Tuesday, August 4, 2009

The Decline of JIT

Just-in-Time inventory has served California game stores well. We can get most games by the next day, as both national game distributors have warehouses in California. ACD is in Fresno, while Alliance is in Visalia. In addition, GTS has a San Jose warehouse, along with Southern California warehouses, while R&M is located in our backyard, about 10 minutes away in Clayton. Occasionally we'll jump in the car and pick something up (usually Joe does this).

There are exceptions. Although Wizards of the Coast is in Washington state, a two day ship, their warehouse is in Texas, a four day ship. Games Workshop ships out of Tennessee, a four day ship under normal circumstances and a three day ship if they send it air (plus or minus a day, depending on the weather and how busy FedEx is that day). Thing have changed with the tough economy, however.

The biggest change is the free freight limits with distributors. In most trades, you order stuff at a set price ("net" in the game world) and pay freight. Sometimes you can get free freight on really big orders, but generally you will pay shipping. You then mark up your item to cover that cost, usually around 10%. In trades that have an MSRP, you can't mark up items without driving away customers. Customers know the MSRP. In the game trade, about half of you stock is like this, with the other half more malleable.

In the world of MSRP, schemes have been worked out to offer sliding discounts and free freight terms, based on the customers patronage and the size of an order. For example, I buy most of my stuff from ACD, so I'm at the top of their discount tier at 50%. I buy very little from Alliance, so my discount there is at the bottom of the tier, at 45%. This is how they capture and retain customers. ACD entices me to maintain my discount, while Alliance entices me to bump it up if I would only buy a bit more. The other capture method is free freight. If I can get an order without paying for shipping, I'm likely to put all my eggs in that order basket. Free freight, however, is slowly slipping away as distributors attempt to cut costs.

ACD has a $1000 minimum free freight limit, less for top tier customers. Games Workshop dropped their Tuesday ordering for Friday delivery program this week, which also hurts just-in-time. The rest of the distributors have a range of $300-350 to get free shipping. The result of all this is the "next day delivery" promise is slowly slipping away for us. We'll get a special order the next day, if possible, but I'm now asking customers if they need it that soon, if I don't have an order planned. Besides this customer service issue, I also have a stocking problem.

Without JIT, stores need to stock deeper or face product outages. If I order every other day, there are few games of which I need more than a couple copies. If the cycle is once a week, I might need to stock up. Both the next day delivery promise and stock on hand are keys to customer retention, in my book, so this problem can't just be ignored. Sure, California has been pampered, but our customers are accustomed to it.

My argument has been to dump MSRP and go to net pricing, but that's an unpopular position. It requires the industry to change, and without a shred of leadership, it will never happen. Instead, we see this squeezing of retailers with the freight issue. Free freight limits and MSRP are a package deal. How can you separate one from the other?