{"id":22093,"date":"2017-11-13T23:32:45","date_gmt":"2017-11-14T04:32:45","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/nordstrom\/"},"modified":"2017-11-14T14:51:55","modified_gmt":"2017-11-14T19:51:55","slug":"department-store-woes-nordstrom-responds-with-digital-supply-chain-innovation","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/department-store-woes-nordstrom-responds-with-digital-supply-chain-innovation\/","title":{"rendered":"Department store woes? Nordstrom responds with digital supply chain innovation"},"content":{"rendered":"

Industry context & supply chain opportunities<\/strong><\/p>\n

From the rise of online competitors to a decline in mall traffic, a myriad of headwinds have resulted in stormy seas for department stores [1]<\/a>. Industry giants such as Macy\u2019s and Kohl\u2019s have struggled mightily in recently years. Nordstrom, which just reported a 0.9% decline in Q3 same-store sales from 2016 to 2017, is no exception [2]<\/a>.\u00a0 However, Nordstrom is fighting back with an effort to digitalize its supply chain.<\/p>\n

An effective, efficient supply chain is central to a retailer\u2019s success. Nordstrom must predict customer demand for products, order quantities of those products from brands, and hold inventory in an effort to quickly deliver those products to customers both in-store or online.<\/p>\n

Harnessing digital technology for its supply chain is critical to Nordstrom for two key reasons. First, ecommerce represents a growing percentage of Nordstrom\u2019s business: approximately 25% of sales compared to 5% ten years prior) [3]<\/a>. Nordstrom must set up its supply chain to successfully handle this shift and integrate its channel strategies. Second, online search transparency has increased customer expectations of selection and customization, leading to SKU proliferation [4]<\/a>. As a result, supply chain decisions are more complex and riskier than ever. In the company\u2019s latest 10K, Nordstrom cites inventory as a key risk: over-buying leads to discounting and margin deterioration, while under-buying results in lost additional sales [5]<\/a>.<\/p>\n

The opportunity is enormous: a digital supply chain streamlines information flow and creates transparency to support effective decision making and responsiveness [[6]<\/a>]. Advancements could help Nordstrom get products to customers quickly and efficiently through multiple channels, while also reducing inventory risk.<\/p>\n

Nordstrom’s plan<\/strong><\/p>\n

In response, Nordstrom plans to invest heavily: approximately 40% of its $3.4B capital plan over next five years is allocated towards technology and supply chain. [7]<\/a><\/p>\n

Notably, last year Nordstrom acquired a minority stake in DS Co, a supply-chain software firm. \u00a0[8]\u00a0<\/a>Primarily, DS Co\u2019s software improves data transparency between Nordstrom and its suppliers by pulling together each company\u2019s inventory data into a central control center. With each party\u2019s inventory level visible, potential issues (e.g. surges, depletions) can be easily identified and communication friction is eased. DS Co also enables \u201cdrop shipping\u201d, in which Nordstrom’s suppliers ship products directly to the end consumer. For example, if a customer orders a Nike shirt on Nordstrom.com, the order is routed to Nike, who ships the shirt to the customer without it ever entering Nordstrom\u2019s inventory. Nordstrom still receives its margin, but by removing itself from the physical aspect of the supply chain it has reduces its inventory cost and risk. This method can be an effective way to cope with the aforementioned SKU proliferation: Nordstrom can expand its selection while only holding inventory of some SKUs, utilizing drop shipping for other, perhaps riskier SKUs.<\/p>\n

In the short term, Nordstrom is making digital investments in customer-facing innovations to promote inventory fluidity between channels. For example, through Nordstrom Local, customers try on products in an inventory-light \u201cshowroom\u201d, then place a customized order online [9]<\/a>. This allows Nordstrom to reduce supply chain costs and avoid in-store inventory decisions. Similarly, its mobile app now allows customers to scan items in its off-price stores, then order any color or size online [10]<\/a>. For those looking to do the opposite, Nordstrom\u2019s app also allows customers to reserve products online to try on in-store.<\/p>\n

Further considerations<\/strong><\/p>\n

While I am bullish on the impact of Nordstrom\u2019s digital supply chain investments, I would recommend a few areas for focus. Although software such as DS Co increases inventory transparency, it largely enables Nordstrom be reactive. I would argue that predictive technology, such as using past signals to predict demand shocks (planned new feature of DS Co [11]<\/a>) has the potential to have an even higher impact.<\/p>\n

I also believe that Nordstrom should invest in digitalization when making initial assortment decisions. By using software such as MakerSights, Nordstrom could analyze customer preferences for certain products and more accurately predict demand. Integrating this technology into their supply chain processes could help Nordstrom avoid costly inventory mistakes.<\/p>\n

Finally, I suggest that the company balances partnerships with external technology vendors with investments in their internal team. While acquiring best-in-class digital tools is crucial, Nordstrom should also attempt to hire best-in-class technology talent. A strong internal team will help the company navigate the dynamic challenges that department stores will inevitably face in the near and distant future.<\/p>\n

Questions for discussion<\/strong><\/p>\n