Todd Harris, Director of Marketing at Celect, sat down a couple weeks ago with Marc Chretien, Sr. Director of eCommerce Operations at the ALDO Group, for a live Q&A to hear his thoughts on:
- the potential and complexity of optimizing store inventories for online order fulfillment
- the unique approach the ALDO Group takes when fulfilling online orders from stores
Check out the the first part of the Q&A transcript below, where Marc shares his experience and thoughts on some of the biggest challenges and opportunities the ALDO Group faced as it relates to fulfilling online orders from stores.
You can (of course) access the full video interview here.
When we think about inventory optimization, we think about balancing and managing the process and costs of bringing inventory into your stores. You’ve got stuff coming in and stuff going out. The question is: what products are we going to offer to our customers? How much inventory do we want to buy?
Where do you put your product? Where do you fulfill it from? How do you know you’re fulfilling it from the right location?
The baseline concept with all this is that retailers, in a way, are no longer in control of the consumer buying process. The way people are buying things is much more erratic and different than it used to be.
That’s a theme I’m sure everyone has heard.
I totally agree. Especially in mature market areas too, we’re battling for market share rather than new market growth in North America, Europe. The new retail challenge is efficient decisions on inventory, and like you also mentioned, the power is in the customers hands. We have to be nimble and flexible with that.
Retailers have to manage multiple sources of demand. There are growing ways to get product out to customers, which is straining inventories and clouding that ability to see forward and see through the trees. What results from this includes things like excess inventory, transportation costs, and greater than necessary markdowns – which, of course, limits margins.
This is that last mile supply chain challenge. How do you get product to your customer, more effectively and profitably?
Tell us a bit about ALDO Group and your role.
I’ve been with the ALDO Group for a little bit more than three years now in the operations role. I’m focused on the post-purchase experience, so balancing the needs of the company in terms of efficiency and profitability, but also the customer experience and making sure we’re delivering something the customer finds delightful. I’ve been in the eCommerce industry for pretty much my entire career (about 20 years) in various capacities – development and coding at one point and then managing businesses (for the vast majority of that career).
Additionally, a big portion of my time was in the direct selling industry. It's funny because I find a lot of parallels between that and the omni-channel evolution going on. It's really about facilitating a relationship between digital and brick-and-mortar and supporting each other with strategies, whether they’re marketing and sales oriented or inventory and operations oriented.
You have a unique role there because you’re knee deep in this stuff, but you’re also orchestrating everything to make sure those general operations, no matter what the channel is, function smoothly.
When I first saw eCommerce in your title, I was thinking how old-school, is anyone e-commerce anymore? But the reality is yes, there is a pure e-commerce part, but the lines are really blurred between what’s e-commerce and what’s not.
Absolutely. Even the term omni-channel too seems to come into and out of favor as well. It’s all the same sort of thing, but e-commerce is just there because that’s within the department org. chart. The philosophy is way more holistic, thinking about all the different channels to get product to customers.
What was the particular challenge you were faced with as it relates to fulfilling online orders? What are the unique issues that made it difficult?
First, one fundamental belief worth highlighting is that ALDO supports and believes in strong brick-and-mortar fulfillment. We do have DC fulfillment as well, but we’ve definitely invested very heavily in store fulfillment.
E-commerce at ALDO is more than 10 years old, it started around 2005. I haven’t been here that long, but I actually heard through the history that the reason store fulfillment actually emerged so strongly – which now is very powerful for us — began from a lack of faith that people will buy shoes online. So rather than setting up a distribution center for that sole purpose, Aldo decided to try to leverage a store to see how it goes. It was a New York-based store, which quickly blew out because capacity was a problem. Despite this, it became a quick model they could replicate across the entire store network.
Now we are where we are.
Our stores provide a large network of mini-distribution centers that are fulfilling for us and provide a lot of benefits. That’s fast forwarding a bit because there was a lot of evolution. It started from a bit of skepticism in terms of the opportunity of digital orders going to customers. Once that proved very beneficial, the challenges became much more cultural and operations-based in getting many mini-distribution centers, which are our stores, aligned on the right customer experience and the right operation.
The concept of having mini-distribution centers is a powerful when you think about the impact of others who may not have that ability. Stores pose a unique advantage.
I believe everyone agrees that the real answer is going to be a middle-ground. We’re seeing investments by Amazon in brick-and-mortar presence, like with their Whole Foods acquisition, which I believe was touted as one of the greatest elements to their successful Prime Day this past summer. The true answer for the pure retailers is they have to address digital. For the pure digital, they have to address brick-and-mortar. So we’re going to land somewhere in the middle. ALDO’s well on their journey there, and we’ll share some of those benefits today.
Let’s try to conceptualize this into something visual.
Here's a simple example of an online order (Figure 1) received by someone in Houston, TX.
We're going to walk through some of the complexities that can come into fulfilling an order and how it can be done so often in a non-profitable manner, meaning sacrificing that all important margin. What ALDO has done, and what all of our customers using Celect Fulfillment Optimization are doing, is really reclaiming margin through this process.
So what happens in a simple online order?
You consider a few stores maybe because they’re relatively close. In the image above (Figure 1), Store 1 might be a little far away, but Store 2 and Store 3 are pretty close so the OMS might automatically consider one of those.
But what about Store 4, which looks like it’s up in the Boston area (see Figure 2 below)?
It’s really far away. Store 4 might not be considered by the OMS because it's so far away.
In a way that shouldn’t matter anymore because the transportation network is very advanced. Yes, players like Amazon or others are putting an emphasis on speed, but you see a lot of articles out there that say ‘free’ beats ‘fast.’
Don’t be discouraged by giving a good customer opportunity if you can get the product to them in 2, 3 or 4 days because you’re offering them free shipping and it’s profitable to you – it’s still a very palatable opportunity for the consumer. So that Boston Store 4 is still definitely within that window given the transportation opportunities we have.
Exactly. What we want to show everyone out of this is why that Boston store may be a hidden gem, in this case, as far as being the most profitable way to ship this order. Again, this is a very simple example, taking a few basic rules an order management system might use.
Let's say for rule number one an OMS will ask:
Does the store have the product to even complete the order?
In the image above (Figure 3), we see:
- Store 2 can’t complete the order.
- Store 3 can complete the order.
- Store 1 can complete the order.
- Store 4 can complete the order.
This eliminates Store 2.
Let’s look at them again now in the image below (Figure 4), looking at a tiebreaker rule or secondary rule. For rule number two, what’s closer to the customer?
Looking at Figure 4, we see:
- Store 4 loses big time because it’s farther away.
- Store 1 loses also because of distance.
- Store 3 wins – because it’s can satisfy the first rule and it’s close to the customer.
In this example, an OMS might fulfill it from Store 3 because it's closer when it’s weighing those transportation fees, but that may not be the best option.
In the evolution of our discussion, this naturally came out. As we were seeing our fulfillment network across all our stores – which in this example only has four. For Aldo in North America we have 700+ stores so we get a lot of opportunities and a lot of variables to manage.
In doing a simple model like this, the questions naturally emerge.
For example, at the end of the season you might think, “Wow, I really sold out of my product in the Texas region, and it’s such a shame because I have leftover product in Illinois.”
These types of opportunities really emerge because if you saw that if you had only had the inventory in a better place at the right time, you could have made more transactions, incurred less markdown, or given away less discounts.
Right. In the end, it’s about understanding that demand. That’s the core concept we want to show here.
So with some optimization in the mix – while the OMS is still in there executing the orders and the workflow—you can consider multiple goals, balanced in real-time, for every order (whether it’s 10 orders a minute or 10,000 orders a minute) while considering all stores and the demand at each store. That’s the key.
In the example below (Figure 5), we have four relatively common goals a retailer may want to consider when fulfilling an order. Again, Celect does this in real-time for every order, not one at a time, and looks at all these variables at once for every store.
In Figure 5, we see:
- Store 2 has a high chance of split shipments and has high in-store demand, but it's close to the customer and has a low chance of a pick decline. This makes Store 2 moderately interesting as a potential option.
- Store 1 has a low chance of a split shipment, low in-store demand, and a moderate chance of a pick decline — but it's far from the customer.
- Store 3 presents a potentially viable option. It has a low chance of split shipments, it's closer to the customer, and also has a moderate chance of a pick decline. However, like Store 2, it has high in-store demand.
High in-store demand pulls Store 2 and 3 away as options because the last thing you want to do in an order fulfillment situation if your using a store is pull a product that has high demand in-store. Doing so sacrifices huge amounts of margins. When that’s done over thousands of orders, we’re talking big money as far as the amount that can be reclaimed.
When we take a look at Store 4, it's the best option because:
- It's got the lowest in-store demand, meaning there is product that is going to sit on the shelves or go into markdown.
- It has a low chance for a split shipment or pick decline.
The idea is to get these items off the shelves, avoid that markdown, and fulfill that online order.
Store 4 might be a little farther and may incur a bit of a higher shipping cost, but in the end, what we’re doing is avoiding markdown units and increasing that full-price sell-through. This scenario far outweighs that extra cost of shipping.
This is a concept that isn’t being fully grasped across retail at the moment, and it’s really important because there’s lots of margin being left on the table.
Absolutely. I think that anybody that has a product they would consider depreciates or runs the risk of depreciating over time – obviously for us, fashion is so trendy and balanced by seasons – so if you don’t get it out at the right season, you’ve missed the opportunity.
I would imagine this is also the case for technology as well, since there’s always the next wave of technology and risks depreciating your inventory.
You can’t understate that bullet that says high in-store demand.
Where I think we get most passionate is exploring how we can best predict that in-store demand, and that’s where a lot of great conversations with Celect have gone.
The better I can predict the right demand in the right store, the better chance I have of making the best fulfillment decision.
Then I can protect the 'hot' stuff in the 'hot' stores, and I can move out the 'cold' stuff in the 'cold' stores —allowing you to get more conversions or margin out of every transaction.
Stay tuned for part two of the Q&A, where we'll dig deeper into the actual process Marc took to adopt advanced analytics at the ALDO Group.
*P.S. Don't forget you can always access the full on-demand webcast recording below!
This interview has been edited and condensed.