As Williams-Sonoma's e-commerce growth explodes — surging to capture 53.7% of the company's total revenue in the first quarter of 2018 — the kitchen and home furnishings retailer is now shifting to a "one inventory" plan to continue widening profit margins.
The plan, as CEO Laura Alber described to investors in a Q4 earnings call, is to manage the company's inventory across all the channels to boost productivity throughout within the distribution network. Williams-Sonoma aims to reduce production lead times at manufacturing plants, boost visibility, quicken turnaround time at distribution centers, and reduce the number of deliveries made per order, in the hopes of speeding customer delivery.
Williams-Sonoma isn't the only retailer focusing on inventory management as a way to streamline operations and improve profitability: TJX and Burlington, in particular, are two off-price apparel retailers employing similar strategies, feeding into the larger trend of retailers using streamlined inventory management to better gauge and address consumer expectations.
The initiatives are a push to better serve customers, drive brand loyalty, and — equally important — improve profit margins as the retailers create a nimbler supply chain.
Inventory's role in creating a nimbler supply chain
"[Williams-Sonoma has] done a lot over the years to reduce their inventory levels and back orders, and also by investing in new inventory planning software to help improve their inventory distribution," RapidRatings Senior Analyst Libby Thomas told Supply Chain Dive.
Some of the successful inventory management techniques employed by Williams-Sonoma include permitting customers to use PayPal and Venmo to pay for online orders and allowing customers to schedule in-home delivery of online orders, which has "reduced care center calls and hold times at our distribution hubs," Alber told investors in a first quarter earnings call.
She said that because inventory growth dropped to 1.5% in Q1, the company is now moving ahead with its strategic initiative to use one flow of inventory to service e-commerce orders and brick-and-mortar demand.
With this new digital age I think a lot of people sort of assume e-commerce is king and brick-and-mortar is a thing of the past, but I think with Williams Sonoma they’ve recognized the strengths in both channels.
Senior Analyst at RapidRatings
"All of our brands are transitioning to one inventory, which means we will be managing our inventory across channels to help optimize our inventory levels, leading to improved productivity and throughput across our regionalized distribution network," Alber said in the earnings call.
Alber expects the "one inventory" initiative to increase supply chain transparency, reduce turnaround time and consolidate deliveries.
"[This] will allow us to manage inventory across channels and improve productivity and throughput across our regional distribution networks," she said. "We will also focus on increasing order visibility and speed of deliveries to customers, while further reducing returns and damages and the number of escalation calls to our care center. We consider the move to one inventory to be one of the most strategic breakthroughs of the last several years."
Improved inventory management yields financial health
Inventory management plans like Williams-Sonoma's have the added effect of boosting financial health, according to data from RapidRatings.
Over the past several years, Williams-Sonoma's cash conversion cycle has been rising alongside its asset turnover ratio, which means the company is generating more revenue per asset, according to a financial report provided by RapidRatings. Williams-Sonoma has also been operating with a cash advantage of 35 days (receiving payments from customers in 7 days and waiting 42 days to pay suppliers), which is higher than average for the retail industry.
One of Williams-Sonoma's strong points has been its ability to balance its e-commerce and brick-and-mortar channels, according to RapidRatings' Thomas, an advantage which the "one inventory" initiative will only deepen.
"With this new digital age I think a lot of people sort of assume e-commerce is king and brick-and-mortar is a thing of the past, but I think with Williams-Sonoma they’ve recognized the strengths in both channels," said Thomas. "They’ve focused on their content and convenience, they’ve scheduled in-home delivery online, and on the brick-and-mortar side they’ve focused on reducing inventory."
We consider the move to one inventory to be one of the most strategic breakthroughs of the last several years.
Thomas said she sees a "growing link" between the financial health of a company and its key risk factors. In retail, a key risk factor is inventory management.
For example, Restoration Hardware (RH) — one of Williams-Sonoma's direct competitors — has struggled with supply chain problems.
RH holds a financial health rating score of 41 out of 100 on RapidRatings' database, which means the retailer is medium-risk. RH's cash flow is strong, but the home furnishings retailer struggles to generate returns. The retailer's asset turnover ratio is also quite low, and it's cash conversion cycle is falling.
"We actually saw their FHR drop quite a bit after some of these supply chain problems," Thomas said. "They have more of a [traditional] brick-and-mortar strategy."
By contrast, Williams-Sonoma FHR score is 84 out of 100.