Paula and I had a very interesting briefing with VendorNet last Thursday, covering their StoreNet solution, which enables cross-channel inventory visibility and fulfillment. Their experience, and the retail vertical where they have enjoyed success (specialty apparel) raises some interesting questions about cross-channel inventory strategy, and how it might differ by retail vertical.

Up until now, most of my discussion with retailers and solution providers around cross-channel inventory has been focused on product categories that are fairly easily replenished, or in the case of fashion items, have focused on using the online store to reduce allocation risk by testing colors or demand uptake in stores.

But apparel retailers have a particular challenge around cross-channel, especially retailers that design and source their own fashion lines. There is only one real shot at getting the size of the buy right in those situations — you order a slug of product, ship it to stores, hope you got it right, and mark down the mistakes. In that environment, if you are going to sell apparel online, you had better guess right as to how much inventory to allocate to the online channel, because there is little opportunity to get more if you need it — and this is the real online challenge, because you have so much greater exposure online than a single store has. Because the audience is potentially wider, and online consumer behavior is still evolving, it’s more difficult to predict sell-through for online.

So how do you cope? When looking at cross-channel inventory strategies, it appears that there are two main strategies to follow, with the right one depending a lot on whether you can get more of the product or not:

Online as Risk Mitigation (Outside In) — In this scenario, the retailer has a greater assortment online, and uses online purchase behavior to inform how to assort in stores. In this case, the retailer has an opportunity to place a small initial order, followed by a much larger store order — or at least, the flexibility to shift around the SKU mix in an order already placed. This is the Target story — sell furniture online exclusively, and then put only the most popular SKU’s in stores (where space is at a premium and you can’t afford to invest in such large, expensive inventory items without an idea of how well they will sell). By using the online channel to gauge initial demand, a retailer can increase the chances that the store inventory investment pays off — using online to reach a greater audience in order to drive internal strategy, thus the ‘outside in.’

Controlling Online Risk (Inside Out) — In this scenario, the retailer has a greater assortment in stores, and wants to figure out both what to sell, and how much will actually sell online. In this case, exposing store inventory to the online channel makes a lot of sense, especially if you can then fulfill from the store location. For a fashion retailer, this creates the ability to expose an item that may have limited demand — a size 2 skirt, for example — to the widest possible audience that may want to buy that item. The additional cost of that exposure (the shipping and handling burden it places on the store) is more than offset by the hit the retailer might have to take in marking it down because the item was in the wrong place to begin with.

But this raises an interesting question — what role will inventory holding costs and shipping play in a retailer’s cross-channel strategy? I know that many retailers — or at least, many merchants within retailers — do not have a very good idea of their holding & shipping costs, or handling costs for that matter. If they did, then there wouldn’t be so many knee-jerk decisions to do things like air-freight product from China. Retailers also wouldn’t leave it up to store employees to make sourcing decisions as to where to get items when they are out of stock but the customer in front of them wants to buy.

The next evolution of cross-channel inventory management will clearly have to be assigning different risk mitigation strategies to different types of inventory. But if retailers are truly going to use cross-channel capabilities to optimize inventory, then they are going to have to have a much better understanding of the full cost attached to each and every item — and that cost will vary significantly depending on the channel where it resides and the location of the customer who wants to buy it.

I still hold that retailers will ultimately have to move to a demand-shaping strategy, where even their costs are exposed to consumers, letting shoppers decide how to balance cost and availability against the speed of that gratification their seeking — but we have a long road to travel before we get to that point. Channel-agnostic fulfillment is an important first step.