The answer to that question really depends on the type of retailer and where the retailer’s stores are geographically located (regional or national). I work very closely with two major specialty retailers (West vs. East). The West coast retailer is now finally digging their way out of 2.5-year recession, while the East coast retailer is expanding their store count. Note their merchandise and assortment is almost identical, as are their supply chain strategies. The difference is that the West, and in particularly California, is still suffering from an economic recession (sub-prime mortgage crisis). This does not mean that all West Coast headquartered retailers are hurting; companies like Zumiez, Amazon, and Nordstrom have recovered from a dismal 2008, and even 2009 lows (reference comp sales table below).
As always, when I write on retailing my goal is to focus on what is shaping retailers from a supply chain perspective versus a merchandise perspective. I am not a merchant, but I do have a deep understanding of retail supply chain strategies and I want to share with you what I believe is the key to a retailer’s success.
12 Dirty Little Secrets Retailers and Manufacturers Need to Know About Inventory Optimization
Get the low-down on the secrets retailers and manufacturers need to know about inventory optimization.
- Retailers need a Supply Chain Strategist and an Economist on their C-Level teams. I am astonished by the number of merchandise-centric retailers that do not value the need to invest in their supply chain talent. Very few, if any, retailers that I am intimately familiar with have appointed C-level executives with a background or degree in supply chain, yet the very nature of delivering the “Right SKU, to Right Store, at the Right Time with the Right Quantity” is predicated on having an executive(s) who understands their retail supply chain from source to consumption. At a minimum, executives must align their organization based on how merchandise flows in order to break down organizational silos.
- The genesis of improving retailers’ supply chains is based upon speed to market, reaction time and total cost to serve (including inventory carrying cost and working capital). Unless you are a boutique retailer sourcing one-of-a-kind merchandise, most retailers’ merchandise is the same. For example, if I want a pair of Nike running shoes, I can go to a number of Sporting Good retailers like Dick’s, Hibbett’s, Sport Chalet, and Sports Authority. As a matter of fact, I can go to a Nike retail store and buy that same shoe or go online and shop at Zappos or one of the aforementioned retailers and buy it on their website. Many retailers are not really competing on product as much as they are competing on “in stock position,” assortment, price and promotion, and ability to service (customer experience). The experience piece is mission critical because customers will pay more for an improved experience. Nordstrom competes on service and experience as does Zappos. We have all heard about the Zappos customer care representative who spent five-plus hours assisting an online shopper. That creates customer loyalty and “word of mouth” advertising. Yet, Zappos also competes on shipping (it’s free!…what a novel concept).
- If retailers want to improve their supply chains they must control their inbound inventory by adopting purchase order flow management solution, vendor compliance and inbound transportation management. Outbound velocity (DC to stores) is predicated on the retailer’s ability to manage, control and gain visibility to their inbound merchandise. I am always astonished when I ask both small and large retailers if they have a vendor compliant program. Do not mistake vendor compliance with charge backs. I am referring to managing a Purchase Order from creation to delivery. A majority of retailers today still do not use Advance Shipment Notifications (ASNs) to manage their inbound freight.
- Retailers need to understand what shapes their demand. Meaning, retailers need to understand how dependent and independent attributes shape their demand and then synchronize how they balance their demand with supply (basic S&OP). They must understand that, in order to synchronize supply with demand, they need to manage the variability of their inbound merchandise. The length of the lead time is not as critical as long as the lead time and fill-rate of the inbound merchandise is tightly standardized and consistent. (Note: I am surprised by the number of leading supply chain demand planning and forecasting solutions that do NOT consider inbound variability). However, lead time is important for designer fashion merchandise (ready-to-wear apparel and footwear), especially if the planner/buyer has inaccurately forecasted their initial buy. This would apply to fashion designers like Tory Burch and Michael Kors.
- Should retailers centralize or decentralize their supply chain networks. I could write my doctorate on this subject. I would counsel all retailers to understand: what shapes demand (predictable vs. unpredictable); reaction time; if your merchandise is a wants vs. needs business; and how the global and U.S. economy affects your business (short and long-term interest rates, fuel prices, unemployment, taxes, Presidential elections, etc.).
The key to lowering inventory levels (specifically safety stock) is the ability to increase the velocity, thereby reducing cycle time from the time a customer buys an item from a store shelf, to the time that the item is put back on the shelf. If you only replenish your store once a week, the time to shelf could actually be 9 to 16 days, factoring in transit time and DC order processing time. If retailers want to improve their flow of inventory, they need to understand the total time from source to consumption to ensure they have product on the shelf. Fashion-centric businesses based upon consumer “want” will be pushing inventory based upon new seasons, whereas a retailer that sells replacement tires will both push and pull inventory, but mainly pull because their demand is shaped by “need” which is not easy to predict. We call this “intermittent” demand, shaped like this: (0,0,0,1,0,01,0,0,0,0,1).
- Social media is here to stay. Get used to it, embrace it and determine how to leverage it. I was recently at the Inc.500|5000 conference and had the chance to listen to social media guru Gary Vaynderchuk. He made a few comments that stuck out for me. With the internet and social media (Facebook, Twitter, LinkedIn) we replicate and distribute news and events globally in less than a 48-hour time period, compared to the advent of this technology, when it would take 50-plus years to gather and distribute the same worldwide. However, we are now moving from a content-centric world to a context world.
The internet and social media exposes all of us. Like it or not, we are becoming a very transparent society. We are moving away from a transaction-based society (low cost and low service) to high touch where consumers want and expect a one-on-one experience, even a relationship, with the businesses they frequent. According to Vanderchuk, we need to move past pushing content to focus on the context of the message. Simply stated, retailers need to get in touch with their customers and become more intimately engaged with them. Nordstrom, for example, has effectively done this through personal shoppers. It is the old the cliche that “the word of mouth” is the strongest form of advertisement. Hence, retailers need to differentiate themselves through “word of mouth” channels that use social media as a delivery agent (both push and pull).
- Retailing needs a major “system reset.” As mentioned in point six above, social media is having an impact on retailers but I predict it will reach its peak in the next five years. This is not to say that social media will disappear, but a new technology or “system reset” will reach exponentially beyond today’s social media. On the other hand, a “system reset” typically take years (a generation). For example, we move information and data at light speed but it takes days, weeks and months to move physical inventory.
Apple, Microsoft and Amazon have reshaped their industry with a “system reset” by moving music and books (content) at the speed of light. When is the last time you actually bought a physical CD or book? But when and how do we move physical inventory (non-digital media) at the speed of light? To a certain degree, retailers are moving in that direction by allowing consumers to view inventory in all channels, even the retailer’s supply base, and then providing the consumer the ability to procure the merchandise. A true “system reset” in retail is moving away from stores (brick and mortar) to the ability to build your own custom wardrobe and pick up your new apparel and shoes within an hour. This would require a decentralized model – a local manufacturing and distribution model with the supply chain infrastructure (air, road, and/or train) to succeed. Is it that far-fetched to think you could by an item online and pick it up in less than one hour? No, retailers are doing this today with buy online and pick up at store, but I am suggesting a no store model where consumers make an online purchase that is delivered to their doorstep with an hour…ultimate convenience. This requires a mind shift in our ability to manufacture and distribute merchandise – a “supply chain system reset.”
Retail is back and definitely moving in the right direction for most major retailers. The exception would be regional West Coast retailers who are now seeing the light at the end of the tunnel, specifically California. The major retail health indicators validate this point. For many retailers, 2011 Com Sale percent is up, as is their stock price. Although The Gap, Walgreens and Zumiez stock prices are down for 2011 YTD, their stock prices are higher compared to year-end 2008 lows. In addition, we are witnessing a slight surge in stock prices for retail-centric software solution providers. For example, Manhattan Associates and BlueYonder (formerly JDA) stock prices have increased in 2011. The 2011 Holiday Season will be a tell-tale sign and will determine if my retail recovery prediction is correct.