The North West Company - Case Study

The following case study is about retail operator The North West Company.

The North West Company has 147 stores across the country in different communities with their own preferences and end customer decision making abilities.

The Company has a complex supply chain system which is currently based on “Push” strategy, there are category managers for head office analyzing historical sales data, markdowns trends and worked with suppliers to place orders and allocating products to stores.

My recommendation would be it to implement “Pull” strategy for food products and improve “Push” strategy for general merchandise goods.

The Company Forecast and Procurement procedures are accruing mostly during November - March, and then orders are placed with the suppliers. Merchandised goods are being shipped to the main distribution center at Winnipeg in June- July and then shipped to the stores. Also, The Company has broad chain of different size stores and some of those are very remote from the main DC. As all goods shipped to the main distribution center first and then to the stores, which means that most of SKUs will have the same lead time for all stores/locations, however it could be not the case. Also, The North West Company has a general schedule for markdown based only on store sizes.

Barry McLeod, the Director of procurement and marketing, of the North West Company is thinking to implement a “pull” strategy in supply chain system and needs benefits, cost and risk analysis and implementation plan for this strategy. The main benefit of localization for the company is it will be higher inventory turnover rate; for the customer, it will be more customized shopping experience based on their local community needs.

By implementing new strategy, the Company may face challenges such as capital investment into computer-based Advanced Ordering System, staff training, and system implementation decisions

The following section will address issues that are faced by The North West company and its supply chain.

There were several issues identified which prevents inventory turns from growing and minimizing margins.

Strategic long term issue:

1. Forecast for all goods are made on “push” basis strategy despite of goods nature: perishable products (food) or merchandize.  A lead time/ shelf life for 2 different categories are different; those product categories should have different strategies to generate more revenue and higher margins.

Short term issues

1. Local stores don’t have flexibility of ordering due to a low level of OTB. Basically, stores are generating inventory as items are not being sold.  Inventory costs are rising; discounts are applicable as time goes by and at the end it leads to a low margin level.

1. Current markdown schedule is applicable to all items without consideration of its seasonality. For example, in big stores “ready to school items” first started to be advertised in June when stores have those goods at the warehouse. According to the markdown schedule, first discount of 25% should apply after 8 weeks from the first day of sale. This being said, 25% discount will be provided in early August.  In some stores that could be just a pick sale season for school goods and potentially no or low level of competitors around. Local store could keep the same level of prices without any discount and maintain higher level of margins. By centralizing discount system, local stores are not able to make decisions on discount levels themselves.

1. Popular items often sell out the day they arrived in stores and at the same time excess stock items can reach 75 percent level markdown and them shipped back to North West’s clearance outlet in Winnipeg.

1. Products arrive at the distribution approximately two months in advance prior selling period. Inventory is separated between food product and regular on two floors. Space is optimized because of the tight managing schedule, however the lead-time to store is too long. Excess merchandise is pushed to stores and becomes subject to markdown soon.

Environnemental Analysis

The North West Company has a lower inventory turnover rate compared to its competitors because of the use of “push strategy” within supply chain. Customers likely will be shopping around at different retail chain if there are no inventory in order to meet their needs.

Quantitative and qualitative analysis – Root Cause

Based on my analysis, it is not cost efficient to keep items more than 4 month in store as they become non-marginal. If will influence overall marginal level. So this being said, they need to increase their turn over, deliver more frequently, sell more often. Need better sales planning. Provide discount at a later stage.

Stores have from 4-11.5% inventory not marginal at all if you apply discounts as per schedule.

The tale below demonstrates how current inventory and sales strategies are influencing

warehousing costs and margin levels with the current discount system.

1. North western Company may keep the same “Push” strategy, however it will require a

detailed analysis on local market needs.

a) Pros:

- There will be no need on capital investment into a new computer base program

- Labor will not require special training

- Marginal level still could be increased

b) Cons:

- Market analysis should be done carefully, almost for every store/area individually

- More analytical time will require

- Forecast level by head office will be improved, but still not at the level of local stores

- Turn over may not be at desired level

2. The Company may change its discount schedule policy, so items will be shipped to the

discount store faster and local stores will have increased OTB. Once inventory items are

reaching 75% discount mark, they should be shipped to the outlet location.

a) Pros:

- Stores will have increased OTB

- Overall margin levels may increase in local stores

- Turnover will be increased locally

b) Cons:

- Inventory Items may age at outlet location

- Warehousing problems may be faced at outlet locations as items will come in a

higher volume from local stores

- Overall marginal level may not increase on a global scale

3. North West may ship its products directly to the stores avoiding Winnipeg DC.

a) Pros:

- They could meet challenging demands and exclude forecast errors

- Shorten shipping period

b) Cons:

- May influence shipping cost, specially for remote locations and small stores

- May create different marginal levels in different locations as transportation cost will be

different based in volume of shipped goods.

If company decides to have a customized approach for all stores, it may lead them to a

management problem like: marginal control, shipment costs, discount schedules, etc.

The Company needs to have a motivation plan for all stores to be more profitable. For example

bonus from increased marginal levels, high turnover and reduced goods shipped to the

outlet facility. This way local stores will forecast better, will have a higher turnover, but in

smaller batches. As North West Company is global, they need to consider their purchasing plan.

This may influence the cost of buying goods from suppliers.

The following is a summary of my recommendations.

The North West Company has to categorize inventory into two sections: Food/Perishable products and Seasonal/Non Perishable products.

The Food/Perishable products should be changed to a “pull system” since inventory turn level is high, lead time is short and purchased from local and regional suppliers.

The Seasonal/Non Perishable should stay with a “push system”. This will reduce storage time at distribution center, the inventory can be ordered later date.

By developing and implementing computer-based advanced ordering system for all stores the store managers would see on hand inventory, what in transit and aging inventory.

Implementation

• First Step (6 - 8 Months)

Management and main departments responsible should all agree to implement localization strategy companywide for food products. Few stores should be picked up for pilot testing and focus on a few products (SKU’s) or categories where impact might be visible. Full training for all stakeholders involved should take place with insource and outsource coaching. This coaching should involve training for marketing analysis, better sales/demand forecast, so stores could meet customer needs with the right supply.

Tracking and placing store orders according to new forecast based on products and market trends.

• Second Step (1 – 2 Years)

This step will include big investment for about $10 million dollars to implement IT ERP strategy for the pilot stores and food SKU’s. Database creation.

• Third Step (1 – 2 Years)

Roll-out localization to all stores and all products if it was successful with food products.

Analyze and monitor all activities between stores in all categories to see if implementation plan is successful. After categorization and database creation, the category managers should measure different KPI’s (key performance indicators). The reduction in markdowns should be measured as well in order to determine aging inventory and if it feasible or not in the system.

If “push system” will succeed for food products implement it to all SKU’s in stores.

Monitor individual stores for marginal levels and keep local managers motivated by developing bonus net system based on KPI’s including margin, reduced items shipped to outlet stores, etc.

Also, company may control marginal levels by each SKU and if any low marginal level products are found, company may exclude those from selling.