Department store woes? Nordstrom responds with digital supply chain innovation

To seize new opportunities and respond to industry-wide threats, Nordstrom is investing in the digitalization of its supply chain

Industry context & supply chain opportunities

From the rise of online competitors to a decline in mall traffic, a myriad of headwinds have resulted in stormy seas for department stores [1]. Industry giants such as Macy’s and Kohl’s have struggled mightily in recently years. Nordstrom, which just reported a 0.9% decline in Q3 same-store sales from 2016 to 2017, is no exception [2].  However, Nordstrom is fighting back with an effort to digitalize its supply chain.

An effective, efficient supply chain is central to a retailer’s success. Nordstrom must predict customer demand for products, order quantities of those products from brands, and hold inventory in an effort to quickly deliver those products to customers both in-store or online.

Harnessing digital technology for its supply chain is critical to Nordstrom for two key reasons. First, ecommerce represents a growing percentage of Nordstrom’s business: approximately 25% of sales compared to 5% ten years prior) [3]. Nordstrom must set up its supply chain to successfully handle this shift and integrate its channel strategies. Second, online search transparency has increased customer expectations of selection and customization, leading to SKU proliferation [4]. As a result, supply chain decisions are more complex and riskier than ever. In the company’s latest 10K, Nordstrom cites inventory as a key risk: over-buying leads to discounting and margin deterioration, while under-buying results in lost additional sales [5].

The opportunity is enormous: a digital supply chain streamlines information flow and creates transparency to support effective decision making and responsiveness [[6]]. Advancements could help Nordstrom get products to customers quickly and efficiently through multiple channels, while also reducing inventory risk.

Nordstrom’s plan

In response, Nordstrom plans to invest heavily: approximately 40% of its $3.4B capital plan over next five years is allocated towards technology and supply chain. [7]

Notably, last year Nordstrom acquired a minority stake in DS Co, a supply-chain software firm.  [8] Primarily, DS Co’s software improves data transparency between Nordstrom and its suppliers by pulling together each company’s inventory data into a central control center. With each party’s inventory level visible, potential issues (e.g. surges, depletions) can be easily identified and communication friction is eased. DS Co also enables “drop shipping”, in which Nordstrom’s suppliers ship products directly to the end consumer. For example, if a customer orders a Nike shirt on Nordstrom.com, the order is routed to Nike, who ships the shirt to the customer without it ever entering Nordstrom’s inventory. Nordstrom still receives its margin, but by removing itself from the physical aspect of the supply chain it has reduces its inventory cost and risk. This method can be an effective way to cope with the aforementioned SKU proliferation: Nordstrom can expand its selection while only holding inventory of some SKUs, utilizing drop shipping for other, perhaps riskier SKUs.

In the short term, Nordstrom is making digital investments in customer-facing innovations to promote inventory fluidity between channels. For example, through Nordstrom Local, customers try on products in an inventory-light “showroom”, then place a customized order online [9]. This allows Nordstrom to reduce supply chain costs and avoid in-store inventory decisions. Similarly, its mobile app now allows customers to scan items in its off-price stores, then order any color or size online [10]. For those looking to do the opposite, Nordstrom’s app also allows customers to reserve products online to try on in-store.

Further considerations

While I am bullish on the impact of Nordstrom’s digital supply chain investments, I would recommend a few areas for focus. Although software such as DS Co increases inventory transparency, it largely enables Nordstrom be reactive. I would argue that predictive technology, such as using past signals to predict demand shocks (planned new feature of DS Co [11]) has the potential to have an even higher impact.

I also believe that Nordstrom should invest in digitalization when making initial assortment decisions. By using software such as MakerSights, Nordstrom could analyze customer preferences for certain products and more accurately predict demand. Integrating this technology into their supply chain processes could help Nordstrom avoid costly inventory mistakes.

Finally, I suggest that the company balances partnerships with external technology vendors with investments in their internal team. While acquiring best-in-class digital tools is crucial, Nordstrom should also attempt to hire best-in-class technology talent. A strong internal team will help the company navigate the dynamic challenges that department stores will inevitably face in the near and distant future.

Questions for discussion

  • As supply chains become more digital, what is the role of the retailer? Is it a dealer of physical goods between manufacturer and customer, or can it be simply a broker of information?
  • Specifically, what are the implications for supply chain economics of certain parties using digital innovations to pass on risk to other parties?

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4 thoughts on “Department store woes? Nordstrom responds with digital supply chain innovation

  1. This was an interesting article, especially in regards to supply chain economics. As Nordstrom increases the amount of drop shipping and pushes the risk onto their suppliers, I wonder if any pushback will come. It seems to me that the suppliers will eventually tire of paying Nordstrom to be the middle man, and then consumers will wise up and see that they can order the same item direct form the supplier for a lesser price.

    It also seems to me that Nordstrom could lose their competitive advantage with unique products. As the supplier takes on more risk and is holding more inventory, Nordstrom is essentially giving up their right to exclusivity. It will become increasingly difficult for suppliers to maintain the risk, and they will have to find other end consumers to use those same products in order for the SKUs to be economically viable.
    I think that digitalization of the supply chain is important and necessary, but pushing off the majority of the risk to the supplier is eventually going to backfire on Nordstrom.

  2. Great article, James. As you flag in the article, Nordstrom faces a huge risk here of being cut out by the end customer going straight to the supplier. Nordstrom seems to feel it is an advantage that a customer could order a Nike shirt and have it be dispatched directly from Nike to the customer. For me, this just gives Nike a huge incentive to make the customer come directly to Nike next time, and since they don’t have to pay a margin to Nordstrom for direct-to-consumer products, they can undercut on price.

    Amazon may initially look like an example of why Nordstrom would not get cut out by the Nike and the end customer. However, it is successful because it has the opposite strategy, it houses the majority of the products it sells its own warehouses and uses its superior distribution network (and subscription pricing model) to make customers ‘stick’ with them.

  3. Two things interest me here.

    First. What was the strategic reasoning behind investing directly in a minority stake of DS Co? It seems like simply purchasing their software product would have been cheaper and led to the same end result. I can see why Nordstrom could capitalize on digital supply chain industry profits by being directly invested in digitalization software, but it’s not clear to me if this was the best use of their owners’ investment. Many traditional retailers are bound to see the benefit of companies like DS Co, so what gave Nordstrom the impression they knew the valuation of future potential in the space better than the market?

    Second. As we discussed in the Nordstrom case, Nordstrom’s customer promise revolves around customer service. Supply chain innovation is a necessity to be competitive, but has Nordstrom considered the implications of how digitalization will transform their service proposition?

  4. This article has been very interesting and in my opinion a great example of a company struggling to catch up on something it should have noticed 10 years ago. It is a bit surprising that Nordstrom reacts and seriously starts investing in technology only when its sales drop and the offline retail industry as a whole is hurt.
    There is a key issue directly related to the second question that I would like to raise: customer experience. The mentioned digital innovation at Nordstrom – DS Co enabling drop shipping -, according to me, is on one side passing the inventory and cost risks to suppliers but on the other side acquiring a huge customer experience risk for Nordstrom.
    Having worked at an e-commerce company in Nigeria that tried to leverage on drop shipping to quickly expand its business, I can say that it requires a very long supplier education process and until this is done it completely takes out from the company the control of the customer experience.
    In a context in which customer retention – given the strong and growing online players in retail – must be key for Nordstrom, is it the wisest decision to use digitalization for drop shipping? I believe there are many more uses to explore first.

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