SUPPLY CHAIN MANAGEMENT, I THUMBS UP FOR THE ANSWERS TO QUESTIONS 1-6! 1. What a

Question

SUPPLY CHAIN MANAGEMENT, I THUMBS UP FOR THE ANSWERS TO QUESTIONS 1-6!

1. What are some key success factors in diamond retailing? How do Blue Nile, Zales, and Tiffany compare on those dimensions? How do they compare on various financial measures dis- cussed in Chapter 3?

2. What do you think of the fact that Blue Nile carries many stones priced at $2,500 or higher, whereas a large fraction of the products sold from the Tiffany website are priced at around $200? Which of the two product categories is bet- ter suited to the strengths of the online channel?

3. What do you think of Tiffany’s decision to not sell engage- ment rings online? What do you think of Blue Nile’s growth into the non-engagement category?

4. Given that Tiffany stores have thrived with their focus on selling high-end jewelry, what do you think caused the
failure of Zales’ upscale strategy in 2006? What products
should Zale focus on?

5. Which of the three companies do you think is best struc-
tured to deal with weak economic times?

6. What advice would you give to each of the three compa-
nies regarding its strategy and structure? How can they best use omni-channel retail?

CASE STUDY Blue Nile and Diamond Retailing A customer walks into your jewelry store with printouts of diamond selections from Blue Nile, a company that is the largest online retailer of diamonds. The list price for the customer's desired diamond is only $100 above your total cost for a stone of the same characteristics. Do you let the customer walk, or come down in price to compete to buy diamonds from ALROSA, the world's second largest diamond producer, which accounted for most of the diamond production in Russia. Russia was the sec- ond largest producer of diamonds in the world after Botswana. Although discount retailers such as Walmart and Costco continued to thrive, the situation was difficult for traditional jewelry retailers. Friedman's filed for This dilemma has faced many jewelers. Some argue that jewelers should lower prices on stones to keep Chapter 11 bankruptcy protection in January 2008, fol- the customer. Future sales and add-on sales such as cus lowed by Chicago-based Whitehall in June. When it tom designs, mountings, and repairs can then be used to filed for bankruptcy, Friedman was the third largest jew make additional margins. Others argue that cutting elry chain in North America, with 455 stores, whereas prices to compete sends a negative signal to loyal cus- Whitehall ranked fifth, with 375 stores in April 2008. In tomers from the past who may be upset by the fact that February 2008, Zales announced a plan to close more they were not given the best price than 100 stores that year. This shakeup offered an opportunity for other players to move in and try to gain As the economy tightened during the holiday sea- son of 2007, the differences in performance between market share Blue Nile and bricks-and-mortar retailers were startling In January 2008, Blue Nile reported a 24 percent jump in quarters of 2008 were particularly hard on diamond sales during its fourth quarter. For the same quarter, Tif retailers. Even historically successful players such as fany posted a 2 percent drop in domestic same-store Blue Nile, Tiffany, and Zales saw a decline in sales and a sales, and Zales reported a 9 percent drop. The manage- significant drop in their share price. As customers tight- ment at Blue Nile felt that the downturn represented an ened their belts and cut back on discretionary spending, opportunity to gain market share because of their com- high-cost purchases such as diamond jewelry were often petitive pricing With the weakening economy, the third and fourth the first to be postponed. The situation worsened as com- petition for the shrinking number of customers became fiercer. In such a difficult environment, it was hard to judge which factors could best help different jewelry retailers succeed. The Diamond Retailing Industry For both wholesalers and retailers in the diamond industry, 2008 was a very difficult year. It was so bad at the supply end that the dealers' trade association, the World Federation of Diamond Bourses, issued an appeal for the diamond producers to reduce the supply of new gems entering the market in an effort to reduce supply. Blue Nile In December 1998, Mark Vadon, a young consultant, was shopping for an engagement ring and stumbled However, the world's largest producer, De Beers, across a company called Internet Diamonds, run by appeared unmoved, refusing to give any commitment to Seattle jeweler Doug Williams. Vadon not only bought a curtail production. The company had recently opened ring but also went into business with Willams in early the Voorspoed mine in South Africa, which, when fully 1999. The company changed its name to Blue Nile by operational, could add 800,000 carats a year into an the end of 1999 because the new name "sounded elegant already oversupplied market. Historically, De Beers had and upscale," according to Vadon. xerted tremendous control over the supply of diamonds going so far as to purchase large quanti On its website, Blue Nile articulated its philoso- f rough dia phy as follows: "Offer high-quality diamonds and fin om other producers. In 2005, the European jewelry at outstanding prices. When r web- Il find extraordinary jewelry, useful guidance Commission forced De Beers to phase out its agreeme Sunil Chopra. Stacey King, "The Internet: Retailers New Challenge," Professional Jeweller Magazine, August 1999

Explanation / Answer

Answer 1

In diamond retailing the key success factors are:

a) Customer service such as waiting time, sales support

b) Pricing compettiveness

c) Product range

Blue Nile has a distinct advantage in product variety and product availability since customers can customize the ring by choosing from an inventory of about 75,000 stones. Customers purchasing at Tiffany and at Zales have been limited to the inventory available at the store. Customers who are comfortable making large purchases online will find the low-pressure purchasing experience at Blue Nile, supported by the educational Web site, salaried sales support, and thirty-day return guarantee, appealing. Given that the jewelry is made to order, clients at Blue Nile must be willing to wait to receive their orders unlike the competitors.

The Tiffany brand is very strong and well established. It is associated with trust, and customer service. These associations allow the company to sell at higher margins than its competitors. Diamond and other high-end jewelry purchases are expensive, and many customers will trade off other factors for the Tiffany customer experience when making such purchases. Moreover, when spending thousands of dollars for a single item, customers often want to see and feel what they are buying.

Zales does not have the product variety and availability that Blue Nile provides, nor does it have the brand name advantage that Tiffany enjoys. The weaker brand is reflected in the firm’s margins, which are lower than those of Tiffany. Blue Nile’s focus on low prices is reflected in the lower margins it has relative to both Zales and Tiffany.

Blue Nile operates out of one warehouse, with its entire inventory at this facility. The inventories at both Tiffany and Zales are disaggregated through their stores. High-end jewelry items are high-priced, have relatively low demand, and have high demand variability. Such items realize the most savings in inventory holding cost through lower safety stock inventory when the inventory is aggregated. Further, since items sold through the Blue Nile Web site are customized, the inherent postponement allows the company to keep inventory aggregated longer, thus reducing safety inventory even more. While Blue Nile’s inventory-to-sales ratio is around 6 percent, the ratios for both Tiffany and Zales are about 40 percent. Blue Nile’s supply chain structure also gives it a major advantage in facility costs.

Blue Nile operates primarily from one warehouse in the United States. Both Zales and Tiffany operate many stores, often in high-priced locations. In addition to stores all over the world, Tiffany has manufacturing facilities, a retail service center that supplies stores, and diamond processing centers in seven countries. While Tiffany has advantages from being vertically integrated, Blue Nile operates on a very low fixed-cost structure. Blue Nile’s property and equipment to net sales ratio was 2.37 percent in 2007, while Tiffany’s was more than 25 percent, down from 35 percent in 2006, and Zales’s was close to 14 percent. Blue Nile also has an advantage in facility operating costs. Because customers design, select, and order jewelry on the Web site, the company does not incur the level of human resources costs in the form of sales staff that Tiffany and Zales do.

Transportation costs, as with most e-retailers, are higher at Blue Nile than at Tiffany or Zales. The outbound transportation distance and hence costs and time tend to be much higher when inventories are aggregated, as is the case at Blue Nile. In the case of Tiffany and Zales, some economies of scale can still be realized on inbound transportation at all downstream stages of the supply chain until the merchandise hits retail stores, and the customer takes care of the last mile of outbound transportation costs.

Answer 2

In the case of Blue Nile, the primary reasons could be the savings in inventory holding cost due to lower safety stocks and the broad product variety and product availability that the firm can offer customers. Stones priced at $2,500 or higher are unique, high-value items with relatively low demand and high demand variability. The high demand variability necessitates carrying larger safety stock in order to meet required customer service levels. Given the high price of the stones, the cost of holding them in inventory is proportionally higher. Aggregating inventory reduces the amount of safety stock required since the demand variability is less than in a disaggregated scenario. By aggregating the inventory in the online channel, Blue Nile also broadens the product availability and variety available to customers. It is a smart move for Blue Nile to aggregate and carry its high-priced products with low demand and high demand variability on an online channel.

The Tiffany brand is built on the glamour, luxury, and quality that customers perceive when visiting a Tiffany store. This perception is a result of both the products and the service. The company’s inventory includes a wide variety of items ranging from very high-end diamond jewelry to basic but elegant tableware.

Blue Nile has a definite advantage over Tiffany's for sales through online channel. It makes sense for Tiffany's to serve high end jewellery items through store and sell the lower priced items only through channel. This shall free up the very expensive space at the retail stores.

However, this sales structure may lead to Tiffany at a cost disadvantage relative to Blue Nile because Tiffany decentralizes its high-value items with low demand and high variety while centralizing its lower-value items. Such a cost disadvantage can be justified as long as Tiffany can maintain its strong brand and associate it with the store experience.

Answer 4

Zales’s upscale strategy was in response to fierce competition it was facing from mass merchant department stores such as Wal-Mart, national chain department stores such as JCPenney, and home shopping networks. Middle America had been Zales’s target market since its founding in 1924. A large portion of the company’s revenue came from value-oriented customers who frequented malls. The success of the Zales brand was built on the perception of the good value one got for the money, but with that came the perception of being inexpensive. While one can see why the company decided on the competitive repositioning, one must question the implementation. It takes much time and effort to educate new customers and transform a brand. Zales tried to make too many radical changes in too little time. The firm drastically changed its portfolio of products, 15 percent of the suppliers in the supply chain network were new and included new overseas vendors, and holiday promotions and monthly payment plans were eliminated, to name a few changes. All this resulted in the firm’s losing not only its core customer base but also sales due to delays in bringing merchandise in on time and not making inroads into new target markets.

The basic premise of its strategy to move into selling high-end jewelry through its stores is also questionable. Given that it has a much weaker brand than Tiffany; Zales’s strategy of bringing high-end jewelry to its stores raised its inventory costs without raising its margins enough to offset this increase. Zales’s inventories in FY 2006, when it tried the high-end strategy, rose to 47 percent of sales, even higher than Tiffany’s; its margins, however, remained lower than Tiffany’s. Poor execution hurt it further, but given that its brand is weaker than Tiffany’s, one can question whether such a strategy would have had any chance of success even in the long term.

Answer 5

A company with a kean and agile supply chain and sales structure has definite advantage in a downturn. Blue Nile has a distinct advantage in this regard with its very low fixed-cost structure compared to Tiffany and Zales. Property and equipment to net sales ratios are 2.38, 13.93, and 25.46 percent for Blue Nile, Zales, and Tiffany, respectively. Both Zales and Tiffany are contractually tied up in many medium- to long-term leases for their facilities. The selling, general, and administrative expenses at Tiffany and Zales are about four times those incurred at Blue Nile. Much of this discrepancy can be attributed to the costs of operating stores. Blue Nile also has a very low investment in inventory compared to the other two companies. The cost of sales at Blue Nile is higher, but this can attributed to the lower margins and the higher cost of outbound distribution. The low cost structure at Blue Nile is well suited for times when demand shrinks in the industry. Blue Nile should take advantage of its low cost structure and lower prices to get more market share.

Zales is perhaps in the weakest position to handle the downturn, given the inventory write-off it had to take when its high-end strategy failed. With tightened credit, Zales may find it difficult to survive the downturn. Tiffany certainly has the strength to survive the downturn but is hurt significantly by dropping sales, given its relatively high fixed costs.

Answer 6

Blue Nile has a strategy that focuses on lower prices on a large variety of high-end stones that aligns very well with its centralized structure. Its marketing focus on convincing customers that the four Cs and third-party validation are the key ingredients when valuing a diamond is also well aligned with its structure, which does not allow customers to touch and see the stone before buying. Given its significant cost advantages and customers’ tendency to try to save money during difficult times, Blue Nile has a significant opportunity in this downturn. Blue Nile can take an aggressive position, emphasizing its lower prices with similar quality to very high-end diamond retailers. Although this is a difficult message to sell in general, it may be easier in the difficult economic environment of 2009.

For Zales, positive recommendations are more difficult to make. From a financial perspective, Zales needs to get control of its inventories. One way to do this is to centralize more of its expensive diamond inventory, making it available to stores as needed. Lower-value diamonds could be stocked and sold from retail stores. For higher-end diamonds, rings with imitation stones could be used to help customers select a style, followed by having the real diamond installed later at a central location and shipped to the store for customer pick-up. Zales’s ideal situation seems to be one in which it stocks and sells lower-cost products from decentralized locations with higher-value stones centralized and provided on demand.

Tiffany finds itself in a bit of a bind. It cannot centralize its high-end stones because that would conflict with its brand image. Pricing pressure at retail is likely to continue with the growth of Blue Nile at the high end and retailers such as Wal-Mart and Costco at the lower end. As a result, Tiffany has to continue working hard to maintain its brand image. Its move into the wholesale part of the diamond business has potential pluses—it gives the company the wholesale margin and could give it some form of exclusivity on its stones.

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