In the Harvard Business Review Online Forum (The Future of Retail), Marshall Fisher, UPS Professor of Operations and Information Management at the Wharton School of the University of Pennsylvania, (researching with Ramnath Vaidyanathan of McGill University), discusses studying and analyzing hard data so retailers can improve revenues and profits. The post is titled: "Don't Trust Your Gut With Assortment Planning." In addition, Fisher and Ananth Raman (UPS Foundation Professor of Business Administration at the Harvard Business School), have a tantalizing book, "The New Science of Retail," focusing comprehensively on utilizing technology and data analysis to get at the real solutions to retail problems and planning. I'm going to call my post for today: "The New Science of Assortment Management: Using Retail Analytics".
In the old days, when retail connected with customers, mom-and-pop had a pretty good idea of what customers wanted and needed. Now, distanced by cyberspace, long supply chain, and salespeople living "in a different world" than their particular target audiences, there's a discrepancy between what retailers stock and sell, and what their customers really want -- and thus a big discrepancy in potential profit and savings by the wisest use of product assortment.
Data Analysis Facilitated By Technology:
If retailers make the transition from hunch-driven to data-driven buying, they will turn inventory faster and mark down fewer goods. Even small improvements in matching supply with demand can literally double a retailer's profit. And, ironically, improving the match between supply and demand has huge leverage because it costs no more to produce and transport goods that customers want than ones that they don't want! And, note that the former sells at full price, and the latter at perhaps fifty cents on the dollar!
With data analysis, retailers can mine significant data and information with the following benefits:
1. Viewed longitudinally, identify trends and the helpful information for decisions, often needed months in advance.
2. Use assortment intelligence to take into account your competitors' assortments. Know what you carry in common, what you carry that they don't, and vice versa.
3. Benchmark your firm's performance along various dimensions against other retailers.
4. Identify how you can better forecast your firm's sales.
5. Assess how sales will change if you increase or decrease the number of products carried in an assortment.
6. Determine the likelihood customers will buy a substitute product if they don’t find their ideal product.
7. Discover new products that might be added to the assortment.
Some quick EXAMPLES of how retail analytics can help:
-- In 2008, Walmart made an effort to “declutter” stores by removing 15% of the SKUs they carried. What happened was an immediate decline in sales, and Walmart eventually had to roll back most of the changes. True that the deleted SKUs had low sales, but when customers couldn’t find the product they wanted, they elected to shop elsewhere. This is a common problem that must be addressed regarding assortment: If you stop carrying a certain product and the customer can't find it, will they stop shopping with you for other things, and will they go to a competitor for the product?
-- An auto-parts retailer sold many parts for Honda Accords -- and also sold lots of brake pads, but, for some reason, he didn't specifically carry Honda Accord brake pads. Add things up and the obvious answer was to add Accord brake pads to his assortment, for greatly increased sales and profit.
-- Retailer thinks customers don’t want to buy tire product type X, so offers a limited amount of it and thus doesn’t sell much of it, thereby confirming his assumption that customers didn’t want tire X. In fact, the retailer wasn't offering the tire in the sizes the customer would buy, losing a third of potential sales.
-- Another study showed that "appearance chemicals" for car tires sold best in a particular neighborhood -- stores that had an urban/bilingual demography.
The era of analytics for retailing has arrived. It's not just a question of having the information, but knowing what to do with it, as noted in the following quotes: "We are awash in data and starved for information"; or, "Operating without business metrics is like driving in a foreign country without a map or GPS"; or "Retailers are… drowning in numbers but lacking in insight." And finally, "…There is more science than art in creating effective retailing." (Tom Stemberg, Founder and Former CEO, Staples). Amen.