Toys ‘R’ Us Is Using Some Tricky Logistics To Stay Competitive Against Amazon

If you sell toys, this is a big time of year. If you are the world’s largest toy store chain, this is a REALLY BIG time of the year.

For Toys ‘R’ Us, this is a critical time to sell and that put a serious burden on their supply chain. They need to both keep their store supplied and fill individual customer orders that come in from their website. And everything has to come together right on time so that there is the right thing under the Christmas tree.

Today’s Wall Street Journal has an interesting article about how Toys ‘R’ Us is tackling the holidays and trying to stay competitive with Amazon (The New Logistics of Christmas, Dec 13). There is also a video showing their New Jersey fulfillment centre in action. One of the interesting points in the article is that like Wal-Mart and Macy’s they are filling some orders directly from stores.

The world’s largest toy chain earlier this year began turning stores into online order-fulfillment centres where workers pluck toys from shelves and ship them to customers, part of an ambitious but complicated plan to use its inventory more efficiently and gain an edge over online-only competition. …

But the current systems need fine-tuning. If a store does too much packing and shipping it could disrupt in-store shoppers. If it doesn’t do enough, it can be more expensive than shipping from a distribution centre where workers are doing it all day. “It can be three to five times more costly,” Mr. Sambar said.

Filling orders from stores also adds new layers of complexity. At Toys “R” Us, analysts have to determine whether it is ultimately more economical to ship from a company distribution centre or a store, depending on how much inventory is in each and how fast it is moving.

For example, it might be more profitable to ship from a store farther away from a customer, if it has slower-selling inventory that might otherwise be marked down. …

For the stores, the biggest challenge is not knowing how many daily Internet orders they have to fill, said Troy Rice, executive vice president of stores at Toys “R” Us. Still, the stores managers like the program, because “it helps meet their overall sales objective,” he said.

Mr. Storch said the undertaking will ultimately pay off because it will increase the amount of inventory the company can offer online, and increase its overall profit.

I must admit that I am becoming more and more suspect of all these retailers trying to leverage their store inventory to fill web orders. If there is significant geographical variation in demand, this makes some sense. A toy sitting in New Jersey might hang around for months but be gone in days if it were in Texas. Letting the Jersey store fill Texan web orders may be more efficient than re-positioning inventory from one store to the other.

However, I wonder just how much regional variation there is in demand. Whatever toy is heavily featured on Nickelodeon or the Disney Channel is going to be high demand everywhere. I similarly suspect that duds are also going to be correlated across markets. Star products are going to stock out quickly everywhere and dogs are going to have to be marked down on-line and in-store. Fulfilling orders from stores seems to make the most sense for items that are in between these extremes. That is, for those items for which the retailer has nearly the perfect quantity so there’s some stock left as the season is winding down but it’s just a handful of units.

Maybe Toys ‘R’ Us has a lot of items that fall in this category. That could certainly boost sales and inventory turns. It is just not clear to me that it is necessarily worth the expense and complication. This is particularly true since their business will be so much more seasonal than other retailers. It is a big investment to develop this capability but then only really need for a small slice of the year.