Crossover Businesses: Part Two--Flexibility and Integration Needed to Support Business Model Evolution
on Nov 16, 2017
As businesses cross over, combining manufacturing, distribution, and retail, they require systems that are integrated across diverse types of channels with more flexible invoicing, revenue recognition, order management, and fulfillment.
In Part One of this series, we talked about the phenomena of the ‘crossover business’ where a manufacturer starts selling direct to consumer (via ecommerce, and sometimes even with its own physical retail stores), retailers start manufacturing their own private label house brands, and distributors start doing both of these. We looked at how this changes a business, the systems it requires, outsourcing, and service. Here in part two, we look further at the impacts on invoicing and revenue recognition, fulfillment and order management, and multi-channel integration—and what it takes to lay a foundation for growth of crossover businesses.
The Need for ‘Universal’ Invoicing and Revenue Recognition
All-rounder cross-over businesses sell a broad mix of goods, services, subscriptions, and as-a-service offerings. For example, some progressive retailers have changed their business model to get paid by manufacturers according to the amount of exposure they provide (as measured by sensors and cameras) and the number of demos they do; essentially offering ‘showroom-as-a-service.’ A number of manufacturers offer their products as-a-service, such as selling lumens-as-a-service instead of selling light bulbs, or selling scans-as-a-service instead of selling MRI machines. Companies like Ryonet and RST Brands offer financing options to the customers to help individuals and small firms buy their equipment (printing presses from Ryonet and luxury furniture from RST).
As a company’s mix of products, services, delivery, and payment models becomes more diverse, it requires a much more flexible and unified financial system that can support a single invoice and revenue recognition across all the goods, services, subscriptions, as-a-service, financing payments, and everything the company bills for. Nobody wants to receive several different invoices from the same company; one for products bought, another for subscriptions, and different ones for various services. That makes things messy and difficult for everyone. Customers want a single invoice, a single portal where they can check status or drill into the components of their bill to better understand what they owe and why, and a single way to pay everything at once. A good example of this is NetSuite’s unified billing and revenue recognition.
Fulfillment and Order Management—Flexible, Integrated Approach Required
A crossover business needs increased flexibility in their fulfillment capabilities. Traditionally, a manufacturer’s warehouse and transportation operations are optimized for bulk shipments of pallets in full or partial truckloads. Similarly, a retailer’s pre-ecommerce DCs were optimized for bulk shipments to replenish store stocks. Once manufacturers and retailers started doing ecommerce directly to the end consumer, they had to pick, pack, and ship much higher quantities of much smaller orders, typically consisting of one or a few items, primarily shipped via parcel carrier. These are radically different kinds of operations, from order management, to pick and pack, to transportation planning, to shipment execution, and tracking.
In many cases, manufacturers, distributors, or retailers start off with an ecommerce operation that is completely separate from their traditional bulk shipping operation. They hold separate inventory, use a separate labor force, and even use a separate facility, in order to isolate and more easily deal with the radically different operational requirements. But, increasingly companies have been realizing economies of scale by combing bulk and ecommerce fulfillment operations. That enables them to dynamically allocate inventory, space, and labor to whichever channel needs it the most (within constraints of course, such as ensuring minimum required stock is always available for store replenishment). This is a pretty sophisticated practice and requires a system that integrates demand, inventory, and operations across the different channels.
Building Synergies, Integration Across Channels and Across Retail, Wholesale, Manufacturing
In all these cases, integration is needed between the ecommerce front end, the store’s POS, and backend fulfillment and inventory management to ensure accuracy, efficiency, and timeliness. When ecommerce, store, warehouse, inventory management, and fulfillment are all on the same system, the required integration happens automatically, in an integral way.
Integration across systems and channels is a critical enabler of growth. Without it, labor and inventory is used inefficiently (due to lack of pooling of resources and time spent on unproductive activities, such as rekeying data between different systems), more mistakes are made (due to rekeying errors and systems being out of synch), and the business is just slower, requiring more people to do the same volumes. An example of how a unified system can enable growth is Blue Microphones. Before they implemented NetSuite about two years ago, they had isolated pockets of data all over the company. Now, they run all of their ecommerce operations and logistics (and soon automated marketing as well) on one system. Having all their processes and data consolidated into one system has been their vision from the start and has helped them grow—Blue Microphones expects to double or triple over the next five years.
RST Brands sells their furniture and flow walls through major retailers (such as Costco, Home Depot, and Lowes) and online through Amazon, as well as their own website. They run all of their channels and major functions on a single system. This includes their core financials, ecommerce, inventory management, warehouse management, marketing campaign management, and more. This enables RST to see exactly what inventory they have all in one place, more reliably promise against orders, accurately set customer expectations, and deliver personalized customer experiences across multiple channels.
Laying a Foundation for Growth
The goal for most companies is to grow. In today’s world, even small companies need many of the system and operational capabilities of their larger competitors. When selecting a system, companies should look for one that provides a full breadth of capabilities that can start in a small footprint and expand as the company grows. For example, Ryonet started by just printing T-shirt for others. Then they started selling supplies for others doing T-shirt printing. Then they started building and selling simple manual presses to hobbyists. They expanded further to selling larger, high-volume printers to major companies, such as Nike and the NFL, that may run a dozen, highly automated million-dollar presses, producing thousands of T-shirts a week. As part of this growth, they offer an increasingly complete suite of services to their customers, including installation and customization of the equipment, remote monitoring and diagnostics of printing presses, financing and capital leases for the equipment, education and training (they do a lot of this), helping customers set up websites, and generally helping their customers grow from a hobby, to a startup in the garage, to becoming much larger businesses.
In this journey, they created their own manufacturing plants, established many different channel relationships, developed their own rewards program, and built up an international network of suppliers and customers. How is a company with just over 100 employees able to do all this, becoming such an all-rounder, crossover business? Part of the answer is that they use a single system (NetSuite) for virtually everything—doing their core financials, manufacturing, order management, inventory management, ecommerce, logistics, customer relationships and support, and rewards program, all on one integrated platform. Whenever NetSuite doesn’t have the functionality they need, they are able to extend the system using SuiteFlow and other SuiteCloud developer tools. Using these tools, they built their own rewards program system, supplies reordering system, and supplies subscription system.
The founder and CEO of Ryonet, Ryan Moor, told me “If we see a need, we don’t have to wait. We automate it with SuiteFlow.” He added, “We have nothing core outside of NetSuite. The biggest key was moving our ecommerce onto SCA (SuiteCommerce Advanced). We used to have a significant lag time synchronizing our ecommerce inventory and the inventory shown in NetSuite, which led to promising orders with inventory that was already sold. Having a single system has revolutionized the way we deal with our customers. It helps us get products to them as quickly as possible, so we can compete better with brick and mortar stores. We can promise orders with much greater confidence in when customers will receive it. We are seeing a lot of traction on our website.”
The Crossover Phenomena is Here to Stay and Will Change Business Forever
Ecommerce, omnichannel, private label products—these are some of the trends driving businesses to crossover into manufacturing, distribution, and retailing. Ecommerce has made it much easier for manufacturers and wholesale distributors to sell direct to the end customer. They don’t need to open physical stores. Retailers are all becoming increasingly omnichannel. As well, they are realizing an increasing share of their revenue and profit from manufacturing and selling private label products. These trends are only growing in importance and scope. These trends ensure that the lines between manufacturers, wholesalers, and retailers will increasingly disappear as more and more businesses span all three. This can enable businesses to do inspiring things. Ryan Moor (CEO of Ryonet) told me, “It is an amazing business we are in. T-shirts are a very expressive media. They are a statement about yourself, the flags of our generation. We’re delighted that we help people express themselves and get to be a part of them making a living doing that every day.” That is a great example of the potential that can be realized by a crossover business.
To view other articles from this issue of the brief, click here.