Imagine running an on-line retailer. What kind of change in your operations do you think it would take to double the rate at which customers who search for items on the site actually buy something?
The amazing thing is that Nordstom actually did this and the change was surprisingly simple (Nordstrom Links Online Inventory to Real World, Aug 24). Effectively, the key step was virtually pooling their on-line and in-store inventories.
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.” …
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).
In addition, turns have gone from 4.84 in 2005 to 5.41 in 2009. That is, inventory is sitting around for less time.
This seems a surprisingly simple change but Nordstrom appears to be fairly unique in the industry. Yes, it adds cost. You are now possibly shipping packages from a hundred different stores in day. But it is a fairly simple task as shipping goes. Shoes and blouses are not bulky or particularly fragile. If anything, I would guess that the emphasis is on presentation so that the item looks sufficiently classy when the item is unwrapped.
On top of that, the stuff you are shipping out from the stores is the stuff you need to get out of the stores. As the article notes, if the central warehouse supporting the web site is out of an item, it’s likely late in the season. Now shipping from the stores not only avoids a loss sale on the web, it sells something that is on the verge of being marked down.
This is a really nice example of the power of pooling inventory. Basic inventory theory says that combining demand streams should lower the relative variability in the system and allow for a higher service level for a given amount of inventory. What the Nordstrom example shows is that you don’t have to run everything out of one location. Rather you just need to pool the information of what you have available.