VOX Music Ltd.
Andre Yager the Director of Supply Chain Operations at VOX Music Ltd., a musical
instrument retailer, joined a meeting of the company’s senior management team chaired
by Sylvia Wallstrom, the CEO. On the projection screen was a quote:
“The past is a great place and I don't want to erase it or to regret it, but I don't want to
be its prisoner either.”
Mick Jagger, The Rolling Stones
Wallstrom welcomed the team. She used the quote as a lead in for what she had to say
about a new direction for the company.
“You’ve all done a great job. VOX is a rapidly growing and very successful company, so
please don’t take what I am about to say as criticism. The market is radically changing,
my friends, and if we don’t change with it we’re going to die a slow and painful death.
We need to turn this place on its head, and I need every one of you to help figure out how
to do it. Andre, your expertise is especially needed for what I have in mind. Our
distribution system will be critical to our success.”
The message was not a complete surprise to the management team. They were well
aware that web and mobile technology was quickly changing the retailer-customer
dynamic. Customers were no longer distinguishing between online and bricks-andmortar (physical stores) channels and expected to have complete freedom to research,
purchase and receive the product in the manner of their choosing, at the time of their
choosing.
Wallstrom went on to express the need for VOX to transition from a multi-channel
operation, using separate channels to fulfill the needs of online and in-store customers, to
become an integrated, omni-channel company, with seamless customer service and
fulfillment no matter how the customer came into contact with the company.
As Yager listened to the pitch, he began to think about the implications. He could foresee
massive change. He noted, “Sitting in that meeting I began to feel overwhelmed by the
task. I could see the potential for a complete overhaul of our operations. Everything from
the DCs [distribution centres], to our shipping methods, to store layouts might have to be
ripped apart and reconceived. It was going to be a huge effort considering that we were
already scrambling. We had been growing rapidly and all our systems, including the
distribution systems, were bumping up against their limits.”
Company Background
VOX Music Ltd. was a Canadian musical instrument retailer founded in 1978. Greg
Morrison and Amy Slidell founded the company. They originally met playing in a rock
band after high school, but discovered that it was very tough to find success as touring
musicians. They both had had experience working in a music store and decided to try
their hands at running their own store.
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VOX Music Ltd.
The duo first started selling guitars and amplifiers but quickly added other lines in order
to meet customer demand. Since that time, they had successfully expanded the business
from one store to 21 stores across the country through a combination of organic growth
and acquisition of other small retailers. In 1996 they added a rudimentary online
catalogue. In 2004 they set up a division of the company to operate a full online sales
website.
The company’s product line included a wide variety of musical instruments and
accessories:
• Drums and percussion
• Electric and acoustic guitars
• Electric basses
• Keyboards
• Musical electronics (DJ equipment)
• Recording equipment
• Amplifiers, mixers and speakers for live sound reinforcement
• School band instruments (wind, brass and percussion)
• Sheet music, books and instructional DVDs
Most of the items were sold in both channels (retail stores and online), but about 10% of
the SKUs were offered in only one of the two channels. Some items were considered not
suitable for both channels. For instance, higher end instruments were not often sold
online because customers typically wanted to try the items in-store before committing to
a purchase. The online store also carried a myriad of slow moving specialty items that
the retail stores did not have room to stock, such as replacement parts for specific drum
set hardware.
Two years ago Morrison and Slidell decided to step back from the business and semiretire. They noted that online sales were growing much more rapidly (14% per year on
average) than traditional store sales (2.5% on average) and felt that they needed some
new leadership to take the company more firmly into the digital age (neither Morrison
nor Slidell personally used social media accounts or online purchasing to any great
extent). They managed to lure Sylvia Wallstrom away from a large North America wide
electronics retailer, where she worked as VP Marketing, to join VOX as CEO. She was
considered to be a highly innovative individual, focused on customer service and always
looking for ways to keep current customers satisfied and to bring new customers to the
business.
Changing Customer Needs
Wallstrom was well versed in the tech-enabled retail world. Online and mobile
technologies had begun to radically change customers’ methods of finding product
information and buying products. Wallstrom’s experience in the electronics industry
showed her that customers expected a great deal of product information be available to
them both online and in the store. As a result they had become better informed and more
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VOX Music Ltd.
demanding. Some of her observations about trends from the electronics industry
included:
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•
•
•
•
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Customers were increasingly expecting to be able to view in-store inventory
availability online as they didn’t want to waste time going to a store that didn’t
have the product they were looking for.
Customers were ordering online but asking to pickup the product in a local store
in order to avoid paying shipping fees, or else to get the product the same day.
This was becoming prevalent in the US market and had begun to filter into the
Canadian market. Customers were also expecting the option to pay for the
product when picking it up, rather than paying online, and also to be notified by
email or text when the item had been set aside and ready for them.
Many customers that were buying online and asking for delivery were expecting
the item to ship from a local store in order to reduce delivery time and cost.
In-store customers were using their mobile devices, while they were in the store,
to research products on the company website. They expected sales associates to
be up to speed with what was happening in the company’s online world.
In-store customers, upon finding a product was out-of-stock, were asking for it to
be shipped to their home from another store or DC free of charge.
Customers waiting for a product delivery were often more concerned about
knowing exactly when the shipment would arrive than how fast the shipment
would arrive.
Wallstrom’s summation of this: “In my experience customer expectations are constantly
increasing. They aren’t content with the way things were. They live in a global world.
They see what’s happening elsewhere and expect that we will offer the same or better.
What was an order winner last year becomes an order qualifier this year as more and
more retailers change their practices. We are now facing a world where the customer
wants a full, uninterrupted, experience with the company. They do not distinguish
between mobile, online or in-store. It happened in the electronics business and it will
happen in ours!”
The Musical Instrument Marketplace
The bricks-and-mortar retail music instrument business was also starting to feel
competitive pressures in addition to customer pressures. The two main sources were new
instrument distributors that sold purely through websites, and big-box retailers that had
added musical instrument lines. The typical strategy of these competitors was low cost
leadership. They often purchased cheaply made instruments in bulk from Asia, and
elsewhere, and made money through large volume sales rather than high margins. Their
delivery times were rapid and product availability was good, but they did not typically
provide a great deal of personal advice for their customers. This was attractive to people
who wanted to try learning an instrument but who were not heavily committed to it or
who were intimidated to step into a music store. VOX’s strategy to combat this had been
to grow by acquiring some of the smaller music stores and chains across the country that
had begun to struggle with the low cost competition. This helped VOX to capture market
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VOX Music Ltd.
share and to reduce costs through greater purchasing volume. This approach had been
successful to date.
VOX Company Operations
VOX Music was organized into three divisions: Retail Operations, Online Operations and
Corporate Support (see Appendices I, II and III for company detail).
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•
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Retail Operations was the largest of the three divisions encompassing the retail
store network and two warehouses (one in the Toronto area and one in the
Vancouver area) focused on store replenishment. All stores and warehouses were
company owned and operated.
Online Operations was focused on fulfilling online customer orders. The division
operated out of a company-owned distribution centre located about 20 km away
from the Retail Operations’ Toronto warehouse.
Corporate Support was a collection of central functions that supported both store
and online operations including the executive office, corporate accounting,
corporate marketing, information technology management, human resources
management and supply chain operations.
There were organizational and information linkages between Retail Operations and
Online Operations. However, the two divisions were run largely as separate profit
centres and had developed their own cultures (for instance Retail used the term
warehouse, while Online used the term distribution centre). Each division had been
responsible for developing its own approach to operating and marketing, although the
national marketing campaigns and product selection were done cooperatively and
coordinated through the Corporate Support division. The operating divisions also had
slightly different sets of KPIs (see the appendix for examples).
Bricks-and-Mortar Store Operations
Each store was laid out to display product groupings (guitars, drums, keyboards etc.) and
allow customers to try out instruments. The surroundings were pleasant with wood
accents, artful displays and effective lighting. There were several sound-isolated rooms
where customers could play instruments free from other noise. Typically one of each
model of instrument was available on the floor for demonstration purposes. Customers
could access many of the instruments without assistance from a sales associate (except
for band instruments, small electronics and microphones which were kept in locked
display cases) but the associates walked the floor offering assistance. The associates
were all musicians (it was one of the prerequisites of becoming an employee) and were
well trained to answer questions and demonstrate each instrument in their area of
expertise.
Approximately 10% of the approximately 5,000 ft2 of space in each store was used as a
storeroom for extra stock. In most stores these spaces were crammed from floor to
ceiling and not always well organized. Sales associates often had trouble locating items
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VOX Music Ltd.
that the computer indicated were in the store. However, most of the associates were
much more interested in helping customers with instruments than tracking down missing
stock and organizing back rooms.
Items not in stock were ordered from the central warehouse with a lead-time of at least
one week, but more often between three and six weeks. The customer paid the shipping
charges for any items that were shipped directly to them. In the past, associates had been
allowed to locate out of stock SKUs at another store and have them transferred to their
store for a customer to try. However this ability had been restricted in order to keep
transportation costs under control. It was now only allowed if a customer paid a nonrefundable deposit of 25% of the price of the item, which has meant some customers
chose to buy from competitors instead.
Occasionally SKUs were transferred between the retail and online divisions. The
revenue for these items was attributed to the division that completed the sale of the
product, regardless of which division originally ordered the product. However, there was
no clear policy for cost attribution.
Supply Chain Operations
The supply chains for the two divisions were operated semi-independently. The
corporate supply chain operations department, managed by Yager, was responsible for, as
he put it, “feeding” the other two divisions. This included supplier selection, supplier
management, supplier development, ordering and inbound transportation to the company
warehouses/DCs. The department also arranged company-wide agreements for items
such as outbound transportation (all transportation was done by third parties). Yager and
his staff also provided supply chain advice and guidance to the staff in each of the
divisions. Each division was responsible for demand forecasting, warehouse/DC
operation, and coordination with outbound transportation providers to get product
delivered to stores and to end customers.
Over the last several years the company had instituted a program to drive costs out of the
supply chain. A great deal of effort was expended to look for efficiencies. The goal was
to achieve high inventory turns, low safety stock and low transportation costs.
Retail Distribution Centre Operations
These two warehouses were set up solely to support the movement of goods from the
suppliers to the stores. The Toronto warehouse was 300,000 ft2 and the Vancouver
warehouse was 1/3 of that size. The warehouses were designed mainly to handle carton
and pallet sized product. Small unit orders from the stores were most often recombined
into cartons and pallets for regular outgoing shipments via truck. Although the retail
division had considered the use of RFID for product tracking they had not implemented it
and relied on barcoding.
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VOX Music Ltd.
The Toronto warehouse was considered the main retail division warehouse and was full
to overflowing much of the time. This problem was compounded several times per year.
The first was August, as there was an upsurge in demand by students starting music
lessons in September. The second was in November and December before the Christmas
rush. The Vancouver warehouse, which had been recently inherited during the purchase
of a retail chain in that area, was not used to its potential partially due to staff
unionization issues. It was the only unionized portion of the VOX company.
As part of the efficiency improvement efforts, the retail operations division management
had made the decision to eliminate some slow moving items from the product list. This
had freed up some space in the warehouses but had caused customer complaints.
Customers were confused as to why they could order the products online, but not get
them through the stores. The division had also implemented risk pooling on some items
with highly variable demand, by keeping much of the stock for those items at a
warehouse, rather than at store level, until demand patterns began to emerge. This had
increased the demand for warehouse space.
The warehouse manager, when asked what kept him up at night, indicated that he had had
an increasing number of complaints from stores about lead times and inaccurate
shipments. He also mentioned that store managers were frustrated that they knew there
was stock in the system somewhere, but they couldn’t always get ahold of it to sell it to
interested customers.
Online Distribution Centre Operations
The online division DC was a 350,000 ft2 pick, pack and ship operation. Incoming
product arrived in pallets, which were broken down and stored. Smaller items were
placed in racked bins for easy picking access. Larger items, such as boxed drumsets and
keyboards, were stored in racking.
The order pickers used mobile computers with an electronic pick list and bar code
scanner to track the products selected. The smaller items needed for customer orders
were picked into mobile bins and then combined into boxes at a packing station. Many of
the orders involved a combination of related products. For example customers ordering a
microphone often also ordered a microphone stand and an XLR cable (a cable used only
for microphones). All orders were shipped out using a courier service or the post office
depending on the customer’s desired level of delivery service. Shipping was free for
customers with orders over $250.
The DC was operating near capacity. It was estimated that if growth continued at the
recent rate that capacity would be reached in nine to twelve months. The management of
the DC was exploring options to expand but, in general, was happy with the performance
of the DC and its staff.
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VOX Music Ltd.
Information Technology
Each of the operating divisions used different inventory management and customer
relationship management systems. This arose because the IT needs of the online
operation were originally significantly different than the retail operation and, when the
online channel was developed, VOX decided not to spend the money to retrofit the retail
operations as well. The IT department had provided some patching to move information
between the systems, but it was a workaround and prone to error.
As a result, inventory visibility was poor between the two divisions and there was
duplicate information for customers that used both channels. Sales associates in the
stores had often found themselves providing customers inaccurate information and
therefore did not trust the inventory information they had access to in the online system.
Each division could track common customers, but could not see what the customer had
purchased in the other division. Customers themselves could find stock availability
levels for products sold online but could not see if their local store had product available.
Inventory being transferred between the two divisions also became invisible while in
transit.
The manager of IT was well aware of the problems. “Our legacy software is older than
some of our employees!” She went on to say that things would need to change as VOX
was now collecting large amounts data about customer needs and opinions, especially in
the online side of the business. She noted that much of the data flowing from social
media was unstructured, and the company would need to develop better data analysis
tools to get a complete picture of its customers and their buying habits.
Wallstrom’s Final Words
At the close of the management meeting Wallstrom summarized her vision for the
company. She said that she saw great potential in the business. She felt that the online
expansion opportunities were abundant. She was also confident that the company could
penetrate its current markets more effectively by adding more brick-and-mortar stores in
each current geographic area. Her longer-term plans were to tackle the US market,
perhaps in five or ten years. However, Wallstrom thought the company wasn’t yet ready
for the new world order in retail.
“We operate a very efficient multi-channel company. But that’s the problem. We pretty
much operate the two channels as separate businesses. The omni-channel approach is
what customers will be expecting, and we have to move that direction. You know that old
Gretzky cliché you Canadians are so fond of – skate to where the puck is going to be, not
where it’s been!”
The After-Meeting Meeting
After the official meeting closed, Yager sat down for a coffee with the Manager of IT and
the VPs of both retail and online operations, and started to brainstorm. Yager’s
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VOX Music Ltd.
contribution was to lay out some of the issues and a range of potential solutions from the
supply chain perspective. He proposed options running the gamut from turning the stores
into pure showrooms with no inventory and then shipping all product from the DCs, to
turning every store into a store/DC combo and shipping everything from the local store.
He even suggested outsourcing to a 3PL but then laughed saying “but that might put me
out of a job!”
He summarized his thoughts. “We’ve been focusing on driving cost out of our systems to
make them very efficient. This strategy change is going to force us to be much more
flexible – but without losing sight of the costs. In my mind though, I don’t see a clear-cut
solution yet.”
After the group went silent for a few minutes Yager said, “Whatever we choose to do we
need to do it carefully. This is going to be a major shift in the organization. It’s going to
take time, and we still have to deal with our existing capacity issues while we figure it
out.”
The conversation continued for a few more minutes. The IT manager was excited as she
could see the potential of implementing some cutting edge technology. The two
operations VPs weren’t as enthusiastic. Their worlds were about to collide in ways that
would change their jobs and the jobs of almost everybody that worked for them. The
meeting left them all with more questions than answers, and they agreed to reconvene in
a few days after they had all had some more time to think.
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VOX Music Ltd.
Appendix I – VOX Music Ltd. Organizational Chart
CEO
Corporate
Support
Division
Accounting
Retail
Operations
Division
Retail Stores
Transportation
and
Warehousing
Online
Operations
Division
Marketing and
Website
Information
Technology
Maritimes - 4
Toronto WH
Market
Planning
Human
Resources
Quebec - 4
Vancouver WH
Web
Infrastructure
Supply Chain
Operations
Ontario - 6
Marketing
Prairies - 4
Fulfillment
Toronto DC
Customer
Support Centre
BC - 3
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VOX Music Ltd.
Appendix II – VOX Music Ltd. Financial Summary
All figures are in millions of Canadian Dollars. Corporate Support costs are allocated to
each operating division. Industry average pre-tax profit is 4%.
Sales
COGS
Gross Profit
Labour
Divisional
Administration
Corporate Support
Pre-tax Profit
Retail
Online
Operations Operations
137
92
84
57
53
35
24
14
16
6
7
Total
229
141
88
38
7
4
10
23
10
17
Appendix III – Sample KPIs for Vox Operating Divisions
Retail Operations
Sales in $
Gross Margin
Return on Sales
Sales per ft2
Average Customer Spend
Stock Turnover Rate by Store and
Product Group
Shrinkage
Number of Complaints
© Supply Chain Management Association
Online Operations
Sales in $
Gross Margin
Return on Sales
Average Order Size in $
Number of Out-of-Stocks
Percent of Product Returned
Website Traffic (Number of Unique Visits)
Customer Conversion Rate
Customer Return Rate (Number Repeat
Customers)
10