Archive for May, 2011

Fashion Forward – Part 1: Clustering is not localization

by Quantum Retail • May 25th, 2011 • 5 Comments »

It has been quite a while since your typical fashion retailer was able to merchandise their stores individually. It has long been common practice to group stores together based on some commonality. On the surface this makes practical sense. One merchant or allocator can’t handle hundreds of stores themselves, so grouping the stores together is a logical way to deal with the problem of location proliferation.

The problem is thinking that clustering via methods developed in the 1980s and perpetuated heavily today is the best way to localize a chain’s assortment. It simply is not. It’s high time we reevaluated clustering to see where improvements can be made. Limitations of yesterday’s merchandising systems were a legitimate reason to use simple clustering to manage the complexity. However, today’s systems are much more sophisticated and need not cripple a merchant with unnecessary constraints like before.

The most common way to cluster today consists of clustering stores based on volume. Typically, this volume is sales volume and the number of clusters varies, but basically is what the retailer is able to handle. The average number of clusters that a fashion retailer uses falls in the 6-8 range, but you could find many that use significantly more.

Unfortunately, volume based clusters have three inherent problems:

  1. The clusters are almost always based on historical sales
  2. The clusters are not updated frequently enough
  3. The clusters don’t incorporate any attributes of the merchandise or the stores

Typically a retailer looks at a store’s performance over the last year or compares like for like seasons to group stores that performed similarly together. The problem is that typically only historical sales are used to group the stores together. This creates a bit of a self-fulfilling prophecy. If a store underperformed in a department because of an inordinate amount of out-of-stocks, could the store have performed better?

The better option is to use either historical demand or a demand forecast. Demand incorporates what would have happened had the store been in stock. Of course, using a true demand forecast which includes understanding those missed historical opportunities to cluster would be the best of both worlds. Not only would you be incorporating lost sales, but you would be incorporating future trends of store behavior as well.

Another problem is when clusters are used and how often they are evaluated. Store assignment to clusters should be evaluated as often as possible. Stores should be clustered pre-season when a buy plan is made, again when the order is placed, another when the buy is pre-allocated, another when the goods hit the DC, and so on. Sometimes this isn’t practical, such as direct to store prepacking for cross-docking, but in the absence of store commitment, stores should be re-clustered. This increases the data used for clustering and makes it more current and more accurate. Furthermore, clusters should never be used in the replenishment process. Once the goods have hit the stores, any re-allocation/replenishment activities should not consider clusters. Store behavior is too erratic, especially in fashion, to rely on clusters in-season. There is simply no good reason to use clusters after the first allocation and even then it’s arguable whether they should be used at all. Today’s technology is capable of identifying and leveraging the uniqueness of individual products in individual stores, so each store can be treated as it needs to be. This is where true localization can really provide huge benefits. Refining a store’s size allotment, replenishing better sellers and, as importantly, not replenishing items that are destined for markdowns, should be store specific decisions.

There are certainly a lot of retailers using clusters that are more sophisticated than simply volume, but it is nowhere near universal adoption. Climate is by far the second most common store attribute on which stores are clustered. But are there other attributes of stores and/or merchandise that would refine the localization strategies better? I would argue both yes and no. Pre-season, it would be beneficial to add some attributes such as price point (merchandise), economic status (store), fashionability (merchandise) or similar attributes to the buy decision to better assort the stores based on consumer behavior. On the other hand, I’ve stated earlier that in-season clusters are useless. They only result in normalizing out store uniqueness. It matters not why a store is selling an item well, it only matters that it is!

I challenge you to question your clustering cadence and ask yourself these questions:

  • Do you cluster only on volume or on other attributes or KPIs too?
  • Do you cluster only on historical sales or do you incorporate historical or forecasted demand?
  • Do you re-evaluate your cluster assignments as often as possible?
  • Do you cluster in-season?
  • Do you cluster the stores as low on the merchandise hierarchy as is reasonable for your business?
  • Do you drive re-allocations or replenishment by clusters?

If the answer to any of the above questions is “no”, there is room for some self-evaluation and improvement to your localization strategy.

Look out for next week’s blog on optimizing size/packs by Dr. Ziad Nejmeldeen, VP of Science, Quantum Retail.

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This Retail Life – Part 4: Quantum CEO Vicki Raport talks about transformational success for retail merchandise optimization

by Quantum Retail • May 4th, 2011 • Write a comment »

“There are a lot of retailers out there who are aggressively moving into the market, to try and figure out how they can be more consumer-driven, how they can optimize their assortments, how they can be hyper-responsive, how they can be more productive, and how they can design into their business everything that they do to be profit-seeking. So if you aren’t thinking about your business that way, one of your competitors is. So I encourage retailers to stop being confined by the way their technology behaves today, and to start thinking about what they need from their technology in the future.”

LISTEN TO PART 4:

speaking with Vicki Raport, CEO Quantum Retail • May 2011

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Audio Transcript

Thanks to our audience for joining us again this week. I am Dan Brown from Mulberry Marketing, in San Francisco, and I am joined with Vicki Raport, CEO of Quantum Retail.

Thanks for having me Dan.

For the last few weeks in these interviews we’ve been talking about the concept of “new school” vs. “old school” retail. Most of the founders and current employees have come from other retail technology vendors. Would you say people are relieved to get away from the constraints of those other companies?

Well absolutely, I mean, you don’t come to work for a small high-growth company because you want to stay with the constraints of a larger beast. You know, really, when people come to work for Quantum they come for probably three key things:

One is – they want to be part of something that is innovative. You know, both engineers and business people alike have a desire to be creative and to have their work shine as something innovative in the market place, and we think we give everyone the opportunity to do that.

The second thing is that when you come to work at Quantum vs. probably some of our bigger and older rivals, everyone matters. We are still a small enough company that the contributions of everyone in our company makes a difference to our company. And as many of us know, when you are working in ten billion dollar company, it’s hard to feel like, as a single person, what you’re doing makes a difference, and in Quantum, everyone makes a difference.

And last, but certainly not least, is that people who work with Quantum want to be close to the creation of value for the customers, they want to be able to identify the things that they are doing with the ways that they are delivering value in the market place, and we allow people to see those results. We celebrate the wins of our customers as if they are the wins of our individual company. And everybody who contributes to that value is acknowledged. And those things together are things that I don’t think you find very easily in larger companies and certainly people who are doing things the old way.

That’s great, I imagine that some of our listeners are going to want to send you their resumes.

(laughs) Well they can go out on our website and we have a nice little place that they can let us know. We are definitely in growth mode and we are still hiring.

That’s great. But let’s go back to the beginning. Why did the founders of Quantum break off and start their own company – were they fed up?

Well I think that, why people found their own companies really has a lot to do with entrepreneurial spirit, and people wanting to be able to start with their own ideas and bring something unique and innovative into a market place that they have confidence that they can add value in. So from the beginning, the founders of Quantum Retail really understood that in the market today, and certainly when we started the company, retailers were and are facing significant challenges in addressing the complexity of their business and achieving their desired productivity and profitability from their inventory and certainly on their ability to deliver on the customer brand promise in a volatile market.

And to do that they really needed something new. They needed a solution that was easy, intuitive, was not disruptive to their people and processes, and really thought about things in a new way. So when we formed Quantum Retail, we really were thinking about, “how do you add new value into an old market place?” And that was the foundation of why we started the company.

Why was a new school solution necessary?

Well first of all, the technology that most existing ERP solutions and most technologies that have been implemented in the last twenty years at retailers, are probably based on technology and thinking that was at least thirty or forty years old.

And, let’s face it the world has changed. Right, I mean five years ago, who would have thought that Apple would invent this little tablet PC called an iPad and generate a $5 Billion dollar business overnight. I mean, the world is completely different than it was thirty or forty years ago, it’s different than it was twenty years ago, and it’s different than it was ten years ago.

So New School is something that doesn’t happen just once. It happens on an ongoing basis. And what we really have to be looking at is, how do you take the new thinking and new technologies, and go after the hardest problems that are out there in the marketplace. Our expertise is in retail. And we go after those components of retail that represent high value for our customers, and can fundamentally change their ability to be profitable and successful. And existing technology and old ways of thinking, they just don’t offer those capabilities anymore.

And we really felt that we had to create a new future for retail, and you couldn’t start from where you were in the past. You just couldn’t get from there to where we are today.

So how did the founders create the concept for Q, and was it hard starting from the ground up or was that an essential component?

Well the answer is both. It is very hard to start from the ground up, but it is something that we did. We literally, you know, what we came to the party with was our understanding of the retail industry and the pain that retailers faced in utilizing technology and leveraging technology to deliver profitability and value, and we started with no technology.

We had our assets of knowledge in the marketplace, but we really started from the ground up. And that’s very hard, you have to start with a blank sheet of paper, you have to go out and do your own research, you have to have a lot of creativity, and a lot of ability to think outside of the ways that you have historically thought about solving problems, but as I said before, and to use your words, it really was essential. We could not develop our solution to be able to look at data at an atomic level, such a granular level to solve really complex problems like, localizing assortment and seeking profit, and driving to consumer demand.

We couldn’t do that with the existing technology. If we started from that, we wouldn’t have been able to get where we are, so it was absolutely essential that we do that, and it’s really foundational to why retailers are drawn to our technology solutions. We look different, we behave different, and we offer a different set of results which are much better than any of our competitors.

So you mentioned a few, what I would say are great selling points right there. But what has been the biggest selling point of Q for your customers?

Probably the biggest selling point for Q with our customers, is our ability to deliver value quickly in a highly complex business environment, and when I say highly complex business environment, now we’re talking about, all of the formats, and all of the assortments, and all of the geographies, and all of the different verticals, and all of the ways your products behave, and the different markets, and the different channels and the different customer segments, I mean, this is a tremendous amount of complexity.

And to solve that problem using old technology requires multiple solutions, being strung and cobbled together to solve many many problems, whereas Quantum and Q, comes from a holistic perspective and look at the business as a complex operating system and use a single system to solve these overarching complexities.

And really that’s why people choose Quantum. It’s why our first customer went with us. It’s why Guitar Center picked us, because they knew that to solve the different types of problems that they had in their business, they would likely have had to implement three different inventory management and forecasting solutions if they went with some of the old school technology.

That’s great, so it seems like your prospective market is growing pretty quickly – how do you keep pace with the challenge of growth?

Well, it’s not easy, but it’s a good problem to have.

(laughs)

So keeping pace with the challenge of growth starts fundamentally with hiring and retaining good people. Quantum is still very much a family, though we are now over 100 people. We vet our folks very thoroughly, we try to hire people who are experts in their field, whether it’s engineering, or whether it’s retail, or whether it’s technology. And it’s really really important that you have great people who are really motivated.

The second thing is that you have to have good customers. And so, one of the things that we’ve done as we’ve built the company, is we find retailers as clients who are looking for us, and want to stay and be very, very, engaged with us. You know, we don’t hand our solutions off to some third party systems integrator and wish our clients good luck. We are extremely engaged with them. We continue to work with all of our customers actively, even years after they’ve implemented.

So probably the biggest thing for us is, having great people, and having great clients. And that’s what’s allowing us to keep our growth and being successful and profitable, rather than being a constraint to the business.

So where is Quantum headed next, what is your vision for the next few years?

Well certainly, we want to build on the success that we’ve had. So in our view, we have been very successful over the last several years, in landing what I would like to call our anchor clients. What we’ve done is we’ve managed to land some key marquis customers in each of the verticals in retail. We have customers in fashion, we have customers in hard lines, we have a customer in departments and mass, and we have a customer in food retailing.

And these represent the major verticals in retail, and for us, we are now being invited to all the parties, we are being asked to participate in many many of the tier 1 selections, and I believe that having these anchors in all of these verticals will allow us to now aggressively go into these markets and continue to convert retailers to the Quantum way of thinking and to get our solutions and applications up and running and delivering value in more and more retailers.

So, the first is to leverage the success that we’ve had.

The second is that Quantum is always innovating, so our vision is, we really want to become the foundation for twenty-first century transformation, as the leader in merchandise optimization for retail. And what that means is three main things:

First, we need to make sure that we are helping retailers align their capabilities to buy, move, and sell merchandise when and where their customers want to shop and in the most profitable ways. And we’re going to do that by addressing not only how we respond to demand but how we shape demand as well, so we really want to be a holistic solution for merchandise optimization and we are well on our way with our platform and with our solution applications.

The second is that we want to provide this transformation through technology that enhances business decision-making and execution in a way that people want to work. Probably one of the biggest things between old school and new school is that new school technologies are designed around the way that people want to work, whether it’s sitting at a work station, or on a mobile device or an iPad, whether it’s an on-premise deployment, or on-demand SAS solution, we’re always figuring out how do people want to be working with technology and the most productive ways, and that is paramount to our vision.

And then lastly, we want to do this in a way that creates what I would call an enduring platform, and enduring means, that the platform itself and the way that we work with our technology to deliver value has to adapt to the ever-changing needs of our customer, and our customer’s customers. And so, all of that means that Quantum is going to continue to innovate, continue to leverage the assets that we have in the market place, but to continue to bring more and more value to not only our existing customers, but our future customers.

Fantastic. So how has it been leading a startup? It seems like there is a lot of energy there. Is that what makes startups so great?

Um, yep. The things that make startups so great are that you have an opportunity to really make a difference. And you know, the founders of Quantum Retail, and really all of our employees are focused on being entrepreneurs. We are constantly looking at how do we bring something new and address a component of the market that isn’t being addressed.

And that’s why you start businesses, you don’t start businesses just to make money, you don’t start businesses because you are mad at your last employer, you start businesses because you really believe that you have something fundamentally different to bring into the marketplace and that difference has value. And that’s what sits behind Quantum, and that’s why all of the people  who founded Quantum are still actively engaged in the company and are very excited about it.

Awesome. So Vicki, are there any other winningest woman awards you can get, or have you won them all now?

(laughs)

Well I might have won them all now, because I think there was actually only one, but we got a lot of airplay out of it for a couple of years. But you know Dan, one of the interesting thing about some of those awards was that those awards weren’t about me. The awards were a recognition of Quantum Retail and Quantum Retail’s success in its early stages of growth and its continued growth.

I mean, when you get awarded a fastest company award, whether it’s a fastest woman-owned company or the fastest company in Minneapolis, or an Inc. 500 company, those are really the success story of our business, that we have been able to build a successful well-run business. My hope is that the future stories aren’t about me as the winningest woman, but they’re a lot more about our clients and their successes and the value that we’ve created.

Fantastic. Any last words of advice for retailers?

Yes. You better start thinking about your business differently, and you better start thinking about how you’re going to optimize your business, and an ERP system isn’t going to do it for you. And there are a lot of retailers out there who are aggressively moving into the market, to try and figure out how they can be more consumer-driven, how they can optimize their assortments, how they can be hyper-responsive, how they can be more productive, and how they can design into their business everything that they do to be profit-seeking.

So if you aren’t thinking about your business that way, one of your competitors is. So I encourage retailers to stop being confined by the way their technology behaves today, and to start thinking about what they need from their technology in the future.

Thanks so much for joining us Vicki!

You’re welcome!

And thanks to everyone for following along with this series. If you’ve missed an episode, you can access them all at The Profit Lab Blog.

Download a PDF of This Retail Life: Changing the Game in Retail»

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