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 Challenge: How to capitalize on the intent for purchase despite the increased lead times due to COVID-19
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.
The Solution: Eliminate manual forecasting and keep selling effectively while on backorder
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:
- Get real-time inventory updates: Having a product that everybody wants leaves businesses with the “good news, bad news” dilemma. On one hand, these products instantly fly off the (digital) shelf. But on the other, this creates the need for proactive and agile inventory forecasting and communication. By using Cogsy for inventory optimization, Caraway receives real-time inventory updates.
- Greatly reduce manual forecasting: Sifting through different spreadsheets to stay on top of product forecasting can be daunting, especially when dealing with multiple sales channels. Deploying Cogsy greatly reduces the manual data-sorting work and saves Caraway valuable time they could then invest in more meaningful activities.
- Raise any red flags for products that will be out of stock: Knowing what products will be out of stock helps DTC brands make timely orders. Being alerted about out-of-stock products lets Caraway pause marketing initiatives for related campaigns until they have the right information on the next batch’s delivery date.
“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.”
The Results: Business growth with smart inventory management
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:
- Replacing manual spreadsheets and guesswork with real-time inventory updates
- Getting automatic recommendations for purchase orders long before running out of stock while also accounting for in-transit stock or products on backorder
- Ordering the right inventory at optimal levels to fuel business growth
- Maximizing opportunity by capturing sales that would be lost without a firm expected delivery date
- Leveraging data to prioritize different marketing initiatives based on the products available in stock
- Setting the right expectations and building trust by transparently communicating with customers on expected delivery dates
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.”
Best practices from Caraway to optimize inventory with a volatile supply chain
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.
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:
- Data-driven inventory management - The only way to rely on the backorder model is to implement a smart inventory management system. This way, you can have real-time inventory visibility and proactively reorder products that are in high demand.
- Accuracy - One of the critical points for running a successful business is to focus on data. Without data hygiene, no matter what inventory management solution you implement, you’ll still have the wrong picture of the level of products you need to reorder. Make sure to have consolidated data to feed the system with accurate numbers.
- Over-communication - Asking customers to pay for products they will receive in several weeks or even months gives a business an even greater responsibility to communicate. Clearly communicating the shipping timetable for products helps avoid misaligned expectations. Caraway puts the estimated shipping date on the product page and adds this information in the order confirmation email as well to keep customers in the know. On top of this, once the order has shipped, customers can track their orders through the Chat by entering order details in the "order status" section.
- Company culture - Making sure everyone is on board with the importance of data and breaking down data silos is critical for the success of any company struggling with a volatile supply chain.
- The nature of the product - The FOMO effect doesn’t work for every product category. Before you decide to put the backorder model to work, check your customers’ pulse to ensure they would be willing to pay upfront and wait for your product to arrive.
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.