As online shopping continues its breakneck growth, fashion apparel and retail brands are working to optimize e-commerce capabilities as well as reimagine supply chains and fulfillment functions. Moreover, consumer demands for fast delivery times as well as an overall push in the market for reducing operating costs is putting immense pressure on the core functions of distribution centers in particular.
Here, Guy Sommerhalder, chief operating officer at John Varvatos, shares his insights about how inventory and warehouse management is not only a science, but also requires elements of traditional merchandising. In addition, Sommerhalder offers his perspective on the role of technology and the impact of consumer preferences on inventory management.
WWD: Why has warehousing and inventory management become so crucial for retailers?
Guy Sommerhalder: Warehousing and inventory management have always been a key focus for fashion retailers. The obvious reason is that inventory is usually the largest capital investment for the business.
The need to consider this function in a more strategic manner has become more crucial recently with the acceleration of online shopping which has made things more complex for “back-of-house” operations.
The omnipresence of new technologies creates a new range of possibilities but paradoxically requires more attention from retailers on inventory content, location and flows.
WWD: What are the major disruptions affecting the supply chain?
G.S.: E-commerce requires flexibility and agility in inventory management and speed in fulfilling an order. At the same time, consumer expectations have changed dramatically over the past few years, calling for a reconfiguration of the supply chain.
Direct-to-Consumer “Click-to-pick” cycle (the time from the moment an order is confirmed online until the merchandise is picked) has become shorter, shipments have become smaller and more frequent (think of orders made of one to two units instead of bulkier shipments to stores or warehouses) and free shipping expectation is universal. Warehouses are shifting from highly standardized operations to less structured environments that need to handle single variations, particularly for fashion retailers.
These changes have put more pressure on distribution centers requiring further operating efficiency. Pressure has been particularly acute on both labor and real estate cost. Additionally, the ever-increasing number of options of how orders can be fulfilled and shipped can trigger significant “hidden costs.” If not identified properly, these will weigh significantly on the overall profitability of a company.
WWD: Can you briefly explain how you approach warehousing and inventory management?
G.S.: The first aspect to consider is the supply chain network and architecture. Key questions that need to be addressed are where DCs should be located, what kind of orders or business channels they will support, and finally how the DC will be organized within its four walls to provide the most cost-effective support.
Usually, the answers to these questions can be adjusted over time but, in general, they will have an impact on the business both financially and operationally for several years.
The second dimension is a clear definition of inventory flows, ownership and availability. With today’s abundance of technology in inventory management solutions, there is no reason to manage individual pods of inventory. Order Management Systems will allow a single view of demand and act as the engine brokering orders to the best location.
The ideal approach to inventory management will include flexibility and agility. Inventory has to be highly visible, easily accessible and transferrable across all distribution channels to match consumer demand. Several buzzwords in the industry address this issue: omnichannel, shared inventory, buy-online-pick-up-in-store, etc. They all rely on a few overarching principles such as inventory accuracy and real-time visibility.
WWD: Why is warehousing optimization needed?
G.S.: Once the location of the DC is identified, the key question is how this DC will operate inside its four walls. The solution will involve a combination of people, processes and technology.
One of the fundamental realities that most retailers face is that DC labor cost can represent up to 55 percent of total operating costs. More importantly, about half of labor is spent on “travel time” representing the time spent by DC associates to travel or walk through aisles. It is not unusual for associates of the largest DC to walk 10-plus miles per day.
The rest of the time is spent on searching and picking units and packing orders. In all, when you think about it, about one-quarter of total DC cost is spent on unproductive travel time. The opportunity to optimize and reduce this expense is sizable, especially since warehouse labor cost has been rising recently at an extremely fast pace.
WWD: So, there’s a science to warehouse merchandising — but why is it important for retailers and brands to take such an approach? What are the benefits?
G.S.: One key answer to this issue is “slotting” which is the science of concentrating the most valuable styles in the optimal location in a DC, i.e. the ideal combination of these high-velocity locations will minimize the walking distance and travel time in the DC and, in return, lower the number of hours required to pick orders. The objective is to pair key styles such as those with the largest volumes, best sellers or replenishment items with these locations.
Usually, these most optimal locations are the front ends of racks or sections of the DC which are strategically located closer to conveyors or packing/shipping stations. These high-frequency pick locations are often called “golden zones” as a recognition of the significant value they can add by accelerating the conversion of stock into shipping.
WWD: Why is merchandising intersecting with warehousing?
G.S.: Slotting is to warehousing what merchandising is to retailing. There is a clear parallel between DC “golden zones” and high-converting fixtures in retail stores.
The objective of these store displays is to convert stock into sales by inspiring and engaging with customers. Like store design is critical in optimizing a retail space to maximize sales per square foot, DC design and slotting will optimize space and minimize operating cost per unit. So in essence, high- frequency DC pick zones should mirror in-store center tables or promo tables.
The science of “merchandising” a DC and its potential in value creation has recently gained more recognition, especially for traditionally stockkeeping unit-intensive fashion retailers. Those DC operators, being third-party logistics providers or in-house operations, who can provide these solutions will be the ultimate winners in the race of supply chain speed and efficiency. Going forward, stores and DC will be more and more connected, retail stores back-of-houses will become more like mini-DC and DC more like retail stores.
WWD: It also requires technology, no? But does that have to be a heavy investment? Why or why not?
G.S.: There are different approaches to have this effective pairing of styles and space, from manual intuitive optimization to high-tech solutions with sophisticated algorithms. The best approach will be dictated by scale and volume which naturally will allow for larger financial investments in technology.
Independently from volume, the prerequisite component is a Warehouse Management System, which is the brain of a DC. When volume reaches a certain critical mass, it makes sense to invest in advanced material handling systems or even more sophisticated technology like robotics or sensors. There has been a multitude of solutions on the market for various degrees of automation but there is no one-size-fits-all solution. Fundamentally, there is a cost benefit analysis that needs to be performed for high-tech solutions which can be quite capital-intensive.
For small- to medium-scale companies, a creative and collaborative mind-set will improve efficiency and DC operation with minimal investments. It will require an alignment across several functions within the company and with 3PL on how supply and demand are managed. In the current retail environment facing structural challenges and scarcity of capital, proper inventory management can release considerable value locked in the supply chain and help retailers adapt to consumer demand.