Traditionally, the retail industry
haslagged behind other industries in adopting new technologies, and
thisholds true in its acceptance of BI technology. Some industries,
such asfinancial services, have become very sophisticated in using BI
softwarefor financial reporting and consolidation, customer
intelligence,regulatory compliance, and risk management. However,
retailers arequickly catching up and beginning to recognize the many
areas of BIthat can be applied specifically to their businesses.
Thecompetitive
game is changing for retail. As the industry continues toconsolidate,
retailers have begun to realize that using technology tobetter
understand customer buying behavior, to drive sales andprofitability,
and to reduce operational costs is a necessity forlong-term survival.
Retailers
are now paying significantattention to BI software, specifically in the
areas of merchandiseintelligence (including merchandise planning,
assortment, size, space,price, promotion, and markdown optimization),
customer intelligence(including marketing automation, marketing
optimization, and marketbasket analysis), operational intelligence
(including IT portfoliomanagement, labor optimization, and real estate
site selection), andcompetitive intelligence. There are many factors
that have ledretailers to adopt BI software: increased competition, the
need tosqueeze more profitability out of less space, prevalent credit
cardusage, the Internet's role as an alternative sales channel,
thepopularity of loyalty cards, and soon, RFID (radio
frequencyidentification). These milestones have created a wealth of
data thatretailers are now beginning to appreciate and use.
Withinindividual
companies, we view the history of BI in retail through amethod that we
devised to describe the status of any company'sevolution toward
becoming an intelligent enterprise. We believe thatorganizations pass
through five fundamental stages as they advance intheir use of BI as a
competitive differentiator:
Operate -- Atthis most basic level
are the companies rife with informationmavericks: the guys in basement
offices hammering away on desktopspreadsheets. If they go, the
knowledge goes with them. There are noprocesses, and each request
becomes an ad hoc data rebuild, resultingin multiple versions of the
truth, with the likelihood of a differentanswer to any one question
every time it is asked.
Consolidate --At this stage, a company has
pulled together its data at thedepartmental level. Here, a question
gets the same answer every time,at least within the department.
However, departmental interests andinterdepartmental competition can
skew the integrity of the output andresult in multiple versions of the
truth.
Integrate -- At thispoint in the evolution, a company has
adopted enterprise-wide data andbases its decisions on this more
complete information. This company isbeginning to have a true awareness
of additional opportunities for theuse of BI to improve processes and
profits.
Optimize -- At thisstage, the company's knowledge workers
are very focused on incrementalprocess improvements and refining the
value-creation process. Everyoneunderstands and uses analysis,
trending, pattern analysis, andpredictive results to increase
efficiency and effectiveness. Theextended value chain becomes
increasingly critical to the organization,including the customers,
suppliers, and partners who constituteintercompany communities.
Innovate
-- This level represents amajor, quantum break with the past. It
exploits the understanding ofthe value-creation process acquired in the
optimize stage andreplicates that efficiency with new products in new
markets. Companiesoperating at this level understand what they do well
and apply thisexpertise to new areas of opportunity, thus multiplying
the number ofrevenue streams flowing into the enterprise. Armed with
information andbusiness process knowledge, organizations approaching
the innovatelevel will introduce truly innovative products and services
thatreflect their unique understanding of the market, their
internalstrengths and weaknesses, and an unfailing flow of ideas
fromcontinuously engaged employees.
We are finding that most
largeretailers have reached or are approaching the integrate stage,
withmany making great strides toward the optimize and innovate
levels.There is an enormous opportunity for the evolution to continue
--within every retail organization.
The Presence of BI in the Retail IT Infrastructure
Inthe
typical retail IT infrastructure, there are two fundamentalcategories
of systems: transactional/operational systems, such as POSand purchase
order management systems; and analytic/BI systems.
Operationaland
transactional systems such as merchandise management, ERP(enterprise
resource planning), and POS, are very good at what they do-- organizing
huge amounts of operational data and transactions. Thesesystems can
tell retailers what has happened in their business and whattheir
customers have done -- last week, last month, and last year.
It'scritical,
however, for retailers to understand what will happen: whatthe demand
will be for a select assortment of merchandise, what impactan
incremental price change will have on demand, which floor plan willsell
more designer shoes, which customers will respond to a direct mailor
catalog offer.
Real value comes from systems that go beyondthe
limitations of operational software alone, systems that can
takeoperational data and create enterprise intelligence and
predictiveinsights.
These BI systems must combine data
management(consolidating, organizing, and cleansing huge amounts of
disparatedata from varying systems and platforms) with predictive
analytics(data mining, forecasting, optimization). When they do,
retailers canmake sense of customer, product, supplier, and operational
data anddraw insights that will help them run their businesses better
and moreprofitably.
Leading retailers around the globe -- like
Wal-Mart,Foot Locker, Staples, Williams-Sonoma, and Amazon.com and many
others-- have begun using BI and analytics to make an array of
strategicdecisions. These include where to place retail outlets, how
many ofeach size or color of an item to put in each store, and when and
howmuch to discount. The effects of these decisions can save or
generatemillions of dollars for retailers.
The Strength of the Market for BI in Retail Today
Themarket
is very strong and getting stronger. While it is difficult tofind a
comprehensive suite of retail-specific BI offerings that spansthe
spectrum from competitive intelligence to merchandise planning
andoptimization (product, price, promotion, and placement) based
oncustomer insight, to knowing how to maximize the ROI on the
nextmarketing campaign, to understanding where to build the next store,
toreducing supply chain costs. Retailers are telling us over and
overthat they are seeking a single, stable, reliable, and proven
providerof superior BI solutions. They are implementing projects that
spanmultiple years and will deliver value for years to come.
The Retailers that are Realizing the Most Benefits from BI
Wefind
that the retailers that are realizing the most significant returnson
their investments are those that take a purposeful, pragmaticapproach
to establishing an intelligence platform upon which to baseall other BI
solutions. A single, reliable demand forecast, forinstance, can also be
used in merchandising, marketing, logistics,store operations, call
center staffing, etc., for operational benefit.BI that remains
segmented by functional area can provide some value,but retailers can
realize a much larger return by building thefoundation upon which the
rest of the house will stand. This is true ofboth top-tier and
midmarket retailers, regardless of segment.
Specific Areas in Which Retailers can Benefit Most Include:
Merchandising--
This is clearly the most important area of a retailer's business andan
area where retailers are beginning to exploit the full value of
BI.Analysis of past performance, combined with plans and forecasts
offuture customer behavior, leads to more accurate initial allocations
ofmerchandise across channels and stores. Assortment and
sizeoptimization that are based on customer demand patterns ensure that
thecorrect assortments, size, and case-pack distributions get sent to
thecorrect stores. Daily price, promotion, and markdown
optimizationensures that items are priced for optimal profitability,
both preseasonand in season. Space automation and optimization ensure
thatdepartmental sales and profit per square foot are maximized,
andproducts are given the correct inventory and space on the shelf or
onthe rack. Optimized fulfillment ensures that products are allocated
orreplenished based on demand. Accurate analysis also results in a
moreefficient use of manpower in picking, packing, and shipping the
firstwave of product, while minimizing additional, costly payroll
expensesto facilitate transfers between stores, vendor returns,
changingsignage and labels for markdowns, and otherwise correcting
mistakes.
Marketing-- By understanding customers better -- whether
by profiling,segmenting, gauging propensity to respond, or using market
basketanalysis -- retailers can create better-defined targeted
campaigns,reducing expenses (printing, paper, postage) while increasing
responserates, revenues, and gross margins. Also, as retailers gain a
betterunderstanding of their customers' buying behavior, this analysis
canthen be used to create more effective merchandising plans for the
nextseason.
Operations -- Understanding and predicting changes
indemand -- by hour, by day, by location, by promotion, by price
change-- means that the store floors, the catalog call centers, and the
fleetcrews delivering replenishment orders from the DC to the store are
allappropriately staffed. This understanding also leads to
optimalproductivity since store-level human capital costs can be
scheduledbetter and managed more efficiently.
The Integrated Solution
Itis
important to note that a good BI solution will be able to integratewith
any other system or platform. That said different BI solutionsneed to
interface with different operational systems for differentpurposes.
A
solution seeking to use customer behavioral datato make better
merchandising or marketing decisions needs to interfacewith sales
transaction systems, loyalty systems, in-house creditsystems, coupon
redemption systems, catalog and Internet customer datasystems, and so
forth. A system that recommends optimized price changesshould interface
with the price management system, the item master, thesystem that
generates labels, etc.
There must be a closed-loopinterface
between the operational systems that retailers rely upon toconduct
day-to-day business and the BI systems that help them conductthat
business more efficiently and profitably.
The Future of BI in Retail
BIwill
be defined by the retailers that have figured out how to
maximizecustomer satisfaction and profitability with the right
combination ofquality products, friendly and efficient service, unique
value, adifferentiated shopping experience, and a business model that
trulyserves its community -- locally and globally. How will this
beaccomplished? It starts with understanding the customer and
thenlinking that insight into every decision that is made,
frommerchandising to marketing to distribution to store operations
tofinance, so that retailers can predict how to best serve
theircustomers' ever-changing needs and desires.
Our vision for
thefuture of retail BI provides for that very scenario, through
ourintelligence platform and our solutions for customer,
merchandise,operations, and performance intelligence that are combined
in a suitedesigned to equip retailers to become truly innovative.
Asolution
seeking to use customer behavioral data to make bettermerchandising or
marketing decisions needs to interface with salestransaction systems,
loyalty systems, in-house credit systems, couponredemption systems,
catalog and Internet customer data systems, and soforth. A system that
recommends optimized price changes shouldinterface with the price
management system, the item master, the systemthat generates labels,
etc.
Mitchell Dubin is Director of Microsoft Solutions for OnX Enterprise Solutions