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Selling Direct? Update Supplier Strategy

The initial results for Black Friday and Cyber Monday show impressive gains in both online and brick-and-mortar holiday sales. But these increases are having different effects on each channel, even when the sales are by two different divisions of the same retailer.

The traditional supply chain has become a well-known quantity for most retailers that purchase their goods from suppliers and deliver them through physical stores. These retailers certainly need to deal with complexities to have the right goods on their shelves when shoppers want to purchase them. For that reason, planning and forecasting has become a science, and both retailers and suppliers pay a lot of attention to it.

The planning for holiday sales season and Black Friday in particular is a source of activity months in advance. Accurate predictions can lead to highly successful sales. Of course, predictions that miss the mark can lead just as easily to disastrous results if shoppers can't find the items they want.

Online sales would seem to bypass those issues. Customers place their orders while viewing images and descriptions of products, and they expect their purchases to be delivered to their door. Never needing to touch the actual merchandise is a huge burden removed from retailers. At the same time, the responsibility of predicting sales and managing deliveries shifts back to the suppliers that pack and ship directly to the consumer.

Though this may seem simple, retailers and their suppliers may find this direct sales approach significantly more complex than brick-and-mortar sales. Of course, online retailers like {complink 11480|Amazon.com Inc.} already have the direct-to-shopper model figured out. But the supply chain is so different that some retailers put their online and physical store sales in completely different organizations.

Here's a quick list of the issues that need to be dealt with differently when retailers sell their suppliers' products using a direct shipping method:

  • Determine whether the product is in stock, and provide feedback to the customer.
  • Route the order to the supplier or suppliers (if multiple suppliers are involved in a single order).
  • Get feedback on order receipt.
  • Allow for order modification or cancellation by the customer.
  • Advise the supplier about an order modification or cancellation.
  • Package the order in retailer-identity packaging.
  • Include retailer promotional materials.
  • Produce retailer-branded shipping labels.
  • Ship the order by the retailer's shipping method.
  • Provide return order processing.

All these tasks are handled by people in the retail store environment but must be automated for online orders. The activity generated this last Cyber Monday in particular shows these functions are being integrated into a comprehensive system. At the heart of much of the back-end processing is some form of EDI (electronic data interchange) that provides standardization to the formatting and processing of orders and the documents they spawn.

The same EDI that enables the complex direct-to-customer order processing is an extension of the EDI systems that process orders between retailers and suppliers for brick-and-mortar environments, but with the necessary changes to accommodate the additional functions.

13 comments on “Selling Direct? Update Supplier Strategy

  1. bolaji ojo
    December 5, 2011

    Scott, You examined this subject from the angle of manufacturers of finished devices and retailers. As you pointed out, a different supply chain strategy might be required for dealing with direct sales. As these companies update their strategies, they also must content with changes at their own suppliers. I assume suppliers too would have to modify their systems to accommodate the new demands. What do you expect will happen at the component suppliers in response to this situation?

  2. FLYINGSCOT
    December 5, 2011

    One of the biggest hurdles retailers face with direct sales is the returns process in that customes dread having to return a product anywhere else except a brick and mortar store.  Some retailers are very slick at this and I imagine do very well as a result.

  3. Scott Koegler
    December 5, 2011

    I doubt those suppliers further down the supply chain will see much difference in their order process because of direct shipments. The only change might be an increase in urgency for timely delivery. If the finished products ship directly from the manufacturer, that removes some of the 'flex' in delays that could be covered up in the extra shipping.

  4. Scott Koegler
    December 5, 2011

    I agree. Product returns are a complex issue, partly because the end customer may have options to return to the shipper, the online retailer, or the physical store. In the name of customer convenience those options need to be made available. But the order process and financial stream can make things highly convoluted.

  5. bolaji ojo
    December 5, 2011

    In order words, just-in-time on steroid! I wonder, though, how a retailer or even the direct-to-consumer OEM would be able to handle the forecasting. That's still one of the more difficult aspect of this entire process. How do you determine potential demand and match this with actual sales in a fluid market?

  6. Scott Koegler
    December 5, 2011

    I agree. Forecasting will be the sticking point, and it will bet more difficult as traditional retailers take advantage of the emerging 'instant catalog' where suppliers host their product information online and retailers can simply include the products in their online catalog without having to inventory them at all. Talk about unknown and unpredictable markets… 

  7. Barbara Jorgensen
    December 5, 2011

    Great blog! I found out the hard way that some retailers treat online and retail sales completely differently. I bought a bulky item online from a sporting goods store that wouldn't take the item back in their retail location. Mailing the thing back was a nightmare. From the business standpoint, I can understand why stores do it this way. As a consumer, though, I hate it.

  8. _hm
    December 5, 2011

    It provides wonderful experience of selling direct. If you provide very good customer service, including returns, consumer will like purchase more online.

     

  9. jbond
    December 6, 2011

    I would say that one of the biggest hassles dealing with some online ordering was keeping the two separate. Many stores do pick up orders on line now. Pay for your order online and by the time you arrive it is sitting there ready to pickup. This is an excellent idea that saves time. Recently we saw something we wanted to buy at Sam's club online. Since we didn't know if this would exactly fit our needs we figured we would just go to the store and check it out since it said you could do store pick up. When we got there they didn't have any, not even a spot on the shelf. When we asked an employee about it he said their online stuff is separate from in the store. When we asked why the computer said we could pick it right up, he had no answer. His answer was one of the irritating things about keeping the sales separate.

  10. Scott Koegler
    December 6, 2011

    I'm seeing more retailers separate their business between online and physical stores. Look at WalMart's practice of store delivery (I expect it is similar to what you experienced at Sam's – a WalMart store really). You can purchase online and pick up at the store. That doesn't mean the product is stocked at the store, but it does mean you don't pay shipping because your purchase piggybacks the daily WalMart delivery. And delivery may not be instantaneous because of that.

    Of course, that scenario means the product comes from WalMart's/Sam's distribution center rather than directly from the supplier.

  11. Barbara Jorgensen
    December 6, 2011

    I see an opportunity here for an organization such as UPS to step in and manage the reverse logistics. Instead of suppliers or retail stores dealing with returns, outsource the function to a carrier and let them channel the return to the appropriate warehouse. The downside is, this might add cost, whihc is the point of buying diect from the supplier in the first place. Any feedback?

  12. Scott Koegler
    December 6, 2011

    Logistics is certainly an issue, but a more important and complex issue is the financial aspect of the return… Granting the return authorization, processing the payment/refund, and properly transacting the $ between the retailer and the supplier.

  13. drpaul1139
    December 7, 2011

    This is a very interesting (astute) observation here. There is an answer however.

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