Omni-Channel Choices for Retailers' Success Today and Tomorrow

Game-changers in Retail: An Interview with Felipe Caro, Professor of Decisions, Operations and Technology Management UCLA Anderson School of Management

In this Game-changers in Retail Series, we had the pleasure to sit down with Felipe Caro, Professor of Decisions, Operations and Technology Management. Felipe Caro leads UCLA Anderson's new M.S. in business analytics (MSBA). His well-documented collaboration with Zara spans almost a decade. In particular, the mathematical model Felipe Caro developed to support the decisions fast-fashion retailers face each clearance period resulted in increased revenues of 3-4 percent for Zara. He has won multiple awards and contributed significantly to the international academic literature on supply chain management.

In this interview, we caught up with Felipe Caro to talk about the importance of planning in fashion retail, the emergent trends in 2022, and how inventory optimization is pivotal to retailers’ success in the omni-channel space. He shared with us what he’s seeing in fashion retailing and what’s helping retailers to become more effective and successful.

Retailers are going through an omni-channel transformation. How do you see the changing retail dynamics?

Many omni-channel shopping trends were already present in the retail world, but Covid-19 has supercharged the pace of the transformation. The pandemic has changed the way the consumers interact with retailers. It accelerated and intensified the shift to digital.

As a result, consumers started shopping in new ways that maybe they wouldn’t have even tried two years ago. People got more used to omni-channel shopping and they are now comfortable using different channels as it suits them. This confirms that omni-channel retail is here to stay.

Secondly, I think that we’ll also see more business models in the retail industry. To meet the different kinds of needs and address niche markets or supply chain challenges that come up in omni-channel retailing, retailers will evolve their business models and operations. Some of these retailers will become successful players and some of them won’t even be big but they’ll still be able to satisfy a niche market.

What are the fundamentals of any retailer’s success in an omni-channel era?

I think to be able to answer this question; retailers need to go back to the basics of knowing who they are. In today’s retail world, there is still a positioning choice that each retailer needs to make. That includes where they’re going to be in terms of omni-channel. This is all about the strategy, and many retailers realize that it is very challenging to get omni-channel retailing right.

Today retailers have 3 different options

First, they need to decide whether they want to have an omni-channel offer or not. Some retailers will choose to become omni-channel, but others might stay away from having an omni-channel presence. And that means some will choose traditional brick-and-mortar retailing, and some others will be pure online businesses. Retailers can still have a successful business model by staying either in the physical space or just being pure online.

Option 1: Stay traditional

Sticking to the traditional retail strategy takes courage, but I think that Primark is a good example of those that have chosen to be mostly brick-and-mortar. They buy in large quantities in advance, offer their products at low prices, and do well.

Option 2: Become pure online

On the other hand, there are pure online retailers such as Amazon. We all know that Amazon was a winner during the pandemic mainly because they have been exploiting all their logistics capabilities and gaining market share by making sure that their products arrive at their customers’ doorstep in a short amount of time.

Option 3: Go omni-channel

And some retailers are in the middle. Those are the ones that have to make the omni-channel promise work. And that’s when they start thinking about how they do it successfully. Customers search for the products wherever they want, and get them wherever they want, but delivering this promise is a huge challenge.

At the end of the day, retailers need to find a positioning that is meaningful to their customers and then, of course, they should be able to deliver it. The ones that get omni-channel right leveraging the combination of stores and online presence will become the big players in the future.  

What do you consider as the biggest inventory optimization challenges or opportunities in omni-channel retail?

Challenge 1: Assortment decisions

Some inventory optimization challenges have always been there and become harder in the omni-channel space.

For example: Making the right assortment decisions. Consumers expect more variety today, and assortment has always been challenging for retailers, but now online removes all the space constraints. Retailers can’t fit too many products in physical stores whereas at online stores there is no limitation. They can carry as many items as they want -at least in theory. Then the questions for retailers become: “Do you want to carry as many items as you want?” and “Which ones do you carry, or do you offer?” This is a classic assortment problem, but today it's significantly harder to solve.

Challenge 2: Forecasting and fulfillment

There is also a forecasting and fulfillment challenge. For omni-channel retailers, demand forecasting and fulfillment are connected. When omni-channel retailers are doing their forecast, they need to take into account not only in-store demand but also the online shopping demand.

This adds a layer of complexity to demand forecasting and once retailers make their forecast and commit some inventory to the stores, the next question becomes, “Do you keep this inventory in the stores for a customer that comes to the store buy that item, or do you use it to fulfill an online sale?”  

We wouldn’t talk about these issues 10 or 20 years ago. Yet, these are the challenges that arise with omnichannel retailing.   

How important do you think it is to have accurate, granular level demand forecasting?

Demand forecasting will always be the holy grail of retailing. It is what drives everything in retail, and it will continue to be extremely important. The thing is that it is almost impossible to get forecasting right. Therefore, I believe what matters is to keep records of the past to fix future mistakes and even turn them into opportunities. Let me give you an example. Let’s say a retailer made incorrect forecasting and ended up with excess inventory. Could they use that excess inventory to fulfill the online demand? Again, forecasting and fulfillment are two challenges that go hand in hand in omni-channel retailing.