Lessons Learned from Threadless

I wrote this paper for my Operation Technology Management class. Enjoy!

Introduction

Threadless is a community-based online retail store. Found at Threadless.com, they are headquartered in Chicago, Illinois. Threadless is best known for their creative t-shirts and unique business model, but they also sell posters and other various merchandise. Threadless manufactures beautiful and unique prints without hiring in-house designers or contracting a design firm. They closely match supply with demand and keep inventory levels near zero. How does a company accomplish this? They leverage the power of their online community. Here is how it works: thousands of artists submit their designs to the website. The online community will then vote each week on the submitted designs, rating them on a scale from one to ten and then selecting whether or not they would buy this design as either a t-shirt or a poster print. The most popular design will be selected to be manufactured. The winning designer will be awarded $2000 and more importantly endless recognition in the community. Threadless will then use the information it acquires during the voting process, such as how many people will buy the print to determine how many t-shirts and posters to manufacture. Threadless uses “crowdsourcing”, or open decisions-making and task-allocation, to control their inventory, make inventory ordering decisions, and minimize inventory costs.

Inventory Control

Threadless employs an unconventional method to determine when to order and how much to order. Traditionally, these decisions are left to business managers who conduct market research to estimate these values. Threadless finalizes the winning design at the end of each week. This is when they will invite the winner to their headquarters to celebrate the design and prepare it for manufacturing. The fixed time frame of once a week works very well for Threadless as it fosters transparency and keeps the community involved. There is no confusion about when the voting ends because it is the same each week. Many members of the community will often visit Threadless to find out what the winning design is each week and congratulate the winner. Threadless is also untraditionally reasonable about how many prints they order. They simply ask the community – “Well how many should we make?” This seems to make perfect sense but is often an unrealistic question for many traditional businesses. This model works for Threadless because they have a thriving community and a voting system that measures public opinion about each design. The Threadless business model leverages the community to make better decisions about the order date and quantity.

Cost of Inventory

Threadless uses their community to minimize inventory costs and optimize the inventory trade-offs between fixed-order costs, holding cost, shortage costs, and purchase costs:
  • Fixed Order Costs: Since storing data is so cheap, the managerial and clerical costs associated with filling orders is minimal. They use their servers to track orders, calculate design winners and store demanded quantities. They do incur costs in maintaining the databases and website. Such costs include having technicians and programmers on staff as well as electrical costs from powering the servers.
  • Holding Costs: Threadless has a warehouse to store manufactured merchandise. Their warehouse is located on the outskirts of Chicago, where the building costs are smaller. This cost is minimized further because they maintain a relatively small warehouse since they are able to keep their inventory levels close to zero because they let the community decide on how much merchandise to make.
  • Purchase Costs:Threadless uses the internet to achieve next-to-zero material transportation costs. They also use generic printers to manufacture their t-shirts and posters so the cost of changing products is minimal. They do need to purchase ink for the printers. Also Threadless incurs a cost to “reward”, or rather purchase distribution rights from the winning designer. Furthermore, there is a cost associated with preparing the design for manufacturing. They also fly the winner to their headquarters, which is a significant cost of manufacturing the prints. Due to the relatively small costs associated with purchasing and manufacturing the print, Threadless is able to manufacture many small lots of product.
  • Shortage Costs: Threadless tries hard to match supply with demand in order to manufacture the perfect amount of merchandise, but they often under-estimate how many people want the shirt. They will lose out on some sales when they sell-out of a product. However, if enough people demand the sold-out product they will re-print the product. If the shirt is re-printed, Threadless will award the artist an additional $500, because his or her design is so popular. Re-printing a design is less costly for Threadless than printing a new design because they do not have to fly in the designer, prepare the design for manufacturing, or repurchase the rights to distribute the design.

Concluding Remarks

I believe the Threadless inventory policy is a model for companies interested in lowering inventory costs. They use the internet to achieve efficiencies that were not previously available to traditional companies, and use their community to make decisions that business managers would previously have to estimate. Nonetheless, Threadless does not have the perfect inventory policy. One improvement they could make would be to better account for shortages. They certainly know how much to produce for the people that voted. But for the casual shoppers, they will not be included in the quantity produced. Also as they could improve their manufacturing process so that the design you vote on is exactly what you will get on a t-shirt. Often times there are limitations involved that cause the design to not perfectly match the end result. As they improve the transformation, they could offer an option that would automatically purchase the winning design for you if you checked the box saying you will purchase this print. The Threadless business model is unique and profitable. They use their community to accurately control their inventory, make inventory decisions and minimize costs. As more companies flock to the internet and as we discover that advertising revenue can no longer sustain an internet company, I believe many energetic upstarts will follow the Threadless way.

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