Companies that sell over the Internet face a whole new set of demands when it comes to inventory replenishment. To ensure that products are available as promised yet still keep stock levels down, an "e-tailer" must fashion a more collaborative supply chain with key suppliers than traditional bricks-andmortar retailers typically do.
Five years ago, the Dutch online retailer wehkamp.nl did just that, forming an unusually close arrangement with its chief supplier of computers and related items to support a shift from weekly to daily restocking of its distribution centers. The two companies worked together to develop a process that closely connects replenishment and inventory levels to actual demand. As a result of that partnership, both retailer and supplier improved their inventory turns, reduced working capital in the supply pipeline, and boosted sales, especially for fast-selling items. Here's a look at how wehkamp.nl achieved those improvements with help from its supplier.
From mail order to Internet-only
Based in Zwolle, the Netherlands, privately owned wehkamp.nl has become the largest online retailer in that country. It sells a wide assortment of home goods, from televisions and computers to apparel. It handles more than 100,000 different stock-keeping units (SKUs) and makes some 4 million shipments each year. Although wehkamp.nl does not release revenue figures, its parent company, RFS Holland Holding B.V. (which also owns other retailers as well as credit management services in the Netherlands) reported annual revenues of about 488 million euros (about US $780 million) in fiscal year 2010/2011.
After starting out as a mail-order merchant some 60 years ago, today wehkamp.nl is online only. "We came from being a catalog company, meaning we sent a catalog once or twice a year to our customers," says Gerco van Norel, the supply chain planner for wehkamp.nl's electronics group. "We have since made the change to a full Internet company, so our only [platform] is the Internet."
Wehkamp.nl promises to deliver products the day after customers place their orders; hence, a product ordered before 10 p.m. on a Monday will be shipped to the buyer on Tuesday. Orders ship out from one of two warehouses. One facility, located in Maurik, stores large items like appliances, while another in the town of Dedemsvaart handles smaller items like DVDs and clothing.
Unlike some online retailers, wehkamp.nl generally does not ship orders direct from its suppliers to customers. "We prefer to have goods in our warehouse first so we can then combine shipments," explains van Norel. "So if a customer orders a mouse, a laptop, and a printer, we can ship all of the items out at once instead of making three different shipments."
The international third-party logistics company (3PL) DHL helps wehkamp.nl combine the various elements of orders so customers receive only one shipment. To do that, DHL picks up orders from the two warehouses and consolidates them at its own Utrecht hub. The 3PL then delivers those orders to buyers' homes or businesses throughout the Netherlands.
Five years ago, wehkamp.nl's management realized that its traditional supply chain model was causing problems in the online side of the business. As a catalog retailer, the company had placed orders weekly and restocked its warehouses based on in-house forecasts. When it switched to online selling, wehkamp.nl discovered that its methods for ordering and replenishment were leading to lost sales. It wasn't hard to understand why. Online customers were not willing to wait for their orders; they expected to place an order and receive deliveries very quickly. But the weekly ordering and replenishment system, which was designed for mail orders, meant that the items customers desired often were not in stock.
Moreover, wehkamp.nl wanted to expand its product range, but that meant tying up working capital in more inventory. If inventory levels weren't right, moreover, the company would have to mark down prices on overstocks. That problem was particularly acute for electronic goods, which tend to have a shorter shelf life because of the rapid pace of technological advancement.
What wehkamp.nl needed was a "pull" selling model rather than the traditional "push" approach. In the latter system, a catalog or bricks-and-mortar retailer predicts customer demand using forecasts based on historical data, and then "pushes" the goods out to buyers, enticing them to buy through marketing promotions and advertising. Successful online retailing, however, is predicated on a pull approach, in which customer orders drive the supply chain. To make the switch to a pull system, van Norel says, wehkamp.nl determined that it needed "more intense" relationships with its suppliers that would allow it to keep inventory levels down while having enough of the right mix of SKUs on hand to immediately fulfill customers' orders.
Automating complex decisions
In 2007, wehkamp.nl began discussions with a top supplier, the wholesaler ETC, about developing a new supply chain model involving daily replenishment and next-day shipping. ETC, the Dutch subsidiary of U.K.-based Specialist Computer Holding, distributes computer hardware and software from a variety of manufacturers.
"ETC was the best partner to do this with," says van Norel. "ETC could meet the requirement for delivering on a daily basis and was willing to invest in a new system [to make this happen]."
The two companies agreed to start with a pilot that involved computer-related products such as laptops, desktops, printers, and accessories. ETC would assume responsibility for keeping the right items in stock at wehkamp.nl's warehouses, a practice known as vendor-managed inventory (VMI).
The aim was to keep a lower level of inventory in wehkamp.nl's warehouses by replacing each unit sold daily. Thus, every day at around 5:00 or 6:00 a.m., the e-tailer provided ETC with information about the previous day's sales. At 11:00 a.m., ETC shipped the replenishment orders to wehkamp.nl's warehouses, by truck for large items like furniture or via DHL's package division for smaller ones.
To make that daily replenishment possible, the partners required software that could determine the appropriate level and type of inventory needed. They chose software from Agentrics, which provides a Web-based application that uses mathematical models to analyze sales data and inventory. The software calculates stocking levels based on a "pull" approach—in other words, sales data drives replenishment.
Agentrics' application replaced software that wehkamp.nl had developed inhouse to determine maximum and minimum inventory levels. "When we changed from a catalog to an Internet company, there was no specific software for that, so we had to do something ourselves," recalls van Norel.
One problem with wehkamp.nl's own software was that once one of the company's planners set the inventory levels, he or she would have to manually reset those levels if a product became "hot" and the online retailer started selling more of a particular item. The new software performs that complicated task faster and more easily, automatically calculating the "trigger" levels for replenishment—that is, the suggested order quantity for each SKU. Van Norel still has to manually set the initial inventory level for a new product, but thereafter the software makes adjustments to the suggested reorder quantity based on actual sales.
"For example, let's say we want to sell a new laptop computer," van Norel explains. " I think I'm going to sell ten a week, so I set the norm to ten. Then we start selling, and Agentrics starts calculating. If we sell more, the norm gets set higher. If we sell less, the norm decreases. It sounds pretty simple but it's really complicated."
The application provides a dashboard that gives supply chain planners strategic, operational, and technical perspectives on wehkamp.nl's inventory. Some examples: On the operational level, the software creates a list of the best-selling products and the slowestmoving ones. On the strategic level, the dashboard provides total inventory value and a breakdown of that value into categories, including fastmoving, slow-moving, inactive, and new products. On the technical level, the system provides both historical and current views of inventory, which allows the planners to see, for example, that 60 percent of the items in the warehouses are fast movers but only 50 percent fit that profile during the same period a year earlier.
The reports and dashboards are available throughout all levels of the company, which means everyone is working from uniform information. "This information is available on a daily basis to the planner, the unit manager, and top management," van Norel says.
Because actual sales are driving inventory restocking decisions, van Norel can let the software handle 80 percent of the replenishment orders automatically. He can then focus on the 20 percent of items that need special attention, such as seasonal goods or new products. In addition, a planner must still approve the replenishment shipments each day. "ETC sends the order to us for the planner to give the okay, but it's only a formality," van Norel notes.
More sales, less inventory
The three-month pilot worked so well that wehkamp.nl and ETC have made it a permanent way of doing business. The collaborative supply relationship's ability to keep even the hottest-selling product in stock increased sales and helped to fuel wehkamp.nl's 15-percent revenue growth in 2010.
"By ordering on a daily basis instead of weekly or monthly, we don't buy too much but [instead buy] exactly what the customer requires," sums up van Norel. "The percentage of customers waiting for their delivery has decreased. Because the service level has increased, so have sales."
At the same time that the e-tailer has increased sales, it has also achieved about a 30-percent reduction in safety stock, resulting in fewer markdowns and lower overhead. That inventory reduction frees up working capital, which means the company can invest in a wider assortment of products, according to van Norel. He notes that in the past, if a manufacturer came out with a new line of products, wehkamp.nl would be forced to choose which ones to carry due to financial considerations as well as limits on warehousing space. Now the online retailer can carry a wider product array and let customer demand determine the level of stock it keeps in the warehouse to support sales. The benefit of that strategy is clear, he says: "If the availability of individual products is higher, you sell more products overall."
Because daily replenishment and vendor-managed inventory have been so successful for computers and associated products, ETC has expanded that program to include some other types of hard goods it supplies to wehkamp.nl, such as cameras, appliances, and home electronics. The e-tailer, moreover, would like to get more suppliers involved in daily replenishment and is now in talks with vendors that furnish goods for its hardware category.
Wehkamp.nl's experience in collaboration with ETC clearly demonstrates the value this approach offers for online selling. "Instead of having to sell goods that are not popular, there can be a focus on the best-selling items. It's pull instead of push," van Norel says. "It's a totally different way of doing business."