The Power of Supply for Digital Marketing, Part One – Four Supply Woes that are Digital Acquisition Killers
If your performance marketing team isn’t pushing you for intelligent assortment and significant visibility to inventory, they are missing out on a step-change in their ability to allocate budget. Better quality differentiated assortments along with rich item data not only improve conversion rates but also have excellent value for building first-bid predictive models (more on that at a future date).
Good data, good communication, and aligned incentives do more to help retail supply more perfectly than any amount of penalties and severed partnerships ever will.
. . . I can’t help but wonder . . . 100 years from now, what relics of today’s innovations will be turned into revitalization projects and rooftop bars?
One of the most significant trends in the ecommerce supply chain over the last decade has been the shift toward drop shipping and third party distributed inventory. A lot has changed since 2003. With such clear advantages, retailers and suppliers are being compelled to adopt drop shipping to be competitive with product selection, product penetration, and omnichannel. As we saw in last week’s post, those who fail to overcome the challenges associated with drop shipping and a more virtual supply chain will face far more severe disadvantages as ecommerce and omnichannel inevitably take up a larger percentage of retail.
“Every investment in retail today is about taking the consumer experience to the next level. That means tackling the extremely complex data sharing challenges that have persisted in the supply chain for decades,” DSCO’s Founder & CEO Jeremy Hanks said. “Vance has strong experience solving hard data problems for the enterprise and in supporting rapid, disruptive growth. The DSCO team is thrilled to have him on board as we work to help retail surpass the expectations of the digital consumer.”
Drop shipping requires that the seller-retailer use data to have a virtual representation of a physical thing that they will not see or control. Therefore, almost all retailers that embrace drop-shipped products start with one of the fundamental pieces of data: the product catalog. This is logical and necessary, as you can’t sell product without it. But it is also the step that is the most challenging and must be handled differently than the other two pieces: inventory updates and order exchange.
For retailers, being able to offer products for sale that they do not have to purchase or physically handle can seem like nirvana. For suppliers, having their products less limited by resellers as they put it in front of consumers is as close to utopia as it gets.
Managing Inventory Visibility tells you where the item is, how many there are, and what it costs you as the reseller. Orders are where everything comes together, when a consumer has purchased a product that a retailer was selling virtually. The retailer must send that order and fulfillment information to the supplier, who will ship to the consumer.
Why do retailers not drop ship their entire assortment? After all, doesn’t the strategy drive incremental GMV and improve inventory turns, ROA, and working capital? While it does do these things, drop shipping has two fundamental limitations. The first is profitability. As described in this blog, COGS are higher when compared to traditional fulfillment due to higher prices suppliers charge retailers. Second, drop shipping is operationally complex because retailers have to rely on 3rd parties – each with its own unique systems, business processes, and self-interests – to serve their customers. Maintaining high levels of customer satisfaction is therefore often difficult.
A lot of retailers focus their energies on either store-based fulfillment or drop ship for increasing online inventory assortment. At first glance this makes sense. Companies only have so much money to invest in their supply chain and they need to choose fulfillment strategies that work best for their business goals.