April 2, 2009
SCDigest: Out of Stocks – and Suppliers – Short Circuited Circuit City
By David K. Schneider, president of David
K. Schneider & Co.
Through a special arrangement,
presented here for discussion is an excerpt of a current article from Supply
Chain Digest.
A recent SCDigest article Just How Big
is the Out-of-Stock Problem in Retail?, reminded me of the "Walk
to Buy" ratio, which measures how many customers walk out of a
store without a purchase versus how many customers actually bought
something. Typically a "walk" was considered the result
of one of three things:
- Out-of-stock of the exact item and there was no
substitute or the substitute was not acceptable. - The customer could not find the in stock item,
and/or could not find help to locate the item. - The price of the item was too high.
Good marketing and pricing is supposed to
fix the second issue. The third issue can be addressed through good retail
layout, signage, and floor customer service. But the first one is a supply
chain issue.
Out-of-stocks came up in a discussion with
one of my clients regarding Circuit City stores. Conventional wisdom is
that they could not compete against Best Buy.
Some of what
"shorted" Circuit City was certainly self-inflicted. Exiting the
appliance market and changing the compensation plan from commission to a
flat sales program certainly contributed to its demise.
But what really killed Circuit City were
out-of-stock issues that began about three years ago. This is anecdotal,
but my own personal electronics/computer buying routine at the time included
going to Tweeter, Circuit City, and finally to Best Buy.
Often at Circuit City accessories would be
out-of-stock or there was no acceptable substitute. I would "walk" out
and go to Best Buy. Accessories were pricier –
but they were in stock. Over time, this led to a change in my purchasing
patterns. I suspect I am not alone
Circuit City was unable to fix its out-of-stocks
because they were unintentionally "shorted" by their own suppliers. An
increase in electronic market penetration by a more "disciplined" retailer,
Wal-Mart, didn’t help either.
Consumer product manufacturers often do not
make enough product to meet all of the demand and there is always competition
from other manufacturers. The last thing that they want is excess inventory.
To prevent markdowns, they don’t ramp up production, but limit it so there
is unfulfilled demand.
Manufacturers receive orders and often first
ship complete orders to large retailers with a supplier compliance program
to avoid chargebacks. Orders for a few other smaller retailers who also
attended "compliance school" arrive, so they fill those too. A
fraction of units remain to fill the rest of the orders, and they set priorities
using the
"ship by" dates. Manufacturers let the unfilled retailers know
they are producing more and may ship a few days late. But by now they
may get replenishment orders from 3 or 4 big retailers who have the strong
compliance programs. They cut back on the smaller retailers, or the retailers
without the program. The retail customers with
"fill rate" compliance programs always get to the top of the allocation
list.
Collaborative Forecasting and Replenishment
(CPFR) as a way of trying to fix this issue didn’t work. However, retailers
who have really embraced a compliance program as a
"collaborative" tool to improve performance can attest to how they
reduce stock-outs with a strong on-time and full-fill program.
Though it tracked fill rate performance,
Circuit City did not charge suppliers for poor performance in this area.
That led to greater out-of-stocks than they would otherwise have faced,
accelerating the ultimate death spiral.
Would fewer out-of-stocks have kept Circuit City
alive? That is unclear. But it sure might have helped.
Discussion Questions: Was the fact that Circuit
City did not charge vendors for poor fill-rates a significant factor
in its downfall? Generally, are you for or against charging back vendors
for shipping non-compliance?
BrainTrust
Recent Discussions
Discussion Questions
Poll
While out-of-stocks may have hurt Circuit City and been a contributor to its demise, laying off a big chunk of its sales staff is as big a cause. Here in Atlanta, you could go to CC and actually talk to someone who knew what they were talking about–this doesn’t happen at Best Buy. With similar prices (or, at least, the ability to find good deals) at either place, it was customer service that was the edge for CC. They gave that up.
Circuit City was brought down by a number of failings, not the least of which was the lack of a competitively differentiated strategy and compelling value proposition. But poor operational execution will doom any strategic direction a company takes. When a retailer like CC fails, the failures occur across the full spectrum. In the end, the responsibility for such a systemic failure lies at senior management’s feet.
CC had many challenges for sure and I don’t think the one mention above was the decision maker. I believe this is a good reminder to all retailers that having a commitment to excellence across the board is crucial.
My guess is that CC was probably a slow payer and therefore suppliers were not too willing to keep up. I’m pretty sure if CC would have prepaid for all their inventory, it would have been on the shelves. Once rumors about bankruptcy start to fly around, suppliers get very cautious.
Suppliers often intentionally short their production in anticipation of about 10% of the orders being canceled off for one reason or another. They are banking on someone canceling because they do not want excess inventory they then have to dump at lower prices, or hold onto longer and carry the excess on the books. Carrying over goods ties up dollars they need to make the next goods.
If you are going to short any one company, it would be the one that carries no penalty for short ships. However, a bigger factor might be in pay history. In the latter years for Circuit City, as a supplier, you might short ship the guy who might not pay you back in a timely manner. Why should I ship goods to a company who hasn’t paid me for the goods I shipped them last month?
I must agree with other comments here. While it was yet another factor, this was hardly the key issue. Having done significant business with both over the years, the key difference was cultural and structural and things like this are only symptomatic of the core problems.
Circuit City merchants manipulated so much they often missed the key issues. They fell way behind Best Buy and others in really partnering. Their IT systems, which once led, became dated. At the heart, they lectured instead of listening. All of these things led to poor decisions, a runaway strategy, poor execution and all the symptoms seen.
Like another comment, how can you fire salespeople for doing what you asked them to do? Change the plan, not the people. This was true throughout the organization.
I’m sure this didn’t help but CC’s demise was poor management on many fronts, not the least was firing experienced salespeople just as high tech TVs were rolling into the market. Retail is supposed to be a selling culture–that’s what moves the merch. That’s why CC was included in the landmark book, “Good to Great.” Not stack ’em high and hope they fly. Show me a great selling culture and I’ll show you a brand–that is not what CC became.
I would also point to the VP who hated appliances and made it his mission to get rid of them–even though they made up 30% of sales.
I respect vendors that enforce strict “first come, first served” policies with regard to order fulfillment (vs. favoring one retailer over another). Vendors who jump through hoops to fulfill big store orders then send incomplete shipments to other accounts only encourage bad behavior with the big guys.
That said, it can be difficult to take the high road when/if the big guys are more punitive. That’s why retailers should implement and enforce penalties for late or incomplete orders. The problem in the past, of course, has been with retailers who used such penalties as a profit center. This too can have a backlash as Kmart, Saks (with its landmark chargeback case), and others have found out. You can’t say that these practices gave them a leg up!
I think Circuit City’s lack of enforced penalties for under-performing suppliers was a contributing factor, but there’s no simple explanation for their demise. Poor real-estate choices, lack of a loyalty program, and mistreatment of store employees are also to blame. Most of all, I don’t think Circuit City took the time to really understand their customers. Their competitors, Walmart and Best Buy, seem to know their customers well and tailored the shopping experience better.
There’s a time line for Circuit City here.
There has to be some blame put on vendors for creating their inventory problem but as for ‘blame percentage’ it’s still 99.99 CC’s fault and .01 for the vendors. If I’m a manager of a CC and I see that my shelves are emptying and my backroom is thinning, I’m going to make the call to my district and regional support teams and find out what the heck is going on. This could be a result of the overall morale situation at the store level. Most of the more-experienced staff were turfed more than 2 years ago, so blaming the economy doesn’t hold water with me.
Vendor penalties are effective but I think CC’s situation was different. Vendors had a choice, ship it to Walmart or Best Buy and possibly sell it, or send it to CC and wait for them to go bankrupt and not get paid. But I guess in the end, that still falls on the CC’s upper management and buyers. Vendor penalties will also only work if you have the volume to back it up. I prefer more of a partnership with vendors than an adversarial relationship. In the end, we both want the same things so it is more productive and profitable for me to work together with the vendor.
Sadly, I can’t believe that the demise of Circuit City was linked to poor oversight of order fulfillment. Rather, a strategic positioning completely without competitive differentiation is more likely to be the underlying cause of death.
As with a patient riddled with cancer, often secondary infections or system failures occur which are not specifically related to the root cause. However, treating these doesn’t save the patient. The root cause of Circuit City’s performance was ineffective management and a lack of competitive visionary leadership. Tracing the impact of this disease can lead to discovering secondary infections, such as chronic out of stocks, or ineffective marketing spend, or poor in-store operational procedures, or sub-optimal race track configurations…the list could be much longer.
Certainly being inconsistently out of stock on product is not an effective way to build customer loyalty or drive sales. However, to point at a specific program for penalizing suppliers for not filling orders properly is myopic at best. It’s a point solution to a much larger, systemic problem.
When a company isn’t dutiful in one aspect of its business, it frequently falls short in other areas too. And so we now understandably examine the demise of Circuit City.
Out-of-stocks hurt retailers and suppliers. First, retailers need to track supplier performance. Unless one knows what is going on, they cannot take corrective action. So it would appear Circuit City was not doing a good job of tracking supplier performance.
The normal retailer reaction is to increase inventory, which has a cost associated with it. The greatest contributing factor to out-of-stocks and excess inventory is always the forecast. Some suppliers may have shorted Circuit City simply due to declining sales and profitability. They simply did not want to take the loss from impending bankruptcy. Note, supplier performance includes much more than just fill rate. All variance in performance increases a retailer’s costs.
On the other side, any retailer that charges/deducts for supplier performance has a ’90s mentality. Beating up on suppliers is not the answer. Collaboration today has yet to achieve any real reduction in out-of-stocks. It is clear even Wal-Mart has not solved their OOS problem, though they appear to have a lower percentage than some other retailers.
The solution to the out-of-stocks issue is to stop forecasting. Excluding fashion retailers, most drive store re-stocking off POS sales. Retailers should provide suppliers with daily POS sales data. Suppliers should use this information to keep the retailer in-stock. We call this Demand Driven Management. When both retailers and suppliers are driven by customer sales, the excuses fall away.
This was a symptom, but not the disease. If the company allowed such a process, the disease appears to be poor management of processes.
But what this does validate is the Supply Chain as a critical link to the success of retailers. Far too many retailers do not recognize the value or the need to be best of breed supply chain professionals. Wal-Mart is one that recognizes that they are not in the retail business but in the distribution business.
As most of the contributors above have stated, OOS were not the main reason for their demise. The failings were many. The problem is, few retailers of any kind react in an effective manner to OOS. The biggest retailers out there have 8-15% OOS and even more for promo items. There is either a culture of customer service or there is not. OOS is one of the key ways to upset the customer. Product knowledge of the sales force is another.
The list goes on. If the captain running the ship doesn’t see these problems as ones to put at the top of their list, then they have bigger fish to fry.
More Discussions
As Boomers ‘Age Out of Peak Purchasing,’ How Can National Brands Retain Interest With Gen Z?
According to a recent First Insight study titled “Is Gen Z Still Choosing Your Brand,” while…Is Supply Chain Volatility Here To Stay?
Can we expect an ongoing volatility to remain in terms of retail supply chain?Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?
While out-of-stocks may have hurt Circuit City and been a contributor to its demise, laying off a big chunk of its sales staff is as big a cause. Here in Atlanta, you could go to CC and actually talk to someone who knew what they were talking about–this doesn’t happen at Best Buy. With similar prices (or, at least, the ability to find good deals) at either place, it was customer service that was the edge for CC. They gave that up.
Circuit City was brought down by a number of failings, not the least of which was the lack of a competitively differentiated strategy and compelling value proposition. But poor operational execution will doom any strategic direction a company takes. When a retailer like CC fails, the failures occur across the full spectrum. In the end, the responsibility for such a systemic failure lies at senior management’s feet.
CC had many challenges for sure and I don’t think the one mention above was the decision maker. I believe this is a good reminder to all retailers that having a commitment to excellence across the board is crucial.
My guess is that CC was probably a slow payer and therefore suppliers were not too willing to keep up. I’m pretty sure if CC would have prepaid for all their inventory, it would have been on the shelves. Once rumors about bankruptcy start to fly around, suppliers get very cautious.
Suppliers often intentionally short their production in anticipation of about 10% of the orders being canceled off for one reason or another. They are banking on someone canceling because they do not want excess inventory they then have to dump at lower prices, or hold onto longer and carry the excess on the books. Carrying over goods ties up dollars they need to make the next goods.
If you are going to short any one company, it would be the one that carries no penalty for short ships. However, a bigger factor might be in pay history. In the latter years for Circuit City, as a supplier, you might short ship the guy who might not pay you back in a timely manner. Why should I ship goods to a company who hasn’t paid me for the goods I shipped them last month?
I must agree with other comments here. While it was yet another factor, this was hardly the key issue. Having done significant business with both over the years, the key difference was cultural and structural and things like this are only symptomatic of the core problems.
Circuit City merchants manipulated so much they often missed the key issues. They fell way behind Best Buy and others in really partnering. Their IT systems, which once led, became dated. At the heart, they lectured instead of listening. All of these things led to poor decisions, a runaway strategy, poor execution and all the symptoms seen.
Like another comment, how can you fire salespeople for doing what you asked them to do? Change the plan, not the people. This was true throughout the organization.
I’m sure this didn’t help but CC’s demise was poor management on many fronts, not the least was firing experienced salespeople just as high tech TVs were rolling into the market. Retail is supposed to be a selling culture–that’s what moves the merch. That’s why CC was included in the landmark book, “Good to Great.” Not stack ’em high and hope they fly. Show me a great selling culture and I’ll show you a brand–that is not what CC became.
I would also point to the VP who hated appliances and made it his mission to get rid of them–even though they made up 30% of sales.
I respect vendors that enforce strict “first come, first served” policies with regard to order fulfillment (vs. favoring one retailer over another). Vendors who jump through hoops to fulfill big store orders then send incomplete shipments to other accounts only encourage bad behavior with the big guys.
That said, it can be difficult to take the high road when/if the big guys are more punitive. That’s why retailers should implement and enforce penalties for late or incomplete orders. The problem in the past, of course, has been with retailers who used such penalties as a profit center. This too can have a backlash as Kmart, Saks (with its landmark chargeback case), and others have found out. You can’t say that these practices gave them a leg up!
I think Circuit City’s lack of enforced penalties for under-performing suppliers was a contributing factor, but there’s no simple explanation for their demise. Poor real-estate choices, lack of a loyalty program, and mistreatment of store employees are also to blame. Most of all, I don’t think Circuit City took the time to really understand their customers. Their competitors, Walmart and Best Buy, seem to know their customers well and tailored the shopping experience better.
There’s a time line for Circuit City here.
There has to be some blame put on vendors for creating their inventory problem but as for ‘blame percentage’ it’s still 99.99 CC’s fault and .01 for the vendors. If I’m a manager of a CC and I see that my shelves are emptying and my backroom is thinning, I’m going to make the call to my district and regional support teams and find out what the heck is going on. This could be a result of the overall morale situation at the store level. Most of the more-experienced staff were turfed more than 2 years ago, so blaming the economy doesn’t hold water with me.
Vendor penalties are effective but I think CC’s situation was different. Vendors had a choice, ship it to Walmart or Best Buy and possibly sell it, or send it to CC and wait for them to go bankrupt and not get paid. But I guess in the end, that still falls on the CC’s upper management and buyers. Vendor penalties will also only work if you have the volume to back it up. I prefer more of a partnership with vendors than an adversarial relationship. In the end, we both want the same things so it is more productive and profitable for me to work together with the vendor.
Sadly, I can’t believe that the demise of Circuit City was linked to poor oversight of order fulfillment. Rather, a strategic positioning completely without competitive differentiation is more likely to be the underlying cause of death.
As with a patient riddled with cancer, often secondary infections or system failures occur which are not specifically related to the root cause. However, treating these doesn’t save the patient. The root cause of Circuit City’s performance was ineffective management and a lack of competitive visionary leadership. Tracing the impact of this disease can lead to discovering secondary infections, such as chronic out of stocks, or ineffective marketing spend, or poor in-store operational procedures, or sub-optimal race track configurations…the list could be much longer.
Certainly being inconsistently out of stock on product is not an effective way to build customer loyalty or drive sales. However, to point at a specific program for penalizing suppliers for not filling orders properly is myopic at best. It’s a point solution to a much larger, systemic problem.
When a company isn’t dutiful in one aspect of its business, it frequently falls short in other areas too. And so we now understandably examine the demise of Circuit City.
Out-of-stocks hurt retailers and suppliers. First, retailers need to track supplier performance. Unless one knows what is going on, they cannot take corrective action. So it would appear Circuit City was not doing a good job of tracking supplier performance.
The normal retailer reaction is to increase inventory, which has a cost associated with it. The greatest contributing factor to out-of-stocks and excess inventory is always the forecast. Some suppliers may have shorted Circuit City simply due to declining sales and profitability. They simply did not want to take the loss from impending bankruptcy. Note, supplier performance includes much more than just fill rate. All variance in performance increases a retailer’s costs.
On the other side, any retailer that charges/deducts for supplier performance has a ’90s mentality. Beating up on suppliers is not the answer. Collaboration today has yet to achieve any real reduction in out-of-stocks. It is clear even Wal-Mart has not solved their OOS problem, though they appear to have a lower percentage than some other retailers.
The solution to the out-of-stocks issue is to stop forecasting. Excluding fashion retailers, most drive store re-stocking off POS sales. Retailers should provide suppliers with daily POS sales data. Suppliers should use this information to keep the retailer in-stock. We call this Demand Driven Management. When both retailers and suppliers are driven by customer sales, the excuses fall away.
This was a symptom, but not the disease. If the company allowed such a process, the disease appears to be poor management of processes.
But what this does validate is the Supply Chain as a critical link to the success of retailers. Far too many retailers do not recognize the value or the need to be best of breed supply chain professionals. Wal-Mart is one that recognizes that they are not in the retail business but in the distribution business.
As most of the contributors above have stated, OOS were not the main reason for their demise. The failings were many. The problem is, few retailers of any kind react in an effective manner to OOS. The biggest retailers out there have 8-15% OOS and even more for promo items. There is either a culture of customer service or there is not. OOS is one of the key ways to upset the customer. Product knowledge of the sales force is another.
The list goes on. If the captain running the ship doesn’t see these problems as ones to put at the top of their list, then they have bigger fish to fry.