Point of Sale: Managing Retail Demand Through an Integrated Value Chain

The proposition that has been advanced both here and in other venues is that an integrated response to business process issues is more efficient and ultimately leads to better business outcomes.  In the article, "Planning and Managing Demand: A Modern Supply Chain Imperative," I made the case for planning and managing demand as an integrated activity, using techniques similar to that used in the airlines.  Previous posts to this blog have discussed the value that arises from integration - value that often goes ignored simply because it's hard to achieve it.  In the article, "Supply Chain Optimization Is the Hardest Easy Thing You’ll Ever Do," I simply make the case for taking what on the surface seems like a simply concept, and how it becomes very difficult as it moves from concept to implementation.


The techniques discussed in these other sources work well in business-to-business (B2B) or complex selling situations.  However, how can the same techniques be applied in a business-to-consumer (B2C) selling environment?  This posting will attempt to answer some of those questions.

First, let's consider some unique differences between a B2B and a B2C selling environment.


B2B versus B2C Selling

• Price is negotiable.  While retail also has negotiable pricing (such as car sales), it typically is not to the same extent.
• Features and terms are negotiable.  Delivery options, quantities, add-ons, and so forth are typically more negotiable than in a B2C selling environment.  While the latter selling environment does have flexibility, it is often in more of a mass customization approach, much like the Dell e-commerce site.
• Volume is lower.  In other words, successful B2B companies have fewer large transactions, whereas successful B2C companies have many smaller transactions.

Success in managing B2B demand relies on the idea that at the point of sale (e.g. the interaction between the sales professional and the customer), offers and so forth can be introduced into the transaction that will positively influence the customer's buying behavior (refer to the articles listed above for a more detailed discussion).  Can the same approach be used in a B2C environment?


Product pricing is set by marketing, and is typically fixed at the offer stage (e.g. when the consumer becomes aware of a particular product).  Wal-Mart advertises "Everyday low pricing," and then backs that up with various media advertising prices for certain products.  While they don't advertise the price of every product, typically at the shelf level the retailer lists the price so consumers can make an informed buying decision.  


The demand management approach used by airlines and that works well in a B2B environment can also be applied in a typical retail environment, but it takes on a different flavor.  The issue for managing demand depends on when the customer becomes aware of a new offer, and how that awareness will ultimately influence their behavior and how it will impact the overall value chain.  Let's take a look at a specific an example.

Retail Warehouse Tries Demand Management
Retail Warehouse (a fictitious company) decides they want to fine tune the flow of goods through their supply chain and reduce costs, so they decide to use demand management techniques.  They sell specialty food products which historically have a high sentsitivity to price, and feel that if they can employ these techniques they will realize significant benefits and provide a real service to their customers.  

The company has 250 retail outlets, serviced by three company-owned distribution centers.  Retail Warehouse works with a 3PL partner to handle logistics to their stores.  Their stores are primarily located in the west, servicing areas such as the highly urbanized areas of Southern California in addition to locations in Arizona, Utah, and similar areas.  Inbound freight is all prepaid.

Demand management can only work when the customer becomes aware of the pricing or availability impact before they make the buying decision.  At Retail Warehouse, they have both shelf-level pricing as well as a circular available to customers who visit the store outlining their current promotions.  Those are the means to promote pricing before and during a store visit.

Their DCs were placed to minimize the overall travel to stores, as well as take advantage of local conditions, including real estate and government regulations.  However, despite decent demand planning, there are inevitable differences in freight flows due to demographic differences between regions.  Because of these differences, their supply of widgets builds up at DC #2 while the other DCs have normal demand patterns.

Making Demand Management Work at Retail Warehouse
Since all the logistics capacity is dedicated, Retail Warehouse has its own transportation planners.  They determined that re-balancing the widget inventory to the other stores will cost  $.50 per unit.  Here are some decisions that Retail Warehouse will need to make.

1. Price and terms sensitivity.  Since the offer needs to be made in advance to all customers, a decision needs to be made on how much the demand curve will change with a certain change in price, or a given change in the terms of sale.  Free or extended service offers may be highly attractive.
2. Re-balance or promotion.  Re-balancing would be the usual way to handle disparities in stocking levels (or just leave the inventory in stock).  Are there supply chain efficiencies or other reasons that you want to manage demand in the first place?  
3. Offer details.  Once the above two decisions are made, and assuming that the decision is to make changes to the demand curve (e.g. incentives to get customers to make favorable buying decisions), then it comes down to how much of the business benefits are shared with customers and how much are retained by the company.  

In addition to the above items, companies will need to look at the cost of communicating the new pricing or terms to customers.  If a company had to re-label everything, likely it would not be worth the effort.  However, if all that is needed is changing shelf pricing and updating pricing databases attached to the POS system, then it becomes much easier.

It may seem that this article took a long time to get to the point about POS systems, but the use of these systems is key.  The POS terminal is the way not only to collect data on buying behavior, but when integrated with the other operational systems, can be leveraged to deliver the new pricing and terms to clients.  While pricing changes need to be communicated before customers have made a buying decision (e.g. at the store shelf or in the promotional circular), it is the POS that played a pivotal role in setting up the conditions needed to execute a productive pricing strategy.  In addition, promotions, changes in service terms, and other information can be conveyed at an individual customer level for up-sell, cross-sell, and extended service options.  It is the opportunity to take a mass market approach to demand management and take it down to an individual customer level.

In the scenario described above, if enough customer demand can be influenced within a $.50 per unit price difference, then it makes sense to try to bend the demand curve.  If it would cost more, then the normal response should be used.  An integrated POS becomes a key tool in influencing demand to the benefit your business and bringing new opportunities to your customers.  Integrate it into your value chain, and it becomes a powerful competitive advantage.
                                      

Making the Most of Best Practices in CRM

"...best practices quickly become common practices.  Best practices also become a trap; you keep waiting for other practices to emulate rather than creating your own.  Ignore best practices.  Then create them."  So wrote Harry Beckwith in the book "The Invisible Touch: The Four Keys to Modern Marketing."  While Mr. Beckwith was making the application to marketing, could the same concept apply to other areas?

If you consider the market for CRM software, it can be broadly divided as follows: large, integrated software suites such as SAP or Siebel (as part of the Oracle family of products), best-of-breed products such as Epiphany, and platform products such as Microsoft Dynamics CRM.  None of these categories start with a blank slate, but rather incorporate best practices in sales, service, and marketing.  However, each of these categories takes a different approach to achieving "best practices."

Without getting into a category discussion, take a moment to consider what constitutes a "best practice"?  Think of any set of products in the marketplace.  Do any of them indicate that they have second-best practices?  Of course not.  Rather, each discusses their best practices approach to the customer interaction problems at hand.  While their processes share some similarities, they each have a unique take on "best practices."

Given this marketplace reality, evaluating best practices becomes a comparative exercise of whether the new practices are better than existing practices.  They become one part of the evaluation criteria for making a switch.  Creating a solid business case for change will require showing how the change will bring specific business improvements.  The business case should also indicate how the change will bring the firm comparative advantage in their markets.

One other facet to consider is the accessibility of those best practices.  Let's suppose you have a territory manager function that really does a great job, but it will be deployed into a specific user community where realignment will only be done every 6 months.  It is likely that users will not be able to retain expertise in the application between uses.  If the user interface is not extremely intuitive, users will tend to revert to previous practices.  Each target suser community will need to be considered in turn. 

Practices themselves and accessibility of those practices are really two parts of the same discussion.  While some would argue that best practices themselves are standalone, it is clear that a best practice that cannot be used will not achieve the desired business outcome.  By any measure, could that practice be considered "best"?

In considering this topic, I purposely stayed away from saying which is the right way.  What is your experience in the adoption of best practices?  How do you know what a best practice looks like? Please leave a comment and share your experience

Objectives, Strategies, and Tactics: Conflation and Obfuscation

Can a company embark on a cost-cutting strategy?  Is saving $10 million a proper objective?  In the trade press and in conversation with business associates, references are often made regarding things going on in these businesses.  In the strictest English usage sense, objectives, strategies, and tactics are very different things.  Some may argue that conflating these terms isn't really that big of an issue, so don't worry about it.  Perhaps the biggest offenders are those who sell services and are making their offerings sound more important.  A search on Google search for "Strategic cost-cutting" yielded 1,590,000 hits, offering such things as "A strategic approach to cost management can help you weather short-term economic hardship..."

Not that this kind of approach is bad, nor is it without value.  A strategic approach to cost management can mean that cost cuts will be done so the objective of the business is sustained.  If the board of directors is looking for 10% in cost savings, then the hope is that those savings will be achieved with the least impact to the organization's business objectives.  One would be a poor business manager if they took a different approach.

There's Objectives, and Then There's Objectives
So the first observation is that objectives can take on any form, but a cost-cutting objective is different than a market share objective.  Companies necessarily establish cost-cutting objectives, but they re more of a reaction to some external condition rather than something that will grow the business.  The CEO and Board of Directors may mandate cost-cutting objectives, but they in no way should be conflated with more important objectives related to business growth, product strategy, and similar areas.

Strategies are the plans that help achieve objectives.  A cost-cutting objective may be achieved by a diagnostic and re-design of certain business processes, and then driving decisions based on that redesign.  Tactics may include commissioning the diagnostic, evaluating the results, identifying the areas for redundancies, and re-evaluating the effects once fully implemented.

Why Not Skip the Strategy?
One thing that has become prevalent recently is mass layoffs - cutting hundreds or thousands of employees across the enterprise.  Is this the result of a well-thought out strategy, or is it a reactive approach to changes in the business?  Companies tend to obfuscate their strategy if it exists, so it is difficult to determine.  Given the recurring nature and the seemingly haphazard way these things are done, it is difficult to discern a strategy.

Strategy is the linchpin among these three phases of achieving the strategic intent of the business.  If a company has a 10% cost reduction objective, but once the strategy is formulated management determines that the objective cannot be achieved without damage to the business, then either the objective changes or the constraints on the strategy are removed.

Right Terms, Right Thinking, Right Execution
If you've made it to this point in the posting, perhaps you've run across the same situation regarding objectives, strategies, and tactics.  Businesses must be crystal clear about what they're doing, their plans, and how they will achieve those plans if the business is to prosper.  Executing tactics in absence of a strategy will lead to poor overall execution as measured by achievement of the business' strategic intent.  Going through the each of these phases will lead to superior business results.

Manage More Than the Relationship - CRM Drives Business

Suppose for a moment that you owned a gas station at a fork in the road, both branches of the fork lead to the same city.  You owned the only gas station, and everyone who came down the road had to refuel at your station.  People liked the right fork in the road because it was more scenic, so they took it most often.  However, you had a friend who owned a restaurant on the left fork, and he needed to get more business.

So, he makes a deal with you.  For every passerby that takes the left fork, he will pay you $1.  You own the only gas station, so you can’t compel anyone to take the left fork.  So put up a sign that says, “Take the left fork, save $.50 on your gas.”  You now have created a win-win scenario – your friend wins, the passersby wins, and you win.  You have just done on a small scale what airlines and others do on a massive scale – you manipulated pricing and availability to improve business and give customers a better deal.

King Customer

The customer is king.  However, corporate servants to the king have a chance to help the monarch do things in a way that improves their business. Airlines get king customer to travel in the middle of the night voluntarily. This is an amazing accomplishment and is worth billions of dollars every year.  It also improves the relationship with the customer.

In the world of customer relationship management, the emphasis has always been on relationship. How can you optimize the channel of communication to lower overall cost and improve experience?  What is the best way to increase customer loyalty?  These and many other questions occupy the thoughts of customer service managers.  They’re important issues and need to be addressed.

However, what if the focus of customer relationship management shifted from managing the relationship to managing the customer?  While building a relationship is still critical to the success of the company, managing the customer opens opportunities to drive important business outcomes that ultimately are better for both the company and the customer.

In a recent edition of SupplyChainBrain magazine, I wrote an article about demand planning and demand management.  The article points out that if one could manage customer demand in a very low-cost way, there can be immediate margin improvements.  These improvements don’t come at the expense of customer satisfaction, but rather result in increased customer satisfaction as win-win scenarios bring real value to customers in exchange for their changed behavior.

Managing the Customer to Good Effect

The specifics of creating win-win opportunities for customers are covered in the article mentioned previously.  Corporate operations will need the tools and training to understand how to generate opportunities for creating win-win opportunities.  Once they are created, they need to be communicated out to customers for their evaluation.  How they’re communicated, supported, and realized is the business of the CRM group.

Let’s take an example where operations determines that an increase in demand of 2,000 units will result in a per-unit supply chain savings of $2.  Historical demand is such that absent some other intervention, customer demand will not change.  Sales and marketing determine that a ten day price reduction on the next two days of $1 are sufficient to increase demand in the current period.  What happens next?

Sales people are given immediate instructions regarding the pricing change.  Customer service people are given scripting changes that cover the new pricing guide.  The website needs to be updated.  In short, each of the contact channels needs to be updated.  Further, campaign effectiveness metrics need to be tracked and reported at the end of the ten day period.

This kind of change is very different from typical operations.  Even if pricing changes are communicated, most of the time they’re done in response to market conditions, not as a way to influence customer buying behavior.  Consider it pricing with purpose.  CRM is the key channel that makes this possible, not only in terms of communicating and executing a dynamic pricing strategy, but also to get even closer to customers.  This kind of program will lead to a better understanding of what will influence customer buying behavior, and thus make the relationship more productive for both the customer and company.

In a tough market, 1-2 points of margin improvement is significant.  The tools already exist – just put them to work for you.

Note: I have a companion to this posting from a supply chain perspective at the following link:

http://www.supplychainbrain.com/content/industry-verticals/automotive/single-article-page/article/planning-and-managing-demand-a-modern-supply-chain-imperative/

"Think and Grow Rich" - the Customer Service Edition

Napoleon Hill's classic, "Think and Grow Rich" has been in the library of every success-minded person, and spawned an entire industry of self help and personal development.  Mr. Hill started from the perspective of trying to understand why certain individuals achieve great success, while others equally talented can't seem to get it.  His basic conclusion is that you become what you think about most of the time.

For modern corporations, they have sought to understand what their customers think most of the time, and use that information to increase market share, wallet share, and loyalty among new and existing customers.  Michael Dell made a powerful observation at the age of 16 regarding the power of market segmentation while selling newspaper subscriptions (see http://www.answers.com/topic/michael-dell).  By tightening the segmentation criteria, Dell was able to sell thousands of newspaper subscriptions - far outperforming his peers at the time.

Segmentation in general allows companies to devise particular strategies for interacting with sub-groups of customers in a standardized way.  The segmentation that Dell did allowed him to target his limited selling resources to a group that was more likely to buy than the first order segmentation that was done by the newspaper.  Thus his efforts, in contrast to his peers, were much more productive.

In a sense, customer segmentation is a backward-looking activity - important, but it is driven by the contours of the market that were created by a particular product or service.  Of course, companies that have been most successful in creating strong loyalty still perform customer segmentation and put a great emphasis on well-executed customer support activities, but it is more of an effectiveness play in reaching customers, but not necessarily the cornerstone for creating customer loyalty.

Apple and Harley Davidson are two companies that have high customer loyalty.  Apple has an iconoclastic culture that represents the best of Silicon Valley.  Harley Davidson is associated with the freedom of the open road.  In a sense, their first order segmentation really is a self-selected group of customers that develop affinity for the perceived value represented by their products.  It is unexpected and welcome by customers.

As much as anything, Napoleon Hill tapped into the human emotion that people have control over their own destiny.  For companies, it doesn't necessarily mean that there needs to be an entirely new product, as in the iPod or the new Harley Davidsons.  What it means is that companies need to help their customers think differently about their products - tell the story in a simple but compelling way.  Companies can then create segmentation strategies that will support the product or services value proposition.  Finally, companies need to structure their support in a way to support the desired company and product perception.

Many other things become part of the support equation, especially as means and channels change in concert with changing demographics and customer service needs.  While bad customer service will always drive away customers, good service will not necessarily keep them.   Building customer loyalty represents a cross-enterprise commitment to customers that a company's products and services will meet and exceed several customer needs and wants, do so in a compelling way, and make it easy to work with the company when things don't go perfectly.  How to do it is a  subject for future posts.