10 August 2021
It’s an exciting time to be operating in the DTC space. Tech-savvy companies have revolutionized retail and raised customers’ expectations for a seamless shopping experience.
However, since the outbreak of the pandemic, everyone has been facing supply chain issues: Statista data shows 64% of retailers worldwide adapted their supply chain for ecommerce as a result of the COVID-19 pandemic while 28% of retailers reported having to deal with shortages and out-of-stock items.
The good news: Businesses are turning to pre-order and backorder models to continue to sell and generate revenue, thus ensuring business continuity. The tricky part, however, is figuring out how to stay on top of inventory management to fuel business growth.
To understand the common challenges of this model and the role of inventory management in overcoming supply chain issues, we talked with Mark Riskowitz, the Head of Operations at Caraway.
The backstory: The DTC cookware business, Caraway, was launched in November 2019 after its founder Jordan Nathan was searching (without success) for non-PTFE or Teflon-coated products. Frustrated at the lack of options, he set out to create his own.
Today, Caraway’s four-piece, non-toxic, non-stick set of ceramic pots and pans with a playful color palette are the product of that initial frustration.
The modern design and aesthetics of Caraway products made them instantly popular, and the company raised $5.3 million in seed funding to support the fast-paced growth Caraway experienced right from the start.
Unlike many other DTC brands, Caraway tested the waters with wholesale early on in the process by selling its products through a handful of other websites including Bloomingdales, West Elm, and Target.
Aside from this, they have an exclusive partnership with Crate and Barrel for the same four-piece set, but in an exclusive color — silt green with gold handles.
The COVID-fueled demand surge for home goods continued the strong momentum Caraway had at launch.
But it also presented a challenge: the havoc the pandemic and other world events created around the global supply chain resulted in order delays.
Caraway had to find a better solution to inventory management in order to meet customers’ expectations.
The pandemic-imposed lockdowns caused a significant customer behavior shift: Suddenly, online shopping became the norm rather than the exception. According to DigitalCommerce360, online retail sales increased 32.4% year over year in 2020.
Some industries were fortunate to experience sky-high demand: Salesforce data from 2020 showed an unprecedented 51% YoY increase within the home goods space. Even now, the cookware market is poised to grow by $5.30 billion during 2021-2025, progressing at a CAGR of almost 4% during that period.
Working from home, closed restaurants, and spending more time at home in general made consumers take a hard look at their home cooking equipment. For some, this spurred a desire to replace old, chipped pots and pans with new, high-quality, attractive-looking substitutes.
Caraway was there to meet that desire.
This wasn’t all great news, however. With the increase in customer demand across a variety of verticals paired with the limitations the pandemic caused, the global supply chain went off the rails. From overwhelmed factories to clogged ports, thousands of companies hit a brick wall when it came to meeting that increased demand. Almost nine in 10 (87%) consumers encountered out-of-stock products during the first months of the pandemic.
Caraway’s products are manufactured in China, so the DTC cookware brand also faced supply chain challenges. Caraway has contracts with manufacturers and various vendors that produce all of the materials and then assemble and pack their goods overseas. From there, they import them into the U.S. However, the situation with the global supply chain meant Caraway also faced delayed turnaround times.
“We've been very fortunate during COVID when home cooking became more relevant than ever before. That was certainly a catalyst to the growth that we saw in the accelerated demand (which exceeded our expectations), but it also created this chasing game wherein we attempted to bring supply up to the demand we were seeing.”
The question became: How could they capitalize on the intent for purchase despite the increased lead times due to COVID-19?
Caraway was aware that putting the backorder model to work could bring them sufficient working capital needed for both inventory and growth initiatives. However, in order to be able to rely on the backorder model, they needed an inventory management infrastructure that would take over all the heavy lifting.
One of the biggest pain points for Caraway was the manual update of countless spreadsheets containing data about available inventory, products that need to be reordered, and general forecasting. As a result, their data would get outdated, and by the time they learned about an issue, too much time had passed.
Many DTC retailers have experienced similar roadblocks. For example: suppose one of your SKUs is selling out faster than expected. In this case, the lack of timely inventory updates could cause serious problems and leave customers frustrated while they wait for their orders much longer than anticipated.
Enter the backorder model.
Deploying a backorder model means customers can get in line to receive the next batch of products set to be delivered at a specific date down the road.
This model leverages scarcity, and the fear of missing out (FOMO) urges customers to make the purchase before the next batch of product sells out. Tapping into FOMO is a smart sales strategy, considering data shows 60% of Millennials said they make a reactive purchase after experiencing FOMO...most often within just 24 hours.
In Caraway’s case, the backorder model made sense because customers felt the premium quality, non-toxic materials, and exceptional design made the four-piece cookware set one worth waiting for.
To make this work, the team at Caraway focused on inventory management to support the backorder model and to be both transparent and proactive in communication with customers who were patiently waiting for their orders to ship.
To stay on top of the supply chain havoc and support its new backorder model, Caraway partnered with Cogsy, an inventory optimization tool for growth-focused ecommerce brands.
Cogsy helped Caraway monitor and accurately forecast its inventory and communicate with customers about when they could expect products to ship. Armed with this information, the cookware brand could set proper expectations around delivery dates, thus removing uncertainty and encouraging customers to make the purchase.
“By providing the infrastructure for a seamless customer journey while being over-communicative about what that means, we've been able to leverage the momentum and convert customers at the moment they show interest in our product.”
As a result, Caraway could keep selling items that were on backorder and have the data to keep all stakeholders in the loop.
Cogsy helped Caraway check all these boxes:
“Cogsy allows us to have an exact understanding and even visualization of what is going on in terms of product availability, what to expect, what the various upcoming batches look like as well as the timelines of incoming products. Leveraging that information helps the team with data-driven internal and external planning to capitalize on all opportunities.”
Using Cogsy’s solution, tech-savvy Caraway leverages the power of data to make informed decisions and pave the way to future business growth.
Key highlights since partnering with Cogsy include:
One of the most significant benefits for Caraway of deploying the backorder model supported by Cogsy’s inventory optimization solution was the advance of working capital that it generated, which could then be used to further invest in the brand’s growth. By collecting up-front payments from orders that are yet to be delivered, Caraway secured free working capital to support the business.
The result: A flipped cash conversion cycle.
“Having a platform to log into where within five minutes I can have a full understanding where the product is, how much to reorder, when are orders arriving, and what our forecasted sales look like based on previous data cuts down by about 90% on the time we would spend doing this work manually.”
The global supply chain shock caused by the pandemic upended formerly predictable operations. Companies have found themselves in uncharted territory that requires agile and timely inventory management to keep businesses up and running.
While not suitable for all products (like those that are widely available, such as dish soap and paper towels, for example) the backorder model turned out to be a great solution for Caraway’s highly-valued premium products that customers were willing to wait for.
“Customer behavior has changed and adapted to be more lenient and flexible about lengthy ship dates or lead times. We've been able to capitalize on that by controlling the messaging conveyed to consumers. Offering the ability to complete the transaction even though the product could be arriving in a few weeks or months enables us to capture the interest when customers first enter our ecosystem.”
Allowing customers to order a product even if it’s currently out of stock also gives the businesses more capital as a result of up-front payment for products that are on backorder.
However, DTC businesses need to be well equipped to effectively apply this strategy. Here are a few key aspects that companies have to understand about the process to prevent customer disappointment:
Everything Caraway implemented around inventory management comes back to creating a seamless customer experience. From the highest quality cookware sets and bespoke shopping experiences to smart inventory management and transparent communication — Caraway makes sure customers have a top-notch end-to-end journey.
Understanding the solutions they needed to support this level of customer excellence helped them build the business on a solid foundation and ensure a consistent experience long-term.
In the next three to five years, the backorder model could become a regular practice, as it allows companies to tap into scarcity and FOMO — and it could change the entire DTC landscape.
Regardless of if you’re testing waters with a backorder model or you just need real-time inventory updates, one thing is for sure — you need an inventory management solution to fuel business growth.
Ready to take control of your business? Let’s talk.