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FierceCRM

"The End of the Sales Rack"

July 10, 2002

Guest Comment: The End of the Sales Rack
ClientLogic's Channing Rollo argues that
direct-to-store fulfillment will save retailers millions in markdowns, overhead, and lost sales.

Channing Rollo,
ClientLogic

Attention, shoppers! For those of you that love clearance sales, we've got some bad news: the era of never-ending markdowns, midnight-madness sales, and nothing-held-back clearance sales may be drawing to a close. Why? Technology-powered direct-to-store (D2S) fulfillment is enabling retailers and manufacturers to ship products to individual stores in an efficient and innovative way. Retailers with direct-to-store capabilities can custom pick and pack shipments according to each store's product demand, just as they would a direct-to-consumer (D2C) purchase. This ability to handle broken-case quantity means that D2S shipments include only the products that are selling -- no more, no less.

For far too long, retailers with case-based shipping warehouses have adhered to the inefficient strategy of shipping identical cases of product to stores nationwide, regardless of demographics. For example, imagine that identical cases of ten golf shirts in x-small, small, medium, large, and x-large ship to 200 stores in 46 states. Depending on the weather, regional body-size variations, and local dress style for each of these retail locations, the golf shirts will sell out in some stores and populate the sales rack in others. What results are painful markdowns -- which cost retailers 33 percent of sales, on average -- and stockouts, which cause lost sales often exceeding 10 percent of revenue. But under a rapid-response, direct-to-store model, retailers instead replenish (and, if necessary, redistribute) products based on individual stores' point-of-sale (POS) data, drastically reducing the number of store stockouts and markdowns.


For far too long, retailers with case-based shipping warehouses have adhered to the inefficient strategy of shipping identical cases of product to stores nationwide, regardless of demographics.



Retail Goes for Broke

  • Markdowns cost retailers more than $200 billion each year. - National Retail Federation

  • Mismatches in demand and supply can result in either out-of-stocks or overstocks. Out-of-stocks can quadruple the number of lost sales; overstocks can lead to expensive promotions and markdowns that are often as high as 90 percent. - AMR Research

  • Markdowns as a percentage of total sales have increased from 8 percent in 1971 to over 33 percent in 1995, and continue to increase today. - Harvard Business Review

  • Customers have grown so accustomed to markdowns that only 20 percent of goods are sold at full price, while stockouts continue to let potential full-price sales walk out the door.

  • If the average retailer's pre-tax profits are in the 5-7 percent range, then reducing markdowns by 20 percent with D2S adds another 5 percent in sales to the profit line.

Traditionally, retailers have focused on design, promotions, innovation, and site selection to gain market share. Large distribution chains offset financial risk by demanding up-front fees from manufacturers to cover the anticipated cost of markdowns.  But as an entire industry feels the burn, many are saying there has to be a better way. These retailers and manufacturers are looking for a way to improve their ability to respond and deliver based on customer demand. And they've just found it: direct-to-store fulfillment.


Customers have grown so accustomed to markdowns that only 20 percent of goods are sold at full price, while stockouts continue to let potential full-price sales walk out the door.



There's a Time and Place for Everything

To meet and exceed customer expectations with D2S, retailers must start by listening. Demographic projections and point-of-sale scanners capture the customers' voices straight from the store. The warehouse responds with continuous, store-specific product replenishment, powered by fulfillment automation and rapid logistics.

D2S fulfillment is based on the just-in-time (JIT) concept: keep inventory in rapid-response warehouses (where inventory is inexpensive to hold and easily redistributed) instead of in stores (where inventory storage and redistribution are extremely costly and difficult). By flowing goods according to demand from POS data and customer records, retailers can save on expensive retail and mall space. Moreover, the JIT characteristics of D2S mean retailers can reduce their in-store back-stock area, which is very pricey as non-revenue generating space.

Super Model Benefits

The primary benefit of the D2S model is simple: shortening the delay between indicators of customer demand and the arrival of the wanted merchandise. D2S enables retailers to:

  • Ship based on store requirements, demographics and POS data (ship what is selling -- replenishment, or "pull" instead of "push" shipping)

  • Reduce stockouts on popular merchandise (lost sales)

  • Reduce markdowns and overstock merchandise disposals

  • Adjust store inventory assortment with ease; redistribute inventory across store chain

  • Reduce retail space and back-stock space expenses

  • Delight customers by consistently meeting demand with in-stock favorites

  • Improve percentage of products sold at full price

  • Capitalize on flexibility: ship to stores daily, twice-weekly, or weekly based on sales requirements

  • Coordinate time-sensitive promotions, advertising, and complementary products with rapid-response fulfillment

Do You Want a Revolution?

With hundreds of retailers awash in red ink, struggling to maintain margins against global competitors, stores can no longer turn a blind eye to the problem of markdowns and stockouts. These inefficiencies -- directly rooted in case-based fulfillment -- are costing precious retail profits.

Replenishment-driven, highly responsive direct-to-store fulfillment enables retailers to respond immediately to demand changes and delight customers with in-stock favorites. D2S is a recipe for store-level success: store-specific shipping enables micro-marketing and better satisfaction of local customer demand. Retailers have long known that "one-size-fits-all" apparel ends up only fitting a minority, while frustrating the majority. So why is it that retailers continue to take this ineffective approach to store fulfillment? It's time to strategize, customize, and realize that direct-to-store fulfillment is the key to regaining profits at stores and retail chains across the nation.

Channing Rollo is the Business Intelligence Manager at ClientLogic.

 

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