3 Ways DTC Brands Can Achieve Operational Excellence

March 15, 2022
8 min read

In this article:

Fast-growing baby brand Lalo shares their 3 proven strategies for achieving operational excellence and growing not just bigger but better.

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 does it matter?

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:

"Operations is figuring out how to get the best product into your customers' hands as quickly and efficiently as possible."

- Greg Davidson, CEO and Co-Founder of Lalo

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 DTC brands did anything to unlock growth–no matter how reckless. And in the process, 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. 

Casper loses $349 per mattress sold
Graphic by: Business Insider

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 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 critical facets to achieving operational excellence, as Greg from Lalo explained in episode #7 of 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 strategy left them underestimating demand and selling out on their bestselling SKUs. When this happened, Lalo missed out on revenue opportunities.   

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.

"Cogsy is the hub and real-time source of truth for our operational data. We're now able to plan for each upcoming quarter with more clarity and accuracy."

- Greg Davidson, CEO and Co-Founder of Lalo

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 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

There are more DTC brands than ever before, which means 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 want precisely 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 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.  

Back-in-stock notifications have dismal conversion rates (between 5-15%), which means only a tiny portion of your opt-in list will actually return to complete the purchase.

You can then further level up this experience by keeping your customer informed and excited about their purchase. For instance, DTC email expert Samar Owais suggests messaging a customer every time their order status changes. Meaning when you receive the order, send an automated email. When your start processing it, send another, and so on. 

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

But admittedly, these messages can feel impersonal. And they often fail to recognize the human on the other end. Luckily, you can troubleshoot this by personalizing the customer experience with a more direct-to-people (DTP) approach.

For example, soda alternative Olipop loves doing things that put the customers first, even if it doesn't scale. They've sent entire cases of their product to their best customers, inviting those customers to share it with their friends.

And while this might sound counter-intuitive to operational excellence, it's not. This non-scalable initiative leads to a better customer experience. So, the brand might not profit on these cases, but their margins cover it. And the free drinks more than makeup for the cost when they retain their existing customers and acquire new ones 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? Set up a demo today, and see how you can improve your everyday operations with Cogsy.

Operations FAQs

Here are answers to common questions about operations:

What is operations?

Operations is the catch-all term for the activities behind business growth. It's how you manage people, processes, and planning.

What is operational excellence?

Operational excellence is a strategy for improving all processes and systems, so your business can unlock sustainable growth. Brands can get there by reducing waste, improving the customer experience, and increasing margins.

How does Cogsy empower operational excellence?

Cogsy empowers retail brands to reach operational excellence by turning static operational data into smarter actions. For example, with Cogsy, you can effortlessly maintain optimal stock levels thanks to accurate demand forecasts and replenish alerts. And you can sell on backorder if a stockout occurs. 

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