Make the Most of Speed — A Nimble Supply Chain is Just the Start

L Brand’s speed-to-market program has delivered a virtuous cycle of positive benefits to the Victoria’s Secret and Bath & Body Works businesses, resulting in lower inventory, faster turns, lower markdowns, higher operating margins and increased sales — extraordinary progress that has set them apart from their mall-based peers.

Yet for any retailer to replicate these results, a fast, visible, and responsive supply chain is just one of the necessary components; it’s equally important to implement the right strategies, execute lightning fast demand-side processes, and continuously, relentlessly improve. In fact, a sped-up supply chain operating without these last three components may have little impact other than increasing costs. Analogy: you may own the fastest car, but if you head the wrong way or have faulty steering, you’ll end up in a ditch. Or as one practitioner put it: “Bad speed is worse than no speed.”

By speed, we mean the whole process of setting the floor, reading results, re-ordering the better performers (a.k.a. “chase”), and receiving full deliveries in time for the next floorset – all within 3-4 weeks. For most retailers, this will involve new relationships with suppliers (or new suppliers), a reconfigured supply chain, change in merchandising and planning processes to read demand, new tools, and significant changes in merchandise strategy. These changes generally increase unit manufacturing and distribution costs. They require CEO leadership, substantial investment and cross-functional teamwork over several years. The payoff for this investment may be a ~25x P/E ratio (ttm) off a record earnings year, if L Brands is a fair benchmark.

If you are contemplating a speed program for your business, here are a few important considerations (by no means a comprehensive set):

Which Products?

One of the first decisions is which products to put in the program. Some products may be too intricate or manual to assemble quickly, or may involve an inflexible supplier base. For some, the economics won’t make sense: when demand is predictable or you have a core program that’s on replenishment, you may end up just trading off a decrease in unit inventory investment with increased unit costs.

From a pure economics standpoint, the best candidates are those products where the downside risk of a standard-sized buy (e.g., 10-13 weeks of supply) is great and the potential gain from calibrating re-orders from a speed-sized buy (e.g. 3-4 weeks) is significant. Then you need to think at the style or class level: what is the upside of managing a category as a flexible series of puts and takes, optimizing color choices and flow of a particular style, for example.

Then there is merchandise strategy. Which products and categories will help differentiate you from the competition by offering a more nimble and stronger assortment? Which categories do you want to protect or dominate because of better profit and customer loyalty characteristics? Which new business do you want to grow aggressively?

These logistical, economic and strategic considerations should factor into determining the merchandising priorities of your speed program.

What Processes, People and Systems?

Picture your existing go-to-market calendar. Overlay the multiple deliveries per season that need to be managed and optimized simultaneously that are in different stages from concept to in-DC to liquidation. Now, overlay the speed program. It will complicate, not simplify, your business.

For one, you’ll likely need new set of planners, a “speed team,” or at minimum, a distinct process that separates planners’ responsibilities. In either case, during critical read and react timeframes, speed must be the focus. These planners work with the merchants to choose the speed buys and with sourcing to ensure timelines. Once these buys hit stores, the speed team reads early results, generates forecasts by SKU x Store (you may need new tools to help with those forecasts) and, with the merchants, optimizes the next set of orders based on these forecasts, their confidence intervals, the merchants’ appetite for risk, and other factors. (The speed team at one retailer does a store walk-thru of the speed buys soon after the new floorset and qualitatively gauges the impact of in-store visual merchandising, product placement and promotions weeks prior to the full-chain floor changes. Then once product hits the selling floor, they immediately collect feedback from customers and store associates and scan the mall for direct competitive activity.) Optimizing these speed products requires fine-tuning along a more sensitive set of glide paths from the rest of the assortment.

Merchants need to adapt to this additional advisory role played by the the speed team. Often the planners’ forecasts, based on very early reads (sometimes just a day’s-worth of sales, depending on store count), will conflict with the buyers’ judgments or run counter with the season’s longer-term strategy. This can prove tricky to manage, especially at first when team-based trust is still being built. But in return for increased second-guessing, ceding some decision making, rewriting meeting agendas, and managing more product flows, merchants gain considerably by the speed program’s enabling of more aggressive strategies, afforded by greater assortment flexibility, lesser inventory risk, and more margin protection.

A Virtuous Cycle

The benefits of speed to the business are far broader than better inventory and markdown management.

  • Speed is the ultimate customer-centric strategy, allowing customers to “vote” for what the retailer should stock. As mentioned earlier, the merchants are freed to take greater risks, which may lead to new assortment architectures and new businesses. Speed allows simultaneously more newness AND extended product lifecycles.
  • Speed changes the nature and economics of “SALE.” If you have little clearance product, you can plan 100% into sale, promoting only products that people actually like, and at less of a discount. Sales become far more productive when the implicit message transforms from “Come buy our dogs dirt cheap” to “Last chance to purchase this season’s winners!”
  • Speed allows the better use of selling space. No more dedicated sale walls, racks and aisles of misfit clothes.

What works and what doesn’t will evolve over time. To maximize the benefits from speed, you’ll occasionally need to step back, relax your fast-twitch reflexes and turn your brain to re-imagining the business.

Conclusion

If there’s a single strategy for becoming truly customer centric and reversing the decline of mall specialty retailing, speed is our candidate.

(Note:  This post was co-authored by Bob Gsanger.)

Tagged with:
Posted in Brand Strategy, Growth, Merchandising, Profit Model, Promotion Strategy, Retail Trends, Speed, Testing