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Macy’s Design Pilot Saved $19 Million and It’s Hoping to Scale That Sourcing Success

Sourcing and supply chain management at Macy’s Inc. will star in its new three-year strategy to pull the ailing chain out of the doldrums and streamline operations on the path to profitability.

Gone will be redundant responsibilities across disparate operating silos–all resulting in inconsistencies throughout the supply chain, with limitations in flexibility and speed and at a higher cost structure.

Centralized sourcing and fulfillment

“Putting in supply chain capability under the same leadership will better align to consumer needs, improve efficiency and costs,” Dennis Mullahy, Macy’s chief supply chain officer, said, noting that the new sourcing model shifts the focus to product classifications and away from brands.

As Mullahy tells it, the new model will drive profitable growth, lower costs and improve speed and agility. It will also improve inventory productivity, provide higher profits and support customer behavior, all of which will benefit Macy’s private brands.

The reduction in production costs will support margin growth and improve the company’s agility, Mullahy said Wednesday morning at Macy’s Investor Day presentation to Wall Street analysts, a day after the department store company unveiled its new Polaris turnaround plan.

For example, consolidating raw materials management will help eliminate unproductive fabric. As team members search the globe for new suppliers and innovative fabrics, they will coordinate with the design team to identify which fabrics work and monitor style trends.

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Instead of each siloed private-label brand working separately on fabrics choices, a product category team for, say, sweaters would look at the designs and see which ones are using a similar fabric weight and quality across the brands. Once identified, the sourcing team would buy in bulk, leveraging the depth in the material order to negotiate a lower overall cost structure for that production component.

One design pilot resulted in $19 million in savings, including $6.3 million in sweaters and $6.4 million in cut-and-sew knits. The strategy also reduced the reorder cycle time and bolstered Macy’s ability to produce goods closer to trend, Mullahy said.

Macy’s is also overhauling its fulfillment strategy by adopting a centralized model that will improve inventory management in how the company flows goods and where it places merchandise. The shift represents a departure from the “hold-and-flow” strategy in the past, as well as the inefficient two-step delivery process in which vendors send a portion of goods to the stores and the remainder to a direct-to-consumer location to satisfy e-commerce orders.

That process failed to take into account each store individual selling capability, and resulted in imbalanced inventory assets across the network, in turn leading to “higher markdowns and lost sales,” Mullahy said.

The new structure will convert the DTC centers to centralized fulfillment operations that ship inventory to stores to meet initial demand, with the balance of goods fulfilling e-commerce orders.  In addition, the centralized centers will offer the flexibility to aid in replenishment by shipping to stores where product sells out. That will allow Macy’s to fill in gaps at stores where inventory is selling out faster, while keeping inventory low at stores where sales for the product isn’t moving as quickly.

By improving sell-throughs, Macy’s expects to reduce markdowns, Mullahy said, adding that one test of a spring dress capsule pilot saw a 22 percent improvement in sell-throughs and a 6 percent decrease in the amount of inventory that ended up marked down or liquidated.

Centralized fulfillment is also expected to reduce the number of shipments for each order; previously, items in a single e-commerce order often were sourced from different stores, Mullahy said, creating inefficiencies, not to mention a larger environmental footprint.

Macy’s turnaround plan

As part of the Polaris plan, Macy’s will close 125 stores in lower tier C and D malls, wind down offices in Cincinnati and San Francisco and focus on private brands that offer higher margins. Merchant teams will be based in Manhattan’s Herald Square neighborhood, while Long Island City will be home to the bulk of the corporate workforce.

At the event, Macy’s identified INC, Style & Co., Charter Club and Alfani as the four private brands it believes can each drive $1 billion in revenue by 2022. Executives from the merchandising team said the company has already worked on zeroing in on each brand’s individual DNA to prevent overlap.

Revamping the department store model

The new plan capitalizes on Macy’s strength, and addresses inefficiencies, such as legacy issues that have been dragging down operations, CEO Jeff Gennette said, adding that the trajectory in sales trends and operations between 2017 and 2019 indicated that the company “urgently [needed] to change direction.” Other problems were “fixed costs going up faster than sales” and a “store fleet too large to [allow Macy’s] to maintain its standards,” he said.

Because Macy’s business is overly reliant on its best customers, the retailer also needs to find a way to bring in new, younger shoppers that it can then migrate to its upper and better customer tier groups who shop regularly at the nameplate, whether through digital or in stores.

“These are all aspects of our business under our control and we are taking control. America loves to shop, but our customers shop differently than they did a few years ago,” Gennette told analysts. The new focus on better A-level locations, building out its off-price Backstage concept, testing a new local social shopping pilot via Market by Macy’s headed by Story founder Rachel Shechtman and growing its digital commerce capability are all part of a plan grounded in how America shops today and where Macy’s still has a key role to play.

“We are stepping up to define what a department store can be,” Gennette said.

He told analysts that the company’s fleet of A mall locations represents 45.8 percent of its store portfolio, and contribute 56.4 percent of total sales. Macy’s is also piloting a self-checkout program in six locations, which will roll out to another 70 locations in 2020. By utilizing labor technology in self-checkout, the company is creating workforce efficiency across its stores, Gennette said.

Macy’s also has plans to expand its men’s sportswear concept The Park, currently being tested at the Herald Square flagship. Its jewelry department already operates on a commission structure, which Gennette said has resulted in higher productivity and better staff retention. In total, Macy’s plans to have its top 250 stores represent 78 of total sales by 2021.

Macy’s relationship with mall developers “is more active now than ever,” Gennette said. The retailer has leased mall anchor stores in addition to real estate monetization strategies at company-owned locations to build out adjacent sites. As for the developers, they “have great visions” for how malls will improve over time, Gennette told analysts, explaining that most operators of “A” malls plan to shift leasing activity to include “more entertainment, more food and beverage, more hospitality and less on fashion.” That should revive traffic at these sites, he said, noting there are about 400 mall locations that are considered vital out of 1,100 malls nationwide.

Other initiatives

Executives noted other plans for the turnaround strategy, including new customer engagement initiatives to upgrade the Star Rewards loyalty program and acquire new consumers. The plan will also focus on top hero categories such as ready-to-wear apparel and establishing a test pilot in six stores where shopping is organized around lifestyle zones. Also on the to-do list: improving digital commerce by updating site speed and redesigning the navigation menu so mobile and desktop users can better surf the site. And Macy’s plans to give customers the option to customize garments in select apparel categories, such special occasion, where they can change necklines and sleeve and dress lengths.