Interesting article on the Wall Street Journal’s site about the challenges facing Marie Robinson – the Toys R Us head of their supply chain. In a growing on line selling world the big issue is the role of stores versus the role of distribution centers. The conundrum- as defined by the retailers – is that the inventory is best kept in the stores in case walk in customers want it, but distribution centers are more efficient when it comes to shipping it to the person who orders on line.
“If a store does too much packing and shipping it could disrupt in-store shoppers. If it doesn’t do enough, it can be more expensive than shipping from a distribution center where workers are doing it all day.”
“Filling orders from stores also adds new layers of complexity. At Toys “R” Us, analysts have to determine whether it is ultimately more economical to ship from a company distribution center or a store, depending on how much inventory is in each and how fast it is moving.
For example, it might be more profitable to ship from a store farther away from a customer, if it has slower-selling inventory that might otherwise be marked down.”
So what’s a girl to do ….. ?
The answer is simple- hire new accountants. With a little more common sense and a little less old school thinking the answer is fairly obvious. Whether Ms. Robinson is capable of asking ‘why?’ a few times and getting to the root of the matter (and the only long term model that will enable Toys R Us to survive in the long haul) is in doubt in light of the fact that her boss – Toys R Us CEO Jerry Storch – is looking to “increase the amount of inventory the company can offer online, and increase its overall profit.” Only believing the old accounting numbers would lead someone to think that increasing inventories will increase profits.
Here’s the deal: The big question is where to put the inventory. Why do they have so much inventory in the first place? Supply chain 101 – because they have long lead times. If Toys R Us had very short supplier lead times – i.e. suppliers located in the USA who could ship the same day either to replenish small store inventories or directly to Toys R Us customers who bought on line – they would not need the “cavernous distribution center“, nor would they have to “disrupt in-store shoppers.”
So why does Toys R Us source from long – really, really long – lead time suppliers in China, instead of from very short lead time suppliers located in the same regions in which they sell? Because their accountants don’t know the cost of lead times. A worker takes five minutes to make a toy. Take that workers hourly rate, divide it by 60 and multiply that number by five and hang a “$” sign in front of it – that math is easy. On the other hand, place a purchase order and wait months for it to arrive, and carry enough inventory to cover all of the unexpected demand that might happen while you wait for it – that math is a complete mystery. Two time driven, resource consuming events … the one with easy math drives decisions, strategies and ultimately the fate of the company. The one with hard math is relegated to ‘non-financial measure’ status of secondary importance simply because management cannot see a clean cause and effect relationship between it and profit. It actually has a huge impact on profit – just not as simple to see. And so it goes.
Of course, the problem is rooted in the whole fixed and variable quagmire that has accounting completely stumped. Moving one toy from China to the United States saves nothing. That “cavernous warehouse” and all of its employees, equipment and the mega-computer to run things will not change one iota. The savings is nil and the price of that one toy is higher. It is not incremental; it is a strategic matter . Move most of the toys to the USA and millions of dollars are saved.
The future of the toy retailing business – and every other business far that matter – belongs to the big thinking, risk taking leaders who really understand the underlying economics of their business and the supply chain. The losers will be those who focus on direct purchase prices, think lead times have little cost impact, and spend their time wrestling with whether work should be done in cavernous warehouses or in stores disrupting customers.
Erik Nordin says
You are exposing a topic that I have been ranting about to my “internal customers” for years. I am constantly amazed by how many accountants and finance resources (and some design engineers) that do not understand the impact of lead time on the total cost of doing business, especially in the electronics industry. Unit cost and overhead absorption drive their decisions. That assertion is plain to see by their reaction to my push for local suppliers with short lead times.
You should see their reaction when I explain that, all things being equal, I will gladly pay a unit price of 5% more for a component that has 1 to 2 week lead times over a product that is cheaper and requires 6 to 13 weeks of lead time. Believe it or not, but I have one “battery” supplier in Europe that requires 26 WEEKS lead time (6 months!!) and a crazy-lengthy annual “volume agreement”, and those same accounting and finance resources are irate when it comes time to release payment for the large quantity of “batteries” we had to order.
I continue to relish the day when my suppliers are local, embrace quick change-over methodologies, ship to kanban replenishment signals, provide value added input to our design teams and are willing to share in cost savings we both bring to the table, AND when our cash flows are much more even and predictable.