John Lewis has been a venerable beacon of British retail since its eponymous founder opened a drapers shop on Oxford Street in 1864. And for most of its 149 years, things were relatively predictable. Its in-house supply chain would deliver to its department stores, which unloaded the stock into store rooms and replenished the sales floor, and two-man-and-a-green-van teams of John Lewis partners would take larger items to customers’ homes.
Then, around ten years ago everything changed. In 2001, the year it launched its internet store, online sales accounted for £121m of a £4.1bn turnover. This spring its annual online sales broke the £1bn mark, a year ahead of its projections, having grown to more than 10% of its £9.5bn annual revenue. John Lewis is now one of the most advanced “omnichannel” retailers in the business, with a state-of-the-art supply chain that is the envy of its competitors. So how did it do that?
The man to ask is operations director Dino Rocos, who has been with the Partnership since 1976, working his way up from the sales floor and the stock room to the board.
No compromises
Rocos describes the online ordering system as “very uncompromising”. And with good reason. “In the pre-Christmas period, we have more than 100,000 orders a day,” he says. “We offer next-day click-and-collect up to 7pm, which means we have to get that order picked, packed and wrapped by 8.30pm, so the carriers can take it to the other end of the country for 2pm. If you get that wrong, if you lose an hour, you’ve got tens of thousands of customers not getting the goods they expect.”
When online first took off, John Lewis developed a second supply chain with a separate pool of stock. “Online was a completely new channel to us,” says Rocos. “We’d had our replenishment arrangements in place for our selling branches for many years, and then this new avenue came up, which required us to pick individual orders at speed, pack and wrap them and send them to our customers on a large scale.”
The other important factor has been the expansion and diversification of John Lewis’s store portfolio. As well as 30 full-line department stores, with more than 350,000 products, it now has nine more At Home branches with the tenth opening in Ashford in November. It has also opened the first flexible-format store in Exeter, which sits somewhere between the two in size, with two more to follow in York and Chelmsford next year.
“The selling branch proposition has changed, in as much as it’s all about speed, and making sure that you minimise your working capital by replenishing selling-floor stocks as quickly as you can – in effect, with product coming off the back of our inbound vehicles straight onto the shop floor. So things like perimeter stock rooms start to disappear, and the ratio of selling to non-selling space in selling branches is altering very significantly.”
The turning point came around seven years ago, when online sales hit £500m and the scale of this parallel operation and changing customer behaviour forced a rethink. ?“We realised we needed to access stock wherever it was ?in the business so that we can satisfy the customer however they choose to shop with us,” ?he says.
“Customers are shopping across the channels – someone might go into the shop and have a look at the product, then mull it over at home and buy it online, and then go back into the shop and collect it because they want to get their hands on it quickly. The last thing we want is a supply chain that provides an obstacle to that.”
Fast-track strategy
In response, Rocos and his team went back to the drawing board to develop a single, omnichannel model. It is now centralising stock in six national distribution centres in the East Midlands, segregated by handling characteristics, which supply goods to stores and customers’ homes through a network of 24 service buildings across the UK. “The start of the omnichannel piece was simply to run fairly fast to satisfy a fairly straightforward customer demand. When you first shopped online, you would expect a delivery within five days. Now it’s delivery by 10.30 the next day, it’s next-day any time, it’s named day, it’s click-and-collect, it’s international. All that meant we had to go back over our network and look at ways of providing reliability, speed and efficiency.”
For John Lewis, the answer is bigger buildings and more automation. In 2009, it moved all of its smaller stock items to the vast Magna Park 1 facility in Milton Keynes, which covers just over 650,000 sq ft and uses significant amounts of automation for picking, packing and wrapping. Construction has just begun on a £97m, 668,000 sq ft extension, Magna Park 2, to be operational from 2015. This will deploy even more advanced automation technologies to manage its entire hanging fashion stock, currently on several sites.
A more efficient supply chain has allowed a shift in the ratio of back- and front-of-house space in stores, and in the overall ratio of stores to service space. Historically, the opening of a new store would be accompanied by a new service building, but recent store openings have not.
“In the past, our service buildings have supported home deliveries and held stock as well. As we’ve drawn stock back up to a single point in our distribution centres, that has released capacity, so we’ve been able to extend our department stores, At Homes and flexible-format stores without a proportionate increase in service buildings.”
Future plans
Asked about how the network might look in another ten years, Rocos pauses. “To answer that, you need to understand how much you really know about how the world of the supply chain is going to evolve,” he starts. “I could presume that I understand what our customers want in absolute terms in 10 years’ time, but in some cases our customers don’t yet know what they will want. The story is still playing out, so we’re seeking to provide all the support that we can to our customers but in a way that means we don’t create something that could prove to be a white elephant in five or 10 years. The word in our supply chain that we focus on most is ‘agility’.”
No one foresaw the popularity of click-and-collect, for example, which now accounts for 45% of John Lewis’s online sales. “If we developed a network based on a model of home delivery, we could have misplaced our resources and focused on the wrong proposition,” says Rocos.
What he does foresee is much greater sophistication in order deliveries, with same-day deliveries, a service tailored to customers’ individual needs, and consolidated orders, so that separate items from across the network turn up in one go.
The network of customer delivery centres covers more than 90% of the UK population, and Rocos foresees only gradual adjustments. “Although the trading landscape looks different than it did a few years ago, the UK hasn’t physically changed shape. If the lease on a site comes up, we may review it and move it five or 10 miles to the right or left, but we see no need to re-rationalise our arrangements.”
In this context, John Lewis is reviewing several of its distribution centre sites, and is looking for properties in west London and Uckfield, Sussex. The key priorities are always location first, workforce second, and third, support of the local authority for ongoing development, as John Lewis has done at Magna Park.
It has also developed bespoke distribution centres in Avonmouth and Stratford in east London, and would do so again if the right product wasn’t available. Many existing properties don’t fit with John Lewis’s supply chain model, Rocos says, so he’d rather start from scratch to get something that does.
“If you’re investing, you’re investing for a reason, and for us, that’s the customer. Any compromise, whether it’s around your proposition or around the limitations of the site, ultimately translates through to a customer impact. The minute you forget that you’re doing all of this to support your customer is the minute you start making decisions around moving into redundant space that you shouldn’t be in.”
See also: The Report part 4: Retail warehouses
