The crushing emergence of the “800-pound gorilla”, Amazon, has forced the US retail landscape to fundamentally shift and to do so swiftly. As Macy’s and J.C. Penny shut down 15% and 14% of their store bases, respectively, traditional retailers have struggled to balance their e-commerce obligations with their physical infrastructure in the new omnichannel era. However, to remain profitable and relevant, adapting the supply chain is critical.
Nordstrom’s online business has reached over $3 billion, growing 30% on an annualized basis since 2010 and representing ~25% of the company’s revenues.  Peter Nordstrom believes it could be 50% of their business in the next five years or so.However, the rapid rise of e-commerce and “omnichannel” retailing demands far more complex and interconnected supply chains and today’s retail supply chains are not set up for it. The accelerated shift to e-commerce has negatively impacted Nordstrom’s overall profitability as CFO Michael Koppel notes:
“This business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments. With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales.”
Rising demand for online retail has created a bottleneck at the fulfillment stage, whereby carriers and retailers are struggling to manage fulfillment and their inventory with the increasing volume of online orders. Furthermore, SKU proliferation through e-commerce has created new capacity and cost challenges including expenses for picking up additional online orders, acquiring additional DC space and processing peak-season demand. As such, even with distribution centers across the country, digitalizing the supply is critical since supply can still be restricted because of the costs associated buying and holding inventory, as well as building and maintaining facilities. Moreover, by not adjusting the supply chain to better manage inventory, retailers like Nordstrom risk either overbuying and leading to discounting and margin deterioration, or underbuying and missing sales opportunities.
So how has Nordstom adapted?
An investment in DS Co., a supply software firm, is Nordstrom’s first step to combatting this problem. The software acts as a middleman such that retailers and their suppliers can seamlessly communicate information about inventory levels and other data to each other. In traditional supply chains, retailers and suppliers use different methods to track inventory data, making it difficult to share the data and ensure that products are in stock and can be shipped out in time. As such, the customer is led to believe that a product is available when in fact it is not.
DS Co. automatically reduces inventory quantities using advanced logic – meaning that when a supplier hasn’t updated their supply since recent orders came in, DS Co. logic will inform the retailer of the most likely true inventory, resulting in lower cancellation rates. Furthermore, the investment in inventory control enables Nordstrom to further to expand its “drop shipping,” a delivery method in which the product is shipped to the consumer directly from the manufacturer, as opposed to the traditional method of shipping from the retailer’s distribution center.
Rather than guessing months in advance as to what consumers will want to purchase and then holding the inventory, by utilizing drop shipping and DS Co. software, Nordstrom will let consumers dictate what they want and adjust accordingly. In doing so, Nordstrom will be able to reduce the cost and the risk of holding inventory. Additionally, Nordstrom may stock only popular colors of a certain item, but make a broader array of colors available to customers via drop shipping.
Next steps for Nordstrom?
While it remains to be seen who will win and who will lose in the new retailing era, retailers will either build a transformative set of supply chain capabilities in the new world order or struggle to survive. These changes will require both meaningful investment and time. Nordstrom is ready to adapt as CFO Koppel notes, “with technology and supply chain as a key enabler of delivering customer experiences, roughly 40% of our plan is allocated towards modernizing our tech platform, delivering digital and mobile enhancements, and expanding our fulfillment network.” As Nordstrom looks ahead, they should focus on implementing advanced analytics to better understand consumer preferences and finding ways to make shopping in a brick and mortar store more experiential and personalized for customers.
Final thoughts / questions
Beginning to digitalize the supply chain is a good start, but will it be enough to help combat current retail trends or is it too late? Will the new concept stores even bring customers back? Ultimately, time will tell whether Nordstrom will be able to move fast enough and if their changes will make enough of a difference to survive.
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