Direct-import strategy for a large mass merchandiser

A large mass merchandiser was using direct imports to increase operating margins for its North America market. As import penetration grew, however, the retailer was experiencing multiple supply chain issues caused by an increase in seasonal and short-cycle items.

Additionally, buyer resistance increased when true costs were less transparent. Other issues included unpredictable supply chain performance, pressure on infrastructure caused by an inventory build-up of slow moving items, and deteriorating lead-time performance.

Challenge
A.T. Kearney was called in to develop a comprehensive direct-import strategy. The retailer needed to address these major supply chain issues, continue with its direct import conversion – and capture significant margin savings.

Specific challenges included

• Assessing several thousands of sub-categories (several million items) to identify the right categories or items to import
• Increasing speed and flexibility in a supply chain network of more than 50 distribution centers and 1,000+ stores, which required a comprehensive assessment to identify needed changes in the underlying infrastructure and enabling processes

Approach
The team’s approach comprised two main actions:

• Performed a direct import (DI) opportunity assessment, including evaluating all merchant categories and sub-categories
  • Used key inputs such as merchandising mix, first cost, logistics and transaction costs, risks, and complexity
  • Identified first-cost benefit, financial impact versus risk and complexity, and projected shift in country mix
  • Prioritized categories and sub-categories into three tiers for direct import – “yes,” “no” and “maybe”
• Identified supply chain factors required to enable DI
  • Mapped the current-state distribution network to include facility locations, size and capabilities, and product flow paths
  • Developed a model of the future-state distribution network based on projected import growth
  • Identified gaps in DI processes based on best-practices comparison

Throughout the engagement, the team brought together leaders across functional areas to determine priorities and identify key change management issues.

Results
The impact of the direct-import strategy was significant:

• More than 1,000 sub-categories (250,000 items) were identified for direct-import conversion with more than 100 basis points margin improvement
• Recommendations for major network changes projected $200 million in savings by reducing inventory and eliminating 2 million square feet of distribution center requirements

Contact

Kumar Venkataraman, partner