Executive Briefings

Managing Merchandise 'Flows' Straight to the Corporate Top Line

Order management is critical to a retailer's top line for one simple reason: Goods must arrive on time to take advantage of selling opportunities. Unless merchandise flow is coordinated between supply-chain players, the shirt shows up before the pants, or the shams' matching bedspread shows up after the season is over, all of which hurts sales. So what's a retailer to do? The key is cross-enterprise order management.

Supply chains in which all players use the same system to get order status updates (and react to problems) give retailers the tools needed to know what's coming - and when - so they can react quickly to selling opportunities. Companies that have visibility into the order management cycle and can make changes based on this information could see improvements in the top line from 2 to 5 percent.

For inbound orders, most retail buyers and inventory planners rely on manual processes from vendors to get purchase order fulfillment status, including which products have shipped, which are waiting to be shipped, and which are waiting to be received into the retailer's warehouse or an in-transit DC. With this system, they really don't know what's coming or when, nor can they affect the flow of merchandise if something is selling more or less than expected. Also, they keep additional inventory on hand to ensure fewer stock-outs, just because there's a lot of "float" in the system.

In addition, retailers don't make adequate use of alternative merchandise flow methods such as drop-ship to customer or store. In order to have more control, or because the system can't handle anything else, they ship everything to a DC. Retailers are just starting to wake up to the fact that direct-ship yields additional sales without taking an extra dollar's worth of inventory. Plus, they don't even have to place the order with the vendor until the item is sold.

For shipments to DCs, stores and customers the basic information needed is the same. Has the order been received? Has it been filled? Has it shipped? What parts didn't ship? When will it arrive?

The retailer has a huge stake in knowing the answers to these questions. They directly affect both the retailer's costs and ability to have product to sell, as well as the customer's experience. With better PO status visibility and the ability to choose different merchandise flow paths, buyers may find they need only 16 weeks instead of 20 weeks of supply on hand. Suddenly open-to-buy dollars are available to invest in products that are hotter than anticipated. To use an aviation image, with better visibility pilots can fly closer to the ground more safely.

Seldom Shipped As Ordered
Once product starts to move, very few orders are shipped from vendors as specified. Any buyer will tell you less than 10 percent of their purchase orders are shipped exactly as ordered: dates, quantities, destinations, and style variations. This is a fact of life that current systems have ignored. For an order of 10,000 units with a requested delivery date of Aug. 1, there's little chance that all 10,000 units will ship together to arrive by that date. Manufacturers may not have all 10,000 units available, so they ship what they have in stock and follow up with the balance later. Likewise retailers may not want to receive all 10,000 units at once, otherwise they will sit on shelves consuming productive capital.

The fact that the shipment doesn't match the order causes even more problems. Many procurement systems cannot cut one purchase order into three partial quantity shipments. Nor do they have the capability to track three different expected receipts into the warehouse. Certainly EDI systems don't "read" the various documents to look for potential discrepancies. This causes endless headaches for buyers, finance departments and vendors to reconcile orders, shipments and invoices.

Without great control over the order management cycle, the retailer loses more than staff productivity. According to John Sviokla of the Harvard Business School, companies that mismanage this cycle "throw money at problems, building excess capacity, adding inventory, or increasing body count, all of which are expensive and none of which solve the real problem."

In years past, retailers had self-contained, one-dimensional pipelines: Manufacturers sold to distributors who sold to retailers who sold to customers. Today's order pipelines have multiple paths or merchandise flow, so retailers must calculate the most profit-optimizing ways to move products to customers.

For items with predictable demand, retailers should keep stock in their own warehouse or stores. But for high value, customized products it is more profitable to ship them directly from vendors. To save shipping costs on bulky items retailers could have vendors consolidate customer shipments to an intermediate location before rerouting them.

Depending on the product's contribution margin (i.e., gross income minus order fulfillment and shipping costs), retailers must figure out the optimal paths for delivery, whether it's DC to customer, 3PL to customer, vendor to DC to customer, or vendor to store. Once the flow strategies are decided, they must be executed flawlessly. For inbound orders, this includes tracking a purchase order to fulfillment, i.e., open-to-buy, open-to-ship, and open-to-receive amounts and quantities.

Retailers should watch for the signs of missed top-line opportunities and look at inventory levels and where your buyers are spending their time. People do a good job of manually making up for the lack of visibility and control, but there's a big cost to a retailer's business.
The opportunities to improve top-line revenues are there, simply by managing the order management cycle and executing merchandise flow effectively:

• Inventory: More certainty in open-to-receive and open-to-ship allow buyers to free up open-to-buy money and keep lower overall inventory levels.

• Revenue: Buyers can invest the free open-to-buy cash in higher selling products. Merchants can expand product lines without taking additional inventory through drop-ship flow methods. Margins are improved.

• Shipping: Logistics can eliminate expensive expediting to customers or stores. They can consolidate more store- and DC-bound shipments.

• Labor: Merchants, buyers, finance and the retailer's vendors spend more time optimizing margins and finding selling opportunities, instead of spending days trying to track inbound goods and reconcile piles of order documents.

Unfortunately, most retailers are missing out on these opportunities to improve their top lines. The order-management concept is simple, the execution challenging, but the reward tremendous.

Jim Brownell is senior vice president and general manager of Escalate, which provides order management systems for the retail industry. Brownell, who has more than 24 years of experience in retail technology, previously served as senior vice president and CIO at Williams Sonoma, vice president of information technology at Toysrus.com, vice president of supply-chain systems at The Gap and chief information officer at J.Crew.

Order management is critical to a retailer's top line for one simple reason: Goods must arrive on time to take advantage of selling opportunities. Unless merchandise flow is coordinated between supply-chain players, the shirt shows up before the pants, or the shams' matching bedspread shows up after the season is over, all of which hurts sales. So what's a retailer to do? The key is cross-enterprise order management.

Supply chains in which all players use the same system to get order status updates (and react to problems) give retailers the tools needed to know what's coming - and when - so they can react quickly to selling opportunities. Companies that have visibility into the order management cycle and can make changes based on this information could see improvements in the top line from 2 to 5 percent.

For inbound orders, most retail buyers and inventory planners rely on manual processes from vendors to get purchase order fulfillment status, including which products have shipped, which are waiting to be shipped, and which are waiting to be received into the retailer's warehouse or an in-transit DC. With this system, they really don't know what's coming or when, nor can they affect the flow of merchandise if something is selling more or less than expected. Also, they keep additional inventory on hand to ensure fewer stock-outs, just because there's a lot of "float" in the system.

In addition, retailers don't make adequate use of alternative merchandise flow methods such as drop-ship to customer or store. In order to have more control, or because the system can't handle anything else, they ship everything to a DC. Retailers are just starting to wake up to the fact that direct-ship yields additional sales without taking an extra dollar's worth of inventory. Plus, they don't even have to place the order with the vendor until the item is sold.

For shipments to DCs, stores and customers the basic information needed is the same. Has the order been received? Has it been filled? Has it shipped? What parts didn't ship? When will it arrive?

The retailer has a huge stake in knowing the answers to these questions. They directly affect both the retailer's costs and ability to have product to sell, as well as the customer's experience. With better PO status visibility and the ability to choose different merchandise flow paths, buyers may find they need only 16 weeks instead of 20 weeks of supply on hand. Suddenly open-to-buy dollars are available to invest in products that are hotter than anticipated. To use an aviation image, with better visibility pilots can fly closer to the ground more safely.

Seldom Shipped As Ordered
Once product starts to move, very few orders are shipped from vendors as specified. Any buyer will tell you less than 10 percent of their purchase orders are shipped exactly as ordered: dates, quantities, destinations, and style variations. This is a fact of life that current systems have ignored. For an order of 10,000 units with a requested delivery date of Aug. 1, there's little chance that all 10,000 units will ship together to arrive by that date. Manufacturers may not have all 10,000 units available, so they ship what they have in stock and follow up with the balance later. Likewise retailers may not want to receive all 10,000 units at once, otherwise they will sit on shelves consuming productive capital.

The fact that the shipment doesn't match the order causes even more problems. Many procurement systems cannot cut one purchase order into three partial quantity shipments. Nor do they have the capability to track three different expected receipts into the warehouse. Certainly EDI systems don't "read" the various documents to look for potential discrepancies. This causes endless headaches for buyers, finance departments and vendors to reconcile orders, shipments and invoices.

Without great control over the order management cycle, the retailer loses more than staff productivity. According to John Sviokla of the Harvard Business School, companies that mismanage this cycle "throw money at problems, building excess capacity, adding inventory, or increasing body count, all of which are expensive and none of which solve the real problem."

In years past, retailers had self-contained, one-dimensional pipelines: Manufacturers sold to distributors who sold to retailers who sold to customers. Today's order pipelines have multiple paths or merchandise flow, so retailers must calculate the most profit-optimizing ways to move products to customers.

For items with predictable demand, retailers should keep stock in their own warehouse or stores. But for high value, customized products it is more profitable to ship them directly from vendors. To save shipping costs on bulky items retailers could have vendors consolidate customer shipments to an intermediate location before rerouting them.

Depending on the product's contribution margin (i.e., gross income minus order fulfillment and shipping costs), retailers must figure out the optimal paths for delivery, whether it's DC to customer, 3PL to customer, vendor to DC to customer, or vendor to store. Once the flow strategies are decided, they must be executed flawlessly. For inbound orders, this includes tracking a purchase order to fulfillment, i.e., open-to-buy, open-to-ship, and open-to-receive amounts and quantities.

Retailers should watch for the signs of missed top-line opportunities and look at inventory levels and where your buyers are spending their time. People do a good job of manually making up for the lack of visibility and control, but there's a big cost to a retailer's business.
The opportunities to improve top-line revenues are there, simply by managing the order management cycle and executing merchandise flow effectively:

• Inventory: More certainty in open-to-receive and open-to-ship allow buyers to free up open-to-buy money and keep lower overall inventory levels.

• Revenue: Buyers can invest the free open-to-buy cash in higher selling products. Merchants can expand product lines without taking additional inventory through drop-ship flow methods. Margins are improved.

• Shipping: Logistics can eliminate expensive expediting to customers or stores. They can consolidate more store- and DC-bound shipments.

• Labor: Merchants, buyers, finance and the retailer's vendors spend more time optimizing margins and finding selling opportunities, instead of spending days trying to track inbound goods and reconcile piles of order documents.

Unfortunately, most retailers are missing out on these opportunities to improve their top lines. The order-management concept is simple, the execution challenging, but the reward tremendous.

Jim Brownell is senior vice president and general manager of Escalate, which provides order management systems for the retail industry. Brownell, who has more than 24 years of experience in retail technology, previously served as senior vice president and CIO at Williams Sonoma, vice president of information technology at Toysrus.com, vice president of supply-chain systems at The Gap and chief information officer at J.Crew.