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Recently, GSI Commerce acquired VendorNet, a company that sells “Supply Chain Collaboration Software.” VendorNet’s software helps retailers keep track of inventory located in their physical stores so that those inventories may be offered to consumers who are shopping the retailers’ online sites. (Click here to read the Wall Street Journal article.)
As this acquisition suggests, selling on one channel and fulfilling from another is a trend that we are likely to see continue, for a number of reasons.
Amazon.com, for example, understands that having the right product at the right time is critical to making online shoppers happy — and loyal. Amazon invites thousands of other retailers (i.e. competitors) to display their inventories on its website. If a customer buys something from a third-party merchant on the Amazon site, Amazon still wins. It collects a commission for each third-party sale without taking on the inventory risk. Additionally, it cultivates customer loyalty by stacking the inventory availability deck, ensuring consumers can find whatever they want on the Amazon website (even if it is not sold directly by Amazon, the retailer).
In more recent years, smart multi-channel retailers, like REI, have successfully leveraged inventories in their own network of brick-and-mortar locations for the benefit of their online shoppers. In some instances, the store-based inventory may be the only style/color/size available in the retailer’s system. Under such a scenario, the retailer sells the assets it already owns, as opposed to expending resources to procure still more products.
In other cases, the store-based inventory may simply be more convenient for the customer. A retail-based option within close proximity may save the online customer time and shipping costs, while the retailer receives the highly desirable “wallet-with-a-pulse” walking through their doors.
Still, other online retailers have enlisted manufacturers to drop ship on their behalf when they are out of stock — consciously or not. While some risk is associated with outsourcing a core competency such as fulfillment to a variety of partners, there is mutual motivation to ensure a positive customer experience when a vendor is involved.
Technology exists that can keep track of every unit in the marketplace — at the manufacturer’s warehouse, the distributor’s storeroom, the retailer’s floor — even “used” pieces in the field. As these technologies become better integrated within market sectors, the practice of leveraging multiple inventories will continue to proliferate as a means to enhance efficiency within the distribution matrix.
The potential of taking this path to its logical conclusions is enticing. However, some adjustments may be on the horizon for retailers who expect to maintain full margins when they choose not to assume the financial risk that comes with a commitment to physical inventory. That, in turn, subjects the vendor’s broader inventory planning process to random variables.
If an online retailer offers an item to a customer it cannot directly fulfill, but instead enlists the aid of a manufacturer to drop ship, it should be expected that the financial arrangement of such a transaction may more closely resemble an affiliate fee than a wholesale purchase. Just as Amazon collects its tidy percentage for conducting a third-party transaction (and making the sale possible in the first place by developing the customer relationship), more manufacturers will be retreating from policies that offer nominal drop ship fees and standard wholesale pricing (plus dating!).
The crystal ball on my desk suggests that consumer-fulfillment scenarios will become more diverse in the future. It’s smart. Multi-channel brands that have the infrastructure to easily integrate and fulfill orders from outside channels will be especially receptive to the drop-ship scenario. But along with that trend, we will see an evolution in billing structures that reflect the true value of these hybrid solutions.
As comprehensive inventory selections become more common and less exclusive, the strategic advantage of a retailer will be measured by their ability to develop and maintain loyal customer relationships. Manufacturers will be delighted to acknowledge those relationships by rewarding retailers with compensation commensurate with having been assigned the burden of a) securing inventory and b) delivering it through their own distribution networks.
Larry Pluimer is an executive strategist with 20 years experience in direct marketing and e-commerce. As a channel specialist and consultant at Waypoint Outdoor in Seattle, Pluimer helps brands to develop and optimize their digital commerce strategies. In 2010, he was named a SNEWS Power Player, an honor that acknowledges 10 outdoor industry leaders for varied accomplishments in different industry sectors.