In today's retail environment it is vital to maximize return on inventory investment. To do that, retailers and their suppliers need to understand and respond to consumer desires in a more precise way than ever before. New technology is helping them succeed. Retailers and consumer goods manufacturers like to talk about "moments of truth." Most famous are the two that Procter & Gamble defines as crucial to its entire business: the moment when a consumer stands in front of a store shelf and decides whether to buy a product and the moment when he or she uses the product and decides whether it meets expectations.
For these decision-making opportunities to ever occur, however, the supply chain must first deliver on its own moments of truth: Is the desired product on the shelf or store floor when the consumer comes in to shop? If so, did the product arrive within a time window and cost basis that allows it to be sold at a healthy margin?
Nailing these defining moments, which can separate winners from losers in the highly competitive retail market, is more challenging than ever, thanks to a changing consumer base that is far less predictable than in the past. "A significant demographic shift is occurring in the first world," says Chuck Kramer, vice president of retail at i2 Technologies, Dallas. "We are a much less homogeneous society than we have ever been before. There is a wider distribution of ethnicity, of wealth and of lifestyle, and that has made consumer taste much more of a moving target."
In addition, today's consumers are a demanding lot. They are tech-savvy, astute shoppers who expect an array of new and innovative products, an enjoyable shopping experience that includes transparent transactions across multiple channels, and everyday low prices. Otherwise known as the Wal-Mart effect, this last element drives companies to increasingly supply their stores from low-cost countries, resulting in much longer lead times and less predictability. It also turns up the pressure to contain supply chain costs and to maximize return from every inventory dollar.
"Return on inventory means one thing: getting the most profit out of every case of inventory that you put in front of the customer," says Danny Edsall, director of worldwide solutions for retail supply chain and merchandising at IBM, Armonk, N.Y. "The fundamental way you do that is by making sure you have the right product in front of the right customer. That's the biggest driver of returns."
Until recently, however, the emphasis at most companies has been on cost efficiency. "I don't think we are done lowering costs yet, but we are pushing the envelope on that," says Edsall. "We are already a long way up that slope and it becomes harder and harder to squeeze more out." What hasn't yet been done effectively, he says, is "really figuring out how to create a merchandising plan and assortment to make sure the right products are in front of the customer in the first place."
The work IBM and its partners are doing now is all about finding new ways to get deeper insight into what customers really want, he says. "It's about getting behind the demand patterns so can understand not just what a customer bought, but what he really wanted to buy. Then start using that to drive the supply chain."
The key is to use not only general demographic data provided by third-party services like Nielsen, but to proactively mine data from loyalty programs, customer surveys and previous buying history. "Some categories of retail businesses are very rich in that data, especially warehouse clubs that require memberships," Edsall says. "They know exactly what members have bought in the past. The thing is not to use this information just to create incentives to buy more, but to plan the entire supply chain around it." IBM Business Intelligence for Retail enables this type of analysis and is part of the company's comprehensive range of retail solutions.
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