In its second-largest acquisition, Amazon buys the company for $970 million.
(Page 2 of 2)
As Circuit City did, Office Depot updates inventory in each warehouse daily, then debits orders against the inventory batch. Success depends on the constant reporting of sales against the batch, Luechtefeld says. “Even if you updated it every 10 minutes, there would still be a disconnect with what you could sell,” she says. “It’s very important to our customers to be able to order today and have it tomorrow. They don’t want to place an order only to find out later it’s out of stock.”
Thus every order is debited against the inventory count the moment the transaction takes place-whether it occurs on the web or on the phone. “The customer who is on the web has the same access to product availability as the customer who is on the phone to us,” she says.
But a retailer needn’t have the sophisticated systems that Circuit City and Office Depot have employed in order to achieve real-time, or near real-time, inventory. Smaller retailers may be able to get away with les than real time. Ecometry, for instance, provides a bridge between a retailer’s inventory system and the web interface. The difficulty of the link depends upon the age of the back-end system and the openness of the architecture, Marrah says.
Cost vs. lost customers
Furthermore, even though more retailers are understanding the importance of real-time inventory, most of Ecometry’s customers don’t provide an amount of stock against which the system debits orders, Marrah says. Rather, they provide an in-stock/out-of-stock message. Many also employ safety stock; the item is in stock but the retailer hedges by telling customers the item is out if the quantity falls below a certain level.
In fact, that approach makes sense if a retailer is using a legacy inventory system while selling on the web, says Askin of CommercialWare. “A call center may have 500 seats tied into the inventory system, but a web site could have 10,000 people looking into the system,” he says. “The web servers have been optimized to handle volume, but that still doesn’t mean that 10,000 people can be checking inventory on every order. So you cache the inventory level several times a day.”
However, there are times when real-time inventory may not be required, say analysts. Retailers with less immediate demand, such as furniture retailers, may be able to get away with knowing that an item is “available to promise,” says John Fontanella, general manager of retail/CPG industry service with AMR Research Inc. Retailers who rely on the manufacturer to ship to the customer may not even have the inventory. “The important thing is that the retailer commit to having it there when the customer wants it,” Fontanella says.
Determining whether it’s worth investing in real-time inventory reporting is a matter of balancing the cost of upgrading a computer system against the cost of acquiring new customers, Marrah says. Start by tracking back orders and determine how many were canceled. Such information will tell not only how many orders the retailer lost but also possibly how many customers it lost because a certain, probably large, percentage will have bought from another retailer. Then determine how many customers whose backorders were fulfilled came back to order again. “Out-of-stock items create a significantly greater risk that they will shop elsewhere,” Marrah says.
The cost of acquiring customers being what it is, more retailers may find the investment in real-time inventory worthwhile, observers say. Says Askin: “What has been considered a differentiator will become an absolute requirement in the not too distant future.”