Supply Chain Helps Nordstrom’s Bottom Line

Stephen DeAngelis

September 8, 2010

Most articles you read about the supply chain seem to be focused on how cuts and efficiencies in supply chains help lower costs and increase profits. One of the prime targets of efficiency experts is inventory — move it fast and keep it low. It must be refreshing for those in the supply chain business to finally read how Nordstrom is actually using inventory to increase sales rather than simply seeing it as a drain on profits [“Nordstrom Links Online Inventory to Real World,” by Stephanie Clifford, New York Times, 24 August 2010]. Clifford begins her article by noting how difficult it has been for retailers to maintain sales and keep customers loyal. She writes:

“Retailers have been flailing about a bit in their efforts to get people to shop again, deploying all sorts of gimmicks and promotions to spur customer spending. Wal-Mart hoped that deeper cuts in its standard rollbacks would be a draw, but then said the prices went too low. At Saks, perhaps customers would go for designer labels if the lines offered less-expensive items. And for Macy’s, how about inexpensive clothes by Madonna? The secret, at least for Nordstrom, has not involved a piercing insight into a customer’s mind. Rather, it has changed the way that it handles, of all things, inventory. And that has brought the department store more success in improving sales than at most of its competitors, whose recent reports signaled that their consumers were still cautious.”

As anyone who shops at Nordstrom knows, you don’t find many bluelight specials, slashed prices, or off-brands on its shelves. That also means that any inventory the company carries doesn’t come cheap. So how does the way Nordstrom treats it inventory help sales? Clifford explains:

“The change works this way: Say that a shopper was looking at a blue Marc Jacobs handbag at Nordstrom.com. She could see where it was available at nearby stores, and reserve it for pickup the same day. More significant, if the Web warehouse was out of that bag, it did not matter. Inventory from Nordstrom’s 115 regular stores is also included. Maybe there was just one handbag left in the entire company, sitting forlornly in the back of the Roosevelt Field store — it would be displayed online and store employees would ship it to the Web customer. What Nordstrom did on its Web site — displaying stock from both the Web warehouse and its stores all at once, was unusual. And that, said Jamie Nordstrom, president of Nordstrom Direct, drove ‘some pretty meaningful results.’ In fact, Nordstrom, based in Seattle, has been the department store with one of the best improvements in same-store sales over the last year, when its overall sales reached $8.26 billion. While it may not seem revolutionary, a melding of Web site and store is surprisingly rare in the retailing world. ‘You’re talking about traditional retailers that have traditional ways of doing things, and sometimes those barriers are hard to break down,’ said Adrianne Shapira, an analyst at Goldman Sachs. Wal-Mart has added a feature where online shoppers can ship items to nearby stores, and Target.com shows which stores carry which items, but customers cannot buy them in advance. Among Nordstrom’s competitors, such fluidity is hard to find, Ms. Shapira said. ‘I don’t see anyone going to the length they are,’ she said of Nordstrom.”

You can imagine how accurate the Nordstrom inventory system has to be in order to keep a real-time inventory available for on-line access. It seems to be working however. Clifford continues:

“In the 11 months since Nordstrom made the inventory change, its same-store sales — sales at stores open more than a year, a crucial measure in retail — have outperformed the department store average measured by Thomson Reuters. In those 11 months, Nordstrom’s same-store sales increased by an average of 8 percent. In the 11 months before the shift, they decreased an average of 11.9 percent.”

Clifford notes that the “improvement is not all because of the inventory change — the economy improved, and Nordstrom made other operating changes.” Analysts believe that the changes in how Nordstrom sells it inventory has nevertheless had significant impact. Like many innovations, the change came about because someone asked a question that started people thinking. Clifford explains:

“Nordstrom began overhauling its online approach two years ago, adding the option to shop and buy online and pick up the item in a store. ‘It was the first thing that we did, because the No. 1 call we got at our call center was, “Hey, I’m looking at this item online, can I look at it at my store?”‘ Mr. Nordstrom said. The company was also trying to increase the number of people who shopped at Nordstrom in more than one way, since those so-called multichannel shoppers spend four times, on average, what a one-source shopper does, Mr. Nordstrom said. Inventory was a big issue, too. If Nordstrom.com did not have the item someone wanted, it was not as if the customer would wait for the company to restock it, Mr. Nordstrom said. ‘If we don’t have it, you’re going to go back to Google and say, “Who else has it?”‘ he said. ‘We have 115 full-line stores out there — chances are one of them has it.'”

As supply chain analyst Lora Cecere has written, there is a great “need to design the supply chain based on value-based outcomes from the outside-in: This … ups the ante to design supply chains from the outside-in with a focus on the true customer and the design of the channel for effective delivery. The focus is sensing and real-time test and learn strategies.” [“Demand Driven is Not Sufficient,” Supply Chain Shaman, 18 June 2010] I think Cecere would agree with Nordstrom that on-line shoppers aren’t loyal to any particular source. If they can’t find what they want at the first source they try they will move on to the next. Nordstrom’s inventory system is one based on what Cecere calls “value-based outcomes.” Clifford continues with her tale of how Nordstrom implemented its system.

“In September 2009, the company wove in individual stores’ inventory to the Web site, so that essentially all of the stores were also acting as warehouses for online. Results were immediate. The percentage of customers who bought merchandise after searching for an item on the site doubled on the first day, and has stayed there (although, Mr. Nordstrom cautioned, that doubling was from a small base). ‘Customers that were looking for an item, we had their size,’ he said. That meant the company hired a few more shipping employees to wrap and send items from each store. But, he said, increased sales more than offset the cost. It also means that inventory is moving faster, and often at higher prices. ‘If we’re out of something on the Web site, it’s probably late in the season and the stores are trying to clear it out,’ he said. ‘By pulling merchandise from the store, you’ve now dramatically lessened the likelihood that you’ll take a markdown.'”

By including their stores as part of their warehouse/inventory system, Nordstrom learned first-hand the value of multi-channel commerce as well as the challenges it creates. Clifford continues:

“Nordstrom’s inventory turnover, which measures how quickly a company goes through inventory in a given year, went to 5.41 in 2009 from 4.84 in 2005, a five-year high. ‘The health of our business when we’re turning faster versus turning slower, it’s night and day,’ Mr. Nordstrom said. Keith Jelinek, director in the global retail practice at the consulting firm AlixPartners, said that Nordstrom’s changes could give it a competitive advantage, but showing accurate inventory information to customers was difficult. ‘The customer ordering via the Web site is not concerned with where the product is, only that it is in stock,’ Mr. Jelinek said in an e-mail message, but that could easily go wrong if a sales clerk entered an incorrect item number, which would ‘incorrectly display what the customer could see online. While, for the retailer, their financial inventory is still accurate.’ … All the changes, Mr. Nordstrom said, were about satisfying customers, but that translated into profits. ‘We can sell more without having to buy more inventory,’ he said. ‘That plays through to margins and, ultimately, earnings.'”

What Nordstrom is doing is a good start; but Lora Cecere believes that we have only begun to see the first inklings of “social commerce” [“Five Reasons why Supply Chain Leaders need to know More about Social Commerce,” Supply Chain Shaman, 19 March 2010]. She writes:

“With the introduction of e-Commerce, the goal was clear. The race was on to deliver a seamless cross-channel experience. Social commerce ups the ante. Take Best Buy as an example. 90% of Best Buy’s customers start their shopping experience on-line on Best Buy’s website. The more advanced social commerce user will search online, read the reviews, and take a trip to the store to check out the physical experience. But, then, like my savvy stepson, they pull out their iPhone and place the order in the store. They avoid the lines and the check-out hassle, and they snag even more loyalty points by ordering on-line. In the last six months, customers have downloaded 700 thousand Best Buy iPhone applications. Social Commerce and eCommerce is converging. What does this mean for the supply chain executive? Master data accuracy, accurate real-time inventories, and better Available to Promise (ATP) signals. With social commerce, there is a greater need for the immediacy of data and the bar for service is greater. Imagine how a savvy iPhone user will feel when they learn that their item is out-of-stock. No longer will they be silent. Their friends will hear about it on Facebook.”

I agree with Cecere that next chapters in the supply chain management textbook have yet to be written. The research is underway, however, and Nordstrom could provide a good case study. Good data is the sine qua non of a demand driven supply chain. In today’s fast-paced marketplace, that data must also be fresh (the closer to real-time the better). Now go out there and buy that blue Marc Jacobs handbag — you or your significant other are bound to love it!