The last time I spoke with Bill Leber, business development manager for Swisslog's warehouse and distribution solutions, he hadn't yet read the Wall Street Journal article I cited in my blog about Macy's converting space in 292 of its 800-plus stores for online order fulfillment. We revisited the topic a few weeks ago in another phone conversation. Now that he's had a chance to learn more about what Macy's wants to do, he's more convinced than ever they're making some critical mistakes.
“I see the Macys thing as a stopgap solution to overcome some other endemic business process problems that should be solved holistically to be efficient in the future,” he said. “If you read behind the lines of what Macy's is saying and doing, it has an old-style inventory replenishment system. Because of that they're doing the stopgap thing of avoiding DCs by using [stores] as their pool stock.”
Leber believes Macy's is stocking too much at the stores and they're hurting themselves logistically. I could tell he really studied that WSJ article carefully, because he cited this one particular sentence that seemed to prove his point:
“By 2:30 p.m. 100 more orders had come to the store, totaling $5,091 in sales.”
“There's no way they make any money on that if they're selling that from a store,” he said. “What happens when the customer orders three items and two are in one store and one is in the other? Now they have to make two shipments, and if they're only running $50 per order they're not making any money on that. The customer won't pay extra for the supplier having his inventory in two places by mistake.”
After my discussion with Mr. Leber, I did a little Internet shopping for anything Macy's might have said in defense of their e-commerce model. I found the transcript from the company's first-quarter business review. Karen Hoguet, Macy's chief financial officer, made some comments and did a Q/A with analysts about the company's performance and its plans. She mentioned the company's e-commerce fulfillment strategy using stores to fill inventory gaps, but she also mentioned something the WSJ article didn't. She said there are big chunks of inventory in Macy's stores that are unavailable online. They are going to experiment with offering this merchandise online with 100% fulfillment from the store that has it.
“[We're] taking advantage of an opportunity to perhaps take some inventory off the floor, use the direct warehouses and broaden the assortment that [we're] offering the customer on the store as opposed to using that space for inventory,” Hoguet said. “There's lots of things we're thinking about category-by-category of how can we use the square footage better, where should we have inventory, how much inventory. It's really very, very exciting.”
During the Q/A someone asked if Macy's inventory systems speak to one another—are they on one platform or separate systems?
“Well, no," she replied. "And in fact, one of the things that we've been talking about that's included in our capital spending is the capital to improve the omnichannel communication across macys.com and the stores, similarly bloomingdales.com and Bloomingdale's. So I would say today, the systems are not. … We've got lots of workarounds, but it will be much more efficient once these systems get built over the next couple of years. But again, it's not stopping the strategic discussion.”
Couple of years? And during that time they're experimenting with their inventory. Sounds like a pricy experiment, especially if their inventory systems are working independently from one another.
MH&L ran an online article about the challenges of e-commerce fulfillment, written by a couple engineering and integration specialists from Wynright, a material handling system integrator. This paragraph from that article should grab Macy's attention:
“Servicing customers at the levels they expect necessitates the ability to view their inventory within the supply chain as a single inventory, not as portions dedicated to one segment of the business at the exclusion of all others. As retail store replenishment continues to shift toward less-than-case quantities requiring small-lot, high-frequency processing of inventory, it puts even more pressure on material handling systems designed for retail store shipment. In short, they need to be able to access and ship that inventory wherever it needs to go, in whatever quantity is required—whether that's one pallet, one carton or one piece. This kind of supply chain optimization and flexibility is at the core of the solution.”
It will be interesting to see if Macy's “workarounds” will prove to be worth their duct tape as they try to support the oncoming rush of “omnichannel” orders Karen Hoguet anticipates.