BRINGING EFFICIENCIES IN RETAIL SUPPLY CHAINS
Dr Jamshed A. Modi
Professor, Operations Management
S P Jain Institute Of Management & Research, Bombay
Some will say that the retail sector in India is about to take off, what with the Ambanis planning huge investments in the sector in the near future. I would say it already has, or at least the nose-wheel is off the runway. The retail sector in India today is un-recognizable from what it was say even 10 years back.
But along with the big bucks will come the big botherations or challenges of introducing appropriate management processes and technologies to cope with the newer and bigger problems. In fact in the long run the big bucks will come only to those Indian retailers who successfully implement these newer technologies, and constantly track the developments in this sector in the western countries.
Operations Research (OR) is one of the fields that have been making important contributions to our understanding of the dynamics of the retail sector, and there have been numerous studies recently that have some interesting insights to offer for managers in this sector. Also, there have been several surveys recently of consumer preferences and needs, and how the retail sector is coping with these. This paper is intended to give a brief overview of some of these findings, and discuss how they might be applicable under Indian conditions.
Some OR Work In Retailing
The question of clearance pricing and left-over inventories is a crucial one in retailing, especially in seasonal and style goods. It is not that only the “truly” seasonal and style goods are involved. The flow of new products has reached such torrential proportions, that countless products that have nothing to do with “season” as such, or style, have a life-cycle akin to the truly seasonal or style products. The challenge of deciding how much to stock of these new products, when to go in for clearance, and how to minimize left over inventory, is the same as for the truly seasonal or style products.
Operations Researchers have long been contributing to our understanding in this area, and one of the outstanding works on clearance pricing and inventory management has been that of Smith and Achabal. [Ref 1]. They developed a computer-based clearance pricing algorithm which was implemented at 3 major retailers in the US. They found that when the rate of sale is sensitive to the inventory level, it is optimal to have higher prices early in the season, followed by deeper markdowns in the clearance period. They measured the ratio of the clearance revenue to the revenue the store would have got at regular prices, and they found that this ratio increased 4% compared to the previous year (before the implementation). This was done only for about 120 merchandise items in the infants and toddlers area, in one store. But the retailer estimated that had the program been implemented for all stores, company-wide, it would have amounted to a $45 million increase in revenue, and a $15 million increase in gross margin.
The authors also mention that the other major benefit of their system was that the retailer was able to reduce the time for clearance --- the “sell-through” (the percentage of inventory sold each week of the clearance) was 15 to 20% higher than during the previous year (before implementation of the authors’ system). As a result, it was possible to bring in new merchandise earlier, and to derive the benefit of full-price sales on the new items from the space that had been devoted to clearance items.
The applications at the 3 retailers indicated that the proposed methodology is highly effective, provided that the retailer’s information system can provide the appropriate sales reports and inventory data in a timely manner.
There is a sizeable literature on OR in the retail sector, and it is growing every month, and 2 more recent ones...
References: 1. Smith and Achabal, “Clearance Pricing And Inventory Policy For Retail Chains”, Management Science, Vol 44 No 3, March 1998.
2. Srinivasan et al, “Do Promotions Benefit Manufacturers, Retailers, or Both?”, Management Science, Vol 50 No 5, May 2004.
3. Tan and Mookerjee, “Allocating Spending Between Advertising And IT In Electronic Retailing”, Management Science, Vol 51 No 8, August 2005.
4. Demand Today: Emerging Consumer Desires In the Retail Sector, Kanbay Research Institute, 2005
5. Russell and Taylor, Operations Management – Quality and Competitiveness In A Global Environment, John Wiley, 2006.
6. Modi, “RFID – The Next Frontier In Supply Chain Management”, ET Intelligence Group Research Paper, May 2006.
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