Can online retailers create the perfect ecommerce assortment?
When it comes to inventory management, ecommerce – whether it be stand-alone or as part of an omni-channel strategy – gives retailers the opportunity to offer customers a vast assortment of products without the limitations of having everything in their own warehouse. Because many items in an online assortment are only ordered from the supplier when a customer makes a purchase, traditional inventory management constraints are removed, allowing retailers to run millions of items on their catalogue. Unfortunately, the retailer still needs to decide what to keep in stock.
In online retail, things happen fast and making quick decisions is imperative. This means retailers have to monitor the stock they do keep constantly to make sure it doesn’t become obsolete. So how does a retailer identify a few thousand items to stock from the millions of possibilities, and not just once, or occasionally but constantly? It begins with a fact- and cost-based model.
When keeping goods in stock, retailers have to factor in capital, obsolescence-risk and warehousing expenses. Purchasing larger batches means less time spent per product in all phases of the ordering process, and retailers can take advantage of freight-free limits and cheaper means of transportation. In contrast, ordering only against customer orders means the cost of warehousing moves towards zero, but ordering costs increase significantly when you source in small batches that are required quickly.
The trick is to compare these two models and select the cheaper of the two. In general, it makes sense to stock cheap items that sell relatively well – and by the same token, expensive items that sell very irregularly are best kept at the supplier’s warehouse.
It seems a simple enough principle, but the difficulties come firstly in gathering and maintaining all relevant cost data, and secondly, in running the process efficiently.
When it comes to cost data, the objective should be one of continuous improvement. The logical starting point would be a subset of products: perhaps the most problematic or those most important to the bottom line. It’s not a difficult task to programme this approach into a well-designed and automated system, and the results materialise quickly to bring better structure to decision making.
This doesn’t mean there won’t be exceptional situations that need to be addressed, especially in the fast-paced retail world. Most concern the rate of sale, a key factor in the decision-making around for example, the introduction of new items. Retailers can address this by initially using estimates based on the previous introductions of similar products. Then, once the basic process is in place, it is possible to make updates on your decisions as the new product becomes established and any exceptional items can easily be tagged for improved decision making.
With retailers now having little choice over providing an online option, it is critical to keep optimising and improving the assortment planning process. By operating the best possible assortment and inventory management system, retailers can give customers the wider shopping choices they demand without compromising on supply chain efficiency.