Reinventing retail at Macy’s: Inventory productivity and sustainability

Editor’s Note: This is the first of two columns on the reinvention of Macy’s retail supply chain. In this one, we look at the department store leader’s focus on inventory productivity. In the second, we’ll look at the role sustainability plays at Macy’s.

Can a 165-year-old department store chain evolve to meet today’s retail shopper and compete with fast fashion, off-price and pure e-tailers? And, if so, what is the role of supply chain in that transformation? Those are questions that Macy’s, Inc., the department store leader with more than $24 billion in annual net sales in fiscal year 2022, began to answer before COVID. That’s when it launched the reinvention of the supply chain that largely supports the Macy’s brands. A major focus is a measure that Dennis Mullahy, Macy’s chief supply chain officer, refers to as “inventory productivity.” Or, Mullahy explains, “If I can generate the same amount of sales with the least number of inventory receipts and fewer moves, I can maximize inventory productivity.”

The strategy is delivering results in a way that demonstrates that supply chain can have a positive impact on an organization’s bottom line: In its financial report for Q4 2022, Adrian Mitchell, Macy’s, Inc. CFO and COO, noted that inventory declined 3% compared to 2021 and 18% compared to 2019, and that inventory turnovers had likewise improved compared to 2019. “We made significant progress in leveraging data and analytics to better forecast sales demand, receipt timing and flow across the supply chain,” he told analysts, adding that “inventory productivity” will continue to be a focus through initiatives such as improved automation and more flexible inventory allocation both of which are designed to drive higher sell-throughs and more sales. Forecasting, timing of inventory receipts and flow through the network – that’s supply chain management.

In many ways, Macy’s supply chain reinvention is designed to support the inventory productivity strategy of selling more with less, and at higher margins. It also enables Macy’s to make good on its promise to “help our customers express their unique style and celebrate special moments both big and small, wherever and however they shop.” From a supply chain perspective, the most important part of that phrase just may be wherever and however they shop.

The current approach also represents a departure from two conventional retail strategies: Build it and they will come, and then pile the inventory high to wow the customers with selection once you get them through the door. At the end of the season, you put it on sale to make room for the next delivery of new merchandise. Those strategies may have served the industry in the past, but that was then and this is now. “Opening a new store and piling it high with inventory doesn’t work anymore because the consumer has more options,” Mullahy says. “There are more choices, more options in terms of digital and a lot of opportunities to buy.” He adds that “from a supply chain perspective, we have to be more nimble and more strategic about investments, how we plan and how we think about consumer behavior.”

During a recent conversation, Mullahy touched on the three pillars that are guiding Macy’s transformation: Visibility, predictability and flexibility. How do they play together?

Visibility is foundational: It’s one of those things that supply chains have been chasing as long as there have been supply chains. For Mullahy’s team, visibility is not just a matter of knowing where product is located as it moves through the supply chain from the manufacturer to the customer, but also real-time visibility into consumer demand across the various channels in which Macy’s participates. What is it that customers want right now and where do they want it in relation to where that inventory is located?

Predictability is the art of mining through the data related to events that are occurring in the stores and online and “then we are able to apply logic and math to predict what comes next,” Mullahy says. The goal is to manage inventory by moving it to where it’s needed, when there is demand. “Retailers overbuy and put it in the stores because they’re unsure of demand,” he says. “We want to put our inventory into the best place to make a sale, maximize the flow of the unit through the building and maximize the profit.”

A byproduct of visibility and predictability is that it minimizes the number of moves for inventory. The tools Macy’s is utilizing are a combination of commercial tools, such as those from companies like Blue Yonder, and tools that Macy’s has built internally.

The third building block is flexibility. As defined by Macy’s, that’s the ability to hold back some inventory in strategic locations until the supply chain team sees a demand signal and then move it where it can generate the most sales. “The idea of flexibility is to be able to make decisions at each individual node and then determine the best path for our inventory,” Mullahy says. “In some cases, we decide up front that we’re not sure where product will sell best, so when we import product in, we can break it out by a DC or by stores and then consolidate and reconsolidate as required.”

One example that illustrates predictability and flexibility is that Macy’s was one of the first retailers to diversify the ports it used coming out of 2021, reallocating about 20% of its imports to east coast ports and away from California.

An important component of flexibility is to react quickly once there is demand. To that end, in 2020, Macy’s transitioned from separate buildings for store replenishment and e-commerce fulfillment to omni-channel buildings that fill both types of orders from one shared inventory. Within the buildings, Macy’s is investing in high levels of automation to drive speed through the buildings and mitigate labor shortages.

Two of the new automation tools include AutoStore robotic goods-to-person systems and pouch sorters. The systems are used for store replenishment and e-commerce fulfillment, depending on the size of the order. “Both technologies allow us to pick directly into a bin or pouch that goes directly to a packer so we can move quickly,” says Mullahy.

As a last question, I asked Mullahy if the pandemic changed Macy’s strategy. To the contrary, he said, the strategy was already in place by the spring of 2020. “We looked at COVID as a reason to accelerate strategies that we were already considering,” he says, crediting them with helping Macy’s get through the global shutdown and some of the pains associated with opening back up. “We’ve worked very hard to build better planning tools, inventory management tools and to organize teams to make decisions quickly that leverage data and then communicate that across our operations,” he says.