Holiday Stocking: Preparing for the Seasonal Retail Rush

By the time Santa starts loading his sleigh, retailers have already spent months getting ready for the holiday season. The goods that turn into gifts have been pouring into distribution centers (DCs) since at least August. And smart retailers started long before then to lay plans for the 2012 holiday rush.

Just in Case
Making a List, Checking It Twice

Pulling in the right products in the right numbers to satisfy customer demand is a fine art at any time of year—especially when unpredictable events such as Hurricane Sandy can create both supply chain disruptions and dramatic shifts in consumer spending.

Preparing for the shopping frenzy that occurs between Thanksgiving and New Year’s requires particular talent. “Retailers need to capture as many sales as possible without leaving themselves overburdened with stock at the end of the season,” says Greg Wilson, vice president of field strategy at Quantum Retail Technology, a Minneapolis-based vendor of supply chain solutions for retail companies.

To this end, retailers are learning to better balance their holiday merchandise flow. “Companies have gotten more sophisticated in how, where, and how much they buy,” says David Vernon, senior analyst at Sanford Bernstein and Company in New York.

They’ve also used technology to gain a better view of inbound inventory, reducing the need for costly expedited transportation. And they’ve made more flexible agreements with the shipping lines that carry their merchandise from overseas.

“Seven or eight years ago, contracts with steamship lines might have been for volume over a specific routing,” Vernon says. Today, a U.S. company might negotiate separate contracts for deliveries to the East and West Coasts, and then balance its volume between the two, as demand requires.

Retailers also use many other strategies to turn the holiday rush into a season of rewards. Here’s a look at how they ensure a shopping experience that lands them on customers’ “nice” list.

How Much of What, Where?

For brick-and-mortar chains, one key to getting the holidays right is predicting as precisely as possible how many of each item the company will need in each retail location. It is a complex calculation.

“The right answer varies so much by location and product that it presents a challenge for retailers operating more than a handful of stores,” Wilson says.

Working out the math for the holiday peak is especially tough. “The window is short, so retailers don’t have much selling activity to determine how the window behaves,” Wilson says. “And they are selling a ton of volume, so they have to throw a bunch of inventory at it.” If they throw too much, though, January could find them sitting on a pile of unsold goods.

Quantum Retail’s software solution, Q, addresses this problem by tracking sales of certain products at specific locations over time, then using the accumulated knowledge to predict demand during various periods. The software also considers the retailer’s strategy for each product—whether it’s meant to drive traffic into the store, produce a high margin, or burnish the company’s image.

Some conclusions Q reaches are surprising. One user called Quantum Retail in a panic a few summers ago because Q had suggested buying $90 million less in inventory for the coming holiday season than the company had bought the year before. The user feared the software had miscalculated.

Reviewing the data, Quantum Retail’s experts assured the customer that Q was correct.

“With a bit of skepticism—but having faith in the results Q had provided in the past—they bought about $70 million less inventory,” Wilson says. “It turns out that it was the holiday season when the economy first tanked. Q had identified the buying trends that were occurring, and the likely impact they would have on holiday shopping, months in advance—before any of us who were being impacted recognized it.”

Squeaky Wheel

Whatever a retailer decides about its inventory strategy, the company must manage suppliers to ensure they deliver on time. “If you take your eye off the purchase order, there’s a good possibility shipments will fall behind,” says Ro Sharma, retail fashion vertical head at third-party logistics (3PL) provider DB Schenker.

The squeaky wheel principle grows more important than ever during the holiday crunch, when a single overseas manufacturer might have thousands of workers churning out products for several retailers. “Companies will come out ahead if they maintain well-built supply chains with controls and measures, and use 3PL partners to ensure vendor compliance,” Sharma says.

Even with the best controls, however, production delays are a harsh fact of life. During the critical holiday peak, late production might force a retailer to shift some volume from ocean to air, sparking a search for air cargo capacity.

Thanks to the relationships they maintain with carriers, and their clout in the marketplace, 3PLs can help retail clients secure a share of scarce cargo space and keep shipments moving.

While expedited service via air is more expensive than ocean transportation, the costs needn’t be onerous. Recently, for example, a large West Coast-based clothing retailer found that, due to a factory delay in Indonesia, it had to expedite a trendy new product to its stores. The company was testing the product in order to plan for the upcoming holidays.

The shipment had to reach the retailer’s midwestern DC three days after the factory released it. But company officials didn’t want to pay top dollar for expedited transport.

“We were able to provide an express-like service using the regular airfreight methodology,” Sharma says. “The product left Indonesia, and arrived in Chicago within 48 hours.” As soon as the shipment cleared customs, Schenker loaded it onto waiting trucks. The goods arrived at the DC the next morning.

Fashion retailers usually find enough ocean and air capacity to meet their needs. But soft goods compete with electronics for space, and when a hot new smart phone or tablet hits the market, it can leave fashion retailers scrambling.

Luckily, that wasn’t the case when Apple introduced its iPhone 5 in September 2012. “A small air cargo backlog occurred through the north Asian hubs,” Sharma says. “But the shipment planning was adequate. The phones are making it to the marketplace, and other goods are moving just fine.” The surge in demand for air capacity did, however, cause a slight increase in air cargo rates.

Domestic Discussions

In addition to providing for import shipments, retailers also need to lock in enough domestic transportation capacity to handle spiking volume in the lead-up to the holidays. At Unyson Logistics, the 3PL arm of Downers Grove, Ill.-based The Hub Group, company reps and their customers start that work in March or April.

Early discussions focus on projected requirements and any changes to the retailer’s footprint—for example, new or closed stores, or relocated DCs.

“Then we set up a strategy: what do we need to do, and what milestones do we need to have, to accomplish a successful retail season?” says Donald Maltby, Unyson’s chief supply chain officer.

Next come meetings with intermodal, truckload, and less-than-truckload carriers to talk about aligning customer needs with carrier services and pricing. Unyson and the customer also review changes in each carrier’s network since the year before.

“The company may have needed to move equipment out of southern California last year, for example,” Maltby says. “But this year it lost a customer, so it doesn’t have that need. We need to know that in advance so we can plan accordingly.”

Retailers should form strong relationships with their transportation suppliers, making themselves important enough to the carrier’s success to ensure the carrier will provide capacity when space grows tight. The retailer might negotiate incremental pricing, for example, agreeing to pay higher rates during the holiday peak.

Of course, retailers must find ways to cut transportation costs as well. “As peak season approaches and velocity picks up across multiple retailers, they can consolidate freight and build multistop truckloads,” Maltby says. Working with a 3PL provides opportunities to gain those economies of scale by collaborating with other shippers.

Seasonal Capacity

While securing space with their carriers, retailers also need to boost capacity in their distribution centers for the holidays. In part, that means bringing in seasonal workers.

“Recruiting and training additional labor presents a challenge during the holidays,” says Kunal Thakkar, vice president of operations at Newegg, a leading online electronics vendor. “Our order volume grows rapidly every day, spiking on Black Friday, Cyber Monday, and the week before Christmas. It’s critical that we have the appropriate skilled labor in place to fulfill these orders.”

Newegg receives product from domestic and overseas vendors at six distribution centers, spread among City of Industry, Calif.; Edison, N.J.; Memphis; and Mississauga, Ontario. Employees in each facility pick, pack, and ship product to customers via a variety of carriers.

Newegg’s supply chain team starts planning for the holidays one calendar quarter before holiday logistics activities begin. Preparations include creating sales forecasts, coordinating with the marketing team to support promotions, renting equipment, recruiting and training temporary staff, stocking supplies, and managing facility needs.

Although the company maintains an efficient supply chain year-round, preparing for the holidays differs from managing day-to-day operations in several ways.

“For example, in advance of the holiday season, we need to plan inbound shipments so we bring in the right amount of inventory at the right time, as well as make sure our warehouse supplies and transportation needs are met,” Thakkar says. “It is also important that we bring in new hires early enough to be properly trained, but at a rate that does not negatively impact production and add to our cost.”

Recent investments in new picking and packing technologies have proven especially helpful. “We have modified and enhanced our in-house warehouse management system (WMS) to support the operations with a pick-to-light system and an automated outbound sortation system,” Thakkar says. “We have also adapted new scanners for higher accuracy and efficiency, as well as invested in new packaging technologies.”

Holiday Handling

Like Newegg, other companies also find that systems used to store, move, and direct the flow of goods inside a logistics facility provide opportunities to better manage the year-end rush.

Long before holiday merchandise starts flowing into DCs, the supply chain team should ensure existing inventory is stored in the right locations, and there is plenty of room for new arrivals. Then it’s time to start preparing for the outbound flow.

“If a facility has scanning or lift equipment, it must ensure it has the materials needed to operate it, such as batteries and holsters,” says Chris Arnold, vice president, operations and solutions development at Intelligrated, a Cincinnati-based vendor of materials handling and automation solutions. “It takes tremendous planning and orchestration to make sure it all fits nicely together.”

Automated equipment that runs at variable speeds can be a big help at holiday time. Take a sortation system, for example. “During the peak season, when the company needs to push more cartons through the facility, it can set the equipment to a faster speed and create a higher ship rate,” Arnold notes.

A staff augmented with temporary workers can easily handle the large number of cartons rolling off the conveyors.

Take Your Pick

A WMS combined with a pick-to-light system can boost efficiency during the holiday rush by directing workers to pick several orders at once.

“The software allows orders to be released in a sequence that optimizes the worker’s walk path,” Arnold says.

Rather than visit several areas to pick one order, then return to some of those locations to pick another, the picker fills several orders at once, moving aisle by aisle like a supermarket shopper. Reducing travel time by consolidating trips increases throughput in the warehouse.

A retailer might also move goods out of the DC faster during the holiday rush by layering one technology on top of another.

One example is a DC that uses a pick-to-light system. The time might come when pickers are using all the available lights to direct their work, yet plenty of orders remain to be filled from that section of the warehouse. The solution is to supplement the lights with radio-frequency scanners.

“The scanners may come from the receiving area, if the business has additional scanning equipment there,” says Arnold. “It can repurpose the devices during peak season for outbound processing, putting them on top of what’s already there, to log into the application and the location workers are picking.”

Game On

Close partnerships with vendors have been helping video game retailer GameStop—which operates more than 6,600 stores worldwide—increase its supply chain network’s efficiency in recent years.

“Our automation is already state-of-the-art in most of our facilities,” says Bob MacDougall, GameStop’s vice president of logistics and purchasing.

To gain further improvement, the company has focused on sharing as much information as possible with hardware manufacturers, game publishers, and transportation partners.

Most of the hardware systems GameStop sells are made overseas and imported by the brand owners. Game software is generally published in the United States. Both kinds of product flow into GameStop’s two DCs—in Louisville, Ky., and at its headquarters in Grapevine, Texas—and through several 3PL-operated facilities.

Video game retailer GameStop prepares for holiday demand surges by outsourcing distribution to 3PLs with facilities near its vendors.

GameStop also manages a second merchandise stream: pre-owned games and hardware—such as wireless phones, tablets, and game systems—that customers trade in for credit or cash. GameStop’s stores ship those products to the company’s 1,000-person refurbishment center in Grapevine, where employees restore them to like-new condition, then repackage them for sale as pre-owned merchandise.

GameStop’s sales volume balloons in the last three months of the year because of holiday demand, and because game publishers release the greatest number of new titles in October and November. The company starts planning for the next holiday season early in the year, but the heavy work starts in late summer.

“Typically by August, we have enough information from our publishers about new games and various projects that will cause significant spikes in our supply chain,” says MacDougall.

Although it’s not always clear which products will become hot sellers, GameStop has developed a sort of crystal ball in its reservation system, through which customers pre-order games and consoles before they hit the market. “It’s an important predictor of demand,” says Bruce Kulp, senior vice president, supply chain and refurbishment, GameStop.

The publishers operate nimbly, so GameStop doesn’t rely on buffer stock. “We can comfortably buy three or four weeks of supply, avoiding high risk on a game if we’re not sure how it will perform,” says MacDougall. If demand for a game suddenly soars, an order placed today will bring new copies into DCs by tomorrow.

Along with suppliers, GameStop also stays in close touch with FedEx and UPS, which deliver more than 90 percent of product to its stores. “As we move into key planning season, we meet with them weekly,” says MacDougall.

In its DCs, GameStop uses flexible space to match capacity to demand as the holiday season progresses. Outsourcing to 3PLs with facilities close to GameStop’s vendors also promotes efficiency. “We’re not moving heavy goods across the country just to move them back again,” Kulp says.

Such strategies have helped GameStop rack up outstanding scores in the game of Continuous Improvement. “In the past six years, our freight efficiency measured in cost has improved every year,” MacDougall notes.

Opening the Window

As retailers put their holiday plans into action, one bit of good news is that the shopping peak might not be as steep these days as in years past. Consumers looking to get a head start on their gift lists have added about 30 days to the front of the shopping period; consumers redeeming gift certificates have added another 30 days at the back.

“The traditional holiday peak has flattened out a bit,” says Sharma.

Whatever the season’s topography, however, retailers need to start early and plan well to capture a goodly share of the gifts of the holiday season.

Just in Case

In 2011, the value of returned holiday merchandise amounted to an estimated more than eight percent of the value of holiday retail sales, according to a study by the National Retail Federation. Not only do retailers lose those sales, but they and their suppliers spend money to process the goods that consumers send back.

Ecospan, which makes a variety of products from plant-based plastics, offers a way for some merchants and manufacturers to ease the pain: a line of reusable shipping cases for consumer electronics and other high-value products.

Companies use those cases in at least two scenarios, says Paul Cannon, vice president of marketing at Ecospan, based in Greenbrae, Calif. The first is when a customer brings a product, such as a smart phone, back to a store because it doesn’t work properly.

“If they can’t fix it in the store in a few minutes, they transfer the SIM card and send the customer out with a replacement phone, usually a refurbished one,” Cannon says. A store employee tucks the phone into one of Ecospan’s containers, and the merchant ships the box to a consolidation point, from which workers ship pallets of product to a repair center.

The other situation occurs when a customer calls a wireless carrier to report that an electronic device isn’t working. The carrier’s 3PL sends the customer a replacement packed in one of Ecospan’s boxes. “The customer removes the replacement device from our box, inserts their broken device, and ships it back,” Cannon says.

In either case, Ecospan’s bioplastic case usually takes the place of a cardboard box. Although the Ecospan box costs more per unit than cardboard, shippers save money because they can use the same box up to 20 times. “The return on investment over the lifecycle of that container is significant,” Cannon says.

Ecospan also makes video game consoles, cosmetics packaging, toys, and other items from renewable plastic. It entered the shipping case business when a global smart phone manufacturer asked the company to custom-develop such a product.

Ecospan later decided to create off-the-shelf versions of its box to accommodate the needs of 3PLs that handle reverse logistics. It offers the product in four sizes, which can handle phones in different configurations, from multiple manufacturers.

Making a List, Checking It Twice

The state of the economy over the past few years has created an extra element of uncertainty for retailers as they plan for the holiday season. Will shipments arrive in time for the holiday rush? Are consumers confident enough to spend as much on gifts as they have in the past? Will they shop early or hold out for deep last-minute discounts? And will they stay loyal to their favorite merchants, or will they shift downmarket in search of lower prices?

“As consumers have been affected by the economy, some are switching from department stores to retailers such as Target,” says Greg Wilson, vice president of field strategy at Quantum Retail in Minneapolis. “Target shoppers may shift to shopping at Walmart. These changes are occurring differently in different areas, depending on how dramatically they’ve been impacted by the changes in the economy.”

Some consumers are staying out of stores entirely, opting instead for Internet shopping. For the package carriers that deliver holiday goods sold online, the prospects for the next few weeks look decidedly bright. Online sales will build to a crescendo in the final two weeks before Christmas, according to UPS. “The company predicts its busiest day of the year will be Thursday, Dec. 20, when an estimated 28 million packages will be delivered around the world,” UPS stated in an Oct. 29, 2012, announcement.

FedEx expects to reach its peak on Dec. 10, 2012, when its global ground, express, and freight networks will carry a projected 19 million shipments. That will be the busiest day in the company’s history.

Both package carriers are gearing up to handle more volume during the upcoming holiday season than they did in 2011. UPS expects to deliver 527 million packages between Thanksgiving and Christmas, compared with 480 million last year. FedEx, using a different unit of measure, forecasts that it will move more than 280 million shipments through all of its networks during that period—a 13-percent increase over the 247 million shipments it moved in 2011.