Urban Outfitters Sales Into the Wind

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Urban Outfitters struts its stuff through aggressive growth, a unique customer perspective, and a supply chain that pulls it all together.

For most of storefront America, difficult macroeconomic headwinds have ushered in a period of re-entrenchment.

Starbucks, the coffee shop on every corner, has been forced to take a deep breath and close some 600 stores. Ann Taylor, Zales, Pier 1 Imports, Gap, Talbots and many other well-known retailers have reined in and shuttered growth or shifted into turnaround mode.

At a time when competitors are reeling, Urban Outfitters Inc. is rocking—sticking to a long-term plan of 20-percent annual growth through its three brands: namesake Urban Outfitters, Anthropologie, and Free People.

The Philadelphia-based company is even expanding in new directions. Earlier this year, it opened a home decor and garden store called Terrain, near Chadds Ford, Pa.

It also recently debuted Leifsdottir, a wholesale brand for Anthropologie, that will be sold through department and specialty stores, including Nordstrom, Bloomingdale's, and Bergdorf Goodman.

How has Urban Outfitters managed to not only sail into the wind, but to do so with gusto?

Part of the answer is dedication to its mission of delivering a distinctive, recognizable shopping concept, whether a customer visits a brick-and-mortar store, goes online to the Web site, or makes selections through its mail-order catalogs.

More significant, however, has been Urban Outfitters' ability to revamp its supply chain and logistics processes to ably meet the demands of rapid growth, laying the groundwork for a projected expansion that will add 500 stores in North America, Europe, and Asia.

Clear Strategy and Vision

Although many of Urban Outfitters' supply chain moves have been years in the making, the pace of change has been particularly noteworthy during the past two years.

"We are not making these changes in response to the economy," affirms Barbara Rozsas, Urban Outfitters' executive director of sourcing. "We base all our supply chain decisions on a clear strategy of growth and a shared vision throughout the organization.

"Our supply chain strategies have all been well-orchestrated," she adds. "We do our due diligence, plan, then march accordingly."

As of the second quarter of 2008, sales averaged about $575 per square foot in its namesake stores, $760 per square foot at Anthropologie, and a whopping $1,050 per square foot at Free People.

The brand appears to be doing just as well in Web and catalog business, with direct-to-consumer sales growing an average of 48 percent since 2003.

An Urgency to Buy

The company attributes its strong sales in part to a lean buying strategy that creates a sense of urgency among its customers, according to John Kyees, Urban Outfitters' chief financial officer.

While many retailers plan to sell a significant percentage of their merchandise as markdowns, such thinking only encourages shoppers to wait eight weeks so they can buy at a lower price, Kyees believes.

"At the Urban and Anthropologie stores, and Free People site, if customers don't buy it when they see it, odds are they will lose their chance, because the sizes will be broken or the item will be sold out," he told analysts at a recent William Blair & Company growth stock conference.

"We love selling out of items because that creates a sense of urgency," he added.

Urban Outfitters' ability to ship lean, while remaining confident it can restock shelves and keep up with rapid growth in both stores and sales, springs from an idea called "concept to market" that Rozsas and Ken McKinney, the retailer's director of distribution, have championed for several years.

"Given the company's growth plans, which we were well aware of, it was essential to have a complementary supply chain strategy in place," McKinney says.

Most importantly, the strategy required the company to design flexibility into its scheduling process. It accomplished that by putting dual sourcing strategies in place.

"We developed fabric and raw materials sources in alternate locations," Rozsas explains. "Doing that greatly compresses our turnaround time in case of a reorder.

"We manufacture an initial order in one location and the reorder in another," she adds. "The ability to dual source lets us deliver less quantity up front. In effect, our calendar flexibility enables us to optimize inventory."

Every two weeks, Urban Outfitters' supply chain team sits down with the company's other key executives to touch base, assess the fluidity of a process that includes more than 1,500 vendors, and discuss needed changes or adaptations.

In the case of concept-to-market, the goal is to reduce the time from designer concept to store shelf from 18 weeks down to nine or 10.

Far East Focus

To do that, the company has focused much attention during the past two years on the Far East, where it sources all its private brand merchandise from about 15 different vendors. Private brands currently make up about 50 percent of the product Urban Outfitters sells.

Typically, the merchandise process begins with the designer, moves on to the raw materials merchant and the production person, then to an agent who helps facilitate the production process. Only then does it move on to the factory.

To tighten turnaround time on products, Urban Outfitters has taken a closer look at its relationships with agents.

"Although we have eliminated some agents, we are not completely removing them from the process," Rozsas says. "Rather, we're striving to ensure that collaboration between our agents and vendors is as efficient and effective as possible.

"Toward that end, we hold agent training sessions both domestically and abroad to ensure everyone working within the brand is on the same page in terms of aesthetics, goals, and objectives," she says.

In instances where agents have been eliminated, Urban Outfitters has begun to work directly with its overseas factories. "These changes are all about having partners on the ground who are aware of, and in sync with, what we want to achieve," Rozsas adds.

Taking its direct involvement in the Far East one step further, Urban Outfitters is contemplating establishing a Hong Kong office that will consolidate logistics functions overseas as the company expands distribution there.

Taking a Chance on Reno

Urban Outfitters has also been restructuring its supply chain operations in anticipation of continued growth. For example, it opened a new West Coast distribution center in Reno, Nev., earlier this year.

While the opening of the new distribution center ended a long-standing relationship with a West Coast third-party logistics provider (3PL), it wasn't a case of dissatisfaction with a long-time partner.

"In fact, the 3PL was a very good partner, but we just outgrew the relationship, which dated back to 1998," McKinney says.

"It became a situation where our volumes were increasing and we couldn't get the services we needed from our 3PL without adding substantially to its costs—and 3PLs are sometimes reluctant to take on additional labor and equipment costs when the customer could walk at any time," he notes.

The new Reno DC relies on high-speed sortation and light-directed picking to speed up the supply chain.

About 15 percent of the merchandise received at the facility goes into reserve storage; the majority is crossdocked to a packing area where it is allocated to the stores the facility serves.

As a result of the streamlined process, Urban Outfitters has reduced turnaround time from distribution center to store from three to four days down to two days or fewer. "And we saved about $1.5 million in facility costs," McKinney adds.

Opening the new distribution center also enhanced Urban Outfitters' ability to grow, allowing for more efficient staging of merchandise as new stores open in a region, and ensuring that "one DC isn't absorbing all the pressure," McKinney says.

Rationalizing IT Functions

At the same time that Urban Outfitters has revamped its supply chain partners and processes, it has also been refining its technology process.

Toward that end, the company launched a new wholesale information management system in both its Pennsylvania and Nevada distribution centers earlier this year.

"The beauty of the system is that it allows me to choose from a menu of daily reports to assess our overall supply chain and distribution operations and determine what, if any, situations we need to address," McKinney says.

"For instance, our direct-to-consumer channel is time sensitive," he notes. "We like to ship within 24 hours, or even faster if it's an expedited order, and now I can get a daily report that tells me if we succeeded."

Other reports detail shipments by state, by weight, and by carrier. "It's a lot of helpful information that enhances how we manage the supply chain," he says.

But as satisfied as Ken McKinney is with the warehouse management system, he's already looking for ways to enhance it.

In early June 2008, Urban Outfitters announced that it will implement a merchandise lifecycle management suite from TradeStone Software Inc., a private-labels solutions provider based in Gloucester, Mass., across all its brands.

To support the company's sales growth, TradeStone's technology provides McKinney and Rozsas with full end-to-end supply chain visibility from design to delivery.

"Our selection of TradeStone's technology is yet another example of how much due diligence goes into every decision we make," McKinney says.

"We looked at a number of systems over 18 months, and while some systems were stronger in areas I cared about and others were stronger in areas Barbara Rozsas cared about, this was the one system that had most of what we both wanted."

TradeStone's system places many different attributes at decision-makers fingertips, McKinney says.

"We like the software's ability to provide us with product visibility at each point in the lifecycle," he says. "The system enables us to more effectively manage exceptions and respond to changing consumer demand."

Filling the Gaps

Weighing heavily in TradeStone's favor was the ability to layer its software on top of existing applications in Urban Outfitters' facilities, notes Ann Diamante, TradeStone's senior vice president and chief product officer.

"In this instance, our software fills the gaps in Urban Outfitters' existing system," she says. "For example, we integrate bar-coded labeling directly from TradeStone into the warehouse management system, providing a quicker, more efficient warehouse locator system than the company's existing one."

Because the system reveals supply chain problems in real time, McKinney and Rozsas can respond as soon as issues arise, eliminating the time wasted in learning about a snafu after the fact, then backtracking to fix it.

"The system reduces risk factors and enables Urban Outfitters to move dynamically when it needs to," says Diamante.

Urban Outfitters plans to phase Tradestone's software into its system over a six-month period.

"There is a lot of pressure when you go live so quickly, but if you don't hold to a tight timetable, it's easy to get derailed," Diamante says.

The effort will be well worth it, if it fulfills Urban Outfitters' ultimate goal, Rozsas says, "ensuring that branded stores have what customers want, when they want it."

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