Telling online customers it’s on the shelf
By Kurt Peters
It may come as a surprise to consumers to find that less
than 10% of retailing web sites have real-time inventory. “When we started our
web site in 1998, we got lots of positive comments from customers who liked
the real-time inventory function,” says Dennis Bowman, senior vice president
of Circuit City Stores Inc. of Richmond, Va. “But in 2002, it has become the
expectation of web customers.”
Customer expectations aside, the number of retail sites
that offer real-time inventory is surprisingly low. Geri Spieler, research director
for The Gartner Group Inc.’s GartnerG2 retail services group, says the 10% of
sites that offer real-time inventory is up fivefold from a year ago.
As the web becomes a mainstream retailing channel, part
of its success will hinge on making the online shopping experience as much as
possible like offline. Providing real-time inventory on the web goes far toward
contributing to creating that experience. It is a lot like having items on display
on retail shelves; it tells the customer the item is there to be bought. “It’s
like picking up a sweater from a shelf in a store,” Spieler says. “No salesperson
will take it away from you once it’s in your cart and say, ‘We’re out of this.’
If it’s in your cart—online or offline—you’re expecting to be able to buy it.”
While most retailers have not measured the impact of
real-time inventory reporting on sales or conversion rates, most believe that
it has affected their web success. They rely on the kind of early feedback that
Circuit City received. Or they extrapolate from what’s happening in the market.
“We pioneered real-time inventory,” says Monica Luechtefeld, executive vice
president of e-commerce at Delray Beach, Fla.-based Office Depot Inc. “But today
the gap between us and our competitors is much closer because the customers
have said it’s important to them.”
As more consumers shop the web, the demand for real-time
availability of inventory is sure to go up, market analysts say. “The web creates
a strong sense of immediacy,” says John Marrah, president of Ecometry Inc.,
which provides multi-channel enterprise software to the retail industry. “When
a customer goes to a web site, there’s an assumption that what they’re looking
at is in stock. You create a significant deficit of goodwill if the consumer
finds that assumption is not true.”
The black hole
Projecting real-time inventory to the web is not all
that difficult for catalog merchants who fulfill orders from one or at least
a limited number of warehouses and where at most a couple thousand telephone
customer service agents have access to the inventory data. But one of the new
avenues to success on the web is to allow customers to pick up items in stores—and
that’s where the real problems arise. “Now you need the visibility with the
store—and the activity between the shelf and the point of sale has always been
a black hole for retailers,” says Donny Askin, founder and CEO of CommercialWare
Inc. “There’s a real difference between a retailer’s ability to sell the last
item in a warehouse and the last item in a store.”
Bowman says Circuit City knew pretty much from the start
of its web venture in 1998 that it needed to make store inventory available
to the web. “We had the notion that we had to win on the web by leveraging the
store structure,” Bowman says. “We could not compete against the pure-plays
on their own turf and win. They were the darlings of Wall Street and had money
to spend like crazy on marketing. We had to change the turf to something they
couldn’t compete on. For us, that was leveraging the stores.”
Circuit City already had the good fortune to have designed
its store system so that a relatively light POS terminal feeds data to a store
server, which then maintains the inventory counts. The store inventory is updated
at the server once a day and the terminals report sales to the server throughout
the day. The server decriments the inventory each time an item is sold. Inventory
counts are updated chainwide at the end of the day. Circuit City developed that
system a decade ago to allow one store to access another store’s inventory so
that if the first store was out of an item a customer wanted, it could check
availability at nearby stores. “That required store-level, real-time inventory,”
Bowman says.
Now, when a customer on the web wants to know if a certain
store has a particular item in stock, the web can inquire at the store and report
availability to the customer with a high degree of confidence—accurate 98.5-99%
of the time, Bowman says.
One of 600
If that store has the product, the store holds it for
the customer to pick up. “We extended that concept to the point where we consider
the web to be one store out of 600,” Bowman says. Web-enabling the store servers
so they could talk to web shoppers took a team of 12 about four months to complete,
Bowman says. The biggest challenge was security, making sure servers weren’t
open to hackers even as they were available to the web store, he notes.
Circuit City has been successful enough with its pick-up-at-the-store
strategy that 50% of web customers pick up their purchases.
While Office Depot is not offering pick-up-at-the-store,
real-time inventory is no less important for it and perhaps almost as complicated
as tracking store inventory. Office Depot, where Internet sales accounted for
14.3% of revenue last year, fulfills web orders nationwide from 20 distribution
centers. “We made a very conscientious and strategic decision to spend the additional
time and energy to integrate into the web site all of our warehouse inventory
management systems, rather than have them stand alone and do batch inventory
reporting to the web,” Luechtefeld says.
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.”
kurt@verticalwebmedia.com
