Hostage By Hanjin: How to keep inventory moving when supply stops
The collapse of Hanjin Shipping, the seventh largest freight carrier in the world, has left $14 billion worth of cargo in limbo. Much of that is literally floating around in the ocean, unable to dock; the rest is sitting idle in ports waiting to be unloaded. For Samsung, that means $38 million worth of electronics and appliances are held hostage in the carrier-bankruptcy case. And HP has 500 containers filled with computers waiting to reach American soil.
While supply chain problems like this will ultimately be ironed out by manufacturers, creditors, and the court system, retailers (of all sizes) are the ones who stand to lose if they don’t have inventory to sell. U.S. courts are expected to grant Hanjin bankruptcy protection, which will keep creditors from being able to seize its cargo -- but that doesn’t mean Hanjin will be able to round up the necessary funds to get containers unloaded from its ships. That would severely impact retail supply chains in the U.S. and around the world. Retailers that aren’t directly affected by Hanjin should still take note because slowing global demand and a capacity glut are eating carrier profits -- others could face the same fate as Hanjin.
The real danger of supply uncertainty
As retailers prepare for the holiday shopping season, the financial solvency of global cargo carriers is only one factor beyond their control that can impact supply availability. Weather events, geopolitical instability, labor issues, and a myriad of other unforeseen events can unexpectedly reduce the availability of any item -- or even stop it altogether. That is cause for concern to retailers that remember the chaos surrounding shortages of products like: Cabbage Patch Kids, Tickle Me Elmo and PlayStation 3.
The inability of suppliers to meet demand is only one half of the equation. The other is forecasting that demand accurately. The omnichannel environment has made developing accurate forecasts even trickier because macro-demand must be stratified between channel partners, e-commerce, and brick-and-mortar to plan inventory distribution. Knowing where and when consumers will ultimately convert as they enter and exit the shopping journey is a formidable task -- but retailers who get it wrong are punished swiftly as shoppers take their business to competitors.
Take control by optimizing fulfillment
The inability to accurately forecast demand on every discrete channel leads to inefficiencies in inventory management. That becomes even more wasteful during supply shortages when out-of-stocks become common problems. An excellent way to combat demand uncertainty is through fulfillment optimization. This is achieved when digital orders are routed to the distribution center best equipped to fulfill them through a fulfillment logic algorithm. By selecting from the best fulfillment center, retailers can react quickly to peaks and valleys in demand at any individual location or channel.
Automated fulfillment logic is an important best practice for any omnichannel retailer to employ during typical operations and it is often customized to account for different preferences among geographies or expected seasonal demand shifts. When supply emergencies erupt, like missed shipments caused by a bankrupt cargo carrier, the algorithm can be tweaked in a number of ways to minimize out-of-stocks. If the shortage is small or temporary, assigning fulfillment priority by order volume is a way to react to demand changes in real-time. During a severe shortage where out-of-stocks will be unavoidable, allocation limits can be set to distribute inventory to the most vital locations and customers.
Ship from any store
Maximizing the value of fulfillment logic is directly correlated with the volume of shipping centers in a network. That’s why empowering every location, regardless of how many there are, to ship orders strengthens resiliency to inventory disruption. Retailers that can ship from any store can truly employ best store fulfillment where each order is routed to the location best suited to fill it. Which store is “best” is a matter decided by retailers to achieve specific goals. Many route orders based on geography so orders arrive at their destinations quickly, but during supply shortages this can be changed to fulfill based on inventory thresholds. Analyzing historic data from these fulfillment patterns provides useful intelligence that can be used to improve accuracy on forecasting future demand for the same and similar merchandise.
Another benefit of shipping from any store is that inventory risk is reduced. Instead of sitting idle in a warehouse waiting for an e-commerce order, inventory is stocked on store shelves. That exposes it to conversion from more channels because it can be purchased by a brick-and-mortar customer or sent out as a Web, phone or mail order item. This increases turnover rates and lowers the cost of holding inventory, enabling retailers to hold more merchandise without incurring additional cost. This buffer is useful for preventing sellouts when supply tightens.
Prioritize channel partners
Retailers that work with channel partners can assign each one a priority in their fulfillment algorithms. For example, retailers who sell on eBay may choose to assign it lower priority since consumers who purchase there tend to be less loyal. They may choose to do the same with Amazon, or even assign it a higher priority since the company penalizes partners that run out of stock. Prioritization can vary based on what makes sense for the retailer or how important each channel is to its business. The key is utilizing automated fulfillment to ensure the highest-valued customers are served and retained.
Maximizing fulfillment boosts service levels for consumers and efficiency for inventory during typical business cycles, and provides a competitive edge for omnichannel retailers. When outside factors squeeze supply, it allows retailers to optimize how inventory is fulfilled so sellouts are minimized and localized to the channels and locations where their impacts can be best contained. Bracing for uncertainty, like the Hanjin collapse, keeps the smartest retailers nimble and able to weather “supply storms” unscathed.
Ian Goldman, president and CEO of Celerant Technology, is an expert software engineer with 25 years of experience developing advanced management solutions that offer integrated omnichannel capabilities for progressive retailers.