Macy's executives have a diagnosis for their struggling company. Everything needs to change, including the entire supply chain. Macy's executives laid out the details of the coming transformation in an Investor Day Presentation Wednesday.

"Like many retailers, Macy's previously viewed the supply chain as transactional — moving goods from point A to point B and optimizing costs along each individual point. While this was effective in the old retail model, it limits flexibility. It drives up and costs and impacts the speed and service we need in today's omnichannel model," said Macy's Chief Supply Chain Officer Dennis Mullahy, who joined in March as the company's first CSCO. Even then, before a disappointing peak season, it was clear that he came on board with the task of transformation.

Mullahy took over a supply chain with siloed management for each delivery channel — each with its own transportation plan and technology stack. The incremental costs added up without much effort to find synergy between them. 

"This is a very tough time in our organization right now," CEO Jeff Gennette said. The retailer will shed 125 underperforming stores and roughly 2,000 employees. Offices will move and consolidate in an effort to bring down operating costs and improve margins. In the first year of the supply chain transformation, Macy's expects to generate $500 million in savings — $900 million by 2022. Cost reduction across the entire organization should eventually reach $1.5 billion in annual gross savings. ​

The plan he laid out touches each area he now oversees within one centralized supply chain organization: sourcing, inventory management and analytics, transportation, distribution and operations, procurement and sustainability.

Warehouse network

Macy's currently operates two warehouse networks that are essentially separate — one serves stores and the other serves direct consumer orders. Vendors ship products to both systems. Store orders go directly through this network with no inventory remaining in the warehouses, making rebalancing inventory next to impossible.

The company will now transition to a centralized model — fully implementing its "hold and flow model," which demands initial allocations to stores be light and replenishment flexible to feed stores that need it and avoid the markdowns that result from feeding stores that don't.

In the new model, multipurpose warehouses will hold inventory, which will either replenish stores or fulfill e-commerce orders. Macy's four existing e-commerce warehouses will transition to the multipurpose function. 

This move will get Macy's closer to best practice in terms of omnichannel fulfillment, according to Moody's Senior Analyst Christina Boni. "The big takeaway is you really should have one area of fulfillment— not store fulfillment and online fulfillment. That is ultimately going to enable you to use your inventory investments more effectively as well as improve the customer experience overall in terms of in-stock positions," Boni told Supply Chain Dive. 

Mullahy said a pilot of the centralized model reduced cost per e-commerce package by $3.74, sped up total fulfillment time by 6% and produced a 3% reduction in split shipments.

The new operating strategy will better enable omnichannel offerings for consumers, including store pickup, which Macy's already offers, but could improve with scheduled curbside pickup and a larger assortment available for within omnichannel options, Head of Digital Jill Ramsey said. 

Inventory management

Coming soon to Macy's staff is a central platform that will help Macy's teams locate inventory at the SKU level across the chain. This will be essential to achieve the company's goal of store-level pricing and fine-tune the "hold and flow" strategy. 

A technology and data-driven approach to inventory management will be in Macy's future but the details are still vague.

"When you look at the several companies that came together to form Macy’s, you can imagine the number of inventory systems that we have. The complexity of pulling all of that together, showing one source of truth is the complexity," Macy's CTO Naveen Krishna said.

Mullahy said the warehouse centralization scheme, once fully implemented over the next three years will bring down total inventory by $200 million. 

Sourcing and Procurement

Macy's main goal within the realm of sourcing is to bring down the cost of goods. Based on Mullahy's comments, the company has a lot of ground to gain back in this area since in the past, each private brand sold at Macy's sourced independently. An internal strategic sourcing operations team will work to find efficiencies across brands. 

"We're leveraging data and analytics to develop costing models taking into account category-based scale, component level costing and country of origin," Mullahy said. 

Some of this cost will come through more vigilant enforcement of supplier contracts, some through more data-driven sourcing decisions and some through more detailed cost analysis — at what Mullahy called the sub-component level. Greater coordination across design functions to use more common fabrics is also part of the plan. 

A pilot of many of these strategies generated a 6% improvement in the cost of goods on the included items by "utilizing just a subset of the actions and limited data sets that we plan to employ," he said. The team is targeting a 6% to 8% reduction in the cost of goods over the next three years. 

"We will drive more strategy into our negotiations and our management of our spend," said Mullahy, forecasting $200 million in savings from this work over the next three years. 

Lead times

Macy's will work to reduce lead times in order to better keep up with fashion trends. To speed up, the company will bring a more data-driven approach to planning and stage materials at production sites ahead of need. Plus, a streamlined supply chain organization will be better-equipped to work closely with vendors, Mullahy said. The company expects to shave 30 days off of its current lead times. 

"This will improve our reorder cycle time, allow us to reduce inventory and make decisions closer to trend," he said. 

Sustainability

In 2019, Macy's released its first-ever sustainability report, but Mullahy admitted the work contributing to it to date has been "grassroots" from within the organization. Formalizing this work with a dedicated team to coordinate sustainability efforts across the company is part of the supply chain transformation and within Mullahy's portfolio. Details were slim, but Mullahy said efforts would span "responsible sourcing, social compliance, human rights and environmental initiatives to reduce waste and carbon footprint." 

Macy's transformation: Supply chain 101?

The operational changes Macy's laid out are supply chain 101 in the omnichannel age —  there are retailers of equivalent size lengths ahead on efforts such as lead time reduction and warehouse network agility. Kohl's, for example, has been focused on lead-time reduction since 2014. Nordstrom has been on a journey iterating its omnichannel fulfillment strategies for nearly two years. Boni said, though, that many major retailers are still working out the optimal supply chains to support omnichannel offerings and that work doesn't really ever end. 

"True omnichannel is a journey," she said. Macy's plan, if well-executed, could get the retailer on par with the best in class, she said. 

Cowen analysts pointed out in a research note that the risk comes in when executing so many large-scale changes at once ups the risk of any single initiative. 

"We are focused on disruptions to the supply chain, as the changes seem prudent but will require sharp execution, otherwise there will be risk to under-inventorying stores," reads the note. However, supply chain transformation is also the greatest potential driver of margin improvement, according to Cowen. 

Boni agreed, noting that anytime a retailer makes material fulfillment changes, there is near-term risk. In fact, some of 2019's biggest retail supply chain calamities came from broad fulfillment network shifts and the technology upgrades that accompany them. But Boni is cautiously optimistic. 

"It’s not insurmountable. Obviously they laid out a lot of work. These are all in isolation important tasks," said Boni. "That’s not to say that it isn’t doable."