3 Ways DTC Brands Can Achieve Operational Excellence

Fast-growing baby brand Lalo shares their 3 proven strategies for achieving operational excellence.

Retail brands are experiencing new challenges every day (from increased customer demand to supply chain issues). And the brands pulling ahead are fine-tuning their operations. Meanwhile, those neglecting their operations are falling behind, allowing these challenges to exacerbate inefficiencies.

And while the answer seems obvious–just invest in operational excellence–that’s easier said than done. That’s because “operations” is a pretty vague term encompassing many of the most complex retail functions. As a result, it’s difficult to know how to improve and where to start.

So, let’s get clear on the definition of operations. That way, we can break down the three ways your brand can reach operational excellence.

What is operations and why it matters?

Operations is the inner workings of your business. It’s how your company functions (like inventory, transactions, demand generation, marketing, communications, finance, and more) come together.

Or in everyday English:

When a business operates effectively (called “operational excellence”), growth, profitability, and scale become measurable, manageable factors. That’s because it’s:

1. Easier to free up working capital and harness cash when running smoothly.
2. Surprises and emergencies become easier to handle.

What is operational excellence?

Operational excellence is how you scale the business functions that already work really well and optimize those that don’t.

Brands that achieve operational excellence gain competitive advantages (like having freed-up capital on hand) and are better equipped to handle today’s turbulent marketplace. Plus, long-term, they sustainably grow bigger and better than brands that grow blindly at all costs.

In the 2010s, many brands did anything to unlock growth–no matter how reckless. And in the process of optimizing their DTC operations to adapt to the ever-changing landscape, many gambled whether they could reach scale and maintain profitability.

Turns out: Most could not.

For example, ecommerce mattress company Casper famously ignored operational best practices like SKU profitability. And today, they continue to lose money on every mattress sold.

Sure, they now have over 60 brick-and-mortar stores nationwide. And they generated $497m in 2020 revenue. But their current price point doesn’t cover operating expenses (in fact, they lose $349 on each mattress sold). Meaning, they’re still not a profitable business, and they’ve yet to achieve operational excellence.

As a result, Casper is currently burning cash. And once their ~$340m in funding runs dry, it’s questionable how long they’ll be able to stay in business. But we didn’t share Casper’s shortcomings to scare you.

Like any other retail brand (yours included), Casper can still ensure their profitability and long-term success. But they have to start prioritizing operational excellence… like yesterday.

Growth vs. operational excellence

Growth isn’t at odds with operational excellence. In fact, the brands that achieve operational excellence grow bigger and better than those that don’t.

For example, Lalo launched in March 2019 and saw jaw-dropping growth right out the gate. In 2020, revenue was up 320% YoY, and the brand served 360% more customers. By mid-June of 2021, Lalo surpassed its 2020 revenue, only to end the year growing more than 400%.

For most retail brands, this level of growth is the goal. But for many brands, it’s also what drives them out of business. That’s because, similar to today’s supply chain issues, ultra-fast growth exacerbates inefficiencies. And it often has dire consequences when operational excellence isn’t practiced to keep this growth under control.

Take Inc’s 5,000 fastest-growing companies list, for example. The median 3-year growth rate for these brands is a soaring 543% (just above Lalo’s 2021 growth rate).

But within 8 years of brands making this list, 2 out of 3 companies shrink dramatically, are disadvantageously sold, or go out of business entirely. The remaining third are those that have achieved operational excellence.

Lalo figured this out from day one and prioritized operational excellence in their business strategy from the get-go. That’s because their goal isn’t to just build a recognizable brand but a sustainable business.

How to achieve operational excellence

There are three guiding principles to achieving operational excellence, as Greg from Lalo explained on The Checkout:

1. Reduce waste (time, money, and materials).
2. Improve your customer experience.
3. Increase margins as you grow.

Let’s walk through how you can do each one.

1. Reduce waste

The first step toward operational excellence is reducing waste (and subsequently) costs. This path begins when you make a purchase order, and it cascades down to freight and final delivery.

Your job is to find areas to reduce waste or eliminate unnecessary expenses altogether. If you make your own products, you can reduce waste by lowering the cost of raw materials, refining product design, or rethinking their product packaging.

But strictly for retail operations, the biggest cash killer is dead stock. This slow-moving inventory racks up warehouse holding costs without making you any money. Plus, it ties up capital that could be better used for other initiatives.

Steering clear of dead stock (and reducing this inventory waste) starts by accurately forecasting demand. This way, you can properly replenish your inventory and not worry about overstocking because you only order what will actually sell (keeping more cash in your business’s accounts).

When Lalo first launched, they would rely on Shopify data and pure assumption to draft their purchase orders (POs). But this new product launch strategy left them underestimating demand and selling out on their bestselling SKUs.

So, the brand turned to Cogsy (plus, they hired an internal Demand Planner) to leverage real-time inventory trends and historical sales data. As a result, their operational plans became notably more accurate.

But Lalo also reduced waste by:

• Rethinking their product packaging to optimize how many boxes fit into each shipping container.
• Finding more direct freight routes also allowed them to save on shipping costs.
• Streamlining internal business processes to make workflows easier to achieve and cutting duplicate work.
• Outsourcing mundane tasks that bogged down their internal team.

2. Improve the customer experience

If we analyze the most recent DTC trends, we’ll see that there are more brands than ever before. Meaning, consumers have a lot of choices in the post-pandemic shift, and brands have stiffer competition. So much so that 17% of customers will leave after just one bad experience.

How does this tie back to operations? Well, a stellar customer experience demands operational excellence. This way, you have better quality control, and customers get what they wantprecisely when they want it.

For example, Lalo does this by always having their bestselling SKUs available. When they start running low, Cogsy’s replenish alerts remind Lalo that it’s time to restock. This way, Lalo places their next PO with plenty of time to avoid a stockout.

But with today’s unreliable DTC supply chains, even the best-operating brands experience stockouts. When this happens, Lalo sells on backorder with Cogsy, so they don’t miss out on revenue. And Lalo’s found that selling on backorder converts only marginally lower than selling their products in stock.

Plus, once you reduce waste (especially via better shipping routes), you’ll get products to customers faster, cheaper, and without damage. This inherently leads to a better customer experience. 

You can then further level up this experience by keeping your customer updated on when they expect their order. This way, you keep customers informed, engaged, and excited about what they bought. 

For instance, DTC email expert Samar Owais suggests sending a message every time the order status changes. Meaning when you receive the message, send an automated email. When your start processing the order, send another, and so on. 

And if the item is back-ordered, Samar suggests sending one more email every week until that product is ready to ship. That way, customers don’t feel forgotten. 

But admittedly, these messages can feel impersonal. Despite the well of customer data and plethora of automation tools, Greg reminds DTC brands that there’s still a human on the other side of the transaction. And brands with operational excellence recognize this by personalizing the customer experience when it makes sense. 

That could mean moving from a direct-to-consumer (DTC) to a direct-to-people (DTP) model. And while it might sound counterintuitive to growth, you might want to try things that don’t necessarily scale. 

For example, Eli Weiss, Director of CX & Retention at Olipop, has sent entire cases of their product to their best customers to share with their friends. While the brand might not profit on these cases, their margins cover it. And the free drinks more than make up for the cost when they acquire new customers for much cheaper than traditional ads.  

3. Increase margins

While the easy way to increase margins is to increase your price, lowering your cost of goods sold (COGs) is the best way to do this. That way, you free up more money to cushion any challenges without turning off customers.

When you reduce waste (such as, again, via better shipping routes), you’ll naturally reduce variable costs that lower your margins. But you can further lower your below-the-line expenses by planning inventory from the bottom up. 

The bottom-up approach considers your suppliers’ production schedules and the stock you need. Then, cautiously layers key growth assumptions and scheduled marketing events onto this solid foundation. 

As a result, the inventory forecast becomes much more accurate than a top-down approach which assumes inventory forecasting should be a multiplier of revenue growth. The problem with this strategy is that it fails to optimize for unit economics. 

And while a bottom-up forecast might be off by one unit, a top-down forecast might be off by 50 units (a much more expensive mistake). This can quickly lead to higher COGS and what Caraway’s Head of Operations, Mark Riskowitz, calls “operating against yourself.” 

With this operational plan, you’ll ensure you only order stock that will actually sell. This way, you’re not unnecessarily tying up capital. 

But you can also use this plan to negotiate a discounted unit price with your suppliers or manufacturers. Any predictability you can offer becomes leverage in the conversation. (Heads up: You might need to commit to fulfilling so many POs with this partner to seal the deal.)

This way, you lower your COGS, so you spend less to make each dollar of revenue. As a result, your brand becomes more profitable without raising its prices. 

Make achieving operational excellence easier

Operational excellence can seem out of reach, but any brand (especially yours) can do it. And leveraging an ops optimization tool like Cogsy only makes it easier!

That’s because Cogsy turns your static operational data into actionable insights. With these insights, your brand can: 

• Reduce waste with accurate forecasts, so you only order inventory that’ll for sure sell.
• Improve the customer experience by optimizing your stock availability and selling on backorder when stockouts occur.
• Increase margins by providing manufacturers the predictability they want in exchange for lower prices.

Ready to achieve operational excellence?