Modern-day retailers recognize the importance of creating an omnichannel experience for their customers. Research shows that companies with extremely strong omnichannel customer engagement retain on average 89% of their customers, compared to only 33% for companies with weak omnichannel customer engagement. But driving sales and an exceptional customer experience across multiple channels is no easy feat. An effective omnichannel order management system can help retailers seamlessly optimize their sales efforts across channels.
Omnichannel retail is the future, but investing in your digital transformation can be a challenging and confusing process. We’ve developed a list of the key omnichannel order management concepts every forward-thinking retailer should know to successfully implement an omnichannel order management system and create a true omnichannel customer experience.
1. Quantity on Hand (QOH)
Quantity on Hand is the physical quantity of an item in stock. QOH is generally calculated for a product that is in stock at the warehouse or the store. QOH of a product at the warehouse level means the physical quantity of an item in one particular warehouse. Retailers may also want to look at QOH for a product at all locations, as they can have multiple warehouses and store locations. In that case, the sum of quantities of a given product across all locations represents the QOH of a product at the company level.
Omnichannel order management systems receive inventory feeds from an ERP daily, so the QOH is always up to date.
Let’s say a retailer has an inventory of white shirts available at the warehouse and store, totaling 100 units and 50 units respectively.
2. Reserved Quantity
Reserved quantity is the inventory that is on-hand but reserved for online sales. Retailers need to reserve inventory for online orders, otherwise they can fall victim to overselling and unhappy customers. Reducing overselling and driving customer loyalty is more important than ever: Bain & Company and Harvard Business School report that "increasing customer retention rates by 5% increases profits by 25% to 95%." Reserved quantities are not included in the “available to promise” (ATP) and are not eligible to be sold. This provides critical visibility into how much quantity is promised, and to which orders.
3. Order Brokering
Order brokering is one of the key functions of a robust omnichannel order management system. Brokering is the process of analyzing order priority and determining the optimal fulfillment location based on proximity and inventory availability. Once the brokering process runs, the order is brokered to the fulfillment location and inventory is immediately reserved for these orders. Retailers can choose to leverage custom routing rules to meet their unique business needs, so omnichannel order management systems offer configurable rules to set up customized brokering engines.
For example, a customer in New York places an order for a denim jacket. Say the retailer has inventory available at two locations: a California Warehouse and a New Jersey Warehouse. The OMS captures the order information and puts the order in brokering, where the most optimal location is selected for fulfillment. After brokering, the order is assigned to the New Jersey warehouse for fulfillment.
4. Brokering Queue
Order brokering is usually run multiple times in a day. All the orders that are waiting to be brokered are in a queue, which is known as the “brokering queue”.
For example, many brokering engines are set to run two times throughout the day, at 10:00 AM and 2:00 PM. In this scenario, after the first brokering is run at 10:00, orders placed between 10:00 AM and 2:00 PM stay in the brokering queue until 2:00 PM.
5. Unfillable Orders
When brokering an order, there is a chance that the brokering engine doesn’t find the required inventory at any locations. When this happens, the order remains unfulfilled. This scenario is typically caused by inventory inaccuracies and variances. Unfillable orders remain unfillable until inventory becomes available and moves to the next brokering session.
For example, say Brand ABC executes a brokering session for 100 online orders, and there are two orders without inventory.
6. Safety Stock
In omnichannel retailing, stores don't promise all their inventory to online orders because they need to cater to walk-in customers as well. “Safety stock” helps retailers control how much inventory they promise to online channels. Once a store’s inventory count falls below the designated safety stock quantity, the remaining inventory will be reserved for in-store sales.
Retailers often face inventory discrepancies, where a system’s inventory does not match the actual inventory in stores. Keeping safety stock also helps retailers mitigate the risk of taking orders that cannot be fulfilled due to inventory discrepancies. A robust omnichannel order management system helps retailers easily manage safety stock for each store.
7. Threshold
Typically, inventory accuracy sits around 65-70% for companies that use SKUs and barcode scanning to manage their inventory. Many retailers have shifted to RFID technology to improve accuracy. But retailers who continue to utilize SKUs manage inventory inaccuracies by keeping a “threshold.” Unlike safety stock, the threshold is not managed at the store level. Merchandisers generally assume that there are inaccuracies, so they reduce the reported inventory of all products at the company level using this value and then promise the remaining inventory to online channels.
For example, let’s say Brand ABC sets the threshold of 10 units for red socks in Store X and Y. This will impact these stores’ inventory levels, in the following manner.
An omnichannel order management system includes tools for merchandising teams to seamlessly manage thresholds for multiple products.
8. Maximum Order Limit
A store can set a maximum order limit, which determines how many orders it can fulfill in a day. If a store reaches this maximum limit, no other orders will be fulfilled for the day, even if that store is the only one with the inventory to fulfill the order. The maximum order limit has no effect on online available to promise (ATP) inventory because orders are still fulfilled the next day. As a result, the store continues to sell online.
For example, assume a store wants to set a maximum order limit on their red button-down shirt.
9. Excluded Facilities
Facilities that are temporarily unable to participate in the fulfillment of online orders due to a number of reasons, including
- Insufficient labor
- Natural and man-made disasters
- Holidays
As soon as these scenarios change, the inventory at these facilities becomes available for online orders again.
10. Available to Promise (ATP)
ATP refers to the quantity of inventory that is available to a customer.
To derive ATP, retailers must deduct inventory that is not available to sell from the QOH. Unsellable inventories include:
- Reserved quantities
- Safety stock
- Threshold
- Orders in the brokering queue
- Excluded facilities’ ATP
As an exercise to understand calculating the ATP, let’s say Brand ABC has 100 QOH for their product “blue shirt”, and receives new orders for 10 Blue Shirts. The ATP can be derived as follows.
- Quantity On Hand = 100 Units
-
Reserved quantities = 10 Units
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Safety stock = 5 Units
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Threshold = 5 Units
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Orders in brokering queue = 5 Units
-
Excluded facilities’ ATP = 5 Units
It's easy to calculate ATP for single-channel retailers: simply reducing the reserved quantity from QOH gives you ATP. However, for omnichannel retailers, deriving this value becomes increasingly complex and an omnichannel order management system is needed to help handle all of these complexities to calculate exact ATP.
11. Rejected Orders
Once brokering is run, orders are brokered to warehouses and stores for fulfillment. However, warehouse staff or store associates may need to reject the order because they don't have the physical inventory at the brick-and-mortar location. This inventory inaccuracy can be a result of damaged, lost, or stolen inventory. These orders are called “rejected orders.” Rejected orders are sent back to the brokering queue so that the brokering engine can broker these orders to a new fulfillment location.
12. Split Shipment
A split shipment is done when an order containing multiple items is broken out into multiple shipments for fulfillment, rather than being consolidated in a single shipment. While taking online orders, there are times when all order items are not available at a single facility. Hence, retailers have to split the order and fulfill the items across multiple location centers in order to ensure an efficient delivery process. With a dynamic order management system, split shipments can help retailers elevate customer experiences and even reduce long-run shipping costs.
13. Order Merging
Order merging is done when more than one order of the same customer with the same address is shipped in one shipment. Sometimes, customers place multiple orders in the span of a day or two. Additionally, sometimes customers place an order at the same time that inventory for a previous pre-order or backorder they placed becomes available. In such cases, retailers usually look to merge the orders, which can help to save costs incurred on logistics and provide customers with a hassle-free experience. Order merging is a configurable option in an omnichannel order management system.
14. Pre-Orders
Pre-orders are simply advance orders taken for future inventory. These products have not yet been released in the market and are still in planning or production, and thus not in stock.
For example, say Brand ABC is preparing to launch next season's clothing line. This purchase order (PO)’s inventory might take 2 months to reach the warehouse. During this period, the brand can start taking pre-orders and promise to deliver the product after two months.
15. Backorders
Backorders are orders taken for products that are temporarily out of stock. These orders are referred to as “backorders” because they were previously in stock and will be available again soon but are currently unavailable due to high demand, inaccurate sales forecasting, or operational discrepancies.
For example, Brand ABC has an amazing season and sells all its inventory. There were some regular items that were bought frequently, so the merchandisers have already sent POs for these goods and know the approximate date of arrival. The brand utilizes this time for sales and starts taking orders for these products.
16. Pre-Order Parking
As pre-orders are taken, it is understood that they won’t be fulfilled till the shipment of the purchase order arrives. If a pre-order is put in the brokering queue, it will be marked unfulfilled. Therefore, these orders are “parked” in a separate queue called” pre-order parking.”
For example, consider a purchase order whose inventory will arrive on 07-01-2022. For this PO, pre-orders start to be accepted on the date 05-25-2022. So from 5-25-2022 until 07-01-2022, these pre-orders will sit in pre-order parking.
17. Backorder Parking
Similar to pre-orders, backorders end up in a queue. These backorders are not eligible for brokering until their dedicated PO arrives in the fulfillment center.
For example, consider a purchase order whose inventory will arrive on 08-01-2022. For this PO, backorders are taken on the date 06-25-2022. So from 06-25-2022 until 08-01-2022, these backorders will sit in the backorder queue.
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These 17 key concepts outline a strong foundation for the field of omnichannel order management. Understanding these ideas is essential for retailers at any stage of their omnichannel journey.
A dynamic order management system can help you manage the key aspects of omnichannel retailing and increase profitability, cash flow, and customer retention. If you are interested in learning how our omnichannel solutions can take your brand to the next level, contact the HotWax Commerce team for a free consultation today.
