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The days of finite store shelves are over. Where retailers once thought strategically about what items they chose to stock at any given time, they are now expected to carry just about anything a customer could possibly want. In a web-dominated shopping world in which every product is a click away, out-of-stock messages simply don’t cut it.

But while most in the industry have come to terms with this new reality, few companies have fully realized it. Even Amazon, the sprawling standard-setter in shipping expediency and efficiency, struggles with coordination between warehouses and brand suppliers and a supply line that is still too dependent on human interaction.

That’s why many retailers are locked in an arms race for the technology that will ultimately transform every level of their operations. Distributed commerce, artificial intelligence and big data will enable fulfillment coordination, centralized databases of inventory information, algorithmic delivery routing and new inventory management paradigms. These changes will obliterate many of the constraints inherent in supply chains that rely solely on a retailer’s own fulfillment assets. Retailers that leverage cloud-based fulfillment to tap into the product inventory and fulfillment capabilities of third-party brands and suppliers might just have the ability to chip away at Amazon’s dominance.

The industry has already come a long way toward this idea of a virtual endless aisle in the last several years. When I started my business, I’d go into meetings with merchandisers and say, for instance, “Listen, you’re only carrying five coffee pots.” And they’d respond that they didn’t want more coffee pots — they had enough for their customers.

Those decisions are no longer made entirely by humans. Prices and stocking allotments are increasingly decided by algorithms that examine factors ranging from competitor offerings to behavioral data. Eventually, products will be selected, displayed, priced and shipped entirely through automated systems working in real-time.

The benefits of this new model of retail aren’t just about satisfying customers who come to a company’s web site with a specific product in mind. It’s a ticket into the Google raffle, so to speak. The search engine accounts for roughly half of all product searches, and every time a customer searches for an item a retailer doesn’t carry, that retailer misses out on a potential sale.

But realizing the full potential of this technology will take some major structural changes. For example, take reliance on company-owned and operated warehouses. Consider for example a sporting goods brand, such as Adidas. As brands ramp up direct-to-consumer selling, it becomes more and more difficult to fulfill all those orders from inventory sitting in their own warehouse; brands need visibility into their product inventory wherever it might exist, including throughout their reseller supply chain. For example, products might be sitting in a Dick’s Sporting Goods store or a Modell’s, or at a distribution center of another downstream reseller, that might be located right next to a customer.

If you buy a pair of sneakers on Amazon right now, there’s a good chance it will be shipped from the brand’s own warehouse to an Amazon warehouse before it even begins its journey to you. This is a horribly inefficient model that will be phased out as inventory is better cataloged and tracked across market participants and locations.

Eventually, data will allow for Amazon to find the absolute closest pair of sneakers — whether they are in the backroom of a local store or the brand’s own warehouse — and chart the shortest shipping route algorithmically. There could even come a hypothetical time when companies like Amazon and Walmart will run a fully digitized supply chain that no longer requires warehouses—or at least substantially fewer of them than they have today.

Amazon has already begun to move towards this model. The company reportedly said last month that certain suppliers can avoid costly freight shipping of products to Amazon’s warehouses and drop-ship items directly to Amazon’s customers, as long as they can meet the company’s rigid Prime shipping standards with their own infrastructure and Amazon’s discounted shipping rates.

But Amazon doesn’t have a monopoly on this sort of technology. As competitors search desperately for ways to withstand the e-commerce behemoth’s ever-growing market clout, a leaner, more efficient inventory and shipping operation is a prime candidate.

When Jet.com launched in 2015, for instance, it touted its proprietary shipping and inventory algorithms as one of its biggest weapons against Amazon. That system eventually helped it attract a $3.3 billion buyout by Walmart a year later.

As retailers continue to realize the transformational potential of artificial intelligence and data in virtual inventory, there’s always room for another business to take a similar leap forward.

Frank Poore is chief executive officer of CommerceHub.

 

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