Increasing Delivery Speed Santiago Gallino – Tuck School of Business Toni Moreno – Kellogg School of Management January 2017 July 2013 – LBS – London, UK

Learning Modules 1. Demand forecasting 2. Inventory Decisions 3. Assortment Planning 4. Pricing Decisions 5. The omnichannel customer 6. Fulfilling omnichannel demand 7. Omnichannel journeys 8. Supporting an omnichannel strategy

M6.3 Introduction 1 For retailers who sell physical goods, every transaction has two main components: the physical product and the experience by which the retailer facilitates the transaction. Product Experience Value Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Introduction 1 In omnichannel retail, one of the most important additional benefits is delivery, and many retailers are reducing their delivery time to customers through a wide range of efforts. These efforts include building more DC, implementing store fulfill-ment programs, and even developing one’s own air-cargo delivery network Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Customers React to Speed 2 Customers react not only to what retailers announce but also to what retailers actually do. Regarding shipping delivery time: Retailers can promise a time range This range can have an impact on demand Retailers can perform differently than they promised Product/Standard/Objective Experience/Variation/Subjective Value Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Customers React to Speed 2 Does shorter delivery times increase sales? Talk about study Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Reducing Delivery Speed 2 3 days 7 days 2 days 4 days Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Reducing Delivery Speed 2 4 days 3 days 2 days 3 days 4 days Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Customers React to Speed Does shorter delivery times increase sales? Talk about the distance variation Approximately 3.5% revenue increase for an average 2 day reduction Is this good? Could the retailer have done better? Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Reducing Delivery Speed 3 days 3 days 2 days 1 days 4 days Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Is this a Good Investment? 4 How to decide on this investment? REVENUE: Increase in demand because of shorter Lead time This should be done weighting the distance times the demand. Where the optimal location of the new DC is? COST: Delivery Cost Reduction Additional Cost of the New DC Additional Inventory because of lack of pooling Should I change my promised time? Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Alternative Solutions 4 A similar exercise can be done for the different approaches to speed up deliveries: Use a more expensive delivery option From Stores Drones Dedicated fleet There is not necessarily one size fit all answer. For example there might be areas that are better of having deliveries from the stores when I have 2 DC an others not. Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Alternative Solutions 4 3 days 3 days 2 days 1 days 4 days Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

M6.3 Free delivery Doesn't Exist 5 Free delivery doesn’t exist How retailers charge for delivery makes a difference on demand? Talk about study Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face

130 120 Stars Stars Free 5 5 days 10$ St. Free-6 St. Free-6 Nordstrom Nordstrom 66% 34%

130 110 Stars Stars Free 2 2 days 20$ St. Free-6 St. Free-6 Nordstrom Nordstrom 75% 25%

M6.3 Free delivery Doesn't Exist 5 Free delivery doesn’t exist How retailers charge for delivery makes a difference on demand? Talk about study Are you going to be able to transfer the cost or this will simply reduce your margins? Home depot – Trader Joe’s Nordstrom – Banana Republic – The North Face