One of my favorite topics to teach is the newsvendor problem, an inventory model for very short-lived products like newspapers and fashion goods. One of the points that gets made in that class is that variability is costly. Having to commit resources before knowing what will sell means risk and risk may be a reason not to be in the business. But that risk also suggests an opportunity: If one can find a way to reverse the order of things and commit resources only after knowing what will be demanded, then an otherwise unprofitable business can be a profitable one.
That is essentially the idea behind Gustin, a maker of high-end jeans. It initially sold its jeans trough boutiques, which bought jeans at a wholesale price near $80 but then marked them up to around $200. Gustin had to front all the cost of production and then wait for stuff to sell. Now, they have reversed the order of things and take orders directly from customers ahead of production. As the founders tell it on Marketplace, they have positioned themselves as a totally crowdsourced fashion company (Burning down the house that Levi’s built, Apr 8). You can hear the story here:
Wayne Gretzky once said that one should skate to where the puck is going to be. Clay Christiansen used that as a hook for an HBR article and a management cliché was born. Now it seems that Amazon wants to apply that logic to shipping retail orders (Amazon Wants to Ship Your Package Before You Buy It, Wall Street Journal, Jan 17).
Amazon.com knows you so well it wants to ship your next package before you order it.
The Seattle retailer in December gained a patent for what it calls “anticipatory shipping,” a method to start delivering packages even before customers click “buy.”
The technique could cut delivery time and discourage consumers from visiting physical stores. In the patent document, Amazon says delays between ordering and receiving purchases “may dissuade customers from buying items from online merchants.”
So Amazon says it may box and ship products it expects customers in a specific area will want – based on previous orders and other factors — but haven’t yet ordered. According to the patent, the packages could wait at the shippers’ hubs or on trucks until an order arrives.
The high production value diagram above (from the patent application) shows the various moving parts to be coordinated.
There is, of course, only one question to ask about this: Is anticipatory shipping crazier than planning to deliver packages via drones? (more…)
What follows Christmas? Returns, of course. This is especially true for on-line retailers who must generally offer more forgiving returns polices than conventional retailers. In Europe, this is a matter of law. In the US, it is often a necessary part of gaining customer trust. But how much do returns cost retailers? According to The Economist, it can be quite a bit (Return to Santa, Dec 21).
Return rates can be alarmingly high: for some online retailers up to half of everything they sell comes back. Studies find that just handling each returned item costs online sellers between $6 and $18, and that is before the losses from items that are returned in unsaleable condition. …
A new study by Christian Schulze of the Frankfurt School of Finance and Management seeks to put some hard numbers on the scale of the serial-returner problem. Mr Schulze studied 5.9m transactions in Germany, involving 166,000 customers, for a large European online retailer. He looked only at those who had bought at least five items over a five-year period, and found that 5% of them sent back more than 80% of the things they had bought; and that 1% of customers sent back at least 90% of their purchases. Without the cost of returns, the retailer’s profits would be almost 50% higher, the study found.
Christmas is just a couple of days away and that means that UPS and other shippers are rushing to get every package and gift to its final destination. Just how much work does that take? Quite a bit. Businessweek reports that UPS starts planing for its peak season in the previous January (UPS’s Holiday Shipping Master: They Call Him Mr. Peak, Dec 19).
We have had several stories over the last couple years about retailers using inventories at their stores to fill web orders. At one time or another, there have been stories about Nordstrom, Wal-Mart and Macy’s all treating that big box at the mall as a warehouse. Now the Wall Street Journal reports that even more chains — including Sears and Office Deport – are hopping on the bandwagon (Retailers Turn Store Clerks Into Web Shippers, Dec 9). You can here the reporter discussing her findings here:
It is not surprising that more retailers are going this way. They are all facing pressure from on-line competitors and finding some way to utilize their existing physical network is appealing. If nothing else, I suspect that everyone in the C-suite wants to be able to tell the board they are trying something.
But how can you set up this up quickly? You need to develop a system that updates inventories in real time while dispatching staff to fetch what has been ordered and scheduling the shipper to pick stuff up. Nordstrom is often identified as the first mover on this. The New York Times reports that it took them a couple of years to get it set up. How can a Johnny-come-lately ramp this up quickly? By working with UPS and FedEx.
UPS and FedEx Corp. which were critical to helping launch the e-commerce boom, are now eager to help traditional retailers deal with it. They have engineered new strategies for jockeying inventory across the country to avoid overstocks and markdowns and to keep customers from defecting to Amazon, a big problem last year. The strategy is also important this holiday season as clothing retailers are threatened with heavy inventories.
UPS says it is working with about 40 retailers on implementing these strategies—about double the number a year ago. FedEx said these partnerships helped boost revenue in its ground delivery business 11% in its fiscal first quarter. Both forecast record holiday-season deliveries: UPS with 34 million packages on Dec. 16 and FedEx with 22 million packages on Cyber Monday.
In the case of Sears, UPS provided software that shows shipment statuses of all orders across the entire system. It also sends tracking numbers.
There have been several things written over the last couple of years about working conditions in Amazon fulfillment centers. (See, for example, here, here, and here.) Now we have a BBC report complete with hidden-camera video of what it is like inside a fulfillment center.
About a year ago, we had a post on Amazon Lockers — the Seattle firm’s attempt to solve recurring last mile problems. Customers could have their purchases delivered to a secure, nearby location. No need to sign for a package; no need to worry about someone walking off with your box. You just need to enter a code to pop open the locker that has your stuff.
But there is an obvious complication here: Those lockers have to go somewhere. Amazon’s plan was not to buy real estate but to plant them in existing retail locations. But which stores would benefit from hosting Amazon lockers? That is the question that a recent Businessweek article examines (Do Amazon’s Lockers Help Retailers? Depends on What They Sell, Sep 20).
The incentive for any business hosting an Amazon locker isn’t the monthly stipend the online retailer pays—”not even worth it,” says the manager of a Manhattan copy shop—but the lure of higher store traffic given the online retailer’s enormous sales volume and the gazillions of brown boxes sent across the nation each day.
Amazon has the lockers in nine large metro areas and touts the delivery option as a customer convenience for the many people who can’t reliably get their online purchases at work or at home. For a bricks-and-mortar business, the idea is that people coming to collect their Amazon purchases will buy other stuff on their way out the door.
How should Wal-Mart fill web orders? That seems like a straightforward question. And, given that Wal-Mart sold over $7 billion of stuff on the web last year, you would think they would have figured that out by now. Still as the Wall Street Journal tells it, the retail giant is still working through how best to fill orders (Wal-Mart’s E-Stumble With Amazon, Jun 19).
E-commerce at Wal-Mart is run as a distinct business, with its own headquarters, CEO and merchants who buy items specifically for the website. Every year, executives would start a “five-year planning exercise, but the plans were never executed and management would say the sales weren’t there to justify the investment capital,” says a former online-division executive. “Even now e-commerce is a rounding error in the U.S. market.” Wal-Mart said it expects $10 billion in online sales this year, which would amount to about 2% of its $469 billion in annual revenue.
As Wal-Mart’s online orders grew, it turned to makeshift spaces carved out of store-serving distribution centers and third-party warehouse operators to help handle the load. The extra layer added to its costs. Wal-Mart’s online shipping can cost $5 to $7 per parcel, while Amazon averages $3 to $4 per parcel, analysts say—a big difference considering some of Wal-Mart’s popular purchases are low-cost items like $10 packs of underwear.
As the quotes make clear, this is all about how to match Amazon so Wal-Mart remains relevant as more transactions move on-line. To put the challenge in perspective, check out this graphic of Amazon’s distribution network.
In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod. Two interesting e-grocer articles appeared this week:
The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area. Why? In class we show the difficulty of this business and I praise the operational focus of Amazon. If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household. It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.
In his article, Tom proposes a second raison d’etre of AmazonFresh:
AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.