About a year ago, we had a post on Zulily and how they managed their order fulfillment. It featured a nifty graphic from the Wall Street Journal showing just how much longer their delivery times were relative to other interet retailers. Now, the Journal has another story — with a spiffy updated graphic — discussing how their delivery times have gotten even worse (Zulily Nips Business Model in the Bud, Mar 23).
I like the original story because Zulily’s delivery performance was very closely tied to their value proposition. They sell clothes cheaply because they would not be holding anything before it sold. Here is how the new Journal article describes their approach.
The flash-sale website staked its growth and profitability on being able to offer thousands of new items for sale daily at deep discounts, purchasing baby gear, women’s apparel and other merchandise from vendors only after shoppers ordered them. Vendors would then ship the items in bulk to Zulily’s warehouses for sorting and delivery to customers.
So that long flow time is what allows them to be cheap. Note that this approach also minimizes the risk they face. They are not going to be the ones stuck with unsold goods. That is still on the manufacturer. A student I had in an executive MBA class (who ran a clothing brand) explained that they in a way found a way to compensate their brand partners for the risk they imposed on them. The exec described the issue as follows. If you sell an item through Zulily, you give up control over the mix of sales in terms of size. You may, for example, run out of mediums and larges but be left with lots of smalls and extra larges. You are then screwed because no discounter wants to take a style for which they cannot get a full assortment. If you had decided to sell through a discounter like TJ Maxx from the get-go, they would take all of your inventory. The difference is that TJ Maxx would beat you up on price. If your initial wholesale price was $10 per item, they would want to pay only $5 or $6 per item. Zulily on the other hand doesn’t argue about price. They will pay your wholesale price on every item they manage to sell. The brand then has a choice of taking a higher price per item but accepting some risk on what will move or accepting a lower price but ditching everything.
So Zulily has built a business model on offering slow delivery times so it can shift volume risk onto suppliers who are compensated for that risk getting higher prices than they would from a more conventional discounter. Pretty cool, right?
But customers don’t like long lead times. What can Zulily do? They can change how they manage inventory.
To shorten shipping times and reduce errors, Zulily is trying to get a wide assortment of merchandise into its warehouses before selling it online. The goods won’t be on Zulily’s balance sheet, Mr. Cavens said, because vendors will own the merchandise until it is sold. Zulily tested the program with a group of suppliers over the past year and is now pitching it to more vendors, Mr. Cavens added.
The approach is similar to a model used for years by Amazon.com Inc., which stores merchandise in its warehouses for thousands of third-party sellers and ships on their behalf when orders are placed through its website.
The article goes on to say that Zulily will charge its vendors for stocking the inventory.
Does this solve Zulily’s problem? Partially. The article says they have 15,000 suppliers and that they are targeting the smaller ones for this program. That raises the question of what fraction of their sales they will be able to fill out of their on hand inventory. If major national brands account for the majority of their sales and those run through Zulily current fulfillment process, their average delivery time is still going to be relatively high. However, if the smaller labels are less organized about shipping stuff to Zulily, this could reduce the worst cases and have an oversized impact on the average times customers see.
The article does not say what happens to unsold items but it adds an interesting twist to the story. Zulily now has a little more at stake if an item does not sell out. The excess inventory may not be on their books but it is still on their shelves. The question is how will this affect, say, how much inventory they are willing to take initially or how they choose to price their flash sales.