US vs. EU Round 4: Cross-Channel Inventory Optimization
It’s time to get back to my occasional series on the differences that I see between the evolution in omni-channel in the US vs. the evolution in Europe. In the series I identified six: differences in demand forecasting, price transparency, inventory localization, personalization / relevancy, store labor, and today’s topic, cross-channel inventory optimization. It’s a fortuitous coincidence that this one turns out to be #4 on the list, as I’m preparing to go to Australia next week to attend the Online Retailer conference there – and speak about almost exactly this topic. So I’m looking forward to an opportunity to add another continent to my comparison list!
A Question of Geography
The first thing to note about cross-channel inventory optimization is that this is definitely not going to be a one-size-fits-all topic. Just looking at the US vs Europe, there are distinct geographic differences that drive some important structural cost differences that have a heavy impact on how retailers view inventory. In the US, space is cheap and transportation is relatively cheap. In Europe, space is very expensive. And while transportation isn’t quite as expensive as space, it is still much more expensive than in the US.
Europe compensates in some ways – more densely packed urban areas and small living spaces mean that populations tend to concentrate together, and they tend to purchase smaller volumes more frequently. Alongside this trend, home delivery is more strongly established in Europe than in the US — though there are definitely cultural differences at play country by country there (some people just don’t like having packages left on their doorstops, and some people don’t live in a place where a package left is guaranteed to be there when the person gets home later).
If you broaden the view beyond these two mature markets, it’s easy to find constraints to cross-channel’s growth, which is a driving force for considering how to best optimize inventory across channels. In Chile, for example, the country is one long, thin slice of land. It’s not very optimal to send inventory from a northern store to fulfill a demand in a southern store. That would be the US equivalent of sending inventory from Maine to fulfill demand in Florida — costly, and not the most efficient use of either inventory or transportation resources. In Australia, it appears that there is a very strong east vs. west challenge in the country — I’m looking forward to confirming that.
An Efficiency Answer
But back to the US vs. EU. I’ve long thought that Europe is better positioned to deliver a more efficient cross-channel fulfillment capability, including leveraging their store inventory as part of their fulfillment network. I have five reasons why:
- European retailers tend to have a better understanding of their inventory position across the chain. Even grocery retailers — and I’m definitely betraying my US heritage here — understand their inventory position in Europe. They have to. It simply costs too much to have the wrong inventory in the wrong place. Not only does it cost in the carrying costs associated with holding the wrong inventory, it hurts to have to ship the right inventory in any kind of expedited manner. European grocers have caught on, but I have to laugh at the shock on other European retailers’ faces when I tell them that for a lot of US grocers, their inventory position is a guess — determined more by what should be selling that it isn’t than by any count or accounting.
- European retailers tend to have distribution closer to stores and deliver more frequently to stores.This follows the rhythm of their customers — who buy smaller quantities more frequently. When Costco moved into Manhattan, they learned that lesson quickly: there’s just no place to put the stuff. I was eavesdropping on a couple shopping in that Manhattan Costco shortly after it opened, and they were about to get divorced over a case of bottled water — the wife wanted it and the husband failed to imagine how they could possibly cram it into their tiny New York apartment.
How is this an advantage? Well, if you’re not sure whether it’s going to be cost effective to use your stores as part of your fulfillment network, then you might be able to gloss over that gap by having highly efficient distribution to stores. If you’re already used to delivering to accommodate a daily rhythm from your customers, it’s going to be an advantage when it comes to ship-to-store. Walmart, the crown of supply chain efficiency in the US, promises site-to-store in seven days. That’s an eternity, whether you’re looking at it purely from the perspective of online fulfillment, or through the lens of cross-channel.
- EU retailers tend to have smaller back rooms and less overall inventory on the shelf. On the one hand, this makes for much more efficient overall distribution – nothing gets lost or overlooked. On the other hand, it doesn’t leave European retailers with as much wiggle room when it comes to tapping into store inventory to fulfill online demand. If US retailers are worried that they may short an in-store customer to fulfill an online order, European retailers need to be doubly worried. However, the flip side of this disadvantage is that EU retailers tend to be tighter on their forecasts — they don’t have as much wiggle room to get it wrong. If they can figure out how to adjust those forecasts for demand originating from outside the store, they’ll be in a much better place than US retailers to accommodate.
- EU retailers tend to have stronger order management capabilities. When inventory is an expensive resource, and especially when you have complex inter-country rules that you have to manage against, you tend to be more inclined to invest in technology to help you manage it. In my travels, it was a European retailer who first asked me about distributed order management, not US retailers. And it was European retailers who first recognized that Merchandising order management would be insufficient to manage customer orders. A lack of integration between inventory and order management across channels continues to dominate cross-channel challenges in RSR’s benchmark research. But I have a sneaking suspicion that — in general — European retailers are going to get a handle on this problem much faster than most US retailers.
- EU retailers tend to have a larger, more well-established home delivery or in-store pickup business. This one confounds me a little, but I guess upon reflection I can make it make sense. In the US, the only places where retailers tend to support drive-up pickup of store orders is in the great, freezing north, where nobody wants to get out of their car unless they have to — and they certainly don’t want their cars to get cold out in the parking lot while they race through the store to pick up a myriad of items.
In Europe, however, there are several retailers that are very good at this, especially in grocery and general merchandise. And this is definitely an advantage when it comes to in-store pickup. I can understand the US rationale that says, “I gotta get ‘em in the store! Why would I want to enable them to just show up and get their order? There wouldn’t be any chance for add-on sales!” However, I suspect this is a place where convenience in service is the differentiator. Would you get more trips from a customer if you made each trip half the hassle it was before? I feel like some EU retailers have figured that equation out — Tesco and Auchan are examples.
In the grand scheme of things, European retailers are theoretically better positioned to deliver on cross-channel promises – and to do so in a way that is already more efficient than what their US counterparts can achieve. Geography throws a wrench in the works though — US retailers may not need to be more efficient in managing inventory across channels. If their costs are lower, and their inventory looser, they may come up with a completely different model for fulfillment that only works in the US. That’s one spin on inventory optimization that I’m fascinated to see how it turns out.
Part Four of an Occasional Series
Cross-channel inventory optimization is one six areas where I’ve seen some differences between US and European retailers. The other five are demand forecasting, price transparency, inventory localization, personalization/relevancy, and store labor. I’ll write about each of these in the coming future. And, if you’ve got a strong opinion, I’d love to hear any other differences you’ve found to exist. Let me know what you think!