This article, by our own Linda Whitaker, was published in RIS News»
As retailers seek out new business tactics to lure back the customers they lost during the recession, they will find that one of the most profitable strategies is creating a customer-centric supply chain.
However, one reality retailers must face is that the recession has created a new consumer paradigm. According to a new report by PricewaterhouseCoopers and Retail Forward, entitled “The New Consumer Behavior Paradigm: Permanent or Fleeting,” customers will not bounce back to their old shopping habits, as “seventy-two percent of all shoppers recently indicated that their shopping behavior has changed significantly or somewhat as a result of the economic environment”. The report suggests that shoppers will be more deliberate and purposeful in their spending, giving way to a more practical consumerism. However, it also predicts that these shopper behaviors may change as the recession eases.
Since we know no one can foretell the future to know exactly how and when behaviors will change, our take on this study is that consumer behaviors have changed and will continue to change, and that retailers need to actively seek new ways to engage them (especially the younger generations), and be ready to continually adjust their product mix accordingly.
With this new paradigm in mind, retailers must take a step back from their businesses to understand how to engage today’s new consumer.
Some questions that retailers should ask themselves:
What are your customers looking for when they walk into the store? Why are they buying that item? Does their buying strategy map to the one you have for the product? What are they not buying? How much are they buying? How often are they buying? Are they buying it at the same store?
To fulfill changing customer demand in your supply chain, you have to start at the store, and it comes down to the two basics: breadth and depth.
What and Where:
There are the tried and true ideas behind why customers select a certain product (the customer product strategy) when supporting customer demand: Price, impulse buys, destination items, etc. But customers today have a huge wealth of information at hand when deciding what to buy, and therefore they can include many new inputs (as well as the tried and true). These customer demand choices indicate their product preferences, and will be inputs into the customer buying strategy, and hence need to be included in your product strategy.
Preferential signals (Inputs to the customer strategy): Price, convenience, fashion-forward, technological, locally made, organic/sustainable, ethical, necessity, value, quality, size, color, style, brand, culture.
Ideally, you have a host of customer data that lets you not only map customers to purchases, but also link the changing customer buying strategy with your product strategy, and this may be different by location. If you do not have customer transaction and purchase information, you can use product/store level demand as a proxy, perhaps supported with market data. It will be important in this changing environment that these product/location strategies are continually monitored and updated.
Once you can assign the product strategy at a location level, you can tackle the breadth issue, i.e. the assortment. Most retailers cannot operationally manage unique store level assortments, and need to assign clusters that are often constrained. Care, supported by process, timely information, and optimal systems are needed to manage the conflicts between desired ranges, and operational constraints: space, fixtures, and assortment planning groups.
How Much and When:
When you assign a strategy to a product/location to drive assortment decisions, this same strategy should be used to drive depth. For example, a key destination item may need a very high service level so that your customer will not be disappointed.
In order to best meet these strategies and keep inventory performance high, the time phased aspects of the local customer demand need to be taken into account:
Circumstantial signals: The time of day or week activity occurs, holidays, local events and promotions, sports schedules, weather, seasonality and regional demand.
Putting it all Together
Retailers need to have the ability to assess and continually change with the patterns at each store based on the local signals and behaviors of their customers. In order to increase margin, achieve proper stock levels and align assortments with customer demand, top down simplifications in the inventory planning process must be removed.
Stores that can quickly process customer behavior and turn it into inventory execution will have an immense advantage in today’s marketplace. This means creating a dynamic inventory plan that is highly reactive to local demand fluctuations, allowing the retailer to be flexible and respond to how their customers are behaving now. This enables the customer to have product available when and where they want it, in the right size, the right color, and the right style at every store and in every channel.
Linda Whitaker, Chief Scientist, Quantum Retail, is one of the leading practitioners of retail science in the country. She provides the research, innovation and advanced science for Quantum Retail’s solutions. Prior to co-founding Quantum Retail, Linda spent the past 17 years developing optimization and scientific solutions for complex retail problems in replenishment, logistics, pricing, promotion and consumer behavior at Retek Inc. and HNC.
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The conventional allocation process allows you to select a base of historical data to either use as a base of allocating, or to create a plan to allocate into. The assumption is that the data will reflect the way products behaved in those stores and that the pattern will repeat itself.
Forecasting is a tricky business, retailers lose money every time a demand forecast is inaccurate. Sophisticated software is necessary to ensure that customer demand and in-stock products are a perfect match.
