Executive Briefings

Inventory, Pricing, and Perishables: Missed Opportunities in 2007, but Not Too Late for 2008

Retail companies plan to spend 3% more in 2007 on IT capital than in 2006, but they are still missing tremendous opportunity in three vital areas: replenishment and inventory optimization, lifecycle pricing, and fresh item management. This comes from analysis of our fourth annual retail IT budget benchmarking study, conducted in partnership with the National Retail Federation's (NRF) CIO council, in which we compared 2006 spending with 2007 budgets.

The study collected line-item detail on retail technology spending in significant budget areas for more than 20 of the largest and most influential retailers in North America. With 2007 almost a memory, retailers should now turn their attention to these three initiatives as they finalize 2008 development plans.
For more information on retail spending trends, see "Retail IT Budget Benchmarking Study, 2006-2007."

Nearly half of respondents (45%) said they would be improving their replenishment and inventory optimization software functionality in 2007, and others should follow. Efficient inventory utilization frees up working capital for more productive uses, such as opening or remodeling stores. The value of inventory optimization is clear:

1. The inventory-to-sales ratio in January 2002 was $1.56, meaning each $1.00 of goods sold required $1.56 worth of inventory. That ratio dropped to $1.26 by July 2006.
2. A recent working capital study conducted by CFO Magazine found a two-day reduction in days inventory outstanding (DIO) in 2007 versus 2004.

To get the most from inventory optimization initiatives, keep the following in mind:

Focus--Determine the type (turn or promotional) and location (store and/or distribution center) of inventory you wish to optimize.
Clarity--Identify if you are solving a quantity problem (right inventory level) or a location problem (right inventory location). Mature retailers solve for both problems and incorporate demand data into the equation.
Sophistication--Determine the complexity of the analysis. Do you need robust what-if and scenario capabilities? Survey the business users to identify inventory goals and ensure that analytical abilities align with user requirements.
Industry--Ensure a software provider has customer references or case studies within your segment of retail.
Scope--Determine the frequency and depth of required analysis. Review your supply chain strategy. Holistic supply chain network decisions warrant the development of a power.

Lifecycle pricing links merchant workflows and consumer-demand intelligence in an effort to guide regular pricing, promotional, and markdown pricing decisions. Interestingly, 44% of respondents are not using regular or promotional price optimization technology, and 39% do not use markdown technology. If your current lifecycle pricing initiatives are disjointed, technologically immature, or both, here's what you may be missing:

1. Pricing strategies linked to category and merchandising strategies, not just the cost of the product
2. Pricing strategies that account for, but are not ruled by, competitors' pricing
3. More frequent price reviews via process automation
4. Pricing decisions that are based on fact, driven by data, and less subjective
5. Demand signals that reflect the influence of pricing strategies and tactics
6. Pricing tactics that maximize gross margins
7. While connecting the three pricing components to manage products through the entire lifecycle is a powerful advantage, take it one step further by extending the process into the following advertising, marketing, and promotions (AMP) activities for even more benefits
8. Promotion management
9. Calendaring
10. Event definition
11. Vendor funds management
12. Lift modeling
13. Advertising execution and performance reporting

Connecting these activities will improve financial performance, campaign execution, and reduced event-cycle time. For example, a food retailer that linked targeted pricing with circular versioning controls saw sales rise 2% for promotional products. In another instance, a specialty retailer saved on gross margins by connecting the promotion planning and markdown processes.

For those retailers where perishables are an appropriate part of the assortment, don't overlook the importance of technology to better manage inventory, ordering, and shrink. Even general merchants like Macy's, specialty retailers like Best Buy, or apparel retailers like Old Navy are expanding their mix of fresh items by offering candy, chips, and soda. FIM software provides a platform to more efficiently manage perishable categories--a critical way to stand apart in this hyper-competitive market.

While many technology projects in this area have stalled, five steps will help you to jump-start the initiative:

1. Create and define your perishables strategy. Develop strategies by department that align with your brand messaging. Determine the role perishables play in creating a unique customer shopping experience.
2. Determine the appropriate business model (centralized versus decentralized production, for instance).
3. Develop education and communication plans. Include human resources and store operations early in the process of defining the perishables strategy, allowing them to begin crafting plans.
4. Use data to push your implementation strategy. Analyze shrink reporting to determine high opportunity areas and begin the project in that department. Use customer data to identify gaps in your perishables offerings and deploy FIM technology to manage the processes.
5. Evaluate your existing scale management infrastructure. Determine your replacement strategy and budget accordingly. Look for complementary initiatives to share the burden of equipment cost. For example, next-generation scales provide the opportunity for merchandising to do additional point-of-purchase couponing right from the scales.

FIM initiatives are fraught with obstacles, but identifying the value proposition isn't one of them. Based on our research, we recommend the following as you begin building your business case:

1. Total cost of ownership (TCO) for a 100-store chain ranges from $1.7M to $4.4M.
2. Shrink reduction benefit across all perishables departments reaches almost $10M for a 100-store chain.
3. Payback periods range from 9 to 12 months.
4. Single department savings often justify an entire implementation.

To allocate IT dollars appropriately, develop a framework that provides a snapshot of your current IT roadmap, identifies the benefits for new initiatives, and highlights any gaps in functionality. While we highlighted three quick-hit investments for 2008, we have also developed a maturity assessment framework to help retailers understand their entire IT portfolio. It provides insights into the following:

1. Alignment of technology initiatives with our demand-driven retailing strategies
2. Resulting maturity level of current and future initiatives
3. Maturity level compared to competitive peers
http://www.amrresearch.com

Retail companies plan to spend 3% more in 2007 on IT capital than in 2006, but they are still missing tremendous opportunity in three vital areas: replenishment and inventory optimization, lifecycle pricing, and fresh item management. This comes from analysis of our fourth annual retail IT budget benchmarking study, conducted in partnership with the National Retail Federation's (NRF) CIO council, in which we compared 2006 spending with 2007 budgets.

The study collected line-item detail on retail technology spending in significant budget areas for more than 20 of the largest and most influential retailers in North America. With 2007 almost a memory, retailers should now turn their attention to these three initiatives as they finalize 2008 development plans.
For more information on retail spending trends, see "Retail IT Budget Benchmarking Study, 2006-2007."

Nearly half of respondents (45%) said they would be improving their replenishment and inventory optimization software functionality in 2007, and others should follow. Efficient inventory utilization frees up working capital for more productive uses, such as opening or remodeling stores. The value of inventory optimization is clear:

1. The inventory-to-sales ratio in January 2002 was $1.56, meaning each $1.00 of goods sold required $1.56 worth of inventory. That ratio dropped to $1.26 by July 2006.
2. A recent working capital study conducted by CFO Magazine found a two-day reduction in days inventory outstanding (DIO) in 2007 versus 2004.

To get the most from inventory optimization initiatives, keep the following in mind:

Focus--Determine the type (turn or promotional) and location (store and/or distribution center) of inventory you wish to optimize.
Clarity--Identify if you are solving a quantity problem (right inventory level) or a location problem (right inventory location). Mature retailers solve for both problems and incorporate demand data into the equation.
Sophistication--Determine the complexity of the analysis. Do you need robust what-if and scenario capabilities? Survey the business users to identify inventory goals and ensure that analytical abilities align with user requirements.
Industry--Ensure a software provider has customer references or case studies within your segment of retail.
Scope--Determine the frequency and depth of required analysis. Review your supply chain strategy. Holistic supply chain network decisions warrant the development of a power.

Lifecycle pricing links merchant workflows and consumer-demand intelligence in an effort to guide regular pricing, promotional, and markdown pricing decisions. Interestingly, 44% of respondents are not using regular or promotional price optimization technology, and 39% do not use markdown technology. If your current lifecycle pricing initiatives are disjointed, technologically immature, or both, here's what you may be missing:

1. Pricing strategies linked to category and merchandising strategies, not just the cost of the product
2. Pricing strategies that account for, but are not ruled by, competitors' pricing
3. More frequent price reviews via process automation
4. Pricing decisions that are based on fact, driven by data, and less subjective
5. Demand signals that reflect the influence of pricing strategies and tactics
6. Pricing tactics that maximize gross margins
7. While connecting the three pricing components to manage products through the entire lifecycle is a powerful advantage, take it one step further by extending the process into the following advertising, marketing, and promotions (AMP) activities for even more benefits
8. Promotion management
9. Calendaring
10. Event definition
11. Vendor funds management
12. Lift modeling
13. Advertising execution and performance reporting

Connecting these activities will improve financial performance, campaign execution, and reduced event-cycle time. For example, a food retailer that linked targeted pricing with circular versioning controls saw sales rise 2% for promotional products. In another instance, a specialty retailer saved on gross margins by connecting the promotion planning and markdown processes.

For those retailers where perishables are an appropriate part of the assortment, don't overlook the importance of technology to better manage inventory, ordering, and shrink. Even general merchants like Macy's, specialty retailers like Best Buy, or apparel retailers like Old Navy are expanding their mix of fresh items by offering candy, chips, and soda. FIM software provides a platform to more efficiently manage perishable categories--a critical way to stand apart in this hyper-competitive market.

While many technology projects in this area have stalled, five steps will help you to jump-start the initiative:

1. Create and define your perishables strategy. Develop strategies by department that align with your brand messaging. Determine the role perishables play in creating a unique customer shopping experience.
2. Determine the appropriate business model (centralized versus decentralized production, for instance).
3. Develop education and communication plans. Include human resources and store operations early in the process of defining the perishables strategy, allowing them to begin crafting plans.
4. Use data to push your implementation strategy. Analyze shrink reporting to determine high opportunity areas and begin the project in that department. Use customer data to identify gaps in your perishables offerings and deploy FIM technology to manage the processes.
5. Evaluate your existing scale management infrastructure. Determine your replacement strategy and budget accordingly. Look for complementary initiatives to share the burden of equipment cost. For example, next-generation scales provide the opportunity for merchandising to do additional point-of-purchase couponing right from the scales.

FIM initiatives are fraught with obstacles, but identifying the value proposition isn't one of them. Based on our research, we recommend the following as you begin building your business case:

1. Total cost of ownership (TCO) for a 100-store chain ranges from $1.7M to $4.4M.
2. Shrink reduction benefit across all perishables departments reaches almost $10M for a 100-store chain.
3. Payback periods range from 9 to 12 months.
4. Single department savings often justify an entire implementation.

To allocate IT dollars appropriately, develop a framework that provides a snapshot of your current IT roadmap, identifies the benefits for new initiatives, and highlights any gaps in functionality. While we highlighted three quick-hit investments for 2008, we have also developed a maturity assessment framework to help retailers understand their entire IT portfolio. It provides insights into the following:

1. Alignment of technology initiatives with our demand-driven retailing strategies
2. Resulting maturity level of current and future initiatives
3. Maturity level compared to competitive peers
http://www.amrresearch.com