QRS – Tradeweave - Keystone

1. QRS – Tradeweave - Keystone Fred Lizotte

2. Mission and Vision • To be a leading provider of demand chain management services to suppliers of consumer goods.

3. Key Dates • 1987 – QRS keystone catalog was developed. It caused great success for the company. • It helped retailers and suppliers improve their purchasing and fulfillment operations • Keystone contained almost 73 million UPC’s as of mid-1999, 42 million of them being apparel related.

4. Key Dates • 1993 – It had its initial public offering • 1993-1998 – Generated sales growth of 33% and net income growth of 36% on a compound annual basis • 1998 – sales and net income were $91.9 million and $12.1 million. • 1996-1999 – Market capitalization grew 43% annually. • 1999 – QRS market capitalization was $697 million.

5. Key Dates • 1999 – The company had become a leading provider of electronic data Interchange EDI services to the U.S. retail industry. QRS had achieved a 40% market share for EDI services in the soft goods sector (apparel, accessories, and footwear). It had also developed the retail industry’s largest and most widely used uniform product code UPC catalog. With more than 7,700 customers, including 270 retailers and nearly 7,500 manufacturers and carriers, QRS was an ingrained service provider to the retail industry.

6. Facts of the case • QRS Keystone was the basis for the companies success. • The catalog contained more UPC’s than any competing product and was more than an order of magnitude larger than the average retailer’s UPC portfolio of 1 million. 1 Source: QRS internal research

7. Facts of the case • QRS has pursued a hub-and-spoke customer acquisition strategy. • The Keystone catalog cut retailers’ costs by automating processes, improving information quality, and tightening monitoring and control. • QRS hub retailers announced that they would only procure products electronically through QRS • This caused the requirement that the vendors “spoke” had to upload all their product information on to QRS Keystone catalog. • This value chain was captured by charging subscriptions and transaction fees to both hubs and spokes.

8. Value Chain

9. Value Chain

10. Goals and Strategies • QRS had fears that they have successfully penetrated and saturated the apparel market. • They decided to move into a broader market • QRS broadened its customer acquisition efforts to include large vendors, many of which had already become QRS customers through their relationships with large retailers. • To gain more revenue QRS had developed new products within its Inventory Management Service and Logistics Management Services product lines.

11. Goals and Strategies • QRS acquired a few companies • Service bureaus • Helped small vendors convert electronic purchase orders from retailers to hard copy for vendors and converted paper documents from vendors to electronic format for transmission to retailers. • Retail Data Services • A National market research and data management firm serving grocery and consumer packaged goods markets that collected, verified, and analyzed competitive retail pricing, promotion, and distribution information

12. Goals and Strategies • QRS was trying to figure out how to keep consistent growth happening for the company and came up with three options

13. Option one • Broaden the scope of the installed base beyond apparel to include other UPC-driven verticals, such as sporting goods, canned foods and grocery, household furnishings, toys, and general merchandise.

14. Option two and three • Create more new product offerings in-house. • To acquire more companies that could enhance the QRS product portfolio. • Also a thought of creating new, organizationally segregated businesses that might enhance and deepen the QRS product offering to provide a more complete solution for the needs of its existing and future customers.

15. QRS and the apparel goods supply chain • Apparel retailing was a $192 billion market in the US in 1998. • Of the top 10 apparel retailers, 8 of them were QRS customers in 1998, distributed approximately 50% of apparel retailing dollar volume. • Of the top 50 apparel retailers, 26 of them were QRS customers in 1998, distributed approximately 83% of this dollar volume. • Of the remaining apparel retailers, only a few were QRS customers in 1998.

16. Apparel Goods Supply Chain Breakdown

17. Apparel Goods Supply Chain • QRS did business with retailers that represented approximately 57% of the apparel retailing market. • General Merchandise department stores were the largest channel within this market • 34% of the total volume

18. The Profit • The problem we see here is that retail segments had very low profit. • Department and discount stores – 3.1% • Grocery stores – 2.2 % • Home improvement stores – 4.7% • Drug stores – 2.6% • Apparel retailers – 6.9% • Apparel retailers had the highest profit, and QRS knew this.

19. Apparel goods supply chain • In 1998 QRS believed that there was about 7,000 vendors supplying apparel and general merchandise to retailers. • These vendors could be segmented into a few categories • Basic merchandise • Fashion • Top • Net profit margins for most vendor segments were typically below 5%.

20. E-Commerce opportunities • Surplus merchandise area • Merchandise that is marked down due to certain things • Time • Damage • Style • Demand • Returns

21. Opportunity • For an apparel vendor with low profit margins • A product underage can cost more than a product overage • For an apparel retailer • Failing to stock a specific item that was in demand was more costly than carrying an item that did not sell right away.

22. Opportunity • Both vendors and retailers had a plan for the extra products that don’t sell in time • In 1998, approximately 15% of merchandise that apparel vendors distributed had to be liquidated, implying a vender-generated surplus merchandise market of $11 billion. • In apparel, retailers are generally responsible for demand forecasts and determining order quantities and pricing.

23. Opportunity • In 1998 apparel retailers disposed of 5% of the merchandise they acquired outside of their stores. • Retailers generated surplus merchandise market of 9 billion. • With the 11 billion market that vendors have we now have a $20 billion dollar market of these surplus goods.

24. Surplus Merchandise Disposition • Both apparel vendors and retailers considered surplus merchandise disposition a time consuming, inefficient, and painful process. • To get rid of surplus • Retailers would reduce the price of the merchandise as much as 45% • Big retailers made contracts with vendors that they would buy back the products at a certain cost.

25. Surplus Problem • The problem remains that in the end there still is a surplus taking up room, thus costing money to hold. • With these products the retailers still had to keep track of the UPC’s, costing them money in handling costs. • Retailers only got maybe 10-20 cents per item from the whole sales cost.

26. Training • Retailers were scared that if they consistently dispose of their apparel clothes to reducing the price, customers would use this to their advantage and wait to buy till the product is cheaper. • Retailers also have the fear that if they discount their products it may cause a channel conflict. • Vendors had a fear that if they discounted these apparel products, brand dissolution could happen to the high named brand

27. Solution • Some vendors shredded their apparel surplus and sold it as rags. • Some maintained relationships with trusted resellers to sell their surplus apparel. • These resellers made sure that their selling the surplus apparel would reduce the channel conflict that occurs. • Selling to foreign markets • 40% - to 60% of apparel surplus merchandise were disposed of using outlet stores or web sites. • 30% - 50% were sold to large resellers such as TJ MAXX, Burlington Coat Factory • 5% - 10% went to other intermediaries

28. Supply Chain to Apparel Surplus

29. The solution to the problem

30. New Entrant QRS • QRS believed that none of the current players was adequately servicing the apparel goods vertical. • All the new entrants had maintained a broader focus on only connecting buyers to sellers or on surplus merchandise in general. • B2B

31. Demand Chain Inefficiencies • QRS had a goal of helping to reduce apparel surplus • They would do this by increasing the technology used to improve communication and inefficiencies • The problem seemed to be bigger than that, vendors had to decide what type of clothing and how much to produce, months ahead of time. Retailers communicated the demand, but only when it came time to order the apparel. • QRS’s inventory management and sales analysis products improved the functioning of the retail demand chain

32. Organizational and Implementation Issues • QRS saw an opportunity to use the internet to do more for retail demand chain to attack the core problem that caused the surplus in the first place. • Given time-to-market pressure, a key issue would be how to design, develop, and launch a product quickly. • The more time spent researching the opportunity, the higher the chance of producing the right product, but the greater risk of missing the window.

33. Summary • QRS was having fears that their tremendous growth was temporary and needed to be solved • They saw a good opportunity in the Apparel Goods Supply Chain • They also saw a good opportunity dealing with the surplus of the merchandise • They were essentially double dipping, they made money off of the retailer getting the products from the vendor and then made money again when it came time to get rid of the surplus in various ways. • They tried to stop surplus from happening in the first place. • That’s where the case ends.