Ain't Nothing Like the Real Thing

It's high noon --does your website know where your inventory is? Most websites don't. And that often comes as a rude awakening to shoppers, most of whom assume that if an item is on a website, it's available for them to buy. Take Steve Katzman's too familiar tale of online-ordering woe. Katzman, CEO of Decoratetoday.com Inc., went to the website of a very well-known brick-and-mortar retail chain to order some Calvin Klein blue jeans. He found a pair, bought them and then got an e-mail confirming that the retailer had received his order and was going to ship it to him. But five days later, just about the time he was expecting his designer jeans to arrive, Katzman got another e-mail that said, "Unfortunately, we had to cancel your order...for one of the following three reasons...." Katzman reacted the same way any Web shopper would: "I'll never go back there again," he says.

This is just one of the thousands of horror stories that have e-businesspeople around the world chanting the mantra "real-time inventory, real-time inventory." Real-time inventory management capability lets a company constantly track every product it sells from when it's manufactured, or when it arrives in its warehouse, to when it hits the buyer's door. The theory is that by integrating a website with a real-time inventory system, a company will never disappoint an online customer again, because its website will list only products actually in the warehouse, ready to be picked, packed and shipped (or would tell customers that something was on back-order but would be available within a certain period of time), and would reserve those products right when the customer places the order. But is real-time inventory on the Web a reality today? And is it really necessary for every Web business?

The answers to those questions are a qualified yes and yes. Some websites have done the necessary back-end integration to be able to tell their customers the truth about whether a product is in stock. But many have had to resort to workarounds that fall far short of offering real-time information. While those workarounds might be good enough for now, it is going to become increasingly important for companies to make the move to real-time in the future. Customers clearly want it: Displaying inventory availability on a website is one of the leading features that makes customers more likely to buy from or revisit an online store, according to a Jupiter Communications Inc. survey earlier this year. And companies that don't have real-time inventory capability will fall behind competitors that do, analysts say. "This capability will differentiate between those who thrive and those who don't," says Lora Cecere, research director for enterprise and supply chain management at the Gartner Group Inc. in Stamford, Conn. "When someone clicks on a website they don't want to hear 'next day.' They want to hear 'right now.'" Right now, as in, "We'll get it out the door today." This type of immediacy is essential for Streamline.com, the Westwood, Mass.-based company that delivers groceries and household services to customers' homes. The dotcom would not be able to operate without checking inventory in real-time, says John Cagno, Streamline's vice president of information technology. How does he know? Because Streamline's website didn't do that when it was first launched--and it cost the company customers.

In the past, Streamline did not check inventory until after a customer had placed an order. If it didn't have what a customer had ordered, the crew member filling that order would guess what an appropriate substitution would be--say frozen strawberries if the order had called for fresh. As with all guesses, sometimes they were right and sometimes they were wrong, but they were never what the customer had ordered. And there's "a huge ripple effect" from not being able to deliver what customers want, Cagno says. Fielding customer service complaints takes time, margins erode, and "customer retention ultimately would be hurt," he says.

Today at Streamline, when customers complete an order they are actually reserving items that are either in the company's warehouse or that a supplier has confirmed as existing and on their way to the warehouse. Streamline didn't plunge headfirst into building real-time links between the website and the inventory system. It started by rolling out SAP financials, a four-month project, then decided to deploy SAP from end-to-end, which took eight months. It uses SAP's warehouse management system, which links receiving, picking and other warehouse functions with the inventory control system, and SAP's online store module, which interfaces with order management, accounting and inventory control.

While it's clear that a company like Streamline--which deals with perishables subject to crop failures or spoilage and has customers who are used to getting their groceries on the day they order them--needs real-time inventory, do businesses that sell nonperishables need it? Definitely, says Bob Lewandowski, vice president of systems for ASAP Software, a Buffalo Grove, Ill.-based software reseller. "We're in a low-margin business, so it is absolutely essential that we automate every function we can," he says. ASAP Software does about 25 percent of its business via its website. Without such tight integration between the company's website and its back-end systems, a clerk would have had to print out every order and reenter it--a horribly inefficient process.

Lewandowski thinks his business has more in common with Streamline than many people realize. A perishable goods merchant's success lies in drawing lots of customers, so that it can turn inventory quickly. Likewise, in order to survive and even flourish, ASAP has to sell as many units as it can as quickly as it can. "We are the grocery store of the software industry," Lewandowski says. For ASAP, real-time inventory means being able to use fewer employees while still assuring greater customer satisfaction. It has lower overhead and can pass those savings online to customers, while at the same time giving them better service--thus making it more likely that customers will return or recommend the company to others.

Today's real-time inventory started out in the 1980s as so-called "available to promise" technology, software that let order management reps field inventory questions in call centers. It was a very basic tool and could give only rough inventory availability information, such as whether a particular item was in stock or how many of that item had been ordered. Since then, more sophisticated tools have been developed to allow supply chain optimization and intricate data analysis, such as being able to measure by product the speed that inventory turns over or the accuracy of inventory information. Other software, such as a combination of supply chain execution, optimization and visibility tools, can track the manufacture, movement, purchase and storage of goods, and integrate that information with an inventory system to give a view of what products are in the pipeline. "But the deployment has been slowed by back- and front-office integration [difficulties]," says Gartner's Cecere.

The Internet--the very thing that has made it possible to extend live inventory information out to the customer--has also made real-time inventory harder to do, Cecere says. Companies now get orders in many different ways--phone, websites, e-mail, fax or in-person at brick-and-mortar stores--making it harder to ensure that inventory information is accurate. And integrating transactions across all these channels is not just a matter of networking a bunch of computers, even if a company starts from scratch with brand-new technology and does not need to link a legacy database to a state-of-the-art system.

First, there's the very nonvirtual problem of how to tell the inventory system what items the warehouse has on hand in real-time. Typically that means physically scanning items as they enter the warehouse, with fixed or handheld scanners that communicate with the warehouse inventory system via radio frequency. The warehouse system, which monitors operations in that particular warehouse, then has to be linked to the master inventory system, which keeps track of inventory in all warehouses or from all suppliers.

Once that is done, the company has to address the question of latency--that is, how soon after information is entered into one part of the system does it get disseminated to other databases throughout the system and to the customer? Let's say there are just two widgets left in the warehouse and three people each order one within minutes of each other. Does the last person find out right then that all the widgets have been taken before the customer completes his or her order? Or does the customer not find out until the order doesn't arrive? Also, the company must decide how to deal with "browsers," customers who put things into their shopping carts and then leave the site without completing the order. Should inventory be set aside for browsers when they put items in their shopping carts or only when they actually pay?

At the same time, the company has to handle what are known as semantics issues. For example, what does something as simple as "one" mean in each step of the fulfillment process? When an item comes into the warehouse, one may mean one case or one gross, but by the time it gets to the ordering process it may mean one package or one item. Defining this correctly is the difference between shipping a customer one widget and shipping a customer 144 of them. While a lot of middleware on the market can handle this kind of translation, getting it up and running is usually a slow, difficult task.

Here's how the real-time inventory system works at ASAP: The company's custom-developed order management and inventory management system runs on an HP 3000. Within 15 minutes of when new inventory arrives in the warehouse, the inventory database is updated. Product descriptions and SKU numbers are replicated from this system to a Microsoft SQL Server database, which Web customers can search; hitting the SQL database is faster than going back to the HP 3000 every time a customer wants to find a product. The product description and SKU information is replicated as a batch job every hour (information on specific products can be updated more quickly, if needed). But when the customer chooses a product, the website makes a real-time call to the HP 3000 to check pricing, since the company centrally manages its pricing rules. And when the customer specifies the number of items he or she wants to order, the website makes a real-time call to the HP 3000 to check if the product is in stock. If the product is not in stock, the customer is told that the product may not be available and is given an estimate of when more stock is expected in the warehouse. The real-time calls are made using middleware in OrderChannel, Web-based e-commerce software developed by Fioravanti-Redwood International. The product is not reserved in inventory until the customer commits to the order.

As one might guess, this type of integration doesn't come cheap. The cost of developing a real-time inventory management system and linking it to a website depends on the complexity of the business's operation. But Cecere says even a basic system, which just provides middleware between a website and an existing inventory system, can run US$500,000 to $1 million for software and system integration services.

Money is not the only hurdle stopping companies from going real-time. Decoratetoday.com, which sells wallpaper, blinds and other home decorations via an 800 number and a website, relies on other companies for manufacturing and distribution. So its website can only give customers information as good as the company gets from its suppliers and distributors, which typically don't have real-time inventory capability.

How has Decoratetoday.com managed to sell a selection of 300,000 products from 45 manufacturers, process more than 800,000 transactions and ship more than 2.5 million packages each year without real-time inventory? Katzman says Decoratetoday.com "will not sell any product from any manufacturer that...cannot guarantee to us that it will be available to ship within 10 business days." Its product database is updated several times a day, with some manufacturers faxing updates and others using e-mail. Those updates let the company know which items are in stock, which are back-ordered and which are no longer available.

Doing things this way takes a lot of legalese and long hours. Decoratetoday.com has penalties written into its suppliers' contracts if they fail to deliver on time. The company also puts a lot of effort into confirming and checking customers' orders both electronically and, with suppliers who aren't tied into the net, by phone or fax. Katzman believes this process has been successful at keeping customers happy, given that 60 percent of business is from repeat customers and 25 percent is from referrals. But it is extremely labor intensive.

Such labor-intensive processes have a cost. And analysts and vendors say that when deciding whether it pays to offer real-time inventory information on the Web, it's important to consider the costs--and the potential savings from improved integration. ASAP's Lewandowski says online orders take about 20 percent less time to process than offline orders, and that online orders also result in 5 percent direct labor cost savings.

Despite the potential savings, many observers believe competition will be what gets most companies to adopt real-time inventory. When one company in an e-commerce sector adopts it, other companies have to adopt it so that they aren't at a competitive disadvantage or they can get a competitive edge. True, the need for real-time varies somewhat by industry. The financial industry has had to be on the leading edge of real-time architectures--both because an hour can make a huge difference in their bottom line and because moving data around electronically is their business. Companies dealing with manufactured goods and retail sales have had more leeway when it comes to implementing real-time inventory systems. But according to a Jupiter Communications survey of e-commerce executives earlier this year, 40 percent of those surveyed plan to integrate their websites with their inventory systems in the next 12 to 18 months. About the same number say they plan to integrate their websites with their fulfillment and other back-end systems.

Beyond just "keeping up with the Joneses," companies will be compelled to roll out real-time inventory capability to improve customer satisfaction. A company's website is where many customers have their first contact with the business, so everything about how the site operates--from a link not working to an order for a pair of blue jeans not being fulfilled--reflects on the company. Everything is exposed online for the customer to see, and there's no sales rep to act as a filter. Or, as Lewandowski puts it, "Our kimono is now wide open to the customer."

Does your website tell customers the truth about inventory? Tell Senior Editor Sari Kalin at skalin@ cio.com. Constantine von Hoffman is a freelance writer in Boston.

Companies have to decide when to reserve inventory for customers--and when to risk disappointing them One of the key decisions to be made when linking a website to a real-time inventory system is at what point does a theoretical order become a real one? Shoppers often come to a website, place things in their shopping basket and then leave without either logging off or ordering. Given the high rates of shopping-cart abandonment, should an item be reserved in the warehouse every time someone tells a webpage he wants something?

Many companies don't think so, preferring to wait to reserve goods until after customers put their money down, says Lora Cecere, research director for enterprise and supply chain management at the Gartner Group in Stamford, Conn. Completing an order and checking out puts an item on hold in the inventory management database and prevents other people from ordering it. This may be good for the company, since it doesn't tie up inventory unnecessarily. But it is problematic for the customer who takes a little too long to complete an order and gets to the checkout only to find an item that was in stock is now out of stock.

To avoid disappointing customers, some companies hold inventory when the customer puts it in the shopping cart, and then cancel it if the customer leaves the website without paying. Different cancellation rules can be set up for different customers. Victoria's Secret's website saves registered shoppers' carts for at least two days; anonymous shoppers' carts are saved for varying lengths of time, depending on how much space is left in the database and how long the cart has been abandoned. -C. von Hoffman

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