Inventory Management: A Circle of One

In 2002, we were in financial trouble.

Our company — Annalee Dolls, Inc. (ADI), a manufacturer of collectible dolls based in Meredith, N.H. — had three active and independently operating channels of distribution: independent stores, department stores and direct to consumer (catalog, store and website). However, we needed to do something to get ourselves back on track. Examining our options, in 2005 we decided to add the off-price channel to our mix. The channel would expand our 70-year-old brand to a much broader marketplace while offering the chance to manage our inventory more efficiently.

What Is Circular Marketing?
The only way this new approach could work was to integrate sales channels so every channel would be paid dividends. We knew we were on to something, so Bob Watson, Sr. [co-author of this article] and Dave Pelletier, CEO and partner of ADI, formally launched an experiment called Program 21. It formed the basis of what we now call circular marketing.

Here's how it works: We send product to independent retailers for free. The retailers and ADI work as a team to sell product to consumers. Product that retailers don't sell is sent back to our distribution center. Since retailers can return the product, they don't have to account for any residual inventory.

After collecting returns from stores across the country, we use most of this inventory to supply direct-to-consumer discount programs via our outlet store, sales fliers and the web — all with a favorable margin. We also sell some of the product to off-price marketers for a smaller margin. Off-price products are often purchased by people unfamiliar with our products. These new customers then can begin to search for our other products at retailers that offer large, current assortments.

The Results Are In
The program works. We studied 3,000 consumers who bought our products at full-price retailers and learned that customers who purchased their first Annalee Dolls within the last three dolls they'd bought either bought them online or from an off-price channel. ADI customers who start buying in off-price channels convert into full-price customers.

We also learned each channel's role in communicating our brand to consumers. Independent retailers communicate to niche markets with great depth, while web retailers allow consumers to buy gifts and shop when they don't have time to visit retail stores. Department stores open up products to new markets within the country while providing a high profile for the brand. Off-price stores identify new collectors who have no awareness of a product and subsequently help control inventory.

The circular marketing model changed the way relationships are built and executed throughout our company. Sales representatives, for example, are no longer responsible for a single channel within a region. Instead, their compensation is aligned with coordinating a brand's multichannel message within a region. By including salespeople in this model, they're more likely to assist channel participants understand the strength of the model.

Getting Buy-In
Acceptance of this model may be difficult for two major reasons.

First, companies don't like to drop old sales models, especially if they've been successful in the past. Some of the old tools, however, no longer work. Our industry was built on the backs of independent retailers that controlled the industry for many years. They continue to be important, but today the consumer is king. We have to talk to consumers where they're buying.

The other reason is trust. This model only works with transparency. In a small, fragmented industry, too many people feel they can break their word without partners noticing. We need to start trusting each other, and that begins with all of us holding true to our word. This doesn't mean being held to deals that aren't working, but being honest about what's working and what's not.

These arrangements will allow us, as a community, to find programs that work. Implementing this openness means telling your channels about your marketing strategies, the role each channel plays and an agreement on how 
to communicate.

What the Future Holds
Circular marketing's been profitable for us, and it holds promise for the entire industry. It's not a cookie-cutter solution, however, and will look different for each company that implements the model.

The reward of circular marketing is organic growth. Thankfully, the transparency inherent in the strategy makes communicating very simple. Not all 
channels will be happy, but they're all your customers and should know the role they play in each other's marketing plan. ROI

Bob Watson, Jr. is the director of sales at Annalee Dolls, Inc. (bobw@ananalee.com), and Bob Watson, Sr. is Analee Dolls, Inc. chief operating officer (Watson@annalee.com).