The future of retail operations in an omnichannel world

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“…what is now really clear when we re-open the stores [is that people] really want to meet us in both channels, physical stores and online. They want to do both.”

Helena Helmersson Chief Executive, H&M Group

What is patently clear is that there needs to be a balance between physical stores and ecommerce. Nowadays, retail space comes at a premium, and it needs to have a good business case in order to remain a part of a brand’s service portfolio. Customers want the convenience of online shopping, but also all the possibilities of physical shopping too.

Omnichannel sales will become a vital part in balancing this equation, because it adds value for the customer, while also using the physical retail space to the maximum possibility.

For any brand to truly succeed it will need to differentiate itself by offering something more than cheap fashion in abundance – customers can get that online, and it is based on a wasteful supply model from the last century when the phrase ‘cheap foreign labour’ seemed OK to say out loud.

Why adopting a customer-centric approach to retail is imperative?

Each company needs to form a solid foundation for their new retail strategy by looking at what they can offer to the customer, always considering what the customer wants. Brands need to be ‘customer-centric’ as the starting point. 

Business consultants BCG have developed a straightforward approach that companies can use to focus their priorities. This model enables retailers and brands be closer to their ideal customer (with an understanding of their needs, habits, and behaviours).  

BCG also identifies two ‘traps’ that you can fall into along the way, which are:  

  • Focusing on non-mission critical objectives  
  • Adopting a short-term focus on boosting sales without a long-term strategy  

For those readers familiar with Eli Goldratt’s Theory of Constraints, you will recognise the prioritisation of only those tasks that overcome constraints, and the primary goal of business being to ‘make money now and in the future’ 

A critical part of making money in the future is to not shoot yourself in the foot today, by being preoccupied by short-term cost efficiencies and small thinking.  

It can be a significant challenge for a large organisation to abandon rules and behaviours that have become deeply engrained but being able to change these habits is equally important as setting out a new strategy in the first place. Deeply engrained mindsets are one of the most significant constraints that need to be overcome, as these prevent new and better methods from being effective.  

By starting with a customer-centric redefinition of retail operations priorities (with the customer as the centre of this new cosmology), retailers can start to rationalise other approaches such as product range and real estate strategies.  

But this must start with the customer-centric approach at the root.

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Risks to retail operations

In January 2020, before the pandemic even hit, McKinsey had already predicted the need for change in retail operations, citing four main risks:  

  • Online shopping (most often via smartphone) 
  • Too many SKUs for brick-and-mortar stores, increasing complexity and risk 
  • Increasing expectations regarding customer services and experiences including omnichannel, online returns, BOPIS. 
  • Dwindling labour pool and higher wages 

Each of these four factors already represented a strong risk to retail operations. When the pandemic hit, all of these ‘four horsemen of retail apocalypse’ came to visit; customers switched en masse to online shopping, stores were left with excess stock due to collapse in demand, customers demanded home delivery and COVID-safe shopping experiences, and staff were unavailable due to restrictions or unwillingness to place themselves at risk.  

McKinsey offers a possible solution to mitigate this risk, suggesting that “retailers must constantly improve their store economics by simplifying, eliminating, or automating routine activities”.  

Starting with simplification, a reduction of SKUs is a rational approach. With customers no longer coming into stores for a ‘browse’, excessive product ranges only add complexity and risk, without contributing to profitability. As we are aware, the Pareto Principle is in full force with fashion retail, and 80% of revenue is typically derived from only 20% of the SKUs.  

As we cannot predict which SKUs will sell, we need to invest now in technology that automatically identifies which lines are actually selling in real-time and ensures that these are always in stock at the point-of-sale using automated replenishment decisions. 

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The vital role of technology in overcoming constraints

Investment in technology is critical, but any investment needs to be focused in ‘constraint areas’ for it to have value. Furthermore, without changing old behaviours new technology cannot do its job. So, a second condition of investment in technology is another investment in redrawing the old rules of the game. Without taking both steps, technology will still not be sufficient to overcome the constraints.  

For any retailer, the ultimate constraint on achieving success is not delivering what the customer wants. This is why a customer-centric approach is so important; everything else follows from this.  

Determining what the customer wants is no simple thing however, at least when we get down to the gritty details. Massive improvements can be found by looking at a general picture; how the customer wants to shop, when they buy different kinds of items, what their motivations are, etc. However, determining exactly which SKUs are going to fly off the shelves this week is a guessing-game that we would be foolish to play. Demand cannot be forecasted. 

Instead, we can employ technology such as the solution from Retailisation to overcome this significant constraint in our new customer-centric model. Paired with a responsive supply chain, this technology can skip the need to ‘predict demand’ altogether, by measuring the sales data and converting it into decisions that are fed back up the chain.  

SKUs which are selling are therefore moved through the chain more effectively to reach the buyers that want to buy them. Agile, near-shored production processes perfectly suit this new customer-centric model, because capital isn’t tied up in stock that is 80% wasteful, and the retail operations are then devoted to selling only products that sell.  

When you use our inventory management solution, you can ‘plug-in’ to existing systems and start delivering improvements immediately. The system works by feeding sales data into advanced smart algorithms which use preset levels to determine responses like stock replenishment and reallocation. This starts delivering value to physical retail spaces straight away, because the labour force is then focused entirely on servicing the customer demand. This is not only more effective, but more profitable too.  

This has a clear benefit for physical stores where the cost/revenue equation needs to be balanced with bigger overheads, but the Retailisation solution is a vital step to becoming an omnichannel success too. Online, BOPIS, and physical sales data are all handled seamlessly together and detailed, aligned metrics give an overview of the whole operation. 

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