Executive Briefings

Book Illustrates How Analytics Can Impact Bottom Line for Retailers

In his book, The New Science of Retailing: How Analytics Are Transforming the Supply Chain and Improving Performance, co-authored with Harvard Business School professor Ananth Raman, Wharton operations and information management professor Marshall Fisher argues that retailers have the data they need to manage supply chains more efficiently and increase sales and profits.

If so, does this imply that if retailers are able to make even small improvements in matching supply with demand, that this would have a fairly big impact on profits?

"Yes, absolutely," Fisher says. "For a simple reason: Retailing is a high fixed-cost business. It costs a lot of money to maintain a store base and pay the associates who work in those stores. You incur those costs whether you sell $1 of merchandise in the store or $10m, so small increases in revenue have a big impact on profit. Typical numbers for gross margin would be somewhere between 30 percent and 50 percent. Take a retailer whose gross margin is 50 percent - a 5-percent increase in sales with a 50-percent margin is 2.5 percent of revenue increase in profit, which, for a lot of retailers, would double their profits. When you consider the one-third who walk out empty-handed because of stock-outs or because they can't find the product in the store, just correcting a little bit of that could double the retailer's profit."

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In his book, The New Science of Retailing: How Analytics Are Transforming the Supply Chain and Improving Performance, co-authored with Harvard Business School professor Ananth Raman, Wharton operations and information management professor Marshall Fisher argues that retailers have the data they need to manage supply chains more efficiently and increase sales and profits.

If so, does this imply that if retailers are able to make even small improvements in matching supply with demand, that this would have a fairly big impact on profits?

"Yes, absolutely," Fisher says. "For a simple reason: Retailing is a high fixed-cost business. It costs a lot of money to maintain a store base and pay the associates who work in those stores. You incur those costs whether you sell $1 of merchandise in the store or $10m, so small increases in revenue have a big impact on profit. Typical numbers for gross margin would be somewhere between 30 percent and 50 percent. Take a retailer whose gross margin is 50 percent - a 5-percent increase in sales with a 50-percent margin is 2.5 percent of revenue increase in profit, which, for a lot of retailers, would double their profits. When you consider the one-third who walk out empty-handed because of stock-outs or because they can't find the product in the store, just correcting a little bit of that could double the retailer's profit."

Read Full Article