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brain (scientific)
respond fast enough to those signals.
The problem is that companies can’t
quantify the value of a short lead time in
reducing stockouts and markdowns. product would have sold if supply had
But as retailers adopt new software been plentiful. The figure can be
tools for forecasting and planning estimated using sophisticated statistical
supply, they can use these tools to techniques, but retailers generally can’t
measure the impact of a shorter lead find such capabilities in commercial
time and to better match supply with software, especially in the case of short-
demand. life-cycle products.
Many retailers
to use; at the other extreme, another
company kept ten years of sales data
accessible on-line.
don’t know if their
People often wonder why it’s valuable
information is to keep a history of sales for so many
years given how quickly trends change.
inaccurate In fact, the data contain some useful
information about sales patterns that
because they remain stable from year to year, such as
seasonality, consumer reaction to a
don’t track data promotion, and differences in sales
patterns at different stores. We have
accuracy. also found that the average forecast
error tends to be reasonably similar
from year to year, even if the products
Some retailers have taken steps to have changed almost entirely.
ensure the accuracy of sales and
inventory data. One interesting Forecasting product sales is much more
approach, the “zero balance walk,” is difficult for the merchants at companies
practiced at office-supply superstore that lack sufficient on-line data. At the
Staples. In this system, an employee retailer with only six weeks’ worth of
walks through the store each day on-line data, merchants referred to
looking for SKUs that are out of stock. heavy stacks of paper copies of sales
For each item that is out of stock, a data from previous years when
stockout card is generated and a sticker estimating future product sales. Given
is placed in the space reserved for the that the cost of computer storage space
item. Other employees verify the has fallen sharply, there’s no reason for
events—sudden surges in consumer retailers not to store sales data
demand, computer data error, electronically and make it easily
merchandise stocked in the wrong aisle, accessible to their merchants. Those
and so on—that caused the sellout. If who don’t either don’t see how the data
the stockout was due to faulty data in could be useful in their decision making
the computer, the inventory level in the or made the decision several years ago
computer system is corrected.
when computer storage space was scenarios—for the four areas that are
extremely expensive. fundamental to achieving rocket science
retailing. But there are other areas of
Some retailers don’t make even recent improvement for retailers who seek to
sales data available at the detailed level. get closer to the grail.
For example, some apparel retailers
track their sales according to style, Many of the issues we’ve touched on
color, and size (each has its own bar have dealt with metrics like forecast
code) but they store only the data accuracy, stockouts, lost sales, gross
regarding style and color in the central margins, markdowns, and inventory
computer. So a merchandiser might carrying costs. But retailers also need to
know how many red blouses in a certain track the variables that drive those
style were sold at a particular store on a measures. For example, which products
particular day but not if those units and market segments tend to have
were sold in small, medium, or large. Is inaccurate forecasts, and how does
it any wonder that a recent survey forecast accuracy change over time?
found that one out of three consumers Only then will retailers have the
who enter a clothing store intending to information they need to get at the root
buy something leave without buying cause of retail problems, solve them,
because he or she can’t find their size in and improve performance.
stock?
Some retailers also focus too much on
Managers at these retailers claim there the short term. The pressure to
is little value in knowing sales by size immediately improve profits can spur
since their vendors and distribution cost-cutting that leads to customer
centers can ship only in standard size dissatisfaction and low employee
packs, which precludes customizing the morale. The senior managers at one
size assortments by store or region. retailer in our study were challenged by
Meanwhile, it is difficult to justify the board to achieve double-digit profit
changes to their transportation and increases every year. Management
warehousing systems that would let achieved this goal by cutting costs
them customize their shipments, through reducing the number of
because they don’t have the appropriate salespeople in the stores. The board was
sales-by-size data that would tell them pleased with the short-term profit
how to do that. It’s the perfect example growth, but the reduced head-count
of the vicious cycle these retailers fall pretty quickly created lower customer
into: an inflexible supply chain justifies satisfaction, and employees were
bad data, which justify an inflexible unhappy.
supply chain.
To prevent this kind of problem,
Costs, Customer Satisfaction, retailers need to visibly and accurately
and Morale track customer satisfaction and
employee morale. At least one retailer
in our study has engaged an outside
We’ve outlined the current best
audit firm to measure those factors, and
practices—and the current best-case
the company is even considering
reporting the results in its annual group, which maintains computer
reports. That approach makes sense; systems at the company, and other
without hard numbers on customer departments such as merchandising.
satisfaction and employee morale, those One retail CEO reports “The only time
factors would take a backseat to cost [the MIS managers] communicate with
reduction. In the long run the retailer me is when they ask me for a $30
would be worse off. million write-off on some previous
project that now has to be abandoned.”
Marriage of Art and Science Another CEO chastised us for not
appreciating the MIS-merchandising
It’s useful to consider the long-standing divide: “You guys don’t get it, the
conflict between left-brainers, the merchandising-MIS relationship is
technical types who either produce or broken.”
rely on information supplied through
technology, and right-brainers, those Most MIS specialists aren’t experts in
who rely more on intuition. The core of products or merchandising. They are
rocket science retailing, as we’ve said, experts in information technologies
involves a marriage of the two. And such as database management and
many retail executives do acknowledge computer networks. Prior to joining the
the need for blending left- and right- retailer, they may have worked at
brain capabilities, particularly in nonretail companies. Consequently,
planning. they don’t always understand the needs
of the merchandising organization. In
Consistent with this view, their many cases, even the language is
organizations have a left-brained substantially different between the two
planning organization to complement groups. One MIS group at a leading
the traditionally right-brained buying retailer found, much to its surprise, that
or merchandising organizations. The when merchants in the company say
planner typically looks at sales data—in “always,” as in “I always follow this
the absence of software systems—to procedure,” they mean 75% of the time.
determine stocking quantities at the This shocked the literal-minded MIS
store and SKU levels. The buyer tries to group for whom “always” means 100%.
look beyond numbers and history and It is not clear how the relationship
focuses on right-brain tasks such as between MIS and merchandising will
identifying changing patterns in evolve. But we don’t see how
consumer demand and developing new merchandising can become scientific
products. without the two factions understanding
each other.
The division of skills and
responsibilities between buying and The Systems at the Core
planning appears to work well at most
retailers. But in other areas, there is vast If rocket science retailing is ever to
room for improvement; a good example happen across the industry, retailers
is the relationship between the must pay more attention to the logic
management information systems
that is embedded in their planning support tools. In the past, many
systems. retailers that have attempted to develop
such systems in-house or purchase
Most retailers, for example, realize that them from third-party vendors have
inventory levels should be reduced been disappointed; the systems did not
toward the end of a product’s life cycle use the appropriate mathematical
and that forecasts should be updated techniques and hence produced poor
based on early sales data after adjusting results. The mathematical techniques
for product availability and price underlying such decision-support
fluctuations. But most inventory- systems are not straightforward for a
planning software is designed for number of reasons.
products that have long life cycles and is
thus inappropriate for products that Consider a task as simple as using early
have an economic life of just a few sales data to guide replenishment; see
months. what’s selling well and get more of it if
you can. But implementing this concept
Consider, for example, a catalog retailer requires careful attention to detail. For
that recently bought a new software example, it’s important to know not just
package for planning inventories of how much has sold of a particular
short-life-cycle products. The company product but the conditions under which
was advised to set the system’s it sold, including price and inventory
parameters to stock four weeks’ worth availability. This point is well illustrated
of projected demand for each SKU. For by one retailer that had developed a
these products, however, sales usually replenishment model based on early
peaked in the first week and then sales data. The model showed that a
declined exponentially. This meant that product in one style and color was
the four-week supply ordered by the selling almost twice as well as had been
system was based on inflated sales. It originally forecast. Based on this, a large
was inevitably too much inventory and replenishment order was placed. The
often generated obsolete goods at the vice president of merchandising who
end of the products’ life cycles. had placed the order was dismayed to
see sales in the next three weeks fall to
What’s more, most inventory planning 60% of what the model had predicted.
systems typically require two or three She was convinced that the model was
years of demand history on which to flawed. But careful examination
model forecasting and stocking revealed that sales were slow because a
parameters. This is a problem for the delivery of the product that had been
many products whose life cycles are expected at the time the order was
measured in months. Some software placed, and that had been assumed by
vendors are starting to address this the model, was delayed by three weeks.
problem, and we’re confident an Hence, stores were stocking out of many
appropriate system will be developed sizes. Once the fresh product arrived,
soon. sales rebounded to the level predicted
by the model. The underlying principle
Rocket science retailing will require the is simple—you can’t sell it if you don’t
development and use of decision have it in inventory. But retailers often
overlook this principle when they solve these problems. Somehow this
interpret sales data.• • • vacuum will be filled.
Nature abhors a vacuum, and the Every decade sees a retailer that
retailing situation today is an economic innovates so powerfully that it rewrites
vacuum that cannot persist. Retailers the rules for other retailers and for all
can’t continue to suffer growing companies in the retail supply chain. In
markdown losses yet disappoint a the 1980s, it was Wal-Mart. In the
significant portion of their customers 1990s, it was Amazon.com. We believe
who can’t find what they want. They the next retail innovator will be the one
can’t continue to ignore billions of bytes that best combines access to consumer
of unused sales history that could help transaction data with the ability to turn
that information into action.