WWD.com/business-news/technology/how-star-retailers-turn-fast-592294/
government-trade
government-trade

How Star Retailers Turn Fast

Any woman who regularly shops specialty retailers like Gap, Abercrombie & Fitch, H&M or PacSun can tell you that clothes, just like first-run movies, don’t have the shelf life they used to. Partly inspired by the example of H&M and...

Any woman who regularly shops specialty retailers like Gap, Abercrombie & Fitch, H&M or PacSun can tell you that clothes, just like first-run movies, don’t have the shelf life they used to. Partly inspired by the example of H&M and Zara, which are known for their ability to design, produce and deliver new styles to stores in only three weeks, American retailers are turning inventory more frequently each season, sometimes as often as every six weeks. The trend has been most striking at vertically integrated specialty stores such as Gap, which have the ability to closely control their supply chains.

“They’re looking to create variety and freshness in consumers’ eyes,” said Kathryn Cullen, principal with Kurt Salmon Associates, a retail and apparel technology consulting firm based in New York. Younger consumers expect it, she said.

Besides giving consumers a reason to shop more often, leaner inventories and faster turns can improve margins by encouraging shoppers to buy more often at full price, she said. If would-be customers hesitate, they know a desired item may be gone the next time they visit, either because of heavy demand (and no replenishment) or a conscious store policy of automatically marking down and blowing out merchandise every six weeks.

Not surprisingly, the trend has necessitated significant changes in business processes, technology and logistics — both for retailers and the manufacturers and brands that supply them.

In the past two years, many specialty retailers have cut the time goods hang in the store from the traditional three months — with four turns a year — to as little as six weeks, with as many as 12 turns a year. Some companies, like H&M, put new clothes on the sales floor every day.

“The trick is providing the right degree of the right product at the right time in the right place — and to do that plus turn fast, that’s hard,” said Marshall Fisher, professor at the Wharton School of Business. The stores he’s seen succeed at it have three things going for them:

  • Accurate forecasts.
  • Optimized inventory levels.
  • Supply chain speed or flexibility.
Fast-turn retailers do everything quicker. For example, they have to analyze their point-of-sale data daily, decide what to do with goods in the first week or two, and probably take only one markdown, said Cullen. They also have to get new product in more often, which they have accomplished in various ways. One of these is a closer relationship with suppliers. For example, this might mean committing to a particular factory and sharing more information up front.

On the manufacturing side, in the last two years turnaround times have been cut from six months to three. With production times halved, manufacturers and brands are now focusing on shrinking the design cycle. Many large companies are turning to product life cycle management software to do this, said Cullen. Programs such as Gerber’s WebPDM and Freeborders’ Product Manager can cut weeks out of the cycle by allowing many steps to proceed simultaneously.

New Look in the U.K. is one company that has had great success adopting such software, which was first used by automobile and plane manufacturers, said Bruce Hudson, program director with Meta Group. “They’ve increased the number of new product lines they can bring out within a season and they’ve decreased the cost to do that,” he said. “A retailer that is changing inventory three times in a season is giving customers a reason to come in and look for something new.”

If goods live only six weeks in the store, but a supplier’s production lead time is measured in months rather than weeks, it’s likely that a retailer will only have time to make one buy, said Fisher. “That’s what retailers call ‘one and done,’” he said. Fisher is best known for his research showing that an item’s performance in its first two weeks is the best predictor of later sales. He’s also chairman and co-founder of 4R Systems Inc. of Wayne, Pa., which makes retail analytics software for matching supply with demand and optimizing gross margins.

Buying without any information based on sales data can eat into gross margins, he said. “You’ve got to take your lumps. The ones that didn’t sell well you’ve got to mark down, and the ones that did sell well you’ll tend to run out of early in the season and miss a sales opportunity that you could have gotten at a higher margin.”

Fisher recommends a leaner initial buy and a jump on the winners, with only two or three weeks to take delivery. “World [Company Ltd.] and Zara do it,” he said. “The more interesting question is when retailers stopped doing it. If you look back to the 1950s, stores were buying from Seventh Avenue. They had a two-block-long supply chain. They had a two-week lead time. It might not even take two weeks. Providing they had the piece goods, they could cut it and sew it real quick. Then, starting in the Seventies, low prices from China won out over speed from Seventh Avenue, and most retailers went from two weeks to six months. That meant they had to buy largely speculatively, and that’s how we got to where we are today.”

He refers to World, Zara, H&M and Mothers Work as “retro” retailers because of their old-fashioned strategy. They use relatively low-tech methods —mainly inexpensive local production in southern and Eastern Europe, and in some cases expensive plane shipments —to deliver fresh goods to stores in three weeks.

Major American retailers have more often turned to software — such as analytics for forecasting or markdowns and Web-based applications that tie together data from disparate departments and suppliers — to speed processes rather than the low-tech approach of manufacturing goods close at hand. For these merchants, Asia is still the preferred place to source apparel because of its inexpensive labor and convenient supply of fabrics and piece goods.

Nonetheless, American companies can and do take advantage of the few U.S. factories remaining when speed is more important than the lowest price. Feldman Manufacturing, based in New York City’s Queens borough, produces private label swimwear for major retailers and catalogues. “People come to me saying, hey, can you help me, I need 30,000 or 50,000 units in a hurry,” said owner Richard Feldman. “My business has always been about getting it to them in a hurry so they can respond to what’s happening on the selling floor. It’s all about turn time and service to the customer, that’s how we stay ahead of the game.”

In the last few years, he says, he’s noticed that the pendulum seems to be swinging back from being all about price to being somewhat about speed as well. Customers have also asked him to break up deliveries more on an as-needed basis, he said.

Gap, along with J. Crew, Coldwater Creek and Wilsons The Leather Experts, is one retailer that stands out for having pursued a strategy of faster turns and higher margins in the last two years. The company appears to move small groups of fashion merchandise onto and off the main selling floor in about six weeks’ time, banishing anything that doesn’t sell at full price to the markdown racks, where it is snapped up by eager bargain shoppers. Gap has lowered its inventory per square foot and is using software from ProfitLogic to help it determine the optimum markdown price and schedule, said a Gap spokeswoman.

“We’ve been trying to move toward more full-price selling,” she said. The company has also focused on better forecasting and assortments tailored to individual stores, said Calvin Hollinger, vice president of information technology (see related story, page 18). For example, the retailer uses data from focus groups and point of sale, and has modified its merchandising system to allow it to tailor size assortments to individual stores. Gap is evaluating software that will allow full store-assortment planning in the future, he said.

Although vertically integrated retailers have the advantage when they need to reorder quickly, department and specialty stores have also been focusing on inventory and selling more at full price, which naturally leads to a higher turn of goods. In the first six months of this year, for example, Nordstrom and Neiman Marcus held on to goods for seven to 10 days fewer than in the same period the previous year, and they each improved their margins by more than 200 basis points.

At Neiman’s, many goods by their nature cannot be replenished, so instead of maximizing its supply chain, the company focuses on trend forecasting and customer service.

“You can turn the knob, but not as much as you would if we were vertically integrated,” said chief financial officer Jim Skinner. The company’s suppliers are global brands as well as small, creative companies that don’t have the resources to make goods or take inventory on materials before they receive orders, which means they often can’t do reorders.

“Many goods we sell are one-time buys,” said Skinner. “They ship to you and it’s done.”

To maximize sales productivity with less inventory, the company’s sales associates can sell goods from any store in the system, including the company’s distribution center in Long View, Tex., which is designed to respond quickly to customers.

The company recently added an allocation group that is focused on the analytics of inventory, making sure the right sizes and colors are in each store. Neiman Marcus added some applets to its merchandising system — software inherited from former parent company Carter Hawley Hale — that helps buyers identify fast and slow movers more quickly.

If the company sees a trend developing, it will take a bet and buy into it. For example, if the jeans category looks hot, Neiman’s might make a large purchase from Juicy Couture up front on the theory that Juicy won’t have the capacity to fill another order later.

“If we’re wrong, we pay the price, so guessing right is very important,” Skinner said. “Full-price selling is very important to us, more so than to people with large private label businesses. We think full price links very well with improving turns. We don’t look to have large increases, so if we can improve, we do it in small increments. We don’t want to [disappoint] customers.”

In the past few years, department stores have been confirming orders later because they’re trying to determine trends before they commit to production, said Joe McConnell, vice president of strategic sourcing for Kellwood of St. Louis. As a result, manufacturers have shortened their production cycles. In the past two years, Kellwood has halved its production time, said McConnell.

“It’s been a general trend over the last few years,” he said, referring to retailers demanding shorter delivery cycles. “As business becomes more difficult, it’s become more prevalent. It’s nothing new, but the degree of it has been increasing. Sometimes we’re getting confirmation of orders two to three weeks prior to what deliveries are. That’s rare but it has occurred.”

Kellwood has cut its production time by executing steps in parallel rather than in sequence. For example, it will source production fabrics and trims, make projections to contractors and test that materials meet its quality standards at the same time. The company is also using software from New Generation Computing to gain visibility onto the factory floor. Contractors update a Web page when fabric arrives, when cutting begins and when sewing starts. Kellwood can adjust its production plan based on sales data or when problems arise. For example, if a fabric for pants fails to arrive at one factory, the company can nix a coordinating sweater at another. The software has shaved seven days from the production cycle by helping the company coordinate production better. It’s also put information in one place where it is easy for everyone to see, and it provides more frequent and better customized shipping reports, said McConnell.

Next on Kellwood’s agenda is to shrink product development and to locate production where it can source fabric — in the Far East — to cut down on shipping time. The company is using Gerber’s WebPDM to coordinate the product development cycle.

“While you’re doing your designing, you’re sourcing your sample fabric,” McConnell said.

Many retailers are implementing Web portals with their suppliers to give them real-time visibility to where their orders are, said David Landau, director of retail solutions for Manhattan Associates, a supply chain software and services company based in Atlanta. They are also creating similar portals for freight forwarders and carriers. J.C. Penney has implemented a dynamic routing system to better manage its trucking with several dozen suppliers.

“Penney’s takes information from all its different suppliers who are ready to ship on a certain day, runs it through its optimization engine and figures out the best way to ship it all together,” Landau said. “If there’s half a truckload here and 30 miles down the road there’s another half truckload, they could send out a single truck as opposed to making two separate runs. They also have better visibility for what’s coming in. It’s definitely a trend we see more of, taking control of the inbound supply chain. Technology now allows that, whereas it might not have a couple of years ago.”