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Episode 16: Is there a Subscription in Your Supply Chain Future?

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Bob Trebilcock: Welcome to The Rebound, where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management and Bob Trebilcock, Editorial Director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments. Now, to today's episode. Welcome to today's episode of the Rebound. Is there a subscription in your supply chain future? I'm Bob Trebilcock.

Abe: I'm Abe Eshkenazi.

Bob: Joining us today is Ranjan Roy, the Vice President of Strategy for Adore Me, an e-commerce disruptor in the women's lingerie and sleep and loungewear market. Ranjan, welcome.

Ranjan Roy: Hey, great to be here.

Bob: Thank you, we're thrilled to have you. If you're of a certain age, as am I and I think is Abe, you might remember the Book of the Month Club and the Columbia Record Club, they were subscription services. You signed up and every month you got a shipment of a feature record, a book or two that you could keep or send back. Fast forward, and e-commerce companies are breathing new life into that old model. Any number of firms are shipping boxes of curated items just for you on a monthly basis. You can keep them in whole, or in part, or ship the whole thing back.

For supply chain managers, subscription services are a mixed bag. On the one hand, they bring a little predictability to your operations. Your daily orders might be random, but once a month, you know what you're shipping out. On the other hand, they also inject a new level of unpredictability and that's because you don't know what's going to stick with a customer, and what they're going to send back. How do you plan for and execute in a subscription-model service - one that includes both forward and reverse logistics, especially when you're also filling other channels?

Those are the questions we're going to put to Ranjan today, as we discuss how his team manages Elite by Adore Me, the company subscription service. To get us started, Ranjan, why don't you quickly describe first how Elite by Adore Me works? When did you launch the service? What's involved?

Ranjan: Yes, definitely. At Adore Me, we've been launching what we call number of transformational initiatives over the past few years. One of them was the launch of Adore Me services, our wholly-owned distribution center in 2017, which was nicely covered by Supply Chain Management Review. One of the things that owning our own logistics center, enabled was to get creative on the business model and service side. One of the things it started as a small experiment, was to launch this idea of try-at-home or Elite.

Simply, we send a box three, four, five or six items, the customer keeps whatever they want, sends the rest back. One key distinction, I just want to make sure for any listeners Adore Me since its inception, has had a subscription service that's more of a membership. You pay $39.95 a month, and that is applied towards shopping on our website and that enables a number of perks and discounts and stuff. That was the VIP membership, which has existed since we began. Elite was our foray into trying-at-home.

It was a big undertaking, because we think for us, it was a unique opportunity that the broad lingerie category. The in-store shopping experience is very specific. It's very difficult to create something that's comfortable, so it really was a place to try to launch this way of shopping in the comfort of your own home.

The other thing for us, is we all really believe across the organization, that this idea of predictive commerce, the idea that you start sending things to customers because you have a deeper relationship with them, we think this is the future. Stitch Fix has paved the way, Amazon has been dabbling in this, but from a customer-experience, logistics, profitability, procurement standpoint, from all these different angles, it just makes a lot more sense but it's pretty hard to get it right. Definitely, can talk about that today.

Abe: Ranjan, let's dig into that a little bit. Obviously, Adore Me wants to minimize returns. You're not going to stay in business by sending out 10 items and getting back nine every time. Obviously, you want to start to learn about the customer preferences and become a little bit more affinity-based as you're supplying them. How do you understand that customer preference to your point about getting a little bit more intelligent about what the customer wants and what he will keep, and then how you keep learning the customer, because obviously tastes change?

Ranjan: The holy grail of what we call the keep rate. That is the North Star Metric, that thing we're all looking at. To step back, the first thing we really think about in this is DTC, Direct to Consumer. The whole idea is you have a direct relationship with the consumer, and to us that's our power, that's our treasure, that relationship. We actually think that there's a lot of brands out there in DTC, we call them plug-and-play brands. The idea you just launch a website on Shopify, outsource all your operational infrastructure and logistics, buy some Facebook ads and you have a brand.

We don't think that is the future. We think owning the relationship, owning the logistics, and creating these new models is the key. For us, the key braid to the customer experience in Elite starts with a style quiz. A number of questions, fun, visually, engaging, swiping around and you answer us on style, fit, preferences, all these kind of things. That's where we start. You give us a bunch of data points, that feeds into the core Elite algorithm and there is a full level of data science behind this to get it right. There's also a ton of input from the creative side, from our designers, from the procurement side as well, in terms of what's selling, what's not selling.

Even every box, we look at as a series of decisions. You send four items, there's four decisions being made by the customer. To them, it's just, “Am I throwing this back or not?” but to us it's, "Okay, did you put it back and return it? What about the colors in there?” If it's a swimsuit, “Is it one or two pieces? Is it printed?” If it's a bra, “Is it on the sexier side or the more comfortable side?” All these data points have vetted that you give you the opportunity to get to know the customer better and get smarter. Again, if you don't get the keep rate right in this, it doesn't make sense for anyone. It's wasteful environmentally. From a profitability standpoint, it's a disaster. That is the main thing we're looking at.

Bob: Let's talk operationally a little bit here. You're going to have the unpredictability of your regular e-com orders. You don't know who's going to order or how many orders you're going to get, what they're going to order on a day-to-day basis. Now, you have these shipments, how do you plan for them? How do you work them into the workflow of your distribution center, and then just explain how you ship out? Do you do it all at one time? Do you spread the shipments out during the year, and then how does it impact fulfilling your other online orders?

Ranjan: A number of questions in there. If we're starting with the workflow-- And again, as it is now-- What is it, December 14th and we're nearing the holidays, shipping is clearly a top-of-mind in every respect for every single e-commerce provider. Adore Me, we're not a small business, we're well over $100 million in revenue and over hundreds of employees, but we're still a pretty flat organization, we like to think of ourselves. One thing that enables is from a workflow perspective, our logistics team can work very closely with the marketing team, in terms of forecasting sales.

This is really important, because one thing in e-commerce that allows you a bit more predictability is even though majority sales are still organic and traffic-organic sales, we have online ad spend. It's a dial we can turn up or down. In terms of building the workflow, enabling the productivity, we have some visibility in that on a week-a-head basis. Every week, logistics sits down with marketing, “What do we think our sales might look like this week?” That enables us to start really planning ahead, “What do we need to do on the warehouse side?” That's how we look at Elite, that's how we look at try-at-home, because it's the most predictable thing on the forward logistics side.

It's, again as you mentioned on the reverse logistics side, definitely a bit more unpredictable but it's beautiful for us, and we think that's why it's such a good model for online shopping because it gives us plenty of time to think ahead, “How can we get this out in the right way, how can we get this to the customer, what are we going to put in there?” It allows our logistics team to work with the marketing team, to make sure that happens in a way that doesn't overwhelm the regular fulfillment side.

I can tell you when we launched this, Elite was a small part of the business. It didn't really impact, but we're pretty well aware that building that into the overall warehouse infrastructure was going to be a key part of how it built and how it scaled. It's definitely something that we thought of very early on when we first launched Adore Me services, it's 130,000 square foot operation, which for us was-- There was plenty of capacity to start working with. It allowed us to start really building in the kind of infrastructure that can allow for this reverse logistics procedure.

Abe: Ranjan, you're describing a fairly straightforward process. One of the things that you indicated before that almost any organization or any individual can open up a website and start selling products. Barriers to entry are fairly low in getting to the consumer, how do you separate yourself from value-added services that Elite becomes the destination for a women's lingerie, as opposed to what the start-up tomorrow that, “I'm selling something because I don't own it, I have no control over me venturing, I just send out volume.” How do you separate yourself from a lot of the “me-toos” out there?

Ranjan: While launching an e-commerce brand is incredibly easy, developing this try-at-home, I think we think is a huge moat for us. You need to know the customer. We have 10 years of sales data. We have incredibly loyal customers. We've hundreds of millions of data points around purchase in preference. That has all been factored into the Elite algorithm. Not only that, Stitch Fix has to sell every type of product across category. Men, women, children, it's spread pretty wide.

For us, it's a fairly limited universe of data that we're working with, we think that's even another advantage that really starting focused, and then slowly building out the algorithm to hit in bras and lingerie, swimwear, sleepwear, all hitting the same kind of customer within the same universe, also very important.

That's on the data side, the logistics side, wow. Handling this stuff, this is not something you can just pay someone else to do for you, because again, you got to predict very well, the customer behavior to try to get things operating on the distribution side as well. One thing I can tell you, this changed the way we built the entire warehouse and think about logistics in general. Our head of Adore Me Services, AMS, Hugo, he likes to call it, “We now think about the circularity of a product.”

Think of it in terms of the life cycle of the warehouse, that it's no longer send-- We send it out and I'm not trying to be overly promotional, but we had one of the lowest return rates in the category. Returns at first, were not a huge overwhelming existential threat for us in any way. Now, we actually have to think about them as a natural part of the life cycle, that it's no longer a return is a negative thing that happened, a return is just a simple thing that will be a major part of the overall purchase process.

Structuring the warehouse, how things are received, building the actual returns process to be scalable, to check quality, a 12-point quality check on every single product that comes through. All those things have to start getting built from the ground up in a really specific way. We kind of consider that way of-- Warehouse approach of circularity as definitely a competitive advantage. It's not replicable.

Bob: Ranjan, I was going to ask you operationally a little bit about the warehouse, which you just answered. I'm going to ask you the next question, but for our listeners, you have a pretty highly-automated DC, particularly for a company with just a $100 million in sales. I know that sounds like a lot, but at that level of sales, typically people aren't going to have things that you have, like robotics goods-to-person, you've got an auto store system, you've got the sure sort and some other things. I know that you designed those for your forward logistics. Now that you have more returns, did you have to modify your systems any, or are you using the automation as part of the returns process?

Ranjan: Yes, that's a great question. I can tell you the automation from our side-- We have, as you mentioned the best in solutions auto store, the put walls. It's a balance, where we start from day one, always thinking about scaling, “How can we build something that can grow?” That's how we built Adore Me Services from the ground up. You start to see the benefits here where-- Especially during the pandemic, having more automated solutions to allow for social distancing was incredibly important.

For Elite, for the try-at-home, it does factor in, adding in automation to speed things up, to allow you to scale. It definitely plays a huge role in how we build the entire process, but it is one thing that before coming on the podcast, we do have these discussions with the AMS team, that we'd like to talk about this at a high level. Again, the circularity, the life cycle of the product, but in terms of the concrete structure and the processes that we build, it's definitely something we think of as a secret sauce and a competitive advantage.

It's interesting to us because normally e-commerce, your logistics process isn't always thought of as the secret sauce, but especially with the try-at-home model, we really think that it's something that we are excited that we built.

Abe: Ranjan, let me give you our last question here, and I think it builds on some of the references that you brought up before about not only forward logistics and being a competitive advantage, but the reverse logistics side. I think for most supply-chain professionals, this has been a cost center. It's been the price of doing business is getting products back, not necessarily a revenue center. It sounds like you've turned it into a revenue center for the organization, how did that come about, and was that planned in the beginning, or are you learning as you're moving forward?

Ranjan: I've never actually heard it put that nicely, that transitioning it from the cost center to a revenue center, but I think that might start getting used internally. This is exactly it. We started building again from 2017, the timing was just kind of perfect that we launched Elite. As we were scaling AMS itself to handle the core business, we already were building the processes on the return side to take in products, and introduce them back into the life cycle of the product. It definitely was from the beginning.

We do think it's a different warehouse because of that. It's a different DC that it looks very different than others, because that was a core part of how we built it from the beginning.

Abe: Thank you very much. We hope you'll be back for our next steps of the Rebound. I'm Abe Eshkenazi.

Bob: I am Bob Trebilcock.

Abe: Stay safe and healthy everyone, take care.

Bob: The Rebound is a joint production of the association for supply chain management and supply chain management review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

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