for Furniture Industry
IWF has positioned itself as a local “Wal-Mart” of furniture, offering a very large variety of furniture at an everyday low-price. The retail space is maintained similar to a wholesaler’s warehouse. It is an 80,000 square foot showroom, offering a plethora of furniture choices for all rooms within the home. Both IWF’s name and the retail atmosphere it presents facilitate what a consumer expects, allowing IWF to focus on its core business objective- selling furniture while keeping prices low. In short, the atmosphere and layout of the showroom floor are conducive to what their target market expects; retail offerings meet consumer expectations. It should be noted that their target market is primarily middle-market consumers, and it was observed that a majority of IWF’s visiting consumers are in their 20’s to 40’s.
In addition to the facility layout, the facility is situated in a location that is able to capture and attract the target market. It is located on a highly traveled route, with moderately high visibility, a lot of parking, and in an area that is majority populated by the working middle class. The route is noteworthy given a significant amount of traffic is the result of worker’s traveling to, and from, factory jobs in the area (i.e. Olin Brass and Conoco-Phillips refinery). This traffic leads to high, and regular, visibility from IWF’s target consumer.
In respect to staffing, there are few employees that work the floor. This is for many reasons, primarily due to the high (state mandated) employee insurance costs. In communicating with IWF’s ownership, it was expressed that the state requires sales employees to be treated as warehouse workers, therefore enforcing a higher insurance premium because of the increased risk a warehouse worker confronts- even if the salesmen don’t step foot in the warehouse. In addition to this cost, employee numbers are kept low because of the high variability in consumer arrivals and the overall moderately low number of consumers. While a study was not implemented to track customer arrivals, queueing, or service time- in an effort to determine the efficiency and effectiveness of employee numbers- it was observed that customer’s were served timely. This visual observation suggests that during normal hours, employee to customer service levels are sufficient; “busy” hours were not observed.
Financial Data and Measurements
IWF’s management possesses substantial experience and appears to operate quite well given what seems to be a high level of intuitive decision making. While it wasn’t directly discussed, there didn’t seem to be a system in place to track inventory, carrying costs, quantity ordering, etc. Decisions are made based on judgment, experience, and intuition. In short, the absence of an EOQ model/system is kind of shocking from an academic perspective, but to see how well the business can operate without an EOQ model says quite a bit about the importance of experience and knowing one’s business.
A significant issue, which seems to bear large influence on furniture pricing, is the result of obsolescence, or the cost incurred as a result of unsold inventory. According to IWF, the 80/20 rule strongly applies to furniture sales; meaning 80% of sales come from 20% of floor models, leaving 80% of inventory on the floor as “dead wood.” The cost of these unsold items, particularly the carrying cost, seems to cause the mark-up price on other items to be adjusted slightly higher. This price inflation is a result of trying to balance money tied up in unsold inventory and that inventory’s carrying cost. In short, each time an item is sold, part of what the consumer pays goes toward the unsold inventory.
Organizational Service Operations
In looking at the organization, one could easily mistake it for a product centered business. However, according to the authors of Service Management (4), “In services, a distinction must be made between inputs and resources. For services, inputs are the customers themselves, and resources are the facilitating goods, employee labor, and capital.” In this respect, it is clear that the business is not product centered, but rather consumer centered as sales rely on the consumer and the product acts as a facilitating good. This then means the most important factors of the business, from a broad perspective, are establishing expectations and expectation fulfillment- both of which have the consumer as the central focus and act as value-adding extensions, with the value-added only as good as, or limited by, the organizations ability to live up to the expectation exchange.
From this perspective, assuming the products sell themselves- for the retailer, the issue is having the right products and presenting those products better than the competitor- whether it’s the result of aesthetics, price, salesmanship, level of service, or being at the right location, all are qualitative and given subjective value from the consumers point of view (price in respect to the retailers willingness to negotiate or offer “better” prices than competitors, therefore improving goodwill).
For IWF, there are a number of tradeoffs that occur to balance their business with customer needs. For example, IWF places less emphasis on aesthetic appeal because they want to offer a large (and locally, possibly the largest) furniture variety that is immediately accessible to the demanding consumer- this enhances the level of service as a result of being able to fulfill immediate gratification. It seems the money saved on aesthetics is transferred to the cost of carrying such a large quantity of inventory. The large offering also allows IWF to capture greater economies of scale in purchasing from manufacturers and distributors, which in turn allows greater price reductions. Again, some of the money “gained” on a per unit basis, as a result of capturing greater economies of scale, seems to be transferred to carrying costs as well. Further research in this area would be interesting; to determine whether or not, or where, a point of diminishing returns exists given the size of the facility, the variety offered, and the cost and revenues associated with such inventory.
One recommendation to overcome the issue of unsold inventory may be to partition the showroom floor into two distinct segments. One segment will emphasize functional models, while the other emphasizes innovative models. This separation will allow management to place stagnant models on the functional floor, possibly giving it a “fire-sale” price, without diminishing the perceived value of the separated innovative space. Additionally, this separation will allow management to create a unique showroom area for the higher end items, minimizing space and effort that would be required if all items were placed in a non-segmented showroom. These higher end showrooms would also have catalogs available for prospective consumers- this would minimize inventory required for the more expensive units, while insuring the consumer could visualize. Another benefit may be the personal aspect of such segmenting, playing on the consumers emotions; people are curious by nature, so they will want to see the segmented portion, and if this area seems to be “off-limits” for the “elite,” this may be enough to incent the customer to “go for it.”
Additionally, while the use of the EOQ model was not discussed with IWF, and presuming it has not been experimented with, it is recommended to utilize the model for a trial period. IWF may find unanticipated savings, improved inventories, and improved service level by utilizing the model. At the very least, given the significance of carrying costs and the adverse effect of stagnant inventory, which directly affects cash-flow, it may be worthwhile to track the affect of inventory with slow turns; possibly assisting in making the decision to put inventory with excessively slow turns on sale, to make room for inventory with better turns. A few additional mathematical tools that are recommended, which will be discussed in greater detail under the subsection Mathematical Considerations, are Yield Management, ABC Inventory, and Linear Programming (LP)- with further research required, to see how LP can be refined through Stochastic Programming, in an effort to enhance the optimization results by considering the probability and degree of uncertainty.
An additional recommendation, which holds contrary to many points of this paper, is to place an emphasis on IWF’s willingness to negotiate prices, similar to buying a house or a car. Make this willingness the “pitch.” It seems that a consumer may feel better about purchasing the product if s/he feels like s/he priced the product. Additionally, this invested time in the negotiation process not only allows the salesmen an opportunity to get closer to the consumer (enhancing his knowledge of what the consumer wants, therefore improving product offering as well as interactional skills), but it also enforces a switching cost on the consumer. It is believed that this invested time will not only influence the single purchase, but also future purchases; as long as the encounter was a positive one.
Finally, while this may not be feasible, or desirable, according to one article (5), “Sales at stores dedicated to one brand or manufacturer are two to three times higher than at conventional furniture stores. Furniture Brands, the largest US residential furniture manufacturer, has stand-alone stores for its various brands, which generate twice the sales per square foot of non-dedicated stores carry the same line.” In short, the authors of this article are suggesting that it is more profitable to concentrate on, or specialize in, selling one name brand.