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.
                                      

Creating Value in the Value Chain

As companies have sought to reduce costs or increase revenues, service suppliers have focused on their part of the value chain to increase their offering's inherent value.  Business Process Outsourcing (BPO) vendors have made their particular contributions through becoming very efficient, whether it be 3PL order fulfillment suppliers, Finance and Accounting (F&A) providers, or others.  Off-shoring is one way these companies have become efficient through delivering labor arbitrage savings.  Further, these offshore service providers have become very good at breaking down processes and then taking over those activities that can be done cheaply and effectively in their service factories.

Software vendors have taken a different tack.  While there are still many single-function software offerings, increasingly attacking more parts of a given business process can be served by one or more integrated offerings.  Siebel has done very well by taking a number of service chain functions and integrating them together, such as warranty and customer relationship management.  While there are still pure-play warranty software products, customers are starting to feel the value of integration that a product such as Siebel offers is greater than the value of a series of best-of-breed solutions.

Here is the real question - if that is the case, have we as an industry arrived at the point where we can only expect incremental overall improvements with the lion's share of the expected benefits realized through integrated software solutions?  While software products yield great advantages and need to be part of an overall solution, my answer to how increased value is realized is not just a particular piece of software, but rather how that software can become part of a mosaic of platforms, software, and BPO solutions focused on a business-focused outcome.

Let's take the perspective of our customers for a moment.  If we as service providers implement the exact same solution for each of our customers, we have by definition removed one lever they could use to create unique competitive advantage.  Ever increasing complexity in software solutions tends to move our customers toward the same end state and same value equation.   Put another way, our customers will invest a lot of money to gain an advantage on their competitors, only to find that their investment has only allowed them to keep pace.

Service providers need to take the time to craft a unique solution for each customer based on the building blocks available through standardized offerings.  That is the "secret sauce" that successful vendors will bring to their customers.  Success will be measured through improved performance of our customers, and more business for service providers.