Unlocking the hidden power of retail media-enhanced supply chains

Retail supply chains span the globe to provide consumers with an infinite range of products each day. With billions of unique item and location combinations to manage, these supply chains are complex, diverse, and ubiquitous. Given the scale and scope of their operations, costly and unpredictable imbalances of inventory or capacity can plague retailers and suppliers. However, a solution to this fundamental challenge is what we call the retail media-enhanced supply chain that continuously re-balances localized supply and demand.

A retail media network is typically thought of as an advertising focused business model. It provides suppliers with opportunities to market products to consumers through a retailer’s online and offline platforms with the advantage of first-party data and closed loop reporting insights. Major retailers like Walmart, Amazon, Kroger, Target, Home Depot, CVS, Lowe’s, and Walgreens have already generated over $30 billion in high margin incremental revenue with this model. Hundreds of additional retail media networks have exploded onto the scene in pursuit of this growing market that is projected to exceed $100 billion within five years.

Although retail media networks are known for revenue growth, few are recognizing their supply chain benefits. As retail media networks continue to develop, personalized consumer advertisements become even more targeted, frequent, and effective. Savvy supply chain executives can embrace these mass customized marketing efforts and integrate with them to align supply and demand across retail stakeholders. By leveraging first party data insights, retail media and supply chain functions can collectively develop powerful demand shaping capabilities that steer consumers to purchase items which optimize operational performance and drive customer satisfaction. Executives can take advantage of retail media-enhanced supply chains in four essential areas:

1. Return on inventory. In a retail media-enhanced supply chain, systems are seamlessly integrated to evaluate individually focused advertisements in conjunction with location-specific SKU inventory levels. If locations that serve a consumer lack adequate inventory to support omnichannel marketing efforts, then advertisements on the platform are shifted to other locations or items with sufficient availability. Localized or sporadic stockouts no longer jeopardize the effectiveness of national promotional plans. Rather, a small segment of consumers is not targeted for advertisements if inventory is not available to them. These adjustments happen in real-time as the efficacy of media spend is optimized for each unique SKU and consumer location combination. Through the integration of supply chain and media insights, retail supply chain partners can enhance their return on inventory and advertising investments while also maximizing customer service.

2. Forecast accuracy. First-party data and closed loop reporting differentiate retail media networks from traditional marketing efforts. Retail media networks have data that shows what each consumer searches for, what advertisements that consumer views, and what items are actually purchased. By knowing the specific purchasing effects of advertisements for individual consumers, a retailer can aggregate these insights to refine plans that feed supply chain operations. The effects of promotional events can be more accurately forecasted resulting in customized inventory placement, optimized transportation, and efficient production runs. Improved forecasting accuracy, enabled by retail media networks, can help all partners reduce costs, improve service, and reduce waste throughout supply chains.

3. Markdown reduction. Selling through seasonal or non-productive inventory is another common problem that retail media enhanced supply chains help alleviate. Retailers have traditionally relied on aggressive markdowns or supplier buybacks to clear out obsolete inventory. However, retail media networks offer options to proactively reduce the need for these costly programs. By matching individual consumer preferences to location-specific inventory overages, retailers can utilize targeted advertisements to address slow-selling items. Implementing this kind of retail media-driven approach early in a selling cycle when demand patterns first emerge can pre-emptively reduce future markdown or buyback needs. Providing compelling promotional offerings to the most likely consumers of lower-velocity items at each location can facilitate increased inventory turnover, improved supplier relations, and margin gains.

4. Capacity utilization. Much like inventory imbalances, mismatches between available capacity and consumer demand are costly and wasteful. Retail media networks can help improve utilization rates and smooth product flow without overselling operational capacities. To ensure equipment or facilities are neither idle nor overbooked, capacity information can be utilized to adjust marketing tactics accordingly through retail media networks. In regions where revenue is already aligned with operational constraints, retail media resources will be diverted elsewhere. If certain facilities have underutilized capacity, then marketing activities will increase to profitably re-balance localized supply and demand.

Although the allure of retail media’s incremental advertising revenue is undeniable, we encourage executives to also seek less obvious but quite powerful supply chain enhancements. The demand-shaping benefits of retail media and supply chain collaboration are particularly impactful for traditional brick-and-mortar retailers. With thousands of store locations to manage, opportunities for inventory or capacity mismatches grow exponentially. Therefore, these organizations should integrate retail media network and supply chain insights to create retail media enhanced supply chains. Taking this integrated approach, executives can expect improvements to inventory placement, forecasting accuracy, markdowns, and capacity utilization. These functional improvements will create a competitive advantage that drives shareholder value.

About the authors: Rodney W. Thomas is director of the undergraduate supply chain management program and an associate professor of supply chain management in the Walton College of Business at the University of Arkansas. His research interests focus on behavioral aspects of supply chain management. Dr. Brent D. Williams is the associate dean for executive education and outreach and Garrison Endowed Chair in supply chain management in the Sam M. Walton College of Business at the University of Arkansas. In his role as associate dean, he leads Walton College units that connect to the business community.

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