a) keeps their inventory at its own warehouses and ships it out when the order comes in, or b) drop-ships from the supplier’s warehouse. We will only focus on Outdoor Décor category of products. Also, the suppliers (in most cases, these are manufacturers of products) are not very sophisticated market players, often don’t have logistical capabilities or strong IT infrastructure.
There are thousands of suppliers in the outdoor decor category at HomeDotCom. These suppliers obviously sell to multiple offline and online retailers and are heavily influenced by their relationships with Home Depot, Lowe’s and some other big box retailers. The retailers enforce their demand perception on HomeDotCom suppliers. The line in blue on the graph below indicates an approximation of the suppliers’ demand PERCEPTION over the course of a year as influenced by HomeDotCom competitors. The line in red indicates an approximation of the HomeDotCom customers’ ACTUAL demand for products in this category. Home Depot and other retailers tend to buy all of the suppliers’ stock for cash and HomeDotCom, because of that, goes quickly out of stock. HomeDotCom normally doesn’t buy inventory from the suppliers as it ties up cash and limits the selection of products offered on the website. It takes anywhere from 30 to 60 days to replenish the supplier inventory. The suppliers are, however, hesitant to replenish or keep stock for HomeDotCom because they don’t have enough trust in the red demand curve.
The goal is to make sure HomeDotCom is being perceived as the number 1 destination for supplier sales growth, that the company doesn’t run out of stock and improves its relationships with suppliers.
To establish better and stronger relationships with the suppliers, we need to understand what drives them. Suppliers are naturally interested in the following:
To help resolve the challenges and meet supplier interests, the solutions must address the problems above and provide additional value to the supplier’s business which other big retailers can’t or don’t offer yet.
Trust is the foundation of any productive collaboration. It is the number one goal of the company to establish trusted relationships with its suppliers. Home Depot (130 M visitors/month to the website) and Lowe’s (75 M visitors/month) sell both offline and online with outdoor décor items available in both channels. Both of them have super strong offline presence and sales. HomeDotCom is significantly smaller online and doesn’t have offline presence. Given the scale at which its competitors operate, it may be hard to convince the suppliers that the demand curve is indeed different from what the suppliers are being told by big box retailers. The following information would help us better understand the suppliers’ position (this information can be sourced during supplier meetings):
Many suppliers in the Outdoor Décor category have very capital-intensive business. Thus, they will be focused on selling and getting paid faster. We should try and collect the following information which may help HomeDotCom better understand and meet suppliers’ interests:
Close inventory monitoring, reliable demand forecasts and understanding of the supplier’s supply chain organization should help achieve more efficient replenishment. Having established trust and having negotiated the financial terms, HomeDotCom can get more efficiently involved in demand planning and inventory management and reorder at the right time, while maintaining the required levels of safety stock. If we already have trust with suppliers, we eliminate the problem of the suppliers’ hesitance to reorder. We would further explore if there is an opportunity to use HomeDotCom supply chain capabilities to decrease the supplier costs and to speed up the shipping of products from the suppliers’ manufacturers’ locations. We would also try and search for alternative sources of inventory (new suppliers, direct manufacturer’s relationships) to minimize the risk of running out of stock.
If we are facing the challenge of going out of stock, another way to speed up the delivery is to ship it faster and give up some margin. In the end, it is more important to have the product available and sell it at a lower margin than be out of stock and lose the customer. A more detailed margin and LTV analysis will be required to understand what the minimum level of margin HomeDotCom needs to maintain to ensure product availability and company profitability.
Suppliers may be more comfortable shipping wholesale to Home Depot and other competitors, especially if they buy their entire available inventory. With HomeDotCom, they will either have to ship individual orders or smaller quantities of products. To eliminate the logistical hassle and level the playing field, HomeDotCom may consider keeping the supplier’s stock at its facilities at no charge for the supplier, in exchange for more favorable terms. Here it would be useful to know the terms of shipping and storing at Home Depot and other competitors, as this information may play significant role in how HomeDotCom structures the deal with the suppliers.
OTHER OPERATIONAL ISSUES
If the supplier’s stock is stored at HomeDotCom’s facilities, the internal logistical teams can take care of customer returns. Suppliers usually don’t like to handle customer service requests and process returns as these processes slow their operations down. HomeDotCom can take care of these issues for the suppliers and thus allow them to focus on their core business: manufacturing and importing the products that will scale their (and, by extension, HomeDotCom’s) business.
ADDITIONAL SUPPLIER BENEFITS
HomeDotCom is a technology-driven organization and, as such, it may be ahead of its larger and more cash-rich competitors. HomeDotCom should use its technological strength to provide additional value to the suppliers. By doing so, it can establish better trust and a stronger foundation for collaboration with suppliers. Additional value can be provided to the suppliers in the following ways:
SCALING SUPPLIER RELATIONSHIPS
HomeDotCom has thousands of suppliers in the Outdoor Décor category with few people to manage them. HomeDotCom should create the environment which would allow suppliers to feel strong personal connection with people at HomeDotCom and at the same time allow it to scale beyond one-on-one communication. Below are several ways HomeDotCom can achieve that.
Every partnership is only as strong as the relationship between people managing the business. To ensure HomeDotCom’s company success, it must ensure constant product availability. If a product is not available on the website or in its warehouse (or in the supplier’s warehouse ready to ship to the customers), HomeDotCom will advertise for its competitors and the customer may never come back to them. Thus, strong supplier relationships are a very important component of the successful marketplace business model and it takes time and effort to build the required level of trust. We believe that if HomeDotCom follows the above-described framework, it can be very successful with establishing long-term partnerships with its suppliers and ensuring large product selection and product availability.
How do you solve product availability and out-of-stock situations at your company?
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