Here's the true story of a retail furniture operation, performing well in sales, but experiencing sub-par profitability.
Sales were up in 2017 for the retailer we will refer to as XYZ Furniture, compared with 2016, as was its gross margin. On the down side, this retailer had warehouse capacity issues leading to a host of other problems including:
- Rushed delivery preparation
- Slow merchandise transfers
- Unorganized locations
- Overuse of external storage units
- An up-tick in damages
- High employee turnover
- Increased inventory dollars
The store's cash position was also not as good as it should have been, given the level of healthy sales and margins.
What Was Going On?
To find out what was going on, we looked at the flow of business over the past 10 months for both written sales and delivered sales. Written shows the current pace or trend for customer transactions recorded at the point of sale. This measure compared with the previous year was up by 10 percent. Written business, examined month- by-month was found to be pretty consistent.
The problem was that this company never really paid close attention to delivered business. Delivered sales fulfilled via the store's supply chain, was not as consistent as their written business. Delivered sales were down 15 percent from the prior year. And, looking at each month, the through-put of delivered business was not consistent.
Of course there were explanations such as:
- Customers wouldn't take delivery
- Customers were waiting on a house
- Vendors had shipped all at once
- XYZ Furniture was short staffed in the warehouse
- They said they were too busy on the sales floor
The Real Problems
All these explanations were the result of a build-up of inefficiencies and poor process management. So, this was a great opportunity for improvement!
A smoother flowing, consistent, delivered sales pipeline, translates into:
- Faster inventory turns
- Better return on investment
- Controlled payroll
- Fewer emergencies and a reduction of chaotic activities
- Increased customer satisfaction
- Happier employees
- Higher cash flow and profit realization
What follows is the general strategy XYZ Furniture followed to achieve the benefits of more consistent delivered sales.
Merchandise gets ordered, it comes in, it goes out. These are the bones of a supply chain. Now, in a perfect world, it would all flow smoothly. Minimum storage and employee time would be needed. Maximum benefit would be achieved. However, with retailers that carry multitudes of erratic vendors with some custom order, some stocking, some foreign, some domestic, inconsistencies in the supply chain seem to be the norm. As business managers it is our job to understand the flow and seek to make it as consistent as possible – to MINIMIZE the CHAOS.
To do this look at each vendor and its reliability. Determine:
1. Average Order Lead Time to Received Time
2. Range of Deviation from Average Order Lead Time to Received Time
3. Number of Pieces not received as ordered (i.e. damaged, short and over)
A vendor that is reliable versus one that is unreliable with respect to these three points is better for your business even if it takes longer on average to receive the product. This is because EXPECTATIONS can be communicated to the customer at the point of sale with confidence. Most salespeople would much rather say to a customer, “You can order this style with these options, and have it in your home the week of February 1st.”, than, “It usually take 6-8 weeks and someone will call you when it comes in.”
Understand that real delivery times to customers’ homes are now the standard of retail. This has been championed by retailers like Amazon.
Maintain and source vendors that meet your standards. This will smooth your supply chain with respect to incoming orders and increase both written and delivered business.
Once merchandise arrives in a facility its main purpose is to get it out of the facility as quickly as possible in perfect condition.
This may seem like an obvious statement, right? Then why is it that furniture retailers routinely range from 60 to 250 days to deliver their inventory value? To answer this question, use the following formula:
Days to deliver average inventory value = 365 days in one year/ (Landed Cost of Inventory Sold (Delivered) in one year/ Average Cost of Inventory Carried)
Example, if you have an annual cost of goods sold (delivered) of $3,000,000 and an average inventory carried of $1,000,000 you would take 122 days on average to turnover your inventory.
365 days/ ($3 million/ $1 million)
This is important because the lower you can get your days to deliver average inventory value number, the faster the supply chain is moving through to customer. The faster the supply chain moves to customers, the faster you earn cash, profits, and satisfy the needs of customers and employees.
Track To Improve
If you believe getting merchandise moving through your warehouse into your customers homes is important, then track your days to deliver your inventory value. Start by checking this metric once per month and report on it in your operations meetings.
Then, to create continuous improvement, make sure your entire organization is aware of, and working to lower your days to deliver average inventory number:
- Salespeople: They produce gross margin dollars that feed the supply chain.
- Delivery schedulers: They schedule delivery or pickup dates. Faster and sooner scheduling on written sales lead to a faster throughput to delivered sales.
- Merchandisers: The faster new pieces are displayed, the faster you will sell it.
- Warehouse people: Quick cross docking systems are a better use of resources.
- Delivery resources: Running resources under and overcapacity are both wasteful.
Set Standards On Delivered Sales
In this retail operation, it was noticed that depending on the week, delivered sales could be up or down by upwards of 50 percent, the result of mismanagement. What happens in these situations is that operations people are taking a break some weeks or catching their breath. Then some weeks they rush around like chickens with their heads cut off. For some reason the busy delivered weeks seem to occur prior to commissions being paid. Going slow then fast then slow then fast does not produce the best customer experience and workplace environment. Operations that function with “even flow” of work are able to function better – period.
To remedy or avoid these delivered peaks and valleys, set a delivered sales weekly standard. Then, bonus the appropriate parties for keeping this standard true.
Over time, this operation was able to produce a more even written and delivered sales performance. Their days to deliver their average cost dropped by 10 days.
Ten days quicker may not seem like much, however between an inventory reduction and a quicker realization of revenue and remaining deposits, this equated to an increase in annual cash flow of over $100,000 for this average sized business (5 Million written and delivered sales). Other benefits were realized as well.
1. Sales people were happier because they got paid quicker and had fewer service issues.
2. Warehouse people were happier because they could pick and prepare product at a normal pace and were not alternatively bored or overwhelmed.
3. The owner was happier because cash flow improved.
4. Finally, customers were happier because they received their deliveries when expected.