Retail Systems Review: A Demand-Driven Future
By Ronald Margulis
Bill Franks, CIO at Saks, told one of the workshops at the 2005 Retail Systems show in Chicago last week that retailers are “driving our ship watching the bubbles in our wake.”
This was one of the most salient points in what turned out to be a conference loaded with good content.
Mr. Franks said retailers need to “listen to what customers are telling us and then actually do those things they wish.” In other words, retailers need to operate a demand-driven supply chain that is focused on giving the customer what they want, when they want it and how they want it. Easier said than done, Mr. Franks is the first to admit, but technology is helping companies make significant strides gaining customer insight and then, importantly, applying that insight to the procurement and replenishment process.
What Mr. Franks is pointing to is a demand driven supply chain, one in which the customer is listened to, and actions are taken based on what is heard. In the case of Saks, the retailers put in place a methodology called a “Listening System” that funnels all feedback from the point of customer engagement (in the store, on the phone, via email, etc.) and analyzes the data to determine what works and what doesn’t. Mr. Franks gave the example of altering advertising and increasing the number of in-store events as a result of this process.
The topic of a demand driven supply chain was also discussed in the keynote addresses by Peter Boneparth, CEO of Jones Apparel, and Bob Willett, EVP of operations at Best Buy, and by workshop speakers from P&G, Smart & Final, Wal-Mart and Gillette.
Moderator’s Comment: Will demand driven supply chain technologies be the next big thing for retail CIO’s? Why?
P&G is betting on demand driven supply chain big time, and Wal-Mart has always focused on what customers want. More and more vendors are either touting
the demand attributes of their solutions or extending their offering to include solutions in this space. All told, there seems to be a move from “selling what you buy” to “buying
what you sell.” –
Ronald Margulis – Moderator
Anything that reduces the gap between what consumers want and what stores can offer is usually helpful. The trick is being right about what customers want. More data does not always mean more insight; it can lead to greater confidence in bad decisions. After all, the golden rule of customer service is “Don’t treat customers how you want to be treated, treat them how they want to be treated.”
One of the most stubborn mistakes retailers make is to try to apply a technological fix to every problem.
Serving your customers isn’t something that’s done on the margins, it isn’t an improvement or tweak to existing systems. It’s what retailing is all about.
If you need a “demand-driven” system to tell you what your customers want, you’re in the wrong line of work.
Demand Driven Logistics or, for that matter, a Demand Driven company is a real possibility today. When we first started working on the concept over 10 years ago, technology and communication systems were too weak to support the idea. The real value is the elimination of forecasting which is where the majority of error occurs. Our tests have shown by taking scan or warehouse withdraw data, one can do complete plant scheduling thereby eliminating DRP and MRP systems which add more forecast error. Net result for CPG companies is a halving of inventory with a substantial increase in service level. For the retailer, both inventory and out-of-stocks can be significantly reduced. If the industry moves forward with its usual practice of doing the same old thing and just giving it a new name, we can kiss this goodbye as well. The Demand Driven concept uses a completely different set of formulas, process and controls.
Apple created the iPod. Like other innovators before and since, Apple sold customers on the idea that they had to have one. Before that, no customer went into a retailer and demanded a $300 plus portable device to play hundreds of compressed music files.
Listening to customers would, and possibly did, keep retailers from carrying the device until Apple managed to convince enough customers that they needed an iPod.
As mentioned, customers sometimes need some help understanding what they want. Clever retailers will work with innovative manufacturers to start new trends and meet needs that don’t even exist yet.
My reaction is similar to Peter Fader’s. When stuff like this becomes newsworthy, it’s a very slow news day. Ron Margulis is one of the smartest and best-connected retail observers I’ve ever known, and I’m betting he’s heard presentations like Bill Franks’ so many times he could make them himself – and probably better.
Some say that leadership is finding a parade and getting in front of it. But, as RetailSeer pointed out, Starbucks created their own parade. So did Bill Gates, etc., etc. The list of successful innovators is long.
Regarding the idea of Wal-Mart being sensitive to customer needs, I suspect that a majority of WM shoppers would be willing to pay a bit more if thousands of new jobs were created by WM sourcing American rather than Chinese manufacturers. Someone once wrote, “The folks who shop at Wal-Mart are those who lost good jobs when Wal-Mart began offsourcing.” If WM is so sensitive to the needs of their customers, perhaps they should look outside their store doors.
The concept of a Demand Driven Supply Network in a fashion or trend driven environment is almost an oxymoron. If you are waiting for the consumer to tell you what you want, you had better be in business niche devoted to meeting established needs.
Personally, I’d rather be in the business of meeting poorly defined or largely un-articulated consumer needs. That model carries larger margins and has less competitive pressure than being in a purely responsive mode. This applies to retailers attempting to be fashion or trend leaders. Note the word “leaders,” which implies creating, not responding.
If anyone is interested, take a look at the new product introduction process The Limited follows. As recently as a few years ago, theirs represented state of the art integration in consumer response and zero lead time supply chain integration. Even so, despite tremendous technology, supporting processes, and synergy throughout the supply chain, The Limited experienced major fashion or trend challenges. At the core, in fashion or trend merchandising, there is still an element of talent or “art” which has to be applied.
Should retail operations be attempting to move their private label toward a Demand Driven Supply Network? Yes. And it’s a given that it won’t be the panacea it’s cracked up to be.
Well, I suppose it might make some sense to define what Demand Driven really means, and how that is somehow different than what we had or aspired to in the past. Does it mean something like the now more than a decade old Efficient Consumer Response or Quick Response initiatives that added some benefits but didn’t exactly meet expectations?
And how does “demand driven” square with the tremendous lengthening of supply chains for both retailers and their suppliers by going off shore, with orders placed 6 months or more in advance?
And from a customer experience, how many shop retail and come out saying, “I sure wish this place was more demand driven?” I might start instead with some service – is anyone happy with the service in most stores today? Some friends and I were joking recently that at what I believe is the number one sporting goods chain you can stand yelling, “Can someone please help me, I’m trying to buy something!” for 10 minutes before someone shows up.
Yes, there are examples like the European chain Zara that operate on a different model and do appear to be “demand driven,” meaning it is highly responsive to making and replenishing what sells. But offshoring is taking most retailers and manufacturers in the other direction. I am sure there are opportunities to reduce inventories by a more “make to order” model, which P&G is trying to get to, for example – as soon as they can figure out how to get the costs to work with shorter production runs.
So, what we need are more specifics about what makes something “demand driven,” and what retailers are doing wrong today if that is the model. Right now, it’s just mostly the empty the catch phrase of the year.
The NEXT big thing — that’s exactly what the Demand Driven Supply Chain Network is. So, Retail CIOs should take a look at the last few “next big things” and where they are today in order to decide what to do about DDSN. Where are we on CPFR and Scan-Based Trading? The DDSN concept is very appealing, but so many things must fall into place for it to work that the odds are against it. One can hope. But, most likely it will morph into something more pragmatic with near term payoffs. Hey, if we could just get more accurate sales forecasting, that would be a giant leap forward.
Huh, I expected to be the contrarian here, but I agree that “demand-driven” should not mean the customers have the final say. There’s a big difference between observing (and listening to) consumers and deriving insights into consumer demand and meeting that demand in creative ways, and reacting to consumer opinion.
A good retailer, to extend the speaker’s marine analogy, should try to understand the current of consumer demand, get out in front of it, and be prepared to channel it into a winning retail strategy.
Giving consumers what they want is fine, within limits. Despite the stubborn survival of some monumentally stupid retailers, this remains a mom-and-apple-pie inarguable goal.
Far more interesting and intriguing to me are the revolutionary things that happen when someone gives consumers something they DIDN’T KNOW they wanted. The classic example being Starbucks, which is well on its way to it’s 10,000th store based on giving people something they didn’t even know they wanted – a public living room with coffee.
Demand-driven analysis manages well once the need is clear. But fortunes await the people who identify un-unexpressed needs.
This notion of a “demand-driven supply chain” is like a motherhood statement — who could possibly criticize it?
But I disagree with Ron when he states that “Wal-Mart has always focused on what customers want.” Wal-Mart is all about cost-cutting and supply-chain efficiency. Wal-Mart doesn’t succeed by listening to its customers; it is winning the game by squeezing its suppliers. Wal-Mart makes relatively little effort to listen to its customers. For instance, how often do they analyze panel data to look at customer habits over time?
So I give Wal-Mart a great deal of credit for what they’ve done, but they are a prime example of why “demand-driven” systems will be slow to take off.
To say you are going to let consumer demand determine what you sell is completely ignoring the success of online retailers like Dell and Amazon who make no bones about their efforts to “manage demand.” By offering discounts on overstock items and charging what the individual customers will pay (read, corporate accounts vs. individual) they work very hard at getting the most return on their inventory, regardless of what the consumer may have originally wanted.
The trick for retailers and the CIO is to implement demand management in the “brick and mortar” channel. This will require not just point of purchase discounts, but some way to deliver targeted discounts at the shelf. Only then will the store be able to compete with catalog or online sales.
After reading this interesting thread, I’ll argue the questions I posed in my initial response still stand:
What defines ‘demand driven’ in retail, and how does it differ from what we have today or aspired to with things like ECR and Quick Response in the past?
Don’t know how we can pursue/promote ‘demand driven’ without first answering those two questions.