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Building the Next-Generation Retail Operating Model

Five Things Every Retail CEO Needs to Know

For many decades, a retail organization's success or failure hinged upon its ability to react to market conditions. But today, the velocity of disruption to retail markets is coming at such a pace that not even the fastest level of reactivity can keep an organization from falling behind the curve and potentially losing market share.

With customer expectations changing at an exponential rate, the stakes for retail CEOs are higher than ever before. Mobile devices,
e-commerce sites, social media and other online tools and apps are making it possible for customers to easily browse, shop and buy across multiple retail touch points, anywhere at any time. Retailers that respond by offering more product choices in more ways must manage greater operational complexity, all while delivering a seamless and inspiring brand experience. All of these variations are placing enormous pressure on today's retail model, which for most companies was built for yesterday's brick-and-mortar retail environment.

The dilemma facing retail CEOs today is unlike any in recent history. Retailers must learn how to manage these elevated expectations while continuing to deliver a consistent brand experience. Yet, pressure on top-line growth and margins is unrelenting, and sales through the new channels are rarely as profitable as traditional sales. These shifts in consumer behavior, preferences and expectations are compelling retailers to completely transform their businesses. Converging technology, organizational silos and channelization of the shopping journey have led to a fragmented brand experience. To differentiate from the competition, retailers must re-evaluate their entire retail enterprises to deliver synchronous shopping that's simple, smart, seamless, frictionless, intuitive and inspiring. This means that retailers must immediately establish the proactive, agile and responsive operating model that is required to successfully compete and win.

Putting the Customer in the Middle of the Equation

As online retail sales continue to grow, the convergence of digital and physical shopping channels gives consumers more options and buying power than ever before. Meanwhile, social media and online review forums have raised the stakes. They've given consumers the power to mete out meaningful "punishment" to retailers unable to satisfy expectations, while at the same time offer the ability to share positive retail experiences, all to a limitless audience. Through social media, shopping aggregation sites and an abundance of online competition, consumers are accessing greater intelligence about product and pricing. All of this has contributed to the emergence of the consumer who wants to shop using any device, anytime, anywhere.

The industry has already made considerable investments in technology and processes to help retailers gain insights into this digitally savvy consumer. Today, many organizations have improved their understanding of who their most profitable and loyal customers are and how they shop. By combining historical and social information in big data frameworks, they're better able to tap into real-time demand signals to offer their customers a greater degree of personalization, delivering what they want, when and how they want it.

However, behind the scenes, many organizations are unable to connect these advanced levels of customer intelligence and segmentation with the fundamental business processes that drive how products are delivered to customers. Therein lies the rub: many retailers are still rooted in archaic channel-centric operating models.

Often these organizations are not taking advantage of the targeted customer information they're collecting. The intelligence isn't being used beyond a surface-level marketing function to influence how products are merchandised and customer orders are fulfilled. This is due to the lack of adoption of modern technology, processes and practices to profitably deliver to this new generation of shoppers. Organizations are still using historical sales data to determine product selection, merchandising and delivery strategy, rather than relying on customer expectations and tastes to drive that strategy. Clearly, retailers need to look beyond segment information gathering and targeted marketing. But what does such a business transformation look like?

Five Key Tenets Required to Deliver Synchronous Shopping

Retailers that reorient their strategies around the customer will enhance their ability to engage, anticipate and execute in today's environment. This will require key changes in some of the most fundamental aspects of the retail business model, impacting demand signals and merchandising to store operations and product delivery. Those changes are exemplified in what we call the five key tenets required for retailers to deliver synchronous shopping anytime, anywhere.

  1. Unified Customer Engagement. Customers expect to receive personalized communications based on their individual interactions with a retailer. This means if a retail organization is getting insight about a customer, or customer segment, from their online activities — such as what items were purchased or abandoned, what delivery option is preferred, what products were "liked," or what experiences prompted an online review or blog entry — all of that data should be consolidated and fed into a proactive decision framework to guide the retailer's future behavior and communication with the customer.

    Not only does this lead to stronger customer relationships, but also more profitable ones. For example, a customer who purchases a weed trimmer from an email promotion should never receive future emails advertising weed trimmers. Yet, the retailer that automatically contacts that customer with a mobile coupon for a lawnmower or other yard care accessories is using the knowledge it is gathering to make fast, and profitable, sales.
  2. Adaptive, Consumer-Centric Offers. Today's path to purchase often involves more than one channel. As such, retailers need to have a better understanding of how customers search across channels and the type of products they search for in order to customize each assortment regardless of channel. For example, a shopper may conduct the fashion-side of a shoe search online, but still want to try the shoe on in the store. The retailer that can't deliver on that shopper's expectation of a seamless shopping experience — from online search to physical store purchase — will lose the sale.

    Retailers need to leverage the customer interaction insights mentioned earlier so they can start making assortment decisions based on real-time customer preferences. Not only do assortment planners need access to those insights, but they must also have the power to link assortments with delivery mechanisms in order to make it easy for customers to get the product in the way that they choose.
  3. Flexible, Real-Time, Responsive Supply Chain. Many organizations today still fulfill products using a set of static rules: a certain product from a certain vendor goes through a specific distribution center and then is sent to a specific set of stores. Yet, in order to offer assortments regardless of channel, retailers need the back-end means to send the product anywhere in the supply chain in the most cost-effective manner. This means that returns should be as fluid as sales or as transfers to different stores.

    While the principle behind this flexibility and responsiveness is simple, the real challenge is in making the economics behind it work in favor of the organization. This could require some deep thinking and investment in retail supply chain planning and execution technology and processes that support a much greater level of supply chain agility while maintaining a profit.
  4. Profitable Distributed Order Management. It is important to meet customers' delivery preferences; however, profit rules must be established to ensure that a retailer maintains profitability while delivering on its customers' preferences. Obviously, a retailer's profitability varies by ordering method, product type and delivery method. For instance, a customer buying a piece of furniture by phone and scheduling a home delivery represents different profit rules than an in-store purchase of a flat screen television or an online purchase of a blouse that the customer wants to pick up in the store.

    While most retailers today offer all customers the same delivery options, this practice may need to be re-examined. It could be that only a handful of customers should be offered the full spectrum of options, so that premier and profitable customers have a greater variety of choice, while less loyal customers can only choose from the most profitable means of delivery. The more capabilities that retailers can build into their intelligence gathering and order-management decision making, the easier it is for them to establish granular rule sets based on segments and specific customer behavior patterns.
  5. Enterprise-Wide Demand Shaping and Forecasting. As consumption points increase across different channels, it becomes harder for retail organizations to determine where inventory should sit across the supply chain. Most retail organizations today do not have the visibility and capabilities required to analyze demand signals across all touch points and produce a single forecast. However, if an organization truly builds the proper amount of data analysis and sophistication into its processes, it can actually start to take those insights from the previous tenets and start anticipating and shaping demand.

    This is especially important as there are many customer behaviors that are not necessarily intuitive. The beer-and-diapers scenario, where a customer picks up a case of beer at the store while also purchasing diapers, offers a well-known example of this kind of counter-intuitive purchasing behavior. Retailers that are able to identify associations like this and then leverage that knowledge in how they assort, merchandise and fulfill across channels will be able to more profitably predict and influence their customers' buying patterns.

Integration Drives Proactive Customer Attention

While the retail industry hasn't traditionally viewed itself as a business dependent on supply chain principles, all aspects of these five key tenets are, at their root, critical supply chain management issues. As the more innovative retail CEOs begin to recognize the importance of these tenets and put them into action, customer expectations of all retailers will continue to rise. Those organizations that continue to rely on the current inelastic, product-centric retail model will find that they aren't easily able to accommodate consumers' shifting demands.

As the industry braces for massive change in the next five years, visionary CEOs must evolve their retail enterprises — the people, processes, partners and technologies that support them — to address the needs of the new consumer. This means shifting to a dynamic operating model with a dynamic supply chain at the heart of it. Retail CEOs who transform their operating models to leverage real-time data and insights to drive decisions at the merchandising, supply chain and operational levels will be the ones who succeed in this new environment.

How to Get Started

Putting the five tenets into practice requires real business transformation that will not only affect but drive retailers to integrate people, business processes and technology. When determining where your retail organization stands, consider the following:

  • Are your salespeople empowered and incented to facilitate cross-channel sales?
  • Is e-commerce operating as a separate department in your organization? Or have you consolidated your organization's approach on how to buy, range and fulfill products across all touch points seamlessly?
  • Are you actively building and delivering your brand experience?
  • How do you measure success? Have you shifted from analyzing store performance to customer retention performance?
  • Are you establishing business processes that capture, retain, measure, reward and protect those customers who are most loyal to your brand?
  • What is your sourcing and fulfillment strategy to support your brand? How do you hold stock in your local, regional and central warehouses to speed fulfillment to stores and direct to customers profitably?
  • Do you have a planned lifecycle, which includes everyday, promotional and markdown pricing, for every product and collection?
  • How are you aggregating all of your customer interaction data to understand the channels your consumers are using and to drive a seamless experience with your brand?
  • Are you prepared to shift from a product-and-location planning strategy to one that's centered on collections, brands, preferences and integrated customer touch points?
  • Do you have the ability to use product and customer attributes to drive your merchandise and assortment planning, allocation and replenishment processes?
  • How will you protect your brand if you don't know your customers' preferences?

Your transformational journey requires a phased approach. Where you start on this journey — and which of these five tenets you address first — will depend on who your customers are, what your products are, and the maturity of your retail organization. No two retail organizations are exactly alike, and as such, each retailer's approach to implementing this business transformation will be different. JDA has the expertise, technological capabilities and change management processes to help you navigate this journey, build a roadmap and achieve success.

About the Author

Wayne Usie is senior vice president, retail, JDA Software. In this role, he is responsible for strengthening executive-level relationships with JDA’s retail customers and key prospects.

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