’t meet demand without T1 and T2 suppliers’ participation, hence keeping good relationships with our core vendors. Enhancing their flexibility, resilience and transparency on capacity management and quick reaction to the market are critical. Other key factors: sourcing new a factory if necessary; leveraging factory capacity for building up core product inventory in low season and making space for new product in peak season; working closely with internal/external stakeholders to shorten lead time and reduce production risks in advance. This ensures production goes more smoothly, boosts productivity and yields fewer defects.

“Digital-first selling provides us great insight into who is buying and why they may be making a particular purchase.” — Charlie Roberts, Echo Design Group

TONY DROCKTON, FOUNDER AND CHAIRMAN OF HAMMITT LA On what digital-first assortment planning means for his business: Focus first and foremost on integrating analytics and flexibility in order to calibrate and improve inventory levels. This has enabled us to efficiently raise sales and margins for direct-to-consumer e-commerce. By buying for our DTC branch before wholesale, deep DTC analytics take the lead in designing future and current assortments. Having that direct relationship and the data around it allows us to design for maximum sell through in all channels of distribution at full margin. We recently integrated with visualization software to create clear KPI’s from all areas into one mobile friendly graphic that can easily be manipulated with unlimited what-if scenarios or forecasts. We also created a “drops” initiative solely for our DTC platform to add a sense of urgency and exclusivity for our loyal customers by giving them early access to limited-edition accessories and styles. On the most useful information in demand planning beyond historical data: Fashion is now a digital-first demand planning world. We carefully plan our digital spend around profitable scaling, and this takes precedent over historical demand data. Entire new demand curves can quickly be

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created with an effective well-planned digital spend. We strive to simplify our supply chain and build strong long-term relationships that save money in other ways versus focusing on lowest cost riskier sourcing options. Demand planning is useless without assurance of delivery in the supply chain, and this is the Achilles heel for most planners.

HOSEA CHANG, CHIEF OPERATING OFFICER OF HAYDEN GIRLS On what digital-first assortment planning means for his business: We are an e-commerce-only apparel business, so when assortment planning, we are not thinking where in the store it will go but rather how we want to organize our website to instantly attract new clientele. Two big questions drive our digital assortment planning: What season is next? and What are the ‘big girls’ wearing? On the most useful information in demand planning beyond historical data: Tween girls want to express themselves through their clothing, and beyond historical data, we pull ideas from trends that are popular among young women’s clothing and translate it to age-appropriate styles and sizes. While these young ladies have minds of their own, moms and dads are the ones who are buying.

“Demand planning is useless without assurance of delivery in the supply chain.” — Tony Drockton, Hammitt LA

5 Steps to Optimal Merchandise Management LA U R E N PA R K E R

he customer journey has never been more complicated—or unpredictable. Today, getting assortment planning right means prioritizing e-commerce, adopting the latest tools and leaning into the right data. As the apparel industry attempts to shake off the damaging effects of the global pandemic, retail executives are tasked with learning new ways to think about their inventory and how to get it to where it needs to be. Here, Brad Eckhart, partner at Columbus Consulting, and Liza Amlani, principal and founder of Retail Strategy Group, share the advice they provide to their retail clients as those retailers grapple with the best way to manage merchandise now.

THINK LIKE AN ETAILER

With so many transactions happening online, even the most traditional retailers must shift their perspectives. “A digital-first assortment allows a merchant/planner to optimize their assortment online prior to planning their physical store assortment, offering up many SKUs and colors without the constraints of the physical limits of the shop floor, fixture capacity, visual merchandising directives and stock room capacity,” said Amlani, who came up the buying ranks at retailers like Holt Renfrew and Club Monaco.

GAIN AGILITY

The only way to meet the needs of today’s dynamic retail landscape is to gain visibility across all channels, according to Eckhart, whose expertise comes from senior planning roles at companies like Finish Line and Juicy Couture. “When it comes to inventory management, the first priority for omnichannel fashion

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retailers should be to evaluate their order management systems (OMS). A successful OMS has the ability to manipulate parameters that leverage in-store inventory for online order fulfillment,” he said.

GO LOCAL

“Fashion retailers should also utilize systems that track demand across channels at the geographic level. This helps develop assortments for brickand-mortar stores that not only address instore demand but online demand in each specific market, making product available closer to the customer, and therefore reducing the shipping time and cost to the customer,” Eckhart said.

TAP DATA PROS

Amlani said retailers must lean into data scientists to better leverage the influx of the signals at their fingertips. These skilled professionals can surface valuable insights from “disorganized” data. “Visibility into the data helps you understand the productivity of each SKU,” she said.

BROADEN YOUR FOCUS

Sales patterns are a valuable tool but Amlani said if retailers are only focused on that data, they’re missing out on a host of other meaningful information, like what brings shoppers to their stores and why they’re abandoning purchases. “In my time at Ralph Lauren, we had the ability to use data around rate of return and sales history to make better buying decisions, but it all comes down to a science. Having the ability to see what customers are searching for, what they are buying and what they are leaving behind will help you use this data to plan better,” she said.

Moving LocalFor-Local to the Top of the Agenda THE COVID CRISIS UNDERSCORED CHALLENGES INHERENT IN OVERSEAS PRODUCTION, BUT IS NEARSHORING THE SOLUTION? G L E N N TAY LO R

he apparel supply chain has been inundated with some major obstacles in recent years, including a trade war between China and the U.S., a global pandemic that first suffocated supply and then demand, as well as shipping delays due to congestion at major ports. All of these factors have increased the challenges related to inventory management, As a result, an increasing number of retailers and brands at least consider the idea of bringing more manufacturing operations closer to home. And apparel focused firms aren’t alone. According to a September 2020 study from the Capgemini Research Institute, 65 percent of retailers and consumer product firms are investing in regionalizing and localizing their supplier base, while 58 percent of retailers and 72 percent of consumer product firms say they are investing in regionalizing and localizing their manufacturing base. The one obvious benefit that brands have in nearshoring their manufacturing operations is that the product is much closer to the end consumer. That alone cuts down

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air and sea freight costs and production lead times, enabling brands to capitalize on trends rapidly, or ship product to customers quickly upon purchase. Additionally, brands may be more apt to embrace nearshoring as a means of creating smaller batches, madeto-order goods or customizable product to boost sell-throughs. “It’s about being able to react in season if a product goes viral or demand goes down, such as in the case of Covid,” said Gabi Ledesma, vice president of consumer products and retail at Capgemini. While Ledesma said these reasons for nearshoring were prevalent prior to Covid, “they have since accelerated because of the dominance of the online sale over the last 12 months.” Local sourcing also better for sustainability, which is becoming more of a consumer imperative, he said. “When it comes to sustainability, countries like the U.S. have a better reputation than those in Southern Asia, for instance,” said Ledesma. “Consumers are going to look at that, and also the impact on emissions. Sourcing locally produces a lot less CO2 in the atmosphere

“For the apparel companies that have slim margins, they’re going to be very challenged to move production here today.” —Gabi Ledesma, Capgemini

than having to ship things in from far away.” And local-for-local production doesn’t necessarily mean reshoring in the United States. American brands, for example, can bring more of their operations to Central America and South America in hubs like Mexico, Peru, Colombia, Honduras and Guatemala, among others. Peru-based vertical manufacturer World Textile Sourcing (WTS) couples its all-under-one-roof operations with a focus on sustainability. The company partners with Lenzing to use fibers such as viscose and modal, and Unifi, using cotton certified by BCI and the U.S. Cotton Trust Protocol. This gives its apparel clients transparency over the type of materials in the process that might not be guaranteed in China or Vietnam. Elayne Masterson, the Peru-based company’s vice president of sales and business development, said that since WTS spins its own yarn instead of importing it, it could take a preemptive approach to gauging client demand, especially throughout the pandemic.

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“The fiber is there in Peru for our customers that need it,” Masterson said. “We are not scraping in order to find it. So that kind of preemptive position is very attractive to people. Also, in these times when staffs may be leaner, our in-house materials innovation and design teams can help to support client product development design.”

CALCULATING THE BENEFITS

Having resources on hand enhances WTS’ speed to market, which is a major benefit of producing locally even if there isn’t price parity with overseas costs. “I think brands have learned that [end consumers] prefer to pay, let’s say 50 cents more, but guarantee the goods are in on time, than just look for the cheapest price and not get the goods on time,” said Luis Antonio Aspillaga, founder and CEO of WTS. “We have been doing reorders in three or four weeks. I remember shipping some Christmas pajamas in the middle of November and we got the order in October, so that was very fast.

I think more clients are just looking to have the goods when they need or want them.” Satisfying consumer demand is one major argument for local production. It’s a major reason why Walmart has committed to spending $250 billion on U.S.-made products by 2023. John Furner, president and CEO of Walmart U.S., has said, “It matters to our customers— more than 85 percent of which have said it’s important for us to carry products made or assembled in the U.S. And most of all, because of the jobs it brings, it matters to American communities and the people who live in them.” But despite the benefits, it’s not always easy to just jump into nearshoring given that investments extend beyond more expensive labor costs, according to Murali Gokki, a managing director in the retail practice at AlixPartners. Capital has to be invested in other ancillary areas, namely compliance. “Our standards when it comes to environmental laws, usage of water and access to natural resources are all going to come at a higher cost than what you’ll probably find globally,” Gokki said. “One of the things that we are looking for constantly is, ‘What kind of innovation is happening in the States?’ That is fundamental to positioning nearshoring as an advantage by means of innovation in manufacturing, innovation in supply chain transparency, innovation in sustainability. As I see it, that’s a key to making nearshoring a reality for this industry.”

BALANCING RISKS & REWARDS

While the costs of local labor combined with the investment into new warehouses, infrastructure and upgraded technology might deter some brands and retailers from considering nearshoring, they would be wise to reconsider. Overseas manufacturing often comes with hidden costs. For instance, producing volumes to hit minimums can result in overstocks that deplete margins.

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Further, supply chain disruptions are only exacerbated the further away a manufacturing operation is from the end consumer. While there’s unlikely to be another pandemic, risks lurk everywhere—and the next crisis could mean the end for fashion firms that fail to insulate themselves. A September 2020 McKinsey & Company survey, The State of Fashion, highlighted that over the course of a decade, companies in most industries can expect a single production shock in which manufacturing shuts down for 100 days. This would wipe out nearly 40 percent of one year’s EBITDA for the average textile and apparel company. Before retailers decide whether shortening their supply chains through nearshoring is an appropriate strategy, they must consider their assortments. Products with healthy profit margins are better suited for local production, according to Ledesma. “For the apparel companies that have slim margins, they’re going to be very challenged to move production here today,” Ledesma said. “The second criteria would be the type of product, and how easily it is to automate that product. Depending on the fabrics and fabrication of that product, it may be better suited for local sourcing, versus some others that require more labor-intensive production.” Gokki noted that categories in which need or trends spike—like personal protective equipment—are the best categories to locally manufacture. “Think about licensed sports merchandise, where you see a spike in demand that needs to be met pretty fast. Nearshoring production helps brands and retailers meet that demand in a very short timeframe and fine-tune and adjust,” Gokki said. “In terms of mainstream fashion, however, I would say nearshoring still continues to be aspirational.”

“More clients are just looking to have the goods when they need or want them.” — Luis Antonio Aspillaga, WTS

Automate Inventory Management, Reduce Handling Costs, and Optimize Cash Flow

SPONSORED CONENT

How can fulfilling orders be more intelligent? AJ: An order management system should give you the ability to be more intentional about how you are fulfilling orders. When an order comes in, the system can see where the order is going and automatically dispatch it to the closest fulfillment center for the cheapest shipping, like a warehouse in Ohio for a New York order versus the Arizona one for LA. It also considers overall profit—not just the least amount of miles, but trying to get multiple orders into the fewest amount of shipments to the same address. How does real-time visibility boost customer service? AJ: It can reduce stockouts by preventing retailers from double allocating merchandise orders—like selling seven when you only have five. It also gives customers options. If a store is sold out, a sales associate can look it up on an iPad and send that customer to a nearby door that has it. If something is sold out online from the warehouse, with NetSuite, you wouldn’t even need that conversation because it would automatically ship from a store. The customer wouldn’t even need to know. Failure to fulfill makes for a bad customer experience that results in canceled orders, complaints or your brand getting slammed on social media. Customers have a lot of options and thus power—they don’t want to hear excuses. In fact, 70 percent of customers will go somewhere else versus waiting for a product to come back in stock, even if they’re loyal to your brand. Plus, sites like Pinterest will show them similar items with links to buy. When is real-time visibility the most critical in making strategic designs? AJ: In the seasonal calendar. If a seasonal item isn’t selling at one store, you can shuffle inventory around with others. If it just isn’t selling through anywhere, you can put an immediate 20 percent discount on it before you’re stuck with an obsolete item two months later. The issue of returns is critical, too. If a customer returns something mid or end of season, having all your channels see that the returned item is back in inventory gives you the best chance to sell it before the season is over. Since all channels talk to each other with NetSuite’s real-time inventory visibility, it doesn’t even matter where the item is returned. How can retailers calculate how much money is wasted each season due to obsolete inventory?

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“Failure to fulfill makes for a bad customer experience that results in canceled orders, complaints or your brand getting slammed on social media.” AJ: To me, obsolete inventory is not the problem, it’s the symptom of not properly forecasting and demand planning. If it’s happening season after season, you need to ascertain where the system is breaking down—and that ultimately comes down to your inventory system. To be able to properly forecast, you need to understand historical sales and seasonality, as well as take into account sales forecasts and historical promotions. That alongside understanding the market are crucial so that you can understand and predict your future demand. After the fact, you need to be flexible and proactive. Mistakes happen and you must react before it’s too late. You need to be able to transfer merchandise to a location where it will sell through before you have to discount or it becomes obsolete. How does integrating inventory with financials to track and optimize key metrics like inventory turns, carrying costs and inventory age help a business? AJ: The bigger handle you have on all this, the better you can properly plan for the future. Plus, always knowing where your inventory is helps you understand how much cash you have. Do you have money to run that marketing program or buy a new machine for operations? What about bringing in an item that’s trending because of a celebrity? You don’t want to wait till the end of the financial quarter to realize you could’ve acted quicker. What are the biggest challenges here? AJ: A system is only as good as the data you put into it. You must be meticulous setting up your SKUs in the system. Otherwise, price changes won’t be seamless and merchandise you receive won’t properly show up in your inventory record.

Winning Strategies for E-Comm THE DIVIDE BETWEEN RETAILERS THAT WERE ALREADY ON THE RIGHT TRACK AND THOSE THAT AREN’T CONTINUES TO GROW WITH THE ADDED PRESSURE OF FULFILLING ONLINE ORDERS. G L E N N TAY LO R

or nearly a year now, retailers have had to manage an endless barrage of e-commerce orders at a rate they had never expected to handle so quickly. And adaptation remains daunting—as recently as February, 56 percent of retailers said that fulfilling growing online demand is their top business challenge, according to a Retail Systems Research (RSR) survey. According to the survey of 160 retailers, another 52 percent have trouble with keeping forecasts in sync with changing demand. The fact that long-established and highly efficient trade routes were completely shut down for months on end—coupled with a full upending of worker and product safety protocols— only compounded these problems. To boot, retailers that were adding more SKUs online to match increasing e-commerce demand already had a tough time differentiating for localization, as the processes and systems that supported the old model focused on scale do not adequately support this new model, which involves getting more of the right products to the right demographic of consumers.

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Since it has become more difficult to “delight” shoppers in their path to purchase, retailers can’t afford to think of 2020 as an anomaly, RSR warned.

THE WINNERS AND LOSERS DIVIDE The gap between retail’s winners and losers always comes down to how they approach handling these challenges, especially in this new era. To address the problem of excess demand, 76 percent of “retail winners” said strategically placing inventory throughout the supply chain to better fulfill customer needs is a top opportunity for the industry. However, only 29 percent of the others felt this inventory placement was a necessity. These retail winners, which are defined by RSR as seeing more than 4.5 percent yearover-year annual sales growth for the three years preceding 2020, understand the importance of having inventory exactly where it needs to be and when it needs to be there. Gaps like this exist across numerous approaches, with 50 percent of winners seeing the reduction of waste and inventory shrink

within the supply chain as an opportunity to meet demand channels, compared to only 27 percent of others that feel the same. Unsurprisingly, when retailers want to act on these opportunities, the winners have a better sense of what processes hold the most value to align supply with demand. Seventy-seven percent of retail winners place significant value on producing highly accurate and granular forecasts at the SKU, channel or day level, compared with only 51 percent of everyone else. No challenge has proven more vexing to retailers than being able to expose—in real time and with a high degree of accuracy— available-to-sell inventory to either consumers in the digital domain or to employees anywhere within the enterprise. Up to 83 percent of winners highly value near-real-time inventory visibility throughout the supply chain, compared with only 62 percent of others. “With uncertainty being the only certainty heading retailers’ way in the coming years, it’s not going to be enough to just know what inventory is on hand: the means to forecast what inventory will be needed have completely changed,” the report recommended. “The past can no longer serve as a predictor for what inventory a retailer will need, and therefore anticipating these changes requires all new types of intelligence and technology. This is no time to sit and wait.”

THE TECHNOLOGY GULF

An even wider gulf between the haves and have-nots stems from the value placed in proactively identifying and resolving capacity bottlenecks in inbound goods flows, warehouses, transportation, picking/outbound or stores. Sixty-four percent of winners prioritize being proactive, while only 38 percent of the others do. At least half of retailers are self-aware enough to understand that their own systems are still to blame for the inability to both keep

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up with online demands and predict changing habits. Up to 46 percent of merchants say legacy technologies cannot support the agility they need in a changing world, while an equal percentage pointed to their reporting systems as inadequate and antiquated. “While panic is never a good idea, our recommendation is to do just what retail winners have shown us throughout: triage decisions in a collaborative—albeit it expeditious—manner,” the report said. “Prioritize those projects which help your brand get closest to the new buy from anywhere/deliver/ any way standards that customers have established, and ensure there are metrics in place to help you ‘fail fast’ (enabling you to move on to things that grow) or help grow the brand.” As a result of the positioning, retailers are reaching for new tools, such as artificial intelligence. It appears there’s still a shortage of affordable data scientists who can help retailers build the models required to understand demand better. Only 44 percent of winners say they have scientists who are competent with mathematical data analysis and modeling tools, and that number drops all the way down to 11 percent for the rest. Of the average-to-lagging retailers, 27 percent said they at least committed budget to developing in-house data science strategies, while another 27 percent were in the stage of discussing the need to develop that expertise without deciding a direction. RSR has pointed out that while retail itself has always been a people-intensive business, the survey respondents are leaning toward using technology both to enable and optimize some processes, and to optimize human resources as well. More than half (55 percent) of retailers that have implemented—and are satisfied with—technologies including warehouse automation, machine learning in demand forecasting and AI for capacity optimization, have improved forecast accuracy (both short term and long term).

With uncertainty being the only certainty heading retailers’ way, it’s not going to be enough to just know what inventory is on hand. —Retail Systems Research

Curbing Fulfillment Costs HOW OMNICHANNEL RETAILERS CAN IMPROVE EFFICIENCY TO REDUCE THE FINANCIAL IMPACT OF SERVING THE DIGITAL CONSUMER. S A RA H J O N E S

hroughout Covid-19, e-commerce use has skyrocketed, with retailers seeing the equivalent of multiple years of growth in mere months. However, fulfillment costs have risen, too. A pre-pandemic Capgemini survey of supply chain executives found that last-mile delivery accounts for 41 percent of retailers’ total supply chain costs. “Not only are inventory and shipping among the biggest costs in a retail supply chain, but these are also the most challenging to manage,” said Rafay Ishfaq, W. Allen Reed associate professor in the Department of Supply Chain Management at Auburn University. Meeting online shopping demands may be an expensive endeavor, but retailers can optimize their processes to cut costs and improve margins while also satisfying shoppers.

MULTICHANNEL MARGINS

For multichannel retailers, in-store shopping represents the least expensive fulfillment option. And replenishing goods to stores has been optimized for efficiency. “Traditionally, store-based retailers have built their

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supply chain prowess on sourcing and moving products in large quantities across their distribution networks,” said Ishfaq. “They developed efficient supply chain processes to keep logistics costs low by moving products in bulk…But now, omnichannel has disrupted this retail strategy.” The next best option for reducing cost is adding buy online, pick up in store (BOPIS). With in-store or curbside pickup, retailers eliminate shipping costs since the consumer does the traveling for them. BOPIS also boosts impulse add-on sales. An International Council of Shopping Centers survey found that 67 percent of customers purchase additional items when they pick up their online order. BOPIS also offers a level of instant gratification that pureplay e-tailers can’t match. “What the [pandemic] did for retail, is it forced them to find a more cost-effective way of fulfilling those orders. And in so doing… they also have created an enormous advantage against Amazon and other e-commerce companies,” said Antony Karabus, CEO of HRC Retail Advisory. Delivering merchandise to consumers’ homes is costlier than BOPIS. McKinsey es-

timates that online fulfillment costs per unit are between four to five times more expensive than replenishing product to brick-and-mortar stores, in part because the basket sizes are generally smaller for e-commerce purchases. With distribution centers typically situated in the middle of the U.S., sending merchandise direct to consumer from these facilities can be costly, as goods often end up traveling hundreds of miles. As an alternative, multichannel merchants can position merchandise closer to consumers by leveraging their stores as localized fulfillment hubs. “The closer the shipping distance, the lower the cost will be of fulfillment,” said Karabus. Along with reducing the distance that individual parcels must travel, this model mobilizes salespeople already in the store for picking and packing. However, Gabi Ledesma, vice president of consumer products, retail and distribution at Capgemini, noted merchants might need to add staff to run both store and fulfillment operations. Per Karabus, retailers can further reduce final mile costs by using local delivery services. Rather than sending a parcel through a carrier, some stores have instead partnered with food delivery companies. For instance, Old Navy leveraged Postmates during the 2019 holiday season to send orders to shoppers’ homes, and Dick’s Sporting Goods has teamed with grocery platform Instacart for

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same-day delivery in about 10 states. In 2017, Target announced a $7 billion investment aimed at turning its stores into localized hubs, leveraging the fact that most shoppers have a Target store within 10 miles. Target also acquired delivery platform Shipt in 2017, expanding its same-day delivery capabilities. When Target saw its online business boom last March, its same-day fulfillment investments paid off. Curbside pickup, instore pickup and Shipt were popular even before the pandemic, but the adoption grew. “Millions of guests were loving them because they’re fast and easy,” said John Mulligan, executive vice president and chief operating officer at Target Corporation, on a recent earnings call. “Without the shipping expense, these orders look much more like a store sale than a traditional online transaction, costing on average 90 percent less than if we’d shipped it from a warehouse.” Additionally, shipping via carriers from stores offers a 40 percent savings compared to sending packages from warehouses. By fulfilling e-commerce orders from stores, Target has more flexibility to react to ebbs and flows in demand. This includes more easily adjusting staffing and storage space to deal with peaks. On the flip side, building and running distribution centers may be a significant investment, but automation can make it

“Not only are inventory and shipping among the biggest costs in a retail supply chain, but these are also the most challenging to manage.” —Rafay Ishfaq, Auburn University

more efficient than fulfilling from stores. Neil Saunders, managing director, retail at GlobalData, says that most large fashion retailers’ volumes justify having a direct-operated DC. To balance out the upfront expenditure, merchants can ramp up productivity in their warehouses. Gap recently opened a new fulfillment center in Ohio designed for multichannel retailing, with a peak daily capacity of 1 million units. Giving the automated facility more flexibility for off-peak times, one of the two sorters can be turned off to process just 500,000 daily units. Translating DC-style automation to the brick-and-mortar environment, retailers can create micro fulfillment centers at the back of their existing stores. Compared to picking and packing from the sales floor, these mini warehouses can boost the efficiency and speed of fulfilling, bringing down labor costs per order. The upfront investment is also lower than building a separate distribution center. “Retailers have to analyze their physical store network to understand if they have to close exiting stores or repurpose them for fulfillment only,” said Ledesma.

HIDDEN COSTS

Some expenses of fulfillment, such as infrastructure upgrades, are readily apparent. What is tougher to calculate are some of the hidden costs. Shipping from a warehouse might be more efficient than picking and packing goods from a store, but retailers have to factor in the higher return rates for online sales. GlobalData’s Saunders calls returns apparel’s “elephant in the room.” He added, “When you look at the cost without returns, some of the business models don’t look too bad. As soon as you start factoring in return costs, they significantly deteriorate, so that is a big area that retailers have to manage.” When it comes to returns, BOPIS has a leg up on home shipping. If consumers choose to make a return while still in-store, the retailer incurs lower processing costs than if goods are shipped back to a distribution center. Split shipments, or orders that are sent from different nodes, also add up, according to Ishfaq. Another hidden cost

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is related to extra inventory. “BOPIS creates an inventory-related challenge dealing with competition for limited store inventory between in-store customers and online orders,” he said. “This situation can lead to stores trying to increase their inventory stock, which increases retailers’ costs.” As store staff adopt new fulfillment tasks alongside existing duties, it can also be a challenge to calculate their labor costs versus the amount of time a warehouse worker takes to process an order. Plus, by having store staff add picking and packing responsibilities, they might neglect customer service, sales floor recovery and restocking, resulting in missed sales opportunities.

THE FREE SHIPPING EXPECTATION Given the expense of offering speedy fulfillment, retailers might be tempted to pass along some of the cost to consumers. This is largely out of the question, as shoppers have become accustomed to fast, free delivery. A UPS survey showed about a third of shoppers will search for promotional codes, pick slower delivery timeframes or raise their cart amount to qualify for free shipping. Around a quarter opted for BOPIS to avoid fees. “[Free, speedy delivery] obviously comes with a cost attached for retailers,” said Saunders. “But unfortunately the market is so competitive that retailers really have to respond to those expectations—or lose out.” While instituting blanket shipping fees is a challenge, retailers can provide delivery options to the shopper, such as giving them free standard shipping and premium paid tiers for faster service. Retailers could also establish minimum basket sizes for free delivery to make up for the cost or encourage less expensive options, such as BOPIS. Even though retailers are cost conscious, they can’t lose sight of the customer experience. Successfully delivering in the last mile could have a significant impact on future sales, with Capgemini finding that 72 percent of satisfied customers will increase their spend. “At the end, retailers who provide great last-mile service will realize significant benefits,” said Ledesma.

Refining BOPIS and Curbside for the Long Haul HERE’S HOW RETAILERS CAN IMPROVE ON THE FULFILLMENT OPTIONS THAT SAW THEM THROUGH THE WORST OF THE PANDEMIC CRISIS. G L E N N TAY LO R

s more consumers preferred to shop online more and frequent stores less during the Covid-19 pandemic, buy online, pick up in store (BOPIS) and curbside pickup offerings went from nice-to-haves to must-haves. In fact, the Adobe Digital Economy Index found that BOPIS/curbside usage among shoppers was 67 percent higher in February 2021 than last year. A sizeable percentage of online consumers still want some interaction with the store—30 percent would rather shop using BOPIS or curbside pickup over standard delivery. Beyond good customer service, BOPIS has real financial implications once customers are comfortable shopping brick and mortar again. More than 80 percent of customers who use BOPIS shop for other things while they’re in-store to pick up their orders, boosting cross-selling opportunities and add-on revenues, according to Adobe’s December 2019 Holiday Shopping Trends report. Now, retailers must sync up their technology, communication capabilities and

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manpower to fortify their store pickup offerings as more shoppers return to brick-andmortar in 2021.

MAKING THE INVESTMENT

If you want a view of which retailers have delivered pick-up success stories, look no further than Target, which fulfilled more than 95 percent of its fourth-quarter sales through its stores. For the full year, Target saw more than 600 percent growth in its “Drive Up” contactless curbside pickup feature, which enables shoppers to use the retailer’s mobile app to purchase eligible items and schedule a pickup time. Shoppers receive a notification when the order is ready, and can pick it up at curbside or in the store. Total BOPIS sales grew 70 percent for Target in 2020, but the success had been in the making for years. “They laid the foundation back in 2017 by ramping up investments in online services and technology,” said Jonathan Gregory, director of community engagement, at GS1 US. “Target also invested in a robust Electronic

Product Code-enabled RFID solution for inventory management. When people were shopping less in stores, Target was able to leverage the infrastructure they had already built to continue serving their customers.” Like many retailers seeking to capitalize on e-commerce growth as stores remained shuttered at the start of the pandemic, Dick’s Sporting Goods heavily expanded its BOPIS capabilities in 2020, introducing the curbside pickup option last March. In the fourth quarter, Dick’s saw in-store pickup and curbside purchases increase nearly 250 percent from the year-ago period, with stores fulfilling 90 percent of total sales. “The ecosystem that we’ve created with curbside now is making our stores a really pinnacled part of our digital experience,” said Lauren Hobart, president and CEO of Dick’s Sporting Goods in an earnings call. “Our technology investments over the past few years helped us not just grow and spinup curbside in two days once the pandemic hit, but also leverage our fixed expenses in a way that we couldn’t have, if we hadn’t invested in technology a few years ago.”

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Hobart noted that curbside pickup “drove significant improvements” in the profitability of Dick’s online channel in 2020. While investments in fulfillment are key, fashion firms are finding that getting goods to consumers quickly begins further upstream. That’s why companies like Nike are focusing on teeing up the products to the right place at the right time. “We’re investing in technology in the supply chain, so that we can better predict where to put inventory, where we think customers want the inventory,” Nike’s chief financial officer Matt Friend said during a recent earnings call. That investment plus the athleticwear giant’s “Express Lane” initiative, which shortens lead times for on-demand products, provides the company the agility to not only act fast but streamline fulfillment.

FOCUSING ON INVENTORY VISIBILITY Delivering an exceptional BOPIS or curbside experience relies on the ability to track

inventory and share reliable, real-time product information. “This information has to be accurate so the retailer can either promise to the customer that it will be available at such and such time, or let them know that it’s not available and when it will be,” said Shannon Warner, a partner in the consumer practice at global consulting firm Kearney. Achieving this level of accuracy is job #1 for Brooks Brothers as the retailer battles back under new ownership. Now operated by SPARC, the joint venture of Authentic Brands Group and Simon Property Group, the chain is leaning into the concept of “unified commerce” to provide a seamless retail experience, according to Todd Treonze, the company’s senior vice president and chief information officer. “If you’re a multichannel or omnichannel retailer, who has both stores and retail, an order management system with a great payment platform behind it is table stakes now,” Treonze said during the Now + Next digital event. “The customer assumes that you have a single view of inventory, you know if they want it and you have it, it shouldn’t matter where that product is. You should be able to get it to them as quickly and as efficiently as possible.” And getting goods when consumers want it is key. Jonah Ellin, chief product officer at analytics firm 1010data, noted that retailers must tie predictive modeling into real-time inventory to ensure goods are ready whenever shoppers want to pick them up, whether immediately or even 24 or 48 hours later. “You’re not going to win the clicks, if you can’t pick the products in the store and keep and exceed your customers’ expectations,” Ellin said. “When I’m placing an order at 10 at night, and you’re picking those items and putting them in the cart at noon the next day, there has to be a connection between the two. It’s not just ‘Is it in store when the customer is clicking?’ but ‘is it in store when an associate puts together that order?’” Unique product identifiers such as Global Trade Item Numbers (GTINs) that appear next to a product barcode can enable supply chain visibility and deliver accurate product data, according to GS1’s

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FLASH OR FIXTURE Necessity fueled the growth in fulfillment options during the pandemic but as regions reopen, will buy online, pickup in store and curbside pickup go the distance?

14.3 PERCENT

45 PERCENT

E-commerce growth in 2021, well below the pandemic-infused growth of 27.6 percent in 2020

The rate at which BOPIS and curbside pickup mobile messages are expect to grow in 2021

(EMarketer)

(Vibes)

56 PERCENT

29 PERCENT

Retailers that plan to expand curbside pickup in 2021

Retailers that plan to expand BOPIS in 2021

(Signifyd)

56 PERCENT

84 PERCENT

The proportion of commerce real estate firms currently using at least half of their parking space for curbside pickup

Consumers who expect brands to keep services like BOPIS and curbside pickup long term (Linnworks)

(ISCS)

400 PERCENT

15 PERCENT

The increase in mobile messages for BOPIS and curbside pickup year over year in Q4 2020

The proportion of shoppers who used BOPIS or curbside pickup during the 2020 holiday season who said it was a problem that the items they wanted weren’t available for BOPIS

(Vibes)

(Convey)

BOPIS: THE BOUTIQUE EXPERIENCE Glenn Taylor

Retailers don’t need a massive brick-and-mortar operation to invest in BOPIS capabilities. Upon launching an e-commerce site in June 2020, Marmalade Fresh Clothing integrated BOPIS with its first store in Coeur d’Alene, Idaho. According to Kasey Widmyer, a co-owner of Marmalade Fresh Clothing, the retailer established BOPIS so shoppers wouldn’t feel rushed while browsing the store. “We really let our customers know that, ‘Hey, you can look at it now, and think about making a decision. Maybe when you go home, you can buy it online and come pick it up later.’ That’s more of our approach of working it out together with the shopper,” Widmyer said. Widmyer noted that launching a BOPIS offering on top of a new e-commerce experience was daunting at first, but it has boosted the team’s inventory management capabilities across its two locations. “We do inventory checks regularly. When we scan, we can see how many of each product is in stock in each store, so it’s definitely something we have to pay special attention to,” Widmyer said. “We’re not dealing with hundreds and hundreds of SKUs of one item, but it’s definitely

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something to pay attention to now that we have online.” BOPIS also changed the daily dynamic for Marmalade Fresh Clothing’s 11 sales associates, who not only sell in the store, but respond to online order notifications from its point-of-sale solution and pack the orders for pickup. “It’s kind of like a multitasking job to get those things done,” Widmyer said. “Working in a small business forces you to learn a lot of different jobs. Our salespeople are really great and they really wanted to learn whatever is going to work best for the customer. It’s a really intuitive process.” Kramer said that merchants frequently miss the staff-scheduling aspect of the investment, especially the demand peaks during lunch and evening rush hour. “The demand is often significant as it can entail systemically acknowledging an order, picking the order, updating the status, acknowledging the customer when they arrive, delivering the order to the consumer and updating the status to ‘closed,’” Kramer said. “All told, this can be as much as 20 minutes per order, which is significant when compared to a typical four-minute transaction at the POS.”

Gregory. He also highlighted the importance of RFID technologies. “Whether the standardized product information is contained in a barcode or RFID chip, its ability to be scanned and interpreted at every point in the supply chain, including the pickup point, is key,” said Gregory. “RFID implementation offers an extra advantage of efficiency, since products can be scanned in batches without a line of sight, automating a process that is more time-consuming if each item has to be scanned separately.”

THINKING LIKE A CONCIERGE

Despite the technological aspects required for BOPIS and curbside to succeed, retailers must also understand that great communication and transparency into the process drives the customer experience forward— particularly once the order is placed. “One of the key areas that is often overlooked is providing the consumer clear and accurate order status at each point,” said Perry Kramer, managing partner at Retail Consulting Partners. “Some of the worst experiences are associated with giving the consumer an estimated time and then they show up having never received a text or email and the order is not close to being ready.” According to Kearney’s Warner, retailers should strive to build a “concierge” shopping experience where the shopper keeps consistent, steady communication with a representative. This concierge would ideally tie location-based services within the mobile app, she said. “They should have good authentication and verification capabilities once the consumer reaches the store so that they can deliver that order to the shopper’s trunk or hand it to the consumer,” Warner said. “The key here being no wait time. If a customer has placed a BOPIS order, they don’t expect to get to the store and wait for 30 minutes to get their bags.”

Optimizing Omnichannel Fulfillment HAVING A REAL-TIME VIEW OF STOCK IS CRUCIAL FOR ESTABLISHING EFFICIENT, COST-EFFECTIVE CROSS-CHANNEL FULFILLMENT. S A RA H J O N E S

“We’ve got to become dramatically better at predicting demand.” — Kasey Lobaugh, Deloitte Consulting

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ourtesy of the e-commerce and click-and-collect boom during Covid-19, omnichannel fulfillment has never been more imperative for retailers. But getting inventory management right in an increasingly cross-channel world requires real-time visibility. In the fourth quarter of 2020, e-commerce sales were up 32 percent year-over-year, according to data from the U.S. Department of Commerce. And it wasn’t just direct-to-consumer shipments that climbed. Buy online, pick up in store (BOPIS) had been growing even before Covid, but safety concerns related to going inside stores caused the curbside fulfillment model to surge. “One thing we saw with the global pandemic was that retailers reacted very fast to change in the retail environment and swiftly developed new fulfillment capabilities to continue to serve their customers,” said Simone Peinkofer, assistant professor in the Department of Supply Chain Management at Michigan State University. “Establishing processes and infrastructures that allow for

flexibility and can be reconfigured to evolving fulfillment options will be key.” Even before the pandemic, delivery timelines were speeding up, necessitating fulfillment that is closer to the consumer. Ken Morris, managing partner at Cambridge Retail Advisors, says that many of his clients are shipping upwards of 75 percent of their digital orders from nearby stores instead of centralized fulfillment centers. Although omnichannel has been retail’s aspiration for years, most merchants are still running legacy systems that manage bricks and clicks separately. Michael Ryba, partner and director at Boston Consulting Group, noted that when retailers began selling online, they realized that their legacy tech stack couldn’t handle the e-commerce business. Instead of migrating everything over to new systems, they attached dedicated e-commerce stacks to their existing enterprise resource planning (ERP) systems—a workaround that was expedient but limiting. “You end up with two distinct views of inventory, meaning you have one stack with e-commerce and whatever inventory dedicated

MISSED OPPORTUNITIES Adding up the amount of money retailers are leaving on the table by not having a unified view of inventory across channels. Sarah Jones

$984 billion

The value of missed sales due to stockouts worldwide (IHL Group)

69% The proportion of U.S. shoppers that have made an added purchase when they picked up their click and collect order

56%

(ICSC)

Consumers that plan to continue using BOPIS after the pandemic (McKinsey)

39% 28%

Consumers that report leaving a store without purchasing due to stockouts (Zebra)

The amount of online shoppers that have abandoned their cart because an item was out of stock (UPS)

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to e-commerce, then you have a parallel stack for the core retail business,” said Ryba. “They don’t talk to one another. Because if you want them to be integrated or talk, you need either a system integration or complex interface.” This lack of communication is compounded by delays in inventory information. “Almost every retailer today is working with yesterday’s data,” said Morris. “Most people update their inventory nightly, which means that their inventory is not accurate.” To make up for the one-day delay in getting actual numbers, these retailers subtract a certain number from their inventory figures to estimate the current figures. With this lack of real-time visibility, they end up buying more inventory than they need to guard against stockouts. This could leave them with up to 20 percent excess inventory that needs to be discounted at the end of the season. Aside from the potential erosion of margins due to surplus or safety stock, this delay in inventory pulses creates hurdles in fulfillment. When an online order comes in, a retailer’s systems need to decide whether to fulfill from a distribution center or a brickand-mortar store. For instance, a two-day delivery might come from a centralized distribution facility, while a nearby store could be chosen to push out a same-day order. Since inventory levels can change dramatically in mere hours, the data can quickly become out of date. For instance, the system might say that a store has multiple units of a SKU in a particular size and color. If an associate goes to pick that item and it’s not there on the store shelf, this means that the order has to be rerouted to another fulfillment channel—which could make it late—or the purchase might be cancelled. To create an accurate real-time view of merchandise, retailers could use tracking technology such as RFID. “RFID tags are license plates that track merchandise, much like your car on a toll road, as it makes its way from manufacturer to your door,” said Morris. “Merchandise is tracked entering a distribution center, to the store back room, to the store floor, to the dressing rooms, through the register and out the door. You know what you have, where it is, what is being stolen and even what is returned.”

“Companies need to carefully evaluate which inventory strategy fits best to their business model.” — Simone Peinkofer, Michigan State University

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PRECISE PLANNING

Visibility is one piece of the puzzle for unified inventory, but another element needed to improve omnichannel fulfillment is more accurate forecasting. According to Kasey Lobaugh, principal at Deloitte Consulting, fulfilling online orders from stores is a sign that a retailer did not effectively gauge demand. “When somebody buys something online and it gets shipped from the store, the reason we’re doing that is because we’ve got the wrong product in the wrong place,” he said. “We’ve got to become dramatically better at predicting demand.” Improving planning includes delaying channel-specific decision making. Using the analogy of streams, Lobaugh noted that the current omnichannel model includes two separate rivers of inventory that flow to either the direct-to-consumer or brick-andmortar channel. Once one of these streams is dried up—or a channel has a stockout— then the order will be fulfilled from the other channel. This is an improvement on the previous model, in which an out-of-stock item couldn’t be fulfilled from another channel, but Lobaugh considers this version of omnichannel retail to be a “Band-Aid.” In an ideal scenario, he says, a retailer would have “one river that flowed as far downstream as you could possibly get, and only at the last moment would you make decisions about how to deploy that inventory to the right destination.” This delayed differentiation model could have helped retailers avoid their inventory issues during store closures early in the pandemic. As locations suddenly shuttered, apparel and footwear sat in stores, while online shopping continued. Aside from guarding against spikes or dips in demand, avoiding sending inventory to the wrong channel improves cost efficiency. Picking and packing from a sales floor can tack on costs to fulfillment compared to sending direct-to-consumer shipments from a warehouse, since a retailer is paying to have items folded or hung on fixtures and then paying again to have them pulled and packaged up for an online customer. To get better at predicting demand, retailers should change what data they are consulting. One Deloitte client was forecasting

for an apparel category by looking at weather and past sales. When Deloitte analyzed these figures against performance, there was little correlation between sales and this data. Instead, information such as consumers’ employment status, life events and their spend with competitors could tell retailers more about expected demand. “Traditionally, these decisions were driven by humans with big spreadsheets, with very little real-time data that would drive their decision-making,” Lobaugh said. “They’d have a lot of historical data and they might group a bunch of stores into four or five collections of stores and then kind of treat them all the same. But today you can be so much more precision oriented.” There are also opportunities to automate more of the decision-making. “Now we have omnichannel buying teams, but the next step as we really start to pursue data science to make these decisions is how far down that path of removing humans from those decisions can we get,” said Lobaugh. Along with enhanced forecasting, Ryba suggests retailers adopt a distributed order management (DOM) system. This can automate the math of fulfillment, choosing the ideal channel for a particular shopping cart based on a combination of costs and time.

DRIVING EFFICIENCY

By leveraging existing distribution centers or stores, retailers can make these facilities more productive. “This could translate into a more efficient use of their established workforce since more volume could be processed through a fixed-cost facility,” said Peinkofer. “Most importantly, retailers should see lower inventory levels in their network, which will translate into additional cost savings.” In the past, when e-commerce was a small portion of a retailer’s total sales, companies could have store associates pick online orders quickly at the beginning or end of their shift, but this has changed. “At the moment, e-commerce revenue exceeds about 10 percent of a store revenue, then it starts to dramatically impact labor scheduling and it’s impacting the customer experience, because you have associates walking the aisles and basically clogging the aisles with carts and

bags to fill orders for consumers,” said Ryba. One option to improve efficiency is creating a mini distribution center in a store’s back of house. Here, workers could fulfill orders for online purchases off the sales floor. Ryba explained that for frequently replenished items that typically have a lot of stock, merchants could hold some inventory in the back for online orders. However, some items that have smaller quantities will likely need to be merchandised on the sales floor. Automation and technology can also help make fulfillment more efficient. For instance, Ryba pointed to software used in grocery stores that sends associates’ carts multiple orders to pick at the same time and provides them with an optimal route to cut down delivery travel time.

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With any system overhaul, there are costs involved. “Companies need to carefully evaluate which inventory strategy fits best to their business model,” said Peinkofer. “Changing an inventory strategy is not an easy task and often involves significant financial investments for example, so there is a trade-off.” In addition to financial investment, establishing a truly omnichannel supply chain can require a cultural shift. “Even though the term omnichannel has been around for a while, in practice, you still have dedicated groups and you could have misaligned practices between core retail and e-commerce,” said Ryba. “It’s a challenge from a change management standpoint to teach both sides how to work together in a unified manner.”

Preparing for the Next Disruption LA U R E N PA R K E R

he effects of the Covid-19 pandemic had major repercussions across fashion supply chains, retail operations and consumer behavior. Even as the industry still attempts to get back on its feet, it’s time to assess the lessons learned and start mapping out a strategy for the next crisis—no matter where it comes from. Here, industry experts from the American Apparel & Footwear Association and Bain & Company look back—and ahead—to provide actionable advice on how fashion can insulate against the next shock.

WHAT WE LEARNED… STEVE LAMAR, PRESIDENT AND CEO, AMERICAN APPAREL & FOOTWEAR ASSOCIATION (AAFA) At the AAFA Executive Summit in March 2021, Li & Fung’s Spencer Fung noted that the Chinese word for crisis has two roots— one for danger and one for opportunity. The pandemic required two simultaneous, and interlocking, responses—protecting your enterprise against that danger and identifying and seizing the accompanying opportunity. AAFA members were able to survive, and indeed thrive, during the crisis by doing the following: Be strategically tactical: Much has been written about the importance of flexible sup-

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ply chains and the resiliency of the industry. Whether it involved the pivot to production and distribution of life-saving PPE items or management of endless and massive inventory challenges, agility has been key. Even as we near the exit from the pandemic, it is entirely unclear what the new normal will look like. Companies like to identify and settle into long-term strategies, but 2021, so far, is not the year to do that. (Over)communicate often: Coupled with nimbleness has been the need to frequently communicate with your supply chain partners, your employees, your consumers and your stakeholders. The unprecedented nature of this novel virus, and the lack of a coordinated response to it, meant that reliable, fact-based and actionable information has been in high demand for much of the year. Early, constant and clear partner communication helped solve other problems, such as integration of new technologies, facilitating payments, making timely shipments and addressing remote compliance concerns. Pick your partners well: A lesson learned simultaneously through Covid-19 supply chain breakdowns and the forced labor crisis in Xinjiang is the importance of transparency and traceability. Like picking our pandemic cohorts carefully, we need to be especially vigilant to know who our supply chain partners are, and who they’ve been doing business with. This becomes increasingly important as supply chains go through some

of the biggest upheavals in years, reflecting the growing pressures to diversify, be oriented toward “local for local” and be sustainable. Embrace your inner geek: We integrated 10 years’ worth of technology in the first 10 months of the pandemic. It kept our supply chains functional, allowed us to work under the most challenging of circumstances, and enabled us to interact with our consumers. In nearly every case, the technology was either already deployed or about to be turned on. Our future is undoubtedly digital, suggesting that the most successful companies will be those who can best marry fashion and technology.

WHAT WE DO NEXT… AARON CHERIS, REGIONAL PRACTICE LEADER FOR RETAIL IN THE AMERICAS, BAIN & COMPANY Natural disasters? Cyber-terrorism? Geopolitical wars? Right now, retailers are just thinking about how to get through the backlog of extra inventory from the last year without creating a longer discount binge. More people are talking about supply chain resiliency and diversity so you don’t have 100 percent of everything coming from one part of China that could always shut down for one reason or another. But looking beyond that, here’s what we’re considering: Plan for natural disaster scenarios: Walmart does really well in crises because everybody stocks up on essentials, and they’ve built in contingencies like cleaning the store to quickly get it back open. Others might strategize where to put distribution nodes to make sure warehouses and fulfillment centers are spread out—not just for customer proximity but if something goes down due to floods, hurricanes, earthquakes and the like. Be proactive versus reactive: People are funny this way. No matter how many times they see a disaster on TV, it doesn’t feel real until it hits their factory or DC, or that of their closest competitor. Usually, supply chain policies start because companies want to make sure something doesn’t happen again.

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Think data security: Every company has its own set of cyber units to protect against getting hacked, but the weak point for many is a vendor partner in the chain with a bunch of your data in their less-secure system. In their contracts, more companies are building in protections and liability clauses, and also checking into what others do for data security. Pay attention to behavioral shifts: What about the great work from home disruption? If that’s a permanent shift, companies need to worry if their stores are in the wrong place. Are they predominantly near offices when people no longer go into work? Think about where people will be shopping in the future. Look for ways to maximize profits: During the pandemic, depending on the category, we saw a two-to-five-year acceleration of e-commerce, but the problem for most retailers is that e-commerce is dilutive, with lower margins than traditional stores’ businesses. So, a big worry is how to make that business more profitable, especially when there are such high returns in fashion e-commerce. How can brands deal with that, whether with fit technology or other things? Listen to the money guys: The better-prepared finance departments are the ones asking, ‘What scenarios have you tried out and built for?’ Let’s push the supply chain team on what would happen if there was a demand or shock, or let’s ask the stores facilities and real estate teams what would happen if a store took on two inches of water. What about hypotheticals like 50 percent of the supply chain getting knocked out or everything from China coming in six weeks late? The majority of the disaster planning is probably done by the network optimization folks in the supply chain. Accelerate change: Nike used this moment to really lean into selling direct to consumer and shortening the list of wholesale partners they allow to sell product online. Dick’s Sporting Goods took this moment to roll out curbside pickup—within a week—as it had been in their plans for a really long time. Companies are witnessing what they were able to do in a really short time during Covid-19, and thinking, ‘We should be able to do this all the time.’

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