Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:00:23} Raj, can you provide a brief introduction to your role at Williams Sonoma?

{audio:0:00:27} I was a director of supply chain, predominantly focusing on the last mile, which is getting the product to the end consumer. I worked with my counterparts in warehousing and manufacturing to ensure product was delivered timeously and with great quality. At a high level, it is a director of supply chain encompassing manufacturing to the final mile delivery.

{audio:0:01:05} What was their strategic focus from a supply chain perspective?

{audio:0:01:13} Being a manufacturer and seller of high end big and bulky goods, one of the first challenges was changing the blanket statement saying customers would get their product within seven to nine days. We were doing that across the board, even though we might have delivered that product in two to three days. The C-levels challenged the organization because our competitors were saying three to five days, and Amazon were guaranteeing two days, meaning we were losing sales as a result. We looked at the data and realized 80% of orders were getting to customers within five days, so we then said five to seven and gave a buffer. We did that comfortably because there are no next day guarantees such as with UPS, FedEx and the post office. 

{audio:0:02:47} Once we got it down to five to seven, we wanted to take it even lower than that by product. For a particular SKU, it could be three to five days, whereas custom orders had an EDD or estimated delivery date, which we wanted to turn into a promised delivery date. When you are tasked with something that big, it's not only about the final mile, you also have to understand the middle and first miles, as well as manufacturing and lead times, per vendor, supplier and carrier. There are many things which determine an estimated delivery date.

{audio:0:03:44} Was there a change in behavior when reducing delivery times by two days?

{audio:0:03:51} Yes, 100%. After announcing that instead of saying seven to nine, we would say five to seven, operations developed reports within the warehouse management system to let them know which orders were outstanding or might be missing something before they go out. We started hitting that target fairly well, but then it became, how do we get it to two to five?

{audio:0:04:19} Did customers order more thinking products would get delivered quicker?

{audio:0:04:26} We didn't see an immediate increase, but Williams Sonoma were 50% online in the 2000s already. Today, Walmart and Target boast about having 25% to 30% of their business online. Williams Sonoma already had brand loyalty, but I wasn't part of the team checking if basket sizes increased. I imagine it would have because getting a product in five days versus the blanket seven to nine, does make a difference. When we started measuring the three to five, that made a difference because we were now competing with Amazon Prime. The seven to nine might have been incremental but the two to four is very beneficial because you're starting to hit consumer experience who want the product on a specific day. Depending on the SKU and the product profile, if it's a big and bulky and you say three to five, you have to plan that last mile with the customer, who sometimes is not available. They order it on a Monday but are not available for two weeks because they go on vacation. Should we get dinged because that delivery took 10 days? Technically, we had the product at our final mile hub, ready to be delivered, but William was not home or didn't agree with the windows we offered.

{audio:0:06:44} How would their first mile work, given they own the manufacturing assets? Wayfair don't manufacture anything so have to work with suppliers, but they do own the freight forwarding and are an NVOCC licensed forwarder. How does Williams Sonoma approach that first mile section and the ocean freight part?

{audio:0:07:06} It depends which Williams Sonoma company because they have West Elm, Pottery Barn and Pottery Barn Kids, who don't manufacture 100% of what they sell, and have global suppliers. They are not as big as Wayfair, who source everything. Knowing where our production facilities are is helpful when sending out annual bids. Having historical volumes and future projections helps us determine what our capacity needs are from a personnel perspective. Most companies go out to bid once a year, locking in two to three year first mile contracts. 

{audio:0:08:06} First mile is from the manufacturing facility to one of 15 distribution centers across the US. Those first mile contracts are typically given to large truck load carriers in a bid cycle. We know our lanes are stagnant, meaning the origin to destination is predetermined 9 times out of 10. There are some last-minute changes when a product goes from manufacturing to the first DC, then we realize demand is bigger in Florida, so we may have to move it from North Carolina on a direct shuttle. There are various nuances but Williams Sonoma knows their capacity needs because they know what they will produce ahead of time. Truckers know the capacity and the rates we have locked in, as well as the service we expect. That gives them an advantage.

{audio:0:09:10} How did you approach the ocean freight leg?

{audio:0:09:17} They partner with NVOCCs and ship carriers to buy capacity. A lot of West Elm's products are not produced in the factory, so there they collaborate with suppliers. The average sail time, pre-Covid, was 25 days and containers cost $4,000 depending on the commodity. We have technology tools, some developed in-house, others provided by the ships or the NVOCC, so we have visibility into our 10 containers on a ship with a sail date and documentation, and we know when and where it will arrive, whether that be Port of Savannah, Houston or LA.

{audio:0:10:32} Do you deal with freight forwarders who negotiate with ocean carriers, rather than going direct and negotiating container rates and volume?

{audio:0:10:45} The majority of it was with the NVOCC. Covid has resulted in Home Depot and IKEA going straight to a vessel provider, like Maersk, saying if they guarantee them X monthly, what rate can they get? The NVOCC facilitate the coordination but if I can do it myself, why wouldn't I go that route to get a cheaper per container rate.

{audio:0:11:18} What was the biggest challenge with the first mile?

{audio:0:11:20} I will split that between domestic and international. From an international perspective, having one supplier fill five containers is good, because that can go on any ship, but if you're trying to coordinate production from multiple suppliers, it involves drayage to the port. We weren't only single source to China, so it's about ensuring all our product can flow on one ship, which makes the supply chain easier once it gets to any of our US ports. The last thing you want is for your product to be on two different ships for a particular PO. 

{audio:0:12:11} A second challenge is documentation and custom clearance. A mistake on country of origin, tariff codes or a quality hold can delay your product coming inland. Many people talk about the first mile in international being after it hits the port, but there are other small first miles in my mind, such as drayage. A manufacturer in inland China produces the product, and the first mile goes from them to the port. It then gets loaded onto a container, sent on a vessel to the US, where an additional drayage occurs from the port to either a manufacturing facility for raw materials, or to a DC. The DC to hub bit is the middle mile, and the final mile is from hub to consumer. Coordinating drayage was easy pre-Covid, but now vessels are stuck at shore for 30 to 50 days. During Covid, it reached 80 days due to labor shortages, but today is in the 60s. Coordinating that drayage is difficult when you are unsure of when you will get clearance. They give you an estimate, but that could be three weeks out, so do I have drayage waiting to bring it to my DC? Those are some of challenges we're seeing pre-Covid, Covid and pre-vaccination.

{audio:0:14:03} How much advantage do Wayfair have given they own that first mile? They consolidate the drayage in Asia with multiple suppliers and negotiate directly with ocean carriers; how much does that help them compared to Williams Sonoma?

{audio:0:14:28} In order to control customer experience, you have to control your supply chain. Wayfair decided to control the consumer experience, and as a result, their average basket size and site visits continues to go up. Wayfair are willing to pay for that customer satisfaction. They can negotiate better rates based on volume guarantees that help with drayage to the vessels, and even the middle mile. That obviously comes with lower rates, but when you don't use it, there is an associated cost. Their strategy is whole, and players in the home furnishing goods like Williams Sonoma, Resto and Pier 1 Imports, will probably take a lesson from them and start doing something similar. 

{audio:0:15:54} American Outfitters acquired Quiet Logistics to control more of their supply chain, and Costco acquired Innovel to control their last mile. More retailers will start controlling their supply chains, but back to your question, it does give them a competitive advantage, up to a point. If your goal is to make your shareholders happy, you're measured on returns and earnings per share, so we would have to peel the onion back to see whether Wayfair or Williams Sonoma give better returns to their shareholders.

{audio:0:16:34} How much does this matter to the end customer? You mentioned cutting delivery but some people are willing to wait five days when buying a sofa. Where are the diminishing returns in reducing delivery time in this category?

{audio:0:17:00} In Wayfair's case, certain parts of their business are still contracted, but they own their distribution facilities and the last mile, and when you get into the business of owning your assets, that involves maintenance and sourcing drivers. Lowe's used to have their own private fleet for delivery and had to source drivers and maintain their trucks, but realized they were not a transportation company and have outsourced that to a third party. There is a tipping point where a CFO will say that it's not worth owning the asset. In the big and bulky division, where Wayfair competes heavily, you have to make an appointment if you order shower doors or a sofa. With end tables and lamps, they can simply drop those off, but for scheduled deliveries, those consumers are willing to wait three to five days. They would love it next day, but it isn't cost-effective or feasible, because 18% to 25% of the cost is in the last mile. 

{audio 0:18:28} The reason that is a range is because if William is not home, I have to bring that back to the warehouse, make another appointment and bring it back out to you. William does not pay an extra dime for that second delivery; Wayfair is paying for that. That means they have to be precise in trying to get that first delivery at home, and avoid 'not at home'. The diminishing return is when you start balancing the cost of the fleet and workers, and offset that to the question of, will you get more business if you move from five days to four. In the home furnishing industry, people don't simply buy a sofa today because they feel like it. They need a sofa in a specific color. They visit williams-sonoma.com, West Elm, Wayfair, Resto or Pier 1, and find a sofa which fits. Once they find that particular piece, they are willing to wait, but if they don't, they will do a custom order from Williams Sonoma or Wayfair, and wait for two to three weeks.

{audio:0:19:52} You might not need to deliver it in two days, but you need to know when you can deliver it and communicate that to set customer expectations, so scheduling it and giving visibility matters more than a two or three-day delivery for large goods?

{audio:0:20:13} Retailers like Macey's, Target and Walmart are setting up control towering, which maps out all the legs of your supply chain. Control towers bring in information from disparate systems and let you see an order holistically so you can monitor the milestones. In order to do that, you have to know everything in the supply chain. A custom manufactured piece from Williams Sonoma or Wayfair has a lead time of three or four weeks, so you need to know what the lead times are for both your supplier and their suppliers. They may need a particular suede or leather which, in some cases, is on site, but they may have to source it. It is very unique and you have to map out the supply chain to set the right customer expectations. For a custom sofa, it could be two to three weeks, or three to five weeks, and you need a buffer.

{audio:0:22:25} How did you organize the middle mile from the DC to the hub?

{audio:0:22:35} Using the Pareto rule, 80% of it is order-based, meaning nothing goes to the hub in Williams Sonoma's case, unless it is allocated to an order. Hubs do not store inventory, except for a very small parts cave, with cords for appliances. You try to utilize your middle mile to move full truck load quantities. Sometimes you may not have enough orders and end up moving an LTL, but we have contract carriers in place who that do that middle mile move. They go from our 15 DCs to our 90 hubs, in some cases daily, and in others once a week run. It all moves backward from the estimated delivery date.

{audio:0:24:14} The hubs are broken down into tiers. Three or four are in the 100,000 range, but the average hub is 25,000 to 35,000 square feet. Hubs are cleaned every night, meaning if you have 10 trucks going out to deliver, the product comes in the night before. It is received, cross-docked, and gets staged to go out on trucks. Whether your own or third party drivers deliver, we have software which shows them 11 stops on a hand-held device. They give customers 30 minutes notice and the goal is for the truck to come back empty after 11 stops. If somebody is not home, they bring a product back and it sits in a warehouse for a few days until we get it re-scheduled.

{audio:0:25:34} Do Williams Sonoma own the middle mile or outsource it to a third party?

{audio:0:25:42} Williams Sonoma outsources it to a third party. Amazon uses CH Robinson as one of their big providers, but operate a dual sourcing strategy. When UPS goes on strike, it's hard to move all that volume to FedEx or the Post Office, so many companies use multiple carriers. Amazon gives the bulk to CH Robinson who plan their fleet purely dedicated to move between Amazon DCs, similar to Williams Sonoma. We have national contract carriers who move from DC to DC, DC to hub, and sometimes hub to hub. Very few Williams Sonoma hubs have their own private fleet, where they could utilize their fleet during peak times or for multi-day runs.

{audio:0:27:21} What was the biggest challenge in the middle mile for large and bulky?

{audio:0:27:25} The biggest challenge, from the trucker's perspective, is the coordination of picking up the freight, because a trucking company gets paid on miles driven. When they go to a warehouse, they do not like idle time; they want the load ready. If that truck shows up at 5:00PM, you don't want to be still building your pallets for outbound, and the driver waits for days. There are windows for when they can pick up and how many hours of service, which affects when they can deliver.

{audio:0:28:15} If you're not ready, would they wait around or simply leave?

{audio:0:28:27} 90% of the time they will wait around. Contracts typically allow for two hours free, so if we say 5:00PM, we have until 7:00PM, but if it stretches to 8:00PM, there could be a $100 penalty per hour. The driver might have to stay the night meaning there are additional costs, but your goal is to be 90% plus on time. It is better to have that truck driver out to free up the dock door for the next driver to come in, or if I have a trailer sitting in the yard I could start receiving in the evening once all the trucks are gone, depending on how your shifts are set up. You want those doors to be clean from a facility perspective. 

{audio:0:29:23} Having that load ready is a challenge for many retailers, especially during and post-Covid because of labor issues. Volumes are going through the roof because of ecommerce and excess residual income in the middle class. They are buying more big and bulky and there is an initiative to fix up your house, so people are buying. There is also a labor shortage and I need that truck ready, but the trucking company has a shortage of drivers so they might not show up. Companies are faced with many uncertainties, which is why Wayfair might have a slight advantage. They control the trucking company who is waiting and do not have to pay demurrage or detention penalties.

{audio:0:30:21} How much does the middle mile cost, from DC to hub, for large and bulky?

{audio:0:30:34} It is driven by fuel and labor costs and is between 7% and 10%. It is definitely not as expensive as the last mile, which has one small 20-foot jumper truck going out with 11 loads. Your per stop cost is very high compared to moving 40 pallet positions on a full truck, and your per mile costs are lower than the final mile.

{audio:0:31:19} Wayfair claims that by owning each step of the supply chain, they reduce how many times the product is touched, and they own the first, middle and last mile. More touches mean more breakages which increase returns, so where do breakages typically happen and which step has the highest risk of a return?

{audio:0:31:52} Williams Sonoma debated doing a quality inspection before delivery, or letting the consumer do that and we go back and pick it up, and all the major retailers wrestle with that. Breakage can happen in manufacturing when they're packing it, but hopefully they catch it and never let it get on a truck. The majority of breakages happen at in bound receiving in the distribution center, and outbound going from the distribution to the final mile hub, because that is where it gets the most touches. From a truck it either gets put away on a shelf or cross-docked, so most touches happen at the end of the first mile, the start of the middle mile and the final mile when it is received. 

{audio:0:33:03} If a product is damaged, a quality inspection is done, then it goes back to the DC and we have returns programs with OEMs. There are ways to prevent returns, and many retailers will do what we call MEDIC, which is to open the product up and see if they can repair it on site. They can fix minor scratches or unscrew and replace torn slats, then rewrap it and bring it to your house. Damage will happen regardless of who controls the supply chain. That damage is either from a forklift or a resource who dropped a box.

{audio:0:34:19} Wayfair claim that by owning it they can reduce breakages which reduces return rates and improves their profitability; is that an advantage for them over the players who don't own as much of the supply chain?

{audio:0:34:34} There is definitely an advantage, and to control customer experience, you have to control the supply chain. UPS own their facilities, trucks and drivers, and even though some drivers are unionized, they represent UPS and have their best interests in mind. Wayfair own the employee, facilities and trucks and everybody works for them. FedEx own their facilities but not their trucks in certain cases because they have a contractor model, and contractors do what is best for themselves. They have a different mindset and are motivated to work on their own small route company they built, and do not work on behalf of FedEx, even though FedEx makes them look and dress that way. Everybody has a common goal of customer experience, and if you own every piece of that, employees are more careful which influences the damage.

{audio:0:36:00} How did approach improving the last mile at Williams Sonoma?

{audio:0:36:11} XPL Logistics has been doing this for many years and is the leader in the industry, and others like MDX and FIDELITONE have specialized and built technology for the last mile. If you can do that and catch up with them, doing it as efficiently at the same cost they can, do it. Williams Sonoma are good at manufacturing, distribution and the middle mile, but once it gets to the hub, any of these providers can handle that. They realize they are giving up consumer experience, but when customers complain to them and you don't fix it, someone else will. Many of these last mile facilities have contractors similar to the FedEx model, and they have a stand-up meeting where they tell them, today our goal is to go 100% damage free delivery, on time, with no “not at homes”. The last mile is the face and experience to consumers, and Williams Sonoma management works with these carriers to monitor complaints, which go to the contractor who then deal with their employee.

{audio:0:37:58} The 90 hubs of Williams Sonoma are run and managed by XPO; do they run the last mile with their own trucks or do they also partner with UPS and FedEx?

{audio:0:38:15} On the middle mile, XPO have their assets; on the final mile, they own the hubs. Williams Sonoma also use MDX and FIDELITONE, depending on the region. They either own or lease the 90 hubs, and provide technology to coordinate getting products to final mile hubs. From there, they control the consumer experience, giving you a tracking number where you can go to a website and track the driver, as you do for your pizza.

{audio:0:38:54} Do they partner with someone or do they run the last mile themselves?

{audio:0:39:03} No, XPO also has a contract model.

{audio:0:39:07} Are two guys with a van doing that job for XPO?

{audio:0:39:13} Companies that are stable and have more than a two-person crew. If they are expected to do a two-day run through multiples states, it might be a two man in a van concept.

{audio:0:39:29} What was the biggest challenge with last mile?

{audio:0:39:36} The biggest challenge is customer experience, and retailers control the first 80%. Once the product gets to the hub and is going the final mile, we gave that 20% to XPO, MDX or FIDELITONE. That 20% means more than what we did in the 80%, and if we mess up that 20%, they will blast you on social media and you will lose their business. At that point, we make them happy by giving them a discount on the next one, or a $100 gift card for inconvenience.

{audio:0:40:32} Williams Sonoma have enough volume, can they not run their own trucks?

{audio:0:40:37} They could own the last mile but humans will continue to do what they do. If they have a bad day or the customer is rude, it makes no difference who does the delivery. Drivers are sometimes rushed because one stop might have taken longer and they have to make up the time, so they might not be nice to the customer and are probably in and out. I'm sure Wayfair has the same problem and has to get rid of drivers who do not represent them well, whereas UPS can simply fire their driver. Williams Sonoma have to tell XPO, who tell their contractor, so there is one more layer to go through.

{audio:0:41:49} What drives the 18% to 26% cost of the last mile?

{audio:0:41:59} That is more of an all-in cost because you have to account for scheduling. You hope to schedule 50% of first calls on the spot, but the person might not be home, so we have to leave messages on answering machine and cell phones and they call back, wait in a queue and hang up. It is also more costly when you only have 13 to 15 loads on a truck, with labor costs for a small truck with multiple stops and fuel. You also have to build in the cost of returns and damage, which all comes back to that last mile hub. UPS also faces this when they deliver a 120-pound box which is damaged, because they have to take it back, run it through a sort and return it to the original OEM or sender. Their last mile costs are a lot higher compared to some of the other per piece costs they track.

{audio:0:43:27} Do XPO and other contract logistics players charge warehouse management fees for operating the warehouse and is the last mile fee charged per mile or vehicle?

{audio:0:43:52} In certain cases, it could be per piece. A Peloton bike could be dropped off in the box, assembled, or plugged in and programmed, so it depends and is called different delivery.

{audio:0:44:17} Wayfair or Williams Sonoma agree on different fees with XPO, but why can't they run the hub and only outsource the last mile delivery?

{audio:0:44:31} Williams Sonoma could, but the CFO will decide whether to open 90 hubs to hit the US market in a day or two, or partner with someone who has actually done it to scale.

{audio:0:44:47} What is the difference between running a DC versus a hub?

{audio:0:44:52} Williams Sonoma have 12 DCs which are huge, and if they are shipping close by, the technology can tell you to take it from a DC to an end consumer, but you cannot hit the entire US market within a one or two-day footprint. That is why many retail companies now have micro fulfillment centers which become semi hubs. They can use 12 DCs and 24 micro fulfillment centers, where they can move 100 fast moving SKUs, plus use it as a hub and spoke. 

{audio:0:45:30} Maybe they are looking at that but once again, are you in the business of running hubs and having your own drivers? If I was talking to a C-level at Wayfair, I would give a true example of Peloton, who started out owning the supply chain, doing final mile deliveries with their vans. They realized they were unable to scale and their drivers were messing up, so they outsourced it to XPO who are the experts, who were on time and their customers were happy. Wayfair would need to have a magic bullet to do a better job than XPO, FIDELITONE and NBX, who have been doing this for their entire company history.

{audio:0:46:34} Is large and bulky different to smaller items like lamps and furnishings?

{audio:0:46:43} In terms of managing the hubs, is it a completely different supply chain?

{audio:0:46:46} Yes, but Williams Sonoma let UPS handle boxed items which fit on a conveyor belt.

{audio:0:46:57} Wayfair outsource most of that, but what advantages do they have over XPO by running both the hubs and last mile delivery?

{audio:0:47:21} It is easier to coordinate when you own both. In XPO’s case, I own the hub, but the product might be coming from my customer's DC, so I coordinate with two different parties, who might have different platforms and cannot talk to each other, so that requires integration. When you are using one system – which I assume Wayfair does – they can transfer from a DC to a hub, and all the EDI, API or XML, happens behind the scenes. There is also the human aspect of two people working for the same company versus a retailer employee and a hub employee.

{audio:0:48:42} How much could Wayfair save running their last mile versus using XPO?

{audio:0:48:51} If Wayfair sets up and controls 90 hubs similar to XPO, the margins are 5% to 7%. That could be huge when you look at the overall spend, but will the cost be justifiable to build and lease 90 facilities to match the width and breadth of XPO? There is also the technology play which ties into the consumer experience. There is a reason why XPO is one of four or five providers who have mastered it. They don't have a monopoly but their client list includes Home Depot, Lowe's, IKEA and Peloton.

{audio:0:50:13} Amazon is obviously running their own?

{audio:0:50:15} Amazon is a different beast and has the money to not be responsible to their shareholders. Bezos said he was not there to make money but to build the infrastructure.

{audio:0:50:33} How good is XPO at large and bulky relative to Wayfair, because furniture hasn't been delivered for that long online?

{audio:0:50:43} XPO have been around a lot longer in big and bulky furniture than Wayfair. If you look at their annual report or investor calls, Brad Jacobs does a good job of explaining not only last mile but LTL, and before they split from XPO and GXO, how they all used to work together. He realizes the value of last mile and has perfected it, both operationally and technologically. Their secret sauce is their technology.

{audio:0:51:26} What technology is used for large and bulky because you can't use robots to move a sofa?

{audio:0:51:33} I am not talking about technology within the four walls, but about scheduling 600 orders in Atlanta, running them through a routing engine to meet all the times, based on what they asked for, then build a truck and give the driver a hand held with the XPO app on, which he uses to scan the product, take a picture of it showing there is no damage, and getting the customer's signature. After that, an automatic survey is sent to the customer. There are so many things to capture. They send a text 30 minutes out and allow customers to track the truck as it heads to your house, similar to tracking your pizza online.

{audio:0:52:27} Wayfair are building out the last mile and own the middle mile; is it worth it if XPO is that good? What are the real advantages Wayfair can have over time relative to the cost, effort and energy it could take to replicate what XPO does?

{audio:0:52:55} The proof is in the pudding and look at what Amazon did. They own warehouses and contracted their last mile to companies who buy different spots, but they also own their own fleet of airlines to move product between DCs, so in time they can also do it themselves. They are very reliant on FedEx and USPS, but since taking some of that, they are trying to decrease their cost. The best way to decrease cost is if you control it, which is what Wayfair is doing. Outsourcing to UPS or FedEx means you don't control the cost, only the contract rates. 

{audio:0:53:43} Obviously, they have to make money whereas Wayfair are hoping that by controlling that, they control the customer experience first and foremost, which should be the driving force. They want to maintain the customer experience and lower costs by doing things in their warehouse. They could introduce automation or incentivize people to behave differently. When you control everything, there are different behaviors and patterns you can tweak to get more. They can squeeze the lime more when they control the whole thing, versus relying on others. That is the advantage it will give them down the road.

{audio:0:54:37} How did you work with IKEA, Wayfair and Williams Sonoma while at XPO?

{audio:0:54:54} First and foremost, I helped to sell our service, and my second role was in product. I helped identify what enhancements our customers were looking for. Our end user customers might not have liked the telephone or tablet survey, or Home Depot, Lowe's or IKEA might ask for a dashboard showing which of their deliveries going out are on schedule. My third role was operational. Sometimes a product would come from Lowe's to our hub and we would deliver it based on an order. We would send trucks to IKEA stores in the morning and they would pick, pack and have loads ready which needed to go to William from Atlanta, so we would collect it.

{audio:0:56:01} Did IKEA only buy the last mile instead of XPOs warehousing solution?

{audio:0:56:06} Exactly; we would go to their stores to collect it.

{audio:0:56:08} IKEA is both a warehouse and a store, those big boxes?

{audio:0:56:13} XPO have a flexible distribution offering; can you put IKEA, Wayfair and other competitors in the same hub, or do customers typically lease a hub from XPO?

{audio:0:56:30} Any customer can go through any hub. We can collect products from IKEA’s distribution center, and when XPO had GXO was part of them, we had a supply chain solution group which had 15 distribution centers. IKEA could house 50 of their fastest moving SKUs in your distribution centers, and the remainder in an IKEA distribution center. Then the IKEA distribution center could send it to a hub, or we can get it from one of our XPO DCs and deliver it. People don't realize how tough it is operationally. Behind the scenes, you need technology to allow you to send an order from the host order management system of IKEA to a warehouse. There are sourcing decisions which need to happen within the host system or the order management system, and they drop that order depending on the XPO supply chain. You have to integrate with the XPO system to influence that 20% of the customer experience.

{audio:0:58:09} If you are constrained with capacity, middle mile or in your hub, how does IKEA, Wayfair or Williams Sonoma choose between different providers? Is there a challenge on a constrained capacity that could hurt their customers?

{audio:0:58:27} Nine out of 12 months I would say probably not. It goes back to the contract language and we pay a penalty if we don't honor what we promised, like when our trucks are idling and not picking up on their two-hour window. The three peak months around Thanksgiving, Christmas and January, where you have many returns, they get more contract carriers on board and more drivers on site to handle it so they don't run into that situation. Sometimes you have to make a decision when the trailer is about to shut in the middle mile and you only have two pallet positions, do I move washer driers or take the two Peloton bikes? The warehouse manager makes that decision because the other ones have to go the next day.

{audio:0:59:26} What is the biggest risk for Williams Sonoma and other large and bulky retailers who outsource both their hubs and last mile to XPO?

{audio:0:59:47} Williams Sonoma control 80% but that 20% can mess up the entire experience. XPO measures their drivers, who are incentivized based on their star scores. Williams Sonoma selected XPO or FIDELITONE and if that contract carrier messes up a customer who has been with you for 15 years, they have to discount products or give out free gift cards, so there is a cost to that. The biggest challenge is ensuring that our final mile carriers ensure those drivers have the best interests of Williams Sonoma in mind when they're delivering that product.

{audio:1:00:49} Will Williams Sonoma or other big and bulky retailers replicate Wayfair and own the last mile?

{audio:1:00:57} Yes, I do see that happening. We talked about Costco buying Innovel for their last mile and you're starting to see more retailers get into supply chain. Several weeks ago, Maersk bought a final mile US carrier. There will be more M&A and partnership over the horizon.

{audio:1:01:36} When we compare large and bulky with the standard small parcel world, how different is the efficiency gains you can get by owning the last mile?

{audio:1:02:03} UPS and FedExs last mile cost for a parcel package is between 8% and 11%, versus 18% to 25%. They are sorting hundreds of thousands of pieces per hour which is very efficient, versus a sofa which cannot fit on a conveyor and has to be physically fork lifted by a driver. From an efficiency gain perspective, it's two thirds less than big and bulky.

Williams-Sonoma, Wayfair, & Furniture Supply Chains

How Williams-Sonoma approaches first and middle-mile 

Wayfair's cost advantages by owning the supply chain vs outsourcing

Challenges organising freight and truckers in the. middle-mile for Williams-Sonoma

Williams-Sonoma, Wayfair, & Furniture Supply Chains

Former Director of Supply Chain at Williams-Sonoma and XPO Logistics

inpractise.com/articles/williams-sonoma-wayfair-and-furniture-supply-chains

Why is this interview interesting?

Executive Bio

Raj Patel

Former Director of Supply Chain at Williams-Sonoma and XPO Logistics

Interview Transcript

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Williams-Sonoma, Wayfair, & Furniture Supply Chains(October 2, 2022)

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