The following insight is from Harvard Business Review.
Many manufacturers that serve retailers are still hamstrung by pre-digital production and supply chain processes, which make it difficult for them to see for themselves what customers’ needs truly are so they can offer them better choices. As one manufacturing executive lamented to us about the way it supplies one of its major retail partners: “It’s like delivering into a black hole.”
As a result of this lack of visibility into customer demand, manufacturers struggle with the worst of both worlds: They end up with excess inventory of goods that customers don’t want and must offer discounts to get rid of them, and they don’t supply retailers with sufficient quantities of the products that customers do want, leading to stockouts at retailers. The rise of omni-channel retailing has only exacerbated these challenges.
But it doesn’t have to be this way: Manufacturers can harness digital fulfillment to deliver real customer choice, realign decision making with customer needs, and realize the flexibility and insight that digitalization makes possible.
Customers fundamentally make three choices when making a purchase decision: Are my desired product attributes present? Is the price point acceptable? How long until I receive the product? Rarely recognized by order fulfillment systems is the customer’s unspoken decision heuristic: What trade-offs can I make among attributes, price, and time?
Conventional fulfillment strategies restrict customers’ ability to fully consider and make trade-offs among these dimensions. Discounts are often driven by the need to clear excess stock, attribute selection is driven by what’s in inventory, and capabilities to customize the product are never realized because they are not shared with the customer. Making attribute-price-time trade-offs visible to customers and giving them the ability to make an informed selection across these is central to manufacturers’ realizing digital fulfillment’s potential. In our research with global manufacturers in the automotive and consumer goods industries, we see this approach play out as some firms exploit the potential of digital technologies to redefine variability in customer preferences as an opportunity for value creation, rather than a problem to be managed.
Towards Digital Fulfillment
Digital technologies open up the entire spectrum of fulfillment channels from offline to online and from manufacturing to retail. They facilitate choice and empower customers to make trade-offs that were previously constrained by the order fulfillment system. In turn, visibility on the trade-offs customers actually make informs important operational adjustments and process improvements. We call this integration of fulfillment channels digital fulfillment.
Adidas’s “storefactory” concept represents a microcosm of the potential presented by information integration between retail and manufacturing. The storefactory relies on a body scan to offer customers insight on their clothing design options and fit, as well as the opportunity to have a custom garment produced by an in-store automated knitting machine. While Adidas intentionally does not vary price between custom-made garments and off-the-shelf products, a direct integration of information from retail through to manufacturing provides deep insight on customers’ attribute-time preferences — insight not attainable by manufacturers via traditional fulfillment channels. This information is key to informing capacity and inventory strategies and to making better use of customization capabilities that are languishing in many manufacturing operations.
Messenger bag manufacturer Timbuk2 takes the integration of manufacturing-retail information a step further in the direction of capturing customer trade-off decisions. In some retail stores, Timbuk2 provides kiosks where customers can order bespoke bags. When mass-produced products in those same stores are out of stock, store staff offer customers a discount if they order a bag through the kiosk (either the one that is out of stock or another bespoke product). The store kiosk information enables Timbuk2 to capture demand by exploiting previously unobserved customer flexibility in lead times in a way that is agnostic to the mode of production.
For manufacturers, integrating retail and manufacturing through digital fulfillment surfaces novel opportunities for demand management and optimizing the use of production capacity. An automotive producer we studied discovered it could use build-to-order fulfillment strategies to defer a portion of overall demand by offering those customers who were willing to wait both a discount and the opportunity to obtain the precise vehicle they wanted. This approach proved to be particularly powerful for products that were in such high demand that manufacturing could not keep up. Offering customers the flexibility to trade off customization, price, and time allowed the company to lock in excess demand that might otherwise have shifted to competing products.
Making It Happen
Here is what firms must do to implement digital fulfillment:
Rethink your order fulfillment strategy. Explore new technologies that make it economical to manufacture variety in small quantities and, as a result, rethink where manufacturing is performed — for example, in a store or in a place that supplies several stores in a region instead of a distant, large-scale factory. Recent advances in digital manufacturing such as 3-D printing (also known as additive manufacturing) provide ample opportunity to experiment with new manufacturing setups.
Rewire your supply chain. Many actors in your supply chain thrive on the inefficiencies that allow them to direct customer choice, and the presence of these actors may mask information about customer preferences. In the auto sector, for example, car dealers often exploit their customers’ lack of awareness regarding trade-offs among vehicle attributes, price, and time to shift their aging stock. Overcoming this challenge means aligning incentives and redefining the roles of actors across the supply chain to enhance information flows, making the full spectrum of choice visible to customers and capturing customer decision processes.
Create visibility across channels. Establish a common data infrastructure to integrate operational and financial information held across manufacturing and retail operations. Opening the order pipeline across all available fulfillment channels surfaces the opportunities and costs associated with the firm’s key decisions. Integrating all factory- and inventory-based fulfillment channels into one IT system enabled the global auto manufacturer we studied to purposefully articulate price, time, and product characteristic trade-offs to make better use of its customization capabilities, reduce finished goods stocks, and entice customers to wait for capacity availability.
Open up the solution space to customers. Expand the customer-choice set to encompass a unified view of available attribute, price, and time options as well as the tradeoffs among them — while taking into account the effects on profitability. This requires simple configurators like those that Timbuk2 and others rely on to guide customers through the cost and time choices for the product variations they are considering. Information on what customers do not want has great value yet is often ignored.
Information disconnects between manufacturing operations and the customer interface restrict firms’ ability to fully understand and meet their customers’ needs. Digital fulfillment provides a pathway for firms to realize the full value of their investments in manufacturing flexibility and information technology. In other settings (such as booking travel online), customers have already come to expect this visibility on trade-offs among price, attributes, and time. In turn, digital fulfillment will become the expectation in manufacturing, rather than the exception.
Read the full article in Harvard Business Review.