Supply Chain Disruption & 12 Ways Retailers Can Avoid the Coming Cash Flow Trap
We can’t seem to catch a break! The cargo ship blocking the Suez Canal could take weeks to move. As if the global supply chain wasn’t sufficiently disrupted. Consumer demand is still at record highs and there is even more stimulus money flowing. However, consumers are getting frustrated and are demanding refunds. Extended lead times due to back-ordered products threaten sales. Learn how retailers are finding ways to avoid the coming cash flow trap in this guest post.
Our guest blog contributor, David McMahon, helps furniture retailers improve their customer experience and overall business processes. In this article, David shares his expert tips for how retailers can avoid cash flow issues. This is crucial, especially with a severely disrupted supply chain.
Guest Post By David McMahon
12 Ways Retailers Avoid the Coming Cash Flow Trap
Manage your retail furniture store pipeline in these chaotic times to avoid cash crunches that are likely to plague home furnishings retailers.
We’ve all seen that the pandemic has altered customers’ normal buying patterns, causing major disruptions in the supply chain for home furnishings. Written sales have outpaced delivered sales. The result is a growing backlog of customer open orders, growing lead times and record levels of customer deposits.
Frustrated customers who have waited longer for their deliveries are canceling at higher than normal rates for some retailers. This rise, combined with accelerated inventory arrivals—as the supply chain returns to normal—has the potential to strain cash flow for those retailers who are unprepared. Even customer tagged orders for which deposits have mostly been paid upfront are cause for concern as payments for newly arrived product will outpace customer payments. Should a slowdown in written business occur at the same time as an influx of inventory and cancellations, cash could quickly become very tight.
You can avoid this scenario by adopting the following twelve practices.
1. Understand your sales and inventory pipeline.
Your pipeline is your work in process made up of sales that are not completed and inventory that has yet to be delivered. To fully understand your cash situation, I suggest you start by taking a close look at three important metrics:
• Open sales by salesperson. It makes sense that your top performers will have the largest backlogs. When a salesperson who normally manages a certain number of undelivered customer projects has to manage a continually increasing amount of work in process, resources may be strained and something eventually may have to give.
• Percent deposits and how much will be owed on customer orders. Tracking this information will give you an idea of how much cash will be collectible and available to pay for incoming inventory invoices.
• Purchase order aging with expected cash requirements. Estimate when customer and stock orders will arrive as well as the landed cost of that freight. This will help with cash flow planning. Predict the dollar amount of these orders expected to arrive in 30-day future aging increments.
“Retailers are finding that their top salespeople may not have time to adequately serve new customers while continuing to follow up with their pipeline of open orders.”
2. Communicate anticipated delivery times clearly and truthfully, upfront.
Find out if your customers are willing to wait for custom ordered items to be produced. If customization is important to them, be honest about anticipated lead times. No retailer wants to tell customers there is a six-month waiting period for delivery, but it’s best to tell the truth and let them decide. If they don’t want to wait, they may have to settle for items in stock or already on order that you can let go.
3. Get store staffing right for sales and sales support.
As mentioned previously, hefty lead times combined with increased written business has resulted in large open order files, especially for the most productive salespeople. In pre-pandemic times, many retailers expected salespeople to follow up with their customers regarding open orders. Now, this has become a double-edged sword. Retailers are finding that top salespeople may not have time to adequately serve new customers while continuing to follow up with their pipeline of open orders. It is, therefore, important to make sure that adequate staffing is available to serve new prospects as well as customers waiting for delivery.
4. Follow up even if there is nothing new to report.
Even if your sales and design associates do a good job of managing customer expectations up front regarding expected delivery times, they still need to provide customers with routine status updates. Furniture is one of the largest purchases consumers make. They need to be handheld through the process, even if there is nothing new to report. How often should you follow up? Right now, I’m seeing that most retailers follow up with customers as often as every two weeks and as little as never. It’s best to follow up at least monthly.
• You next follow-up can be, “our manufacturer has “scheduled your furniture for production.“• Your first follow up can be as simple as a “thank you.“
• Then it may be, “your furniture is in production“ or “being custom crafted for you.“
Take customers through the production process so they feel a part of it. Use visuals if appropriate. Help them to eagerly anticipate the arrival and value their home furnishings so they don’t even think about canceling.
“Your vendors’ supply chains have become more expensive and the costs must be passed on for these essential partners to stay in business.”
5. Put automated systems and processes in place.
It can be time consuming for retailers to accomplish a high level of routine customer follow-up. Defining systems and processes to make reaching out to large numbers of customers in a short amount of time through technical automation will help you to do better with the resources you have. Customers can be updated on their order status faster through the use of email, text and web forms. Make it easy for them to return messages. This will avoid frustration if they have a question or request. The personal touch of a telephone call can be valuable, but the reality is that phone calls can interrupt busy sales associates and result in time-wasting telephone tag. Instead, consider sending what you have to say, in short, systematic, pre-built electronic messages.
6. Follow up with customers by exception, as well.
Because of changing lead times and supply shortage issues, there will be times when something outside the expected occurs. For example, a situation such as a fabric becoming unavailable or a shipping delay should trigger exception follow-up. Communication between your purchasing staff, vendors, salespeople and/or sales support needs to be effective so that customers are informed of these situations ASAP. Exceptions must take priority. Put a standard practice in place regarding how options and solutions are discussed with customers. Your entire team must approach these situations in a consistent and professional manner.
7. Define your strategy for handling cancellations.
In the months that go by while customers wait for delivery, events may occur that change their initial decision to purchase. A customer may simply be tired of waiting, or a life-changing event such as job loss or a health issue may have occurred. Whatever the reason, retailers have to decide what their policy will be when a cancellation is likely. I am not going to tell you what is right or wrong, however, here are some options:
• Buy the customer a gift certificate to spend at their favorite local restaurant as an expression of gratitude to keep their order.
• Charge a restocking fee for the cancellation.
• Switch the on-order merchandise for something else they can get immediately from stock, or from sooner to be delivered items.
• Give them the option to finance their entire ticket so they can make “affordable low monthly payments“ instead of putting down a large amount of cash upfront.
• Allow the customer to cancel and apply their money as a credit on account.
• Cancel their order, refund their money, and make the stock available for another customer. This treats the cancellation as an opportunity. You might be able to make two customers happy: one who gets their money back, and another who gets merchandise faster than expected.
“In the months that go by while customers wait for delivery, events may occur that change their initial decision to purchase. A customer may simply be tired of waiting, or a life-changing event such as job loss or a health issue may have occurred.”
8. Weigh stocking vs special order models.
If you feel that an increasing portion of your customers are looking for speed of delivery over customization it is worth looking at your merchandise line-up. Decide what you can back-up with stock and which custom options you might drop. After doing this, if you feel there are merchandise line-up holes, you might need to grow a particular vendor and/or find new sources of supply. The important thing is to get in the habit of constantly evaluating your product mix with respect to what your customers are telling you with their words and their wallets.
9. Price your products appropriately.
Availability sells at a premium and those customers who want custom options will pay for them. If you wait to price properly you will end up losing margin and profitability. Your vendors’ supply chains have become more expensive and the costs must be passed on for these essential partners to stay in business.
10. Order quickly and pay vendors promptly.
You should not hang on to orders for more than one day. Order every day, even if that means ordering smaller quantities. This may get you in-line for delivery with some vendors sooner. Ensure that your purchasing staff understands how each of your vendors’ production fulfillment works. And, pay immediately upon invoicing! Do not even wait one day. This will help keep your credit with them healthy and allow for a measure of safety if ever needed in the future.
11. Communicate with vendors just like you follow up with customers.
No matter what the size of your business, follow up with vendors routinely, systematically and exceptionally. This requires that you allocate the proper resources. And, don’t expect salespeople to do this! They need to focus on their customers. Keep on top of all acknowledgments. Enter realistic production and shipping days. Use realistic transport road days. Monitor these days and vendors to verify the timeline. Modify the timeline in your system where necessary. Communicate date exceptions to your sales team. If you believe in UPOD (Under Promise, Over Deliver) you can pad your days a bit. To make these processes more efficient, consider EDI systems to transmit and update your data quicker.
12. Flow inventory fast through your facility.
You must get information from your vendors and freight companies about what is being shipped to you and for whom, at least a few days in advance. This allows you to get ahead of the workload so that received merchandise can flow faster through your facility. Cross dock, inspect and schedule sold items for delivery quickly. Likewise, display inventory should be identified and your merchandisers should be ready to place it on the showroom floor.
“Cross dock, inspect and schedule sold items for delivery quickly. Likewise, display inventory should be identified and your merchandisers should be ready to place it on the showroom floor.”
Just like having the right number of people doing the right things on the front end, the back end needs to be able to fulfill quickly. Look for ways to communicate effectively with customers for time consuming tasks such as delivery scheduling, payment collection, and customer service work processing. Online system-integrated forms, email and text are all ways to get the job done faster and make a more favorable impression on your customers.
It is likely that supply chain issues will continue for sometime into 2021. In my opinion, these challenges will exist until demand goes back to pre-pandemic levels and the virus dissipates. This is an opportunity in disguise for retailers that embrace continuous improvement, become better at managing customer experiences to reduce cancellations and gain a leg up on their competition.
David McMahon is founder of PerformNOW Inc. Read other articles by David McMahon