February 04, 2007

Virtual CEO: Coldwater Creek and Inventory Management

Through comments and e-mail, many loyal readers of The MineThatData Blog voiced their opinion on creating a good customer experience when items are sold-out on a website. This discussion started when Becky Carroll talked about items being pulled from her shopping cart during a recent online shopping experience at Coldwater Creek.

What has been discussed can be summarized around at least four key constituents.

First, you have the customer, who rewards outstanding shopping experiences with loyalty and word-of-mouth.

Second, you have the inventory executive, responsible for the unforgiving task of not buying too much merchandise (requiring markdowns, and less profit), while at the same time not buying too little merchandise (causing lost sales, less profit, and a reduction in customer loyalty).

Third, you have a management team that prioritizes the work of the information technology folks, ultimately determining what the online customer experience looks like to the consumer.

Fourth, you have the Chief Executive Officer, responsible for determining an incentive plan for her leaders, an incentive plan that rewards leaders for accomplishing company objectives.

In most direct-to-consumer businesses, one of the primary objectives is to maximize fulfillment while minimizing markdowns. There is a sweet spot where profit is maximized. When too much merchandise is purchased, markdowns occur.

Markdowns are horrible for a business, because the business freely gives up profit to pay for mistakes in execution and anticipation of fashion. A $100 item that has a $50 cost of goods yields $50 of profit. Marking the item down to $69 to clear it reduces profit on that item from $50 to $19. Worse, the customers who buy the item are often discount-oriented customers, meaning there are fewer loyal customers willing to pay for something at full price.

Lost sales are also horrible for a business, as evidenced by Becky's post. Lost sales can create a bad experience if not executed correctly, and can reduce customer loyalty.

CEOs like to provide incentives to Inventory Executives, incentives that protect the profit of the overall business. An Inventory Executive might receive a larger bonus payout if he hits the 'sweet spot' between lost sales and markdowns. An Inventory Executive quickly loses his job when he fails to hit the sweet spot.

As a result, the Inventory Executive has a significant incentive to endorse any strategy that protects the profitability of the business, and the long-term prospects of keeping a well-paying job. This person could encourage any activity that is, theoretically, not a great customer experience, if it means that more data is collected on items where the Inventory Executive makes a mistake.

I am not saying this is what happens at Coldwater Creek. I am saying that seventeen years in this industry help me understand what the business is up against.

So here is a challenge for all of my readers who responded via comments and e-mail on behalf of the customer (I have yet to receive one response supporting the leaders of a business).

Pretend you are the CEO of Coldwater Creek. Knowing what you now know about managing inventory, how would you set up a bonus plan for your leadership team that achieves the following:
  • Protects the 'sweet spot' where your inventory team doesn't purchase too little merchandise, or too much merchandise.
  • Provides incentives for your creative or online marketing team to write language that is customer friendly when merchandise is not available, or is about to run out.
  • Provides incentives for your IT staff to work outside of company-stated priorities to fix problems like the shopping cart issue that frustrated Becky, while still addressing company-stated priorities.
  • Provides incentives for your analytical folks to develop analytical tools to correctly forecast potential sales when items run out.
What would your bonus plan look like for your leadership team, to accomplish these objectives?

An even more intriguing question to consider --- what do you do when your CEO and Inventory VP don't have a passion for the customer experience, won't allocate resources to fix the problem, are not likely to be fired in the next few years, and are delivering outstanding sales and profits? Now what?

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