The company was new to the general merchandising business. As such the Category Managers were going wild with ideas on how to expand their product assortments and procuring new and interesting products to sell.
But unfortunately their zeal did not come with a thorough understanding of the Supply Chain implications of their decisions.
This all came to a head when they had placed orders for a large number of oversized items, including those giant stuffed teddy bears. You know the kind. The giant stuffed animals that are anywhere from 5 feet to 8 feet tall, like you find at Costco.
What followed was a disaster in terms of cost and customer satisfaction.
It obviously makes sense in Retail that you want your Category Managers to curate unique items that will make you stand out from your competitors. When Category Managers travel the world and meet with vendors selling these curious items it is very easy to become enamoured with selling something that looks cool and different.
But there is more to Category Management than just marketing. Certainly you must find those standard and those unique items which will fill out your portfolio of products to sell. You are looking for items that will maximize sales for sure.
However Category Managers must look at more than just the gross margin (ie. the difference between the intended resale price and the cost of procuring the item from the vendor). You must consider the net margin which also takes into account all of the costs involved in moving the product to and through your channels and on to the end consumer.
It is the lack of focus on net margin where the Category Managers fell short in curating their products. This was further complicated by a lack of communication with anyone as to what exactly they were procuring and what the Supply Chain team could expect to have to handle.
The Stuffing Hits the Fan
It was a few months before the Holiday season and truckloads of product was starting to arrive in the Distribution Centre from all over the world. Typically all items arrived in relatively small boxes and cases that were all packed onto a standard 40″ x 48″ pallet.
But then the Distribution Centre team started unloading trailers which contained goods that were anything but standard. Large 8′ long backyard slides, full sized swing sets, large doll houses, and yes those giant stuffed teddy bears started arriving in dozens and dozens of trucks.
Nobody had told us this kind of stuff would be arriving. They all took up a lot of space. None of it could be handled by forklifts or operators like normal. We had no where to put all of the goods. What’s more there were still more containers coming in over the ocean. What on earth were we going to do?
Something was seriously wrong. The Supply Chain model was fairly simple. All goods would be shipped from anywhere around the world into a single Distribution Centre. From that single Distribution Centre we would in turn ship the goods back out to consumers across the country as they were ordered on-line.
With the relatively small items we normally sold this made economic sense. But with these huge items the costs to ship them back out to consumers would be huge. This is the reason that Amazon excludes the cost of shipping oversized items in their free shipping Amazon Prime program. The Category Managers had completely ignored the outbound shipping costs in their margin calculations.
We made some estimates based on shipping costs for the oversized items as well as forecasted sales patterns. Aside from a relatively small percentage of items that would be sold in close proximity to the Distribution Centre all of the remaining items that would be sold would lose money after outbound shipping costs were taken in to consideration. We were screwed!
Problem Solving on the Fly
We were already out of space in the Distribution Centre as it was and there was a ton of product coming in that hadn’t even arrived yet. Shipping the oversized items were going to lose us a lot of money. We had to act fast.
Given that most of the oversized items were being shipped from Asia overseas and landing in Vancouver we decided to set up an ad hoc solution. Instead of shipping everything to central Canada, only to ship half of it back to western Canada (at enormous expense), we would set up a small, temporary operation in Vancouver.
We would keep a lot of the product in Vancouver. As customer orders came in from that part of the country we would fulfill those orders from the Vancouver operation. This would cut down our outbound shipping costs, give us space relief in our central Distribution Centre, and reduce the time it would take for customers to received their goods. In essence we would be pseudo-drop shipping product to consumers.
The number one problem we had was a lack of communication and planning. If the Supply Chain team had known of this pending situation beforehand they could have taken the appropriate steps to avoid the problem in the first place, including drop shipping.
Costco is a great example of the drop shipping model in action. In any Costco store you will see all kinds of large and oversized items in the store. They aren’t all shipped to a central Distribution Centre and sent back out. They are drop shipped directly to the store avoiding all unnecessary handling and costs.
Those huge Teddy Bears that you can by at Costco are still on the pallet they were shipped on. No one touches any single bear after it leaves the supplier. The pallet is shipped from the supplier right to the point of consumption without any unnecessary handling. This is drop shipping in action. We call this our “Don’t Touch” Supply Chain strategy.