Distribution Strategies

If your operation doesn’t sell products in more than a couple of venues, investing in multichannel management systems may seem wasteful. But don’t overlook the power of these applications — as they grow ever more versatile and flexible, they’re starting to become a necessity rather than a luxury. Even dyed-in-the-wool mail order firm Lillian Vernon has recently invested in multichannel software that will not only ease the company’s eventual expansion into other channels but also streamline merchandise planning, buying, and inventory control. Lillian Vernon’s choice, a merchandise planning system from San Francisco-based Evant Inc., is a unique program designed to monitor product performance across multiple channels. Lillian Vernon plans also to install Evant’s replenishment system, which will link the catalog company’s vendors and corporate headquarters with its 827,000-sq.-ft. national distribution center. O+F discussed Lillian Vernon’s inventory control strategies with executive vice president of operations and CIO Tom Scott.

What led Lillian Vernon to revamp its merchandising inventory systems?

We have a custom-built system for order entry, order management, and so on. For merchandise planning, we were using a different system with older technology. It was built specifically for a catalog or direct-to-customer business. So it had some nice features and functions, but we knew we were going to be upgrading our back-end fulfillment system, and we knew we could be expanding into more channels, so we were going to be looking for a more robust function/feature set, as well as a stronger technology that would help us adapt to a rapidly changing business.

Was your goal to respond to fast changes in inventory demand?

Not really. While we may go more strongly into a brick-and-mortar channel, it’s not a significant part of our business right now. We are currently a catalog and Internet, direct-channel company. We have only nine outlet stores. So a replenishment model, where you’re replenishing multiple stores, really isn’t that big of a requirement for us.

So what we’re really looking for is to be able to do much stronger drill-down analysis of what’s selling and at what rate, and to put attributes on products so that we can determine the invariable characteristics of products that are selling: Is it a specific color? Is it a specific type? Is it a product in a specific category like our celebration products versus our organization products? We want to be able to do a better job of forecasting what will sell and to better plan our inventory buy. The whole quick-response and flow-replenishment model doesn’t make as much sense in a direct environment.

How does your current fulfillment system work?

Our order-entry/order-management system keeps track of all of our orders. We will feed that information into the new merchandising and forecasting system. The current system has a good customer base, but it’s from a niche vendor and doesn’t have a lot of backup. So the new system is an overall technology upgrade for us.

How did you choose your app provider? There are a lot of vendors out there.

Yes, there are, but you can narrow them down. I think we started with an RFP that went to 13 different vendors. You can cut some out because they play largely to brick-and-mortar retail, and most of their systems grew up with brick-and-mortar retail. Almost all of them want to increase market share. They claim, “Yeah, we’re multichannel,” and they try to incorporate the direct business, both catalog and especially Internet. It’s really the rise of the Internet that’s given all of them a new look at the direct channel. They say, “This could be big, so we’d better play in it.” They try to build on top of their brick-and-mortar base as a way to support a direct business. Frankly, most of them try to treat the direct business like another store. But you can’t. If you want to be serious at all about the direct channel, there are too many holes, too many gaps to fill.

So how did you make your final vendor selection?

Starting with 13, we could cull some out just because they cater to a market much bigger than ours — they cater to Gap and much larger companies. There’s another big block that we were able to cull out because they really grew up brick-and-mortar and were trying to shoehorn in a direct business. We don’t think that strategy works.

Then we were left with a relatively small shortlist, and Evant was distinguished not only in the function/feature set but probably even more so in the technology platform. It was maybe the only system that was built from the ground up with the direct model in mind. It was a newer system, built with newer technology.

When we were in the process of evaluating it, we knew other people that were investigating Evant, and we learned that the company was actually taking the requirements it was getting through the RFP process and modifying the system fast enough so that when Evant was going back to respond to people’s investigations, it wasn’t “Yeah, we can do it” — it was “Yeah, we’ve already modified it to do it according to what you just asked us.” That was very impressive. Of course, we were operating in a much shorter time frame than some other companies. We did our evaluation within three months.

How long do you expect system implementation to take?

We’re probably looking at six months.

What if you were to include the retail component? Is Evant’s software flexible enough?

Yes, it is. That’s the other reason we went with Evant. When they built, they built with direct in mind, but they also built with brick-and-mortar in mind, as opposed to taking a platform that had already been around for ten years and trying to modify it. So while we didn’t have nearly as rigorous requirements to evaluate retail, we know from other people who have the software that it has strong brick-and-mortar retail capabilities. It’s hard to use the right language these days. Some people say “retail” and they mean all three channels — catalog, retail, and brick-and-mortar. Some mean just brick-and-mortar, so I always try and clarify it first.

What key software functions were you looking for?

We were looking for something that would allow us the ability to really look at product; to do top-down, bottom-up planning for product; drill up and down to any level that we desire to see what’s selling and how much inventory we have at what level; to plan for optimal inventory levels; and forecast what sales would be and what inventory levels we would need.

Does the software handle returns?

We have only a 3% return rate, so it’s not as big of an issue for us. The software doesn’t actually handle the processing of returns — that’s in the back-end fulfillment system — but it certainly helps factor in returns. It’s an important part of the equation to know what products you should be buying. You can’t look just at sales. If I look at my sales history, the Evant software will show my net sales and what was returned, but there isn’t a specific module for returns.

How will this application affect your fulfillment process?

We will streamline fulfillment, but more important, we will make much smarter buys. We say in this business that it’s all about the product. You can do everything great on the back end, but when it comes down to it, do you have the product the customer wants to buy? So we think this tool will help us figure out the right product to buy and the right categories of products, but then, to take it to the next step, if you have the right product, then you have to have the right quantity of it.

And that’s the second thing — it will help us have the right product in the right quantities at the right level.

You obviously expect it to be cost-effective as well.

We believe it will be very cost-effective for us. Right now we aren’t buying anything that we think will have a return of longer than a year. With this system, we did less of a rigorous payback analysis than we did on some other systems. We made some assumptions on what sales could be increased based on having better product, the percentage of improvement of inventory, and we felt clearly that there wasn’t a lot of question about whether it would pay back.

Is this type of system worth exploring if you plan to expand DC capacity?

Absolutely. In our case, it’s not so much for capacity planning as in a store, but certainly for inventory planning. That’s the second biggest reason we purchased it: to know how much to buy and when. It’s such a critical decision. If you end up with too much, you have to dispose of it at lower prices, and if you don’t end up with enough, you’ve just missed a lot of sales. Getting that equation dialed in just right is a real trick in this game — to find the right thing in the first place and get enough of it there.

Rama Ramaswami is editorial director of O+F.

There’s a lot more to Lillian Vernon than free monograms. This 53-year-old catalog and online retailer of gift, household, and children’s merchandise mailed over 150 million catalogs last year to an estimated 27 million customers (90% of them women) in the U.S. The company’s six catalogs — Lillian Vernon, Favorites, Rue de France, Lilly’s Kids, Personalized Gifts, and a sale catalog — average 96 pages each and offer a total of 6,000 products; about 1,700 new items debut each year. The cataloger’s wholesale division sells corporate gifts and premiums to large businesses.

Measuring the size of 18 football fields, Lillian Vernon’s national distribution center, located on 62 acres in Virginia Beach, VA, shipped roughly 4.8 million packages in fiscal 2003. More than 3,500 employees work there during the holiday season, with the call centers alone employing about a third of that number. During the peak holiday week, 310,000 packages leave the facility.

With corporate headquarters in Rye, NY, Lillian Vernon operates outlet stores in Delaware, New York, South Carolina, Tennessee, Vermont, and Virginia; there are two Rue de France stores in Rhode Island.
RR

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