I read an article the other day describing Macy’s strategy to blur the lines between stores and distribution centers. They are keeping a couple of DC’s, but looking to ship stuff customers ordered online more and more from store inventories. They currently ship a lot of the items customers go into the store and buy, but they are expanding it to ship online orders from stores. “Today, about 150 Macy’s stores are set up for shipping, and by the end of 2012, we expect that number to grow to 292 stores, on top of the inventories in four primary online fulfillment centers,‘ [chairman, president & CEO] Lundgren said. ‘We also are beginning to use store-to-customer shipping to fill online orders.”
Makes sense. According to an economist named Kleinman: “The time to ship an item to a customer is shorter from the local retail location than from centralized hubs to a customer that may be half way around the country. Transportation is a larger chunk of fulfillment cost than the cost of real estate. What they are doing is minimizing the cost of transportation while maximizing the efficiency of their existing asset.”
Kleinman isn’t getting the entire picture, however. Let’s bounce over to Kevin’s old pals at American Apparel – the Made in the USA clothing people who are always in trouble for sexual harassment, immigration violations or both. For the record, let’s make it clear that there is nothing lean about American Apparel. They are losing money and turned inventory at a ludicrous 1.4 times last year. Flow and time are foreign concepts to them. “I’ve had ideas on Monday and had them hanging in a storefront on Friday in Manhattan,” their head of manufacturing said. May well be true, but the average couple of yards of fabric bought by American Apparel take almost 9 months to get to someone’s closet. I could make a shirt in China and row it across the Pacific faster than these guys get shirts made and sold in the USA from their factory in LA.
The real lesson is embedded in their accounting statements. Sales – $547 million; Cost of Goods – $252 million … and still lost money. They lost it because they spent a big chunk of that COGS on all that inventory, but most of it because they wasted $210 million on the ‘Cost of Sales’ and another $105 million on Admin. The cost of sales is 100% pure non-value adding waste. The value of an American Apparel shirt is not enhanced by a single dime as a result of everything that happens once it is produced – but that is when the real spending at AA begins.
This is the same phenomena we saw with Dollar Shave Club hammering down the price of razors by cutting out the retailers. It is why Amazon is making book stores a thing of the past, why video stores are disappearing, and why music stores are rapidly going the way of the T-Rex.
We are seeing a powerful convergence here. The Internet is becoming more widely available and the graphics make it easier to check out what we can buy on line. Social media is replacing advertising as a warp speed word of mouth engine letting us know what stuff is good – and what isn’t, making on line shopping less risky. Energy costs are high – and will probably stay high for a long time. The dismal economy is making us all much more value sensitive, and less willing and able to pay for all of the waste of retailers and massive DC’s. It all adds up to the inevitable death of retailing as we know it; the doom of huge, central DC’s; and the demise of traditional Madison Avenue thinking and big advertising budgets.
The move by Macy’s is an attempt to minimize the waste between factories and end users, as are all of the fumbling attempts at Walmart to figure out a way to merge on line buying with their money-pit massive retail store infrastructure, but not figuring it out yet quite as well as Lowes. Who knows how it will shake out but brick and mortar retailers everywhere are struggling with the fact that either they are adding value in their business, or they are doomed. And paying people minimum wage with no knowledge of the product, no service function, harsh return policies reflecting no responsibility for quality … all to peddle something I can buy cheaper directly from the manufacturer on line is hardly a viable business plan.
The accountants won’t get it so long as they think segregating costs by meaningless distinctions like fixed and variable, direct and overhead, labor and material are important. They will only figure it out when they realize that the cost distinction that really matters is between value adding and non-value adding.
Big money people and businesses vested in the way things have always been will fight it, but to no avail.
The government won’t see it. Getting the things we want and need without all of the people working in retail is a huge macro productivity boom, and retail jobs will be lost by the millions, while traditional measures of manufacturing productivity will not improve much. The economic data is all built around sectors – manufacturing, transportation, retailing – and changes in one that decimate another is not something their models can understand.
The big innovation proponents don’t see it – they envision innovation as new, whiz-bang technology stuff distributed and sold through the same old outrageously wasteful channels. The Food Network has a show called Invention Hunters, where a couple of guys look at new gadgets people have invented for the kitchen “hoping to find the next million dollar idea“. I heard them tell one inventor they needed a manufacturing cost of about $6-7 in order to sell the product for $29.95. Are you kidding me? We think an economic model that charges $3 of non-value adding waste for every $1 of value will sustain in the age of lean and the Internet? Old products sold through high value added channels will dwarf the economic impact of nano-technologies.
Economists – even smart ones like Tyler Cowen – don’t see it. He wrote “Some of the major technological marvels of today’s world are not doing so much to create new jobs. They’ll bring big gains but without putting too many people back to work …” The Internet isn’t a big job creator or even a big money maker (dot.com Roman candles notwithstanding). The Internet is the big productivity engine. Millions fewer in non-value adding, non-wealth creating retail jobs; and millions more in manufacturing working for lean companies that can make more customized products in small quantities and ship directly to customers.
The real promise of lean is beginning to take form, and it is exciting to watch. It’s looking more and more like the lean book historians will cite fifty years from now isn’t about Toyota, but Seeing the Whole. The winners over the next ten years will be whoever sees it first.