In 2020 as the COVID-19 pandemic gained momentum, direct-to-consumer (DTC) brands experienced incredible growth. In fact, sales across DTC brands in the US saw a 45.5% growth increase. At face value, that may sound like a beautiful thing. But ongoing challenges with the supply chain meant that many brands struggled to deliver on that demand.In fact, in 2021, roughly 43% of consumers opted out of holiday shopping with DTC brands and many continue to remain skeptical. To win back and keep shoppers, DTC brands are under intense pressure to find better ways to sustainably handle supply chain issues.
In this article, we’ll take a look at the core supply chain challenges for DTC brands and proven tactics to help scale unencumbered.
Table of contents
- Offset waning customer loyalty with a responsive supply chain
- Bring all your supply chain data under one roof
- Aim high when it comes to profitability
- Better supply chain visibility, lower return rates
- Be smart about your Minimum Order Quantities (MOQs)
Offset waning customer loyalty with a responsive supply chain
It is well known that the responsiveness of the supply chain directly correlates with the ability to acquire and retain customers.
In fact, one study published in The International Journal of Logistics Management surveyed 250 firms and found that the speed at which a company can reconfigure resources to meet the changing needs of customers (operations systems responsiveness) and the agility of its distribution and warehousing system (logistics systems responsiveness) improves customer development even more than the responsiveness of its supplier network.
Put another way, customers who feel that their needs are regularly met by brands will stay with the brand longer.
With the increased competition in the DTC space, acquiring and retaining customers is critical. A recent report by Metrilo found that DTC brands enjoy a customer retention rate of 28% overall and that in some categories, increased customer loyalty can account for up to 68.5% of a brand’s average revenue.
To capture those benefits, you’ll need to implement an optimized customer experience strategy that builds on your ability to respond to your customers’ needs better than your competitors.
And a responsive supply chain is a big part of making that happen.
As a growing online brand that sells directly to consumers, take time to audit your supply chain for its ability to:
- Align sales pace and inventory availability
- Provide 360-degree supply chain visibility
- Give updates on your current inventory status
- Offer suggestions to help maintain optimal levels
Bring supply chain data under one roof
Inventory optimization is more than just reordering your products every 60-90 days. It relies on seamless integration throughout every step of the purchasing journey.
Disjointed and hard-to-use systems invite costly human errors that can have a major impact on the way customers perceive your brand.
More than many other types of retailers, DTC brands have to rely on a number of systems working together seamlessly — accounting for all product SKUs, sales channels, and supplier systems.
Centralize your supply chain data by bringing all of the following information together:
- Product SKUs
- Sales history
- Supplier data
- Inventory level reports
- Purchase orders (POs)
- Transfer orders (TOs)
By aligning and customizing your own advanced inventory planning and supply chain monitoring system, you’ll have easier access to real-time data that improves your sales forecasting.
Aim high when it comes to profitability
Some brands with very small margins move to DTC expecting that if they pursue an ecommerce strategy with their existing products, they can simply make up their low profits by scaling.
But scaling at a loss is a race to the bottom, and will only improve margins incrementally. A better strategy is to manage inventory and supply chain effectively, increasing margins, and then scaling.
Fortunately, there are several strategies you can use to help improve inventory management and supply chain, and the resulting margins. For example, you could:
- Consider leveraging sales on smaller items that require less packaging
- Improve your inventory forecasts to order the right amount of products
- Sell deadstock and reinvest that capital into high-performing products
- Focus on your top 20% of products that bring in 80% of your margin
Remember, it’s ok to consider temporarily scaling down in order to improve profitability.
The important thing is to zoom out and assess your product at the portfolio-level so that you can identify any opportunities and risks that may currently be overshadowed by your star products or poor performers.
Better supply chain visibility, lower return rates
Return rates are the cost of doing business as a DTC brand, but that doesn’t make them easy.
According to a recent report from the National Retail Federation and Appriss Retail, customer product returns average about 16.6%. When it comes to ecommerce, DTC brands can easily have sales siphoned off if they aren’t aware of the root causes of their return rates.
Issues at the product manufacturing level can lead to billions in lost sales. Many of these quality failures occur long before reaching the customer and if caught in time, they can save DTC companies millions.
To scale your revenue without a heavy return rate, create an expanded customer return policy that clearly spells out the expectations and liabilities and optimize your supply chain for increased visibility from production to doorstep.
Here are some ways to use your supply chain to enhance product quality:
- Institute Corrective and Preventive Action (CAPA) processes. With total visibility, most issues and their root causes can be nipped in the bud early. After that, your team can carry out risk-based triage procedures to minimize returns and deadstock.
- Sharpen your store’s agility. View your products at the portfolio-level to keep a focus on selling more of your most-profitable products and reducing sales and inventory around problematic products or slow movers.
- Workflow automation. No matter the industry, human error is a significant part of operational failures. Cutting out repetitive and manual tasks in favor of automating key supply chain workflows not only reduces costs but makes room for increased sales.
It’s also important to note that despite even the best efforts, the peak season for returns is the holidays. During that time, be sure your staff and systems are empowered to limit returns and reduce any accumulation of deadstock.
Be smart about your Minimum Order Quantities (MOQs)
You already know it’s important to keep a close eye on your Minimum Order Quantities (MOQs) if you want to stay in stock and maximize sales. But when setting minimum and maximum days of stock, most retailers fail to consider product predictability.
That’s a problem because the predictability of each product you offer is critical to keeping optimal inventory levels. It brings stability to both your supply chain and revenue.
The more predictable your products, the less inventory buffer required and the more capital you’ll have to grow and expand other areas of the business.
Deciding which MOQ level is right for your business means considering:
- Demand. Look at your historical data to understand factors such as lead times and seasonality.
- Holding costs. Understand how much it costs to store products, especially if you hold them for long periods.
- Break-even. Consider your overhead costs and calculate how much profit you would make from charging fair market value.
Once you’ve run these calculations, you can set your MOQ strategy in place, remembering to account for product predictability on each SKU in your portfolio.
If you’re not sure how to find your product predictability, start by looking at two key areas:
- Predictability of sales
- Predictability of supply chain
This will give you a good idea of how easy or difficult it is to align your sales and inventory on a specific SKU. But it’s still only half the story.
Balance in the supply chain is crucial to DTC growth
Your ability to overcome the growing pains associated with scaling a DTC brand largely comes down to the tactics you use to strike the balance between your sales and available inventory.
For brands that are firmly focused on scaling profitably, you’ll need a reliable system for streamlining your supply chain operations including synchronized sales, marketing, and inventory, so that you can continue to drive sales and designate more capital to the real revenue levers in your business.
With the help of Flieber’s advanced algorithms, DTC brands can create a more holistic inventory and supply chain strategy. One that accounts for past stockouts, seasonality, outliers, and other variables and sets the pace for profitable and lasting growth. See how it all works with a free demo today.