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The rise and rise of omni

The rise and rise of omni

The rise and rise of omni
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By European Supply Chain Management

The need to compete may be the visible manifestation of the move from Multi to Omni-channel, but the real
driver is channel economics claims Stuart Higgins 
Whatever the motivation, the world of retail supply chain is changing and, for the majority of retailers, that change is coming in the form of Omni-channel. Earlier in 2013, LCP commissioned independent research which established that nearly two thirds of the key retailers in the UK and US envisaged a need to move from a Multi-channel to an Omni-channel operating model within the next five years and many are already on track to deliver this.

Survival is financial

The individual reasons for a move from multi to Omnichannel are many and varied. However, the research highlighted what analysts had been reporting for some time: there is one significant, generic, motivational driver – the need to compete. Yet, that imperative for survival has, in itself, the power to undermine an organisation and it is the understanding of the channel economics that makes the case for an Omni model so powerful. While the need to keep up with the competition may be the ‘burning platform’, the real driver is financial and requires an overall change in the retail business operating model. This, in turn, provides a significant opportunity for supply chain directors to play a more active and influential role in this brave new world.

Currently, the challenge facing most European retailers is that net margins are being eroded by the tension between bricks and mortar and online channels. A greater demand for click and collect or home delivery services – with higher fulfilment costs and lower margins – is shifting the balance away from the (relatively) higher net-margin, retail store environment. At the same time, this is leaving retailers with real estate that is now too large for requirements but which is still tied to long lease commitments, all of which puts pressure on profitability.

Unlocking profitability

The key to future success is an understanding of channel economics and the ability to demonstrate margin growth using an Omni model. Perhaps surprisingly, supply chain directors hold the key to unlocking this margin potential.

From a consumer perspective, an Omni environment manifests itself through greater product availability, ease of consumer access to products, better-informed choice and enhanced customer service. However, Omni goes well beyond simply engaging with customers across multiple sales channels.

With a compelling need to change the retail business model to mitigate long term reductions in net margin, the Omni solution offers greater profitability through optimising stock visibility across the whole organisation, more effective inventory management and, as a result, greater profitability by maximising full margin sales opportunities. 

The LCP research reinforced the view that having clear visibility of inventory, together with the ability to postpone replenishment decisions closer to the point of consumption, is an enabler of an efficient Omni-channel service. Combininga single view of stock with enhanced customer insights,allows deployment of inventory into specific channels to be deferred closer to the time of sale. Not only does this provide significant improvements in stock availability, it also reducesoverall stock holding; this is a common feature of successfulOmni-channel operators who offer broad ranges backed upby effective fulfilment capability. Certainly, our view at LCP is that excellence in Omni is characterised by retailers who have a deep understanding of their channel economics and combine this with an intimate knowledge of their customers to fashion innovative approaches to assortment and fulfilment.

The elephant in the room

In many retail boardrooms, the tension between the need to compete and the margin-eroding impact of higher fulfilment costs and pure play pricing benchmarks has become the elephant in the room. However, the LCP research clearly showed that board directors recognised the need for change. More than one third stated that an aligned board was essential in delivering a truly-Omni brand to the market. Many also agreed that functions such as operations and supply chain need to become more influential at the top table if the business is to realise profitable long-term growth.There is no question that a new, flexible, business operating model is seen by many as a significant enabler for success in an Omni channel world. It is needed to deliver increased sales, enhanced margins and improved availability of stock, but it will require some significant re-engineering of the business as a whole to deliver it – not just supply chain. So whilst supply chain directors increasingly hold the key to unlocking Omni channel performance, they will have to work closely with their peers to drive all aspects of change in order to ensure there is an alignment between the brand, channel fulfilment and uniformity of service proposition.

Speculate to accumulate

Unsurprisingly, the research found that delivering this level of change is complex and challenging. It also comes with a significant price tag for the major alterations to IT and supply chain infrastructure required to create an effective Omnichannel environment.Of those retailers currently on the path to an Omni-channel model, half are already investing as much as three per cent of gross turnover in the model, with nearly a quarter spending three per cent or more. In terms of hard cash, for the non-food retail sector this represents an investment of almost £5bn (€5.8bn) over the next five years in the UK alone.

While this eye-watering price tag may seem excessive simply to compete, the reality is that it will deliver a significant return on investment by ensuring long-term financial sustainability for Europe’s top retailers in the face of the margin-eroding pressures that multi-channel growth might otherwise imply.

LCP Consulting

Stuart Higgins is retail partner at LCP Consulting. LCP Consulting is a leading specialist in customer-driven supply chain management. With over 20 years’ experience in the field, it has a profound understanding of how supply chains make major contributions to how businesses operate profitably and compete effectively.

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