omninomics creating a more connected value chain

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Fashion Omninomics—Creating a more connected value chain The fashion industry is undergoing the biggest change since the industrial revolution: Today’s consumers prize instant convenience and authenticity. They want innovative new products, instantaneous information, to comparison shop, easily return items that don’t fit, and always get the best deal. You must be sure that your value chain is ready to meet the challenges of omni-channel retail. It’s likely that your supply chain has evolved from a linear push into a global value chain network of different companies, sometimes hundreds of companies, that are working together to innovate, to respond to orders, fulfill and deliver on customer commitments, and react to disruptions in supply. How can these companies collaborate to create a seamless experience for shoppers? How should omni-channel customer insights fuel this network? This paper on “omninomics” will help you answer these questions.

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Page 1: Omninomics Creating a more connected value chain

Fashion

Omninomics—Creating a more connected value chain

The fashion industry is undergoing the biggest change since the industrial revolution: Today’s consumers prizeinstant convenience and authenticity. They want innovative new products, instantaneous information, tocomparison shop, easily return items that don’t fit, and always get the best deal.

You must be sure that your value chain is ready to meet the challenges of omni-channel retail. It’s likely that yoursupply chain has evolved from a linear push into a global value chain network of different companies, sometimeshundreds of companies, that are working together to innovate, to respond to orders, fulfill and deliver on customercommitments, and react to disruptions in supply.

How can these companies collaborate to create a seamless experience for shoppers? How should omni-channelcustomer insights fuel this network? This paper on “omninomics” will help you answer these questions.

Page 2: Omninomics Creating a more connected value chain

2Omninomics Industry Perspectives

3 What is omninomics?

4 Omninomics in action

4 How a new breed of consumers ischanging the value chain

6 How to create a more collaborativevalue chain

10 Recommendations

12 Why the strength of your networkmatters

Table of Contents

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3Omninomics Industry Perspectives

What is omninomics?Omninomics refers to how omni-channel retail and thefashion value chain have evolved in tandem tobecome an interconnected network that includesdesign, source, manufacture, distribute, and retail. Thisconcept is an extension of omni-channel shopping, amultichannel sales approach where consumers canexperience a seamless shopping experience whetherthey are in a brick-and-mortar store or using theirpersonal computers or mobile devices.1

Omni-channel retail sales are on the rise, making itmore important than ever to understand how yourindustry is changing. Having doubled every 4 to 5years since 2001, omni-channel sales are expected togrow to become a $1.8 trillion market by 2016 and $7trillion by 2025.2 Forrester defines these sales as"transactions that are touched by any digital medium,but not completed through the Internet."3 In addition,they are the result of "preshopping," where consumersresearch the products they want to buy, perhaps on amobile device or in a store, before making a purchase.

As omni-channel shopping brings consumers closer tothe value chain, fashion companies must move towardnew business models that are more collaborative,consumer driven, responsive, and quick. Successrequires all value chain partners to work together toget the right products to where consumers want them,as quickly and efficiently as possible.

In this paper, we explore the concept ofomninomics—how your value chain collaborates toget a product to a consumer in an ever-evolvingomni-channel market.

In previous papers on fashionomics and consumernomics,we charted the first steps in this journey to omninomics:

■ In Freak’n Fashionomics—The new economics offashion, we explored how the fashion industry was theeconomic driver in economies around the globe, from thelabel maker to the button maker to the brand and retailerwho move and sell their products. We also looked at theevolving economics of the industry.

■ In Consumernomics—The plan is there is no plan, wedelved into how the powerbase of the fashion industrywent from mass production, where the market was not aconstraint, to the retailer being the channel master, andtoday’s world, where the consumer is in control, andeveryone along the value chain has to keep up.

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4Omninomics Industry Perspectives

Omninomics in actionThe retailer used to be the end point of the valuechain—where the product met the consumer. Today,new channels and online tools have given theconsumer the freedom to choose where they makepurchases from anywhere along the value chain andusing a myriad of new touch points. This presents ahost of new opportunities—and challenges—forfashion companies.

For some, it could mean using the brick-and-mortarstore as a showroom where customers can discoverthe styles and sizes that work best for them beforethey make purchases online. A third-party logisticsprovider could then fulfill the order using one of yourdistribution centers or work directly from yourmanufacturing plant—and drop ship. Or you could useyour online channels to drive customers to your storesthrough loyalty programs, discounts, and otherpromotions or offer them the opportunity to completetheir transaction online and choose home delivery orone of a number of different pickup locations.

It all comes down to knowing what your customerswant and how to get it to them.

How a new breed ofconsumers is changing the value chainThere are roughly 80 million Millennials in the US,spending approximately $600 billion each year. Theyaren’t just teens—Millenials are young adults in their20s and 30s.4 As Accenture notes, “Many havecareers, are raising kids and live in their own homes.While Millennials are already a potent force, they willtruly come into their own by 2020, when we projecttheir spending in the United States will grow to $1.4trillion annually and represent 30 percent of total retail sales.”5

These Millennial “shoppers are now willing to interactwith retailers on a number of different social networksin order to find information on deals, products andcontests,” observes Fashionbi.6 All it takes is acomputer and a subscription to Amazon™ Prime. But,Millennials as a group are not as label-obsessed asshoppers in the past. Millennials are often moreinterested in the style than the brand—and will look fora cheaper option elsewhere.7 And it’s not justMillennials; all generations are adopting omni-channel.So how can you stand out?

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5Omninomics Industry Perspectives

The consumer now has an endless number of options to research new products. With more digital channels opening up each year, consumers have all of theinformation they need—anytime, anywhere, day or night.

Reach more consumers withan omni-channel strategyToday’s consumers can flip from one channel to thenext with unprecedented speed and ease, whilemobile computing makes them more connected thanever before. Thanks to the digital nature of today’sshopping channels, along with the rise in social media,the fashion world now has access to a wealth ofcustomer data that can be captureed and actedon—while also providing a positive experience.

All parties along the value chain need access to thesame information across every interaction touch point,from browsing and shopping online or off; to making apurchase at a retail outlet, web storefront, or vendingmachine; to the delivery of goods. With anomni-channel presence, fashion companies canoptimize the connection of demand to supply byusing customer data to inform their manufacturingprocesses—and dramatically improve the speed ofdelivery, demand planning, stock replenishment, andprice competitiveness.

The journey from product to consumer

• Purchase in store• Click and collect in store• Click and collect at drop-off point• Home delivery• Drop ship by supplier

• Retail outlets (own stores, outlets, store in store, franchise, pop-up store)

• Web storefronts• Mobile devices• Kiosks• Wholesale• Vending machines• Vendor managed inventory

(VMI)

D

ELIVERY

PURCHASE

• Social media• In-store• Catalogues• Internet search

BROWSE OR SHOP

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6Omninomics Industry Perspectives

How to create a morecollaborative value chainIn today’s digital age, information can travel quicklyaround the world. Creating and moving yourmerchandise in this environment, however, meansdealing with shrinking lead times and extra effort tocompensate for the complexity and speed necessaryto stay ahead of today’s evolving needs. Here’s whatyou can do to keep up:

Personalize your experiencesto create better productsShoppers are increasingly willing to walk away fromthe store without the instant gratification of making apurchase because they know they have greaterchoice than ever before. But, if they’ve experiencedwhat the brand has to offer, while also gaininginformation on sizing, styles, fit, and look—theopportunity has not been wasted. With thisinformation, they can make their purchase online andcontinue to do so whenever they need a new pair oftrousers. That’s the model the eCommerce men’sretailer Bonobos® has built its brand on.

Bonobos began with a simple premise: Off-the-rackmen’s trousers should still fit like they were custommade. The costs associated with running a retail storewere going to be too high for a startup brand toproduce such a high-quality product consistently,however. The answer was to go digital. By launchingas an eCommerce company, Bonobos could focus oncreating a high-quality product and brand, whilebuilding up a solid customer base.

In the next step, Bonobos opened up what it calls“guideship” stores to attract new customers. At itsbrick-and-mortar locations, shoppers get one-on-onepersonalized service, the ability to try-on new styles tofind the perfect fit, and a showroom to browse andexplore. What they don’t get, however, is the ability tomake a purchase. Bonobos’ stores are almost entirelyinventory free.8

For Bonobos, not having to supply the store with lotsof merchandise has reduced its inventory costs andsidesteps the problems of inventory allocation. Thisfrees up more money for what truly matters to aBonobos customer—getting the best designed, bestsourced, and best fitting pants possible. Bonobos’superior marketing strategy frees the company up tofocus on creating a better product. And, whenshoppers know exactly what they want, the chancesof returns from online purchases are lower. Theconversions are also higher, because the shopper iscompletely informed and ready to make a purchase.

No matter how you slice it, the challenges ofinventory allocation are largely the same in the

omni-channelenvironment.

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7Omninomics Industry Perspectives

Improve inventory allocation by learning whyitems are returnedShifting inventory from one channel to other is acomplex challenge to manage efficiently. Theshoppers are there, and you need to be able to matchyour inventory to their demands. "Omni-channelshoppers exhibit a tendency to shop more frequentlyand spend almost 3.5 times more than regularshoppers. In-store conversion rate amid multichanneloptions is four times higher than online-onlyconversion rates. If the in-store pick up option isavailable for online orders, retailers can realize 7%higher net sales," observes Forbes.9 That's goodnews. But because of the high logistics and returnscosts, online is by nature a low-margin business.

Why do people return goods? For retailers likeZappos®, it's because shoppers are encouraged tobuy a pair of boots in two different sizes and return thepair that doesn't fit. Returns are a part of Zappos’business model. For the convenience of shoppingonline, Zappos must factor in the inconvenience of notbeing able to try on an item before it’s purchased.Returns still need to be mitigated, however. That’s whyZappos offers extensive information on its site aboutsizing, including charts and information shoppers canuse as they're still researching a purchase. Videosalso help to show off the look and feel of a pair ofboots. However, sending out more than one sizesincreases the chances of retaining a sale.

When it comes to returns, you must factor in theexpenses related to storage, packaging, and thedelivery of online orders, as well as the sales mix.Online often accounts for weaker margins comparedto brick-and-mortar. Are there products that should besent directly from the supplier? Do you use athird-party logistics company for deliveries? Or, do yourely on an OEM manufacturer that not only operateswith vendor-managed inventory (VMI), but can takethe product to the consumer's door? Do you need tofactor in different prices for different delivery times?

No matter how you slice it, the old challenges ofinventory allocation remain largely the same in theomni-channel environment. What’s changed is howdemand for eCommerce orders can be lesspredictable than in physical retail or wholesale stores.When facing increased eCommerce or omni-channelinventory demands, companies must also decide whatchannel takes the highest priority for fulfillment. Andwhere do you hold merchandise inventory? What ifshipping an eCommerce order means limiting thesupply that a retail store has? Between the costsassociated with leasing or renting a space, staffing,and other costs, retail stores are much moreexpensive to maintain. But that doesn't necessarilymean they have the strongest demand for certainstyles or the lowest margins.

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8Omninomics Industry Perspectives

The value chain is not a chain—it's a network. And a more collaborative network between the brand, suppliers, manufacturers, and retailers can give today'sfashion companies the flexibility they need to thrive in an omni-channel information environment.

Tap into your inventory all along the value chainThe value chain needs to be closer to the consumer,so you can make and ship your products to and fromanywhere. Are your consumers using their retaillocations as showrooms?

Do they want to purchase online and pick up an itemfrom a locker? Who delivers to the location where theconsumer physically takes ownership? How can youmake this experience seamless for consumers?

By creating a more collaborative value chain networkthat uses the information you gain from theomni-channel and information technology, you cananticipate the desires of today’s shoppers and makemore cost-effective decisions about trends, demand,and your inventory.

Create a more collaborative value chain network

RETAILERMANUFACTURER

SUPPLIERS3PL

RETAILERSUPPLIERS

SUPPLIERS

BRAND

SUPPLIERS

Value Chain NetworkGlobal Commerce Network | GT Nexus

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9Omninomics Industry Perspectives

When creating this value chain network you need tobe asking questions like: What does the consumerwant? Does the consumer still want to shop? Yes. Dothey still want to go and see the product in stores?Yes, but for many, the store has become a showroomand one of many potential purchase points rather thanthe place where all sales transactions are executed.

To help match inventory supply with demand in theomni-channel environment, third-party logisticsproviders and information technology can help fashioncompanies to create common inventory systemsacross all of the channels that they must monitor.

“A common, not siloed, system, such as an ERP,determines from which channel to pull orders basedon the delivery ZIP codes or the option the customerschoose (store pickup, direct-to-consumer homedelivery). With this visibility, retailers can betterunderstand inventory locations and fulfillment times,leading to lower inventory carrying costs and fasterdeliveries,” observes RIS.10 With the right visibility intoyour inventory, you could even sell products asthey’re on ocean liners in transit.

In omninomics, the consumer determines what you’re doing, not the other wayaround. By listening to the consumer—getting closer to them—you can

create better strategies formeeting consumer needs.

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10Omninomics Industry Perspectives

RecommendationsThe value chain is the foundation of omninomics. Itscreation and execution drive the performance of yourdesign, sourcing, manufacturing, manufacturing,inventory allocation, warehousing and distributionoperations. To meet the needs of Millennials andother generations of shoppers, you should:

1. Collaborate in real-time with your valuechain—Connected global commerce across yourvalue chain network is the real key to success. Youcan always find a cheaper solution to meet yourneeds, but the lowest cost supplier is likely to be theslowest as well. Not only does geographic distanceadd lead-time, but manufacturing centers in low-costcountries often compensate for low margins with fullcapacity utilization. That’s risky behavior. Instead,source your components where they can be createdbest—at the best cost and with flexibility and reliability.

Collaborate with your value chain to bring thesecomponents together for assembly in a place close toyour markets. Gaining 90 days advance knowledge ofwhat the customer wants is worth the air freight, ifyou’re selling out in minutes—especially if you’reactually getting your products into customers’ hands,not just to the distribution center or retailer. Look forsuppliers that are willing to be connected into yournetwork. Inventory visibility and timely information arekey to meeting demand and satisfying consumers.

2. Treat your inventory as one single body to matchmerchandise to demand—To supply all of the rightchannels, you must look beyond the traditionalnotions of fulfillment. Make to stock or make toforecast aren’t going to cut it when consumers wantso much more. To make your inventory flexible, youneed to factor in your fulfillment rates, service levels,air freight costs, and more.

All parties along your value chain need access to thesame information across all of your interaction touchpoints, from print catalog, to web, to order entryscreen, to manufacturing and distribution center—andeven social media. Capturing and analyzing highvolumes of data in near real-time is vital. With anomni-channel presence, you can optimize theconnection of demand to supply by using customerdata to inform your manufacturing processes. Thispipeline data can offer up-to-the-minute inventoryaccuracy—and dramatically improve your speed ofdelivery, demand planning, stock replenishment, andprice competitiveness.

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11Omninomics Industry Perspectives

3. Get closer to the consumer, so you can see whatthey see and react how they want you to react—Inomninomics, the consumer determines what you’redoing, not the other way around. By listening to theconsumer—getting closer to them—you can createbetter strategies for meeting their needs. Just asZappos knows there’s no one-size-fits-all approach toretailing shoes, there is no one approach to buildingan omni-channel business strategy. If you’re trulyengaging with your customers, you can use this datato inform your operations.

One strategy is to start with common items for the line:fabrics and trim elements. Design a style around themand put it out there. Your customers can lead you tobetter designs. With the technology to capture andanalyze social media feedback and a flexible valuechain, you can adjust your manufacturing processes inreal-time to satisfy new demands—and get closer tothe consumer.

Another strategy is to utilize 3D design and samplingtechnologies to ensure the proper fit of a garment.You can shorten the time to the consumer, reduce thenumber of physical samples, and save on your costs.

4. Use Big Data to help you create the next newthing your customers are after—Sometimes all ittakes is a change of color, fabric, or trim to catch atrend or extend the run of a flagging style. How canyou know? The operational data you need to is likelyalready there, but perhaps you aren’t using it as wellas you could.

To fix this, create a central data repository for yourentire organization. Track, collect, and analyze thedata generated between your design teams, amongproduct developers and sourcing managers, suppliersand buyers. You should also create a growing libraryof reusable designs, together with the specifications,BOMs, sourcing, costing, and construction details tominimize the lead time for introducing variations on astyle or bringing an extra contractor up to speed whenyou need added capacity.

A collaborative value chain, informed by omni-channel data, can help you anticipatethe desires of today's shoppers and make more cost-effective decisions about

trends, demand, and inventory.

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1 Daniel Newman, "The omni-channel experience: Marketing meets ubiquity," Forbes(http://www.forbes.com/sites/danielnewman/2014/07/22/the-omni-channel-experience-marketing-meets-ubiquity/), July 22, 2014.2 Sarah Mahoney, "Forrester: Cross-channel sales to reach $1.8 trillion," MediaPost(http://www.mediapost.com/publications/article/230787/forrester-cross-channel-sales-to-reach-18-trill.html?edition=), July 27, 2014.3 MediaPost.4 Accenture, "Who are the Millennial shoppers? And what do they really want?" 2013.5 Accenture.6 Fashionbi, "Omni-channel retailing: The future trend in fashion and luxury industry, Part 2 of 2," May 2014.7 Steve Olenski, "Only one quarter of American consumers are brand loyal," Forbes(http://www.forbes.com/sites/marketshare/2012/03/26/only-one-quarter-of-american-consumers-are-brand-loyal/), March 2012.8 Barbara Thau, "Why a store you've likely never heard of hints at retail's future," Forbes (http://www.forbes.com/sites/barbarathau/2015/07/08/bonobos/),July 2015.9 Trefis Team, "Urban Outfitters' omni-channel adoption and its pros and cons," Forbes(http://www.forbes.com/sites/greatspeculations/2015/10/07/urban-outfitters-omni-channel-adoption-and-its-pros-cons/), Oct 2015.10 Curt Bimschleger, "The omni-channel ecosystem: Where 3PL fits in" Retail Info Systems News(http://risnews.edgl.com/retail-news/The-Omnichannel-Ecosystem--Where-3PL-Fits-In92840), May 2014.

Why the strength of your network matters

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For fashion companies, success in the omni-channel environment will require the creation of an interconnectedvalue chain network that works together on one common platform. In this network, companies will be able toexchange information in near real-time to prepare for the needs of physical retail stores, as well as the diversity ofonline and other sales channels. And, they’ll use customer data to supply the right channels with the rightmerchandise and put the product in the hands of the consumer at the location and point in time they want to buy,with the appropriate fulfillment options.

All players along your value chain must have shared goals, a share in the gains, and a shared fate. Throughco-innovation, an interconnected global commerce network, and collaboration, every business along the valuechain should have the same mission and the same stake. Everyone benefits and profits from the work eachplayer contributes.

In the omninomics world—your strength is in your network.