DSW’s Improvement in Inventory Management Leads to Growth
Inventory Management is the planning and controlling of inventories to meet the competitive priorities of the organization. DSW (Designer Shoe Warehouse) improved its inventory management and is the reason for delivering its first full-year earnings growth since 2013. DSW is an American footwear retailer of designer and name brand shoes and fashion accessories. DSW was a closeout retailer when it first opened in 1991. Excess merchandise would be bought from shoe companies at a discount and then passed on to customers. The shoes acquired would often be late in the season or out of season. The unsold shoes would end up accumulating (“DSW Tries on New SKU’s and Stocks”). DSW has always tried to improve its processes. In 2009, they tested a new replenishment method in a few stores. The new method was successful and was implemented in all stores. In 2012, DSW integrated a fully automated unit sortation system. There was zero automation before that. DSW has always been adapting to changes in the market and advances in technology. “The company reported a 6.7% increase in sales during the fourth quarter with same-store sales up 1.3%. Footwear, in particular, achieved its third consecutive quarter of positive comps, according to the company.” DSW’s actual inventory declined by 2% and with less stock, the company is better able to respond to changes in the market or demand. This creates flexibility which may be a new competitive priority for the company. According to the article, this flexibility allowed DSW to focus its money on athleisure when consumer demand was high. And when temperatures dropped the company was able to put out merchandise that matched the season as consumers wanted them. “Our conservative inventory positioning at the start of the year enabled us to chase demand for seasonal boots and end the season with relatively flat goods available for sale,” said Jared Poff, senior vice president and chief financial officer.
When DSW first debuted, competitive priorities were most likely price (as they bought shoes at a discount). As the market changes, so do competitive priorities to a certain extent. It seems like DSW is shifting its focus towards flexibility. As consumer demand changes (as well as the season), DSW will shift their inventory to match the needs of the customer and the season. This is unlike the past where a DSW store would be sent a full case of shoes in different sizes, styles and colors, and once the a few pairs were out of the case, the store would be sent another case leading to some styles and sizes not being sold. Leading to accumulation and frequent markdowns. Another competitive priority DSW seems to be shifting towards is high quality. The article states that “going forward, DSW will focus on elevating its brands, reducing underperforming vendors and paring back on over-distributed labels.”
DSW seems like a very intelligent company that assesses the market and consumer demand. DSW uses this information to then cater their inventory to consumer needs. Do you think DSW is making the right move here?
https://sourcingjournalonline.com/dsw-inventory-management-remodel-services/
http://www.inboundlogistics.com/cms/article/dsw-tries-on-new-skus-and-stocks/
Mark,
Attached is an article posted in 2016 by Fox News. This article touches on the decline in sales that DSW had seen in its brick and mortar stores. The analysts of the company and author of the article predicted that DSW would continue to see low growth and sales declines.
DSW was able to recognize the expected decline in sales and demand, but was able to spur growth by changing its inventory system. They started carrying less inventory on hand, reduced under performing vendors, and encouraged flexibility across their stores. This is a great example of why forecasting is important, and why companies must focus on the current and future state of their business to maintain growth.
SOURCE: https://www.foxbusiness.com/markets/dsw-falls-on-comparable-sales-decline-pessimistic-guidance
Mark,
Thanks for your post. My first curiosity when reading your post was what exactly was this inventory strategy they were using that had been so successful? I did some digging and got my answer. Their strategy is called a “broken-case picking and packing solution” which is located in their Columbus distribution center, used for restocking. This solution uses a cross belt sorter, which is basically a highway of conveyor belts that move inventory around the distribution center. This sorter is huge – it spans across a mezzanine of 140,000 sq. feet and has 500 chutes. This system is efficient enough to provide replenishment for all of DSW’s store locations (~750). This system allowed their replenishment capacity to increase sixfold and has helped them trend towards future growth internally and externally in their market. This was truly genius of DSW in the sense that they already had this distribution center and they already had this conveyor belt (it had been used for value-added purposes previously), and really just had to spend time working out the logistics of HOW they wanted to set up the warehouse moving forward. This article is a very good read even beyond what I have mentioned and it shows how their inventory management has been adapting almost each year to changes in their storefronts as they mature. I would agree with you in the sense that they are a flexible company. https://www.mmh.com/article/dsw_sorts_it_all_out
Mark,
It is interesting that you ask “Is DSW making the right move here?”. They obviously want to be able to provide the highest quality, maintain flexibility, and have a good price. However, I am not sure that is always a feasible option. Every company would want to lead the industry in every competitive priority there is; but that is just impossible. I do not know that much about DSW as I do not shop there regularly. However, I feel that the quote you have mentioned from the article is just speculating. It is odd that they are making assumptions about what they think DSW is doing when they mention that DSW is “elevating its brand”. Obviously they want to elevate their brand. I think the topic is very interesting, but the article is very general and makes some conspicuous and evident claims.
At the bottom of this comment, I have attached a link to an article saying other things that they are focusing their efforts on, which include more about the experience of the customer. Their supply chain efforts are discussed earlier in your post from the CFO and that was very insightful.
https://www.prnewswire.com/news-releases/dsw-designer-shoe-warehouse-invigorates-brand-with-new-mission-strategic-plans-300526830.html
Mark,
I love this topic because I think it was a very important change for DSW to make. Obviously in a competitive industry, price is going to be extremely important. This is especially so for DSW because of the timeline they work with and how they buy inventory at a discount, and oftentimes out of season. Making this move is important because flexibility helps keep the company relevant. If DSW didn’t have the flexibility to hold inventory that people are interested in, then there would be no demand for their products and it wouldn’t be a store. Being able to be flexible by replacing inventory and understanding the types of products a consumer is looking for is essential for DSW to remain such a successful business. I feel as if the pricing of their products comes somewhat naturally but changing into a much more flexible company is what will be able to help them sustain the success that they have already had.
Mark,
It is good to hear DSW is still working to improve their company and hopefully will continue operations in the future. There is a store near my home and it is where I go when I am looking to buy a new pair of shoes. DSW is in a tough spot right now as more and more companies are attempting to cut down on their brick and mortar and move towards e-commerce. They are making the right moves in cutting down on their inventory and becoming more efficient in supplying customers with the shoes they are looking for in season and in style. If the company chooses to move to e-commerce, these changes they are making will still be helpful, as they still must keep a physical inventory. Whether DSW chooses to close their physical stores or continue to keep running them, they are making good decisions for their long term.
Mark,
Although I had never heard of DSW before I came to the US it seems that these types of discount store are very popular in the US. Finding a pair of shoes at, let’s say, half of the original price in a store just seems crazy to me as a foreigner.
This being said, I made some research beyond your blog post on how inventory was managed in the company. The fact that inventory was not organized through a fully automated sortation system until 5 years ago given the fact that they have stores all around the country just seems like a nightmare to manage. I found out that the software that DWS is using to control the amount of stock is from a company called SAS (Statistical Analysis Software). They use the SAS Size Optimization program, which allows them to calculate how the right amount of shoes to be provided to each store. This software helped DSW find the right balance in inventory as well as increasing their sales. SAS Size Optimization calculations helped the company avoid lost sales when boots sell out too quickly at one store and lost profits when those same boots had to be marked down at another store. It would be interesting to see what other companies are doing to solve similar issues to those DSW had.
https://www.sas.com/en_us/customers/dsw.html
Mark,
I learned a great deal about Designer Shoe Warehouse (DSW) from your post, and this was surprising to me at first because of how often I visit DSW locations! I remember the first time I walked into A DSW, I was blown away at the size of the store and the seemingly thousands of shoes that DSW offered. That is why I could not believe it when you said that there wasn’t any automation in DSW’s inventory sorting system until 2012. If an organization can swallow the high costs of automation, the benefits tend to out-weigh the costs in the long run. DSW has seen the benefits of improving the organization of their extended inventory and it is continuing to reevaluate its company strategy.
Shifting towards flexibility as a competitive priority, in my opinion, is a smart decision by DSW if they want to compete with the online shoe retailers who specialize in flexibility. In addition, DSW is making an effort to increase the quality of the brands sold in the store. Again, I believe this is the right move for DSW to maintain its position in the foot apparel market. These significant changes in the company’s competitive priorities will define DSW as a company moving forward. Furthermore, these changes are a result of the inventory reorganization initiatives which granted DSW better insight into their own inventory and where the company can succeed in the near future.
I think DSW is in an interesting position in relation to managing their inventory. Like you mentioned, DSW started with a closeout business model. Since then, it was transitioned to a hybrid of closeout, special makeup and in-line products. Had the company stuck with their business model of being a closeout retailer, they would have essentially eliminated their ability to forecast inventory and demand. They would have been working at the mercy of the larger brands, not know what product lines they were going to receive, and waiting until they had the physical inventory to make any predictions.
DSW is still undergoing changes to their business model and it working to enhance their omnichannel cohesions. It plans to use its physical store locations as warehouses for the shipping and receiving of digital demand and returns. According to the company’s CEO, this change will be an opportunity to combine the benefits of a warehouse with a synchronized and efficient infrastructure that will connect the customer at every point. This integration will further allow DSW to have a better handle on the managing and forecasting aspect of their business. Having access to the inventory, having a say in what inventory is being carried, and having that interacting with customers will benefit DSW in terms of their flexibility and their ability to respond to customer preferences and their demands.
http://footwearnews.com/2016/business/retail/dsw-executives-plan-future-retail-innovation-ebuys-263835/
Mark,
DSW has been experiencing the decline in sales in stores that many big box companies have seen over the last few years. DSW has shifted the way it handles inventory. In the past, DSW has accumulated unsold inventory from big brand shoe companies. However, DSW has transitioned to a conservative inventory approach. DSW has implemented a full-automated sortation system, which has given the company more flexibility. This flexibility has allowed DSW to focus on customer demand and match their inventory to its customer demand. This change has lead to its recent earnings growth.
DSW has been called the “guinea pig” of retail because of its testing retail strategies and piloting of a new store design. The new store design allows DSW to have more styles and hold deeper inventory of certain key items. This store design is reflective of their new conservative inventory approach. In addition to matching their inventory to customer demand, DSW’s new store design is focusing on other services to match customer demand. DSW is trying to give customers more reason to shop at their stores by adding shoe repair services and manicure services. DSW’s shift in their inventory management approach and design of their store reinforces the importance of customer satisfaction to a company’s success.
https://www.bloomberg.com/gadfly/articles/2018-03-13/dsw-earnings-watching-retail-s-guinea-pig
Mark,
One of the highlights of DSW’s Q4 2017 financials was the increase in operating expense leverage. A higher operating expense leverage means that a company is removing costs from its operations. In Q4, DSW’s operating margin grew 270 basis points, suggesting that they have been successful in identifying and removing costs from its operations (InvestorPlace).
Based on your post, the 2% decline in DSW’s inventory was likely a major contributor to DSW’s ability to cut costs in Q4 2017 and recognize increase in operating margin. As a result, it is probably that DSW was able to reduce storage and handling costs associated with inventory. One question that I have is where the 2% reduction in inventory was recognized? Did all DSW stores cut inventory by 2%? Were some stores more or less successful than others in reducing inventory? Was there a 2% decline at DSW warehouses?
Furthermore, as your post discussed, DSW’s inventory strategies have made them a more flexible retailer. As you mentioned, this has allowed DSW to respond more quickly to seasonal changes in demand as well as consumer preferences. This flexibility has allowed DSW to capture more sales and recognize meaningful top line growth, but it may have also resulted in meaningful cost reduction. Your post mentioned that in the past, DSW’s unsold inventory has tended to “accumulate.” As a result, DSW likely had to practice a form of inventory shrinkage known as “obsolescence.” Obsolescence occurs when inventory cannot be sold, and is a major expense in the retail industry (Textbook). In order to shrink unsold inventory, retailers often offer drastic discounts that eat into their bottom line. Being a more nimble retail player has allowed DSW to keep up with consumer preferences and lower the degree to which unsold inventory is accumulated and sold at a deep discount.
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Mark,
Very interesting post on DSW’s inventory system. In my mind, DSW seems like one of those stores that is bound to crumble in the new age of E-commerce and digital marketing. Similar to Sears, their stock price and relevance in their industry has consistently declined year after year recently as they continue to lag behind the time and lack proactive innovation. That said, it is interesting to see a story that reflects what they have attempted to do to boost their bottom line.
From your post and the sources you linked, it seems like DSW is emphasizing flexibility. Now more than ever for retailers, it seems especially important to be able to meet seasonal and micro-trend demand. Customer satisfaction is amplified as a priority since service failures can spread like wildfire across social media and review channels. For DSW, customer satisfaction does not just come with having the cheapest price anymore, but rather with having good prices and enough of the demanded styles. For shoes especially in today’s fashion world, price is no longer the order winner. Shoes have become more than just a tool for walking and customers are focusing more on finding the shoe that stands out to them and fits their style needs.
It sounds like DSW is lowering their cycle inventory amount and perhaps their lot size as well. By doing this, they will be increasing their setup costs, but will allow them to be malleable. A lower lot size will mean that they have less time between orders and they will more promptly be able to adjust to shifting trends and demands in their inventory. Although we cannot tell from this information if DSW is moving towards or away from the EOQ, this move will benefit their ability to pivot. Perhaps it is too little too late for DSW and nothing will save it from its decline, but these inventory decisions show the importance of inventory management even on a small scale.