One of my favorite topics to teach is the newsvendor problem, an inventory model for very short-lived products like newspapers and fashion goods. One of the points that gets made in that class is that variability is costly. Having to commit resources before knowing what will sell means risk and risk may be a reason not to be in the business. But that risk also suggests an opportunity: If one can find a way to reverse the order of things and commit resources only after knowing what will be demanded, then an otherwise unprofitable business can be a profitable one.
That is essentially the idea behind Gustin, a maker of high-end jeans. It initially sold its jeans trough boutiques, which bought jeans at a wholesale price near $80 but then marked them up to around $200. Gustin had to front all the cost of production and then wait for stuff to sell. Now, they have reversed the order of things and take orders directly from customers ahead of production. As the founders tell it on Marketplace, they have positioned themselves as a totally crowdsourced fashion company (Burning down the house that Levi’s built, Apr 8). You can hear the story here:
I have become increasingly taken with the question of what constitutes a good job. Various parts of operations in many industries have become automated over time and that trend will continue. But firms will still need people. Some production steps will be sufficiently nuanced or require too much dexterity that using a robot is (at least for now) impossible. Other setting like retail will favor resources who can move more or less seamlessly between restocking shelves to checking out customers. So what do these jobs look like? Unfortunately, the answer can be fairly grim.
The Atlantic has an article written by an ex-Politico reporter who lost his job and ended up (mostly out of desperation) working at sporting goods store (My Life as a Retail Worker: Nasty, Brutish, and Poor, Mar 11) and found the experience rather dehumanizing.
Of course, I had no idea what a modern retail job demanded. I didn’t realize the stamina that would be necessary, the extra, unpaid duties that would be tacked on, or the required disregard for one’s own self-esteem. I had landed in an alien environment obsessed with theft, where sitting down is all but forbidden, and loyalty is a one-sided proposition. For a paycheck that barely covered my expenses, I’d relinquish my privacy, making myself subject to constant searches.
“If you go outside or leave the store on your break, me or another manager have to look in your backpack and see the bottom,” Stretch explained. “And winter’s coming—if you’re wearing a hoodie or a big jacket, we’ll just have to pat you down. It’s pretty simple.”
When he outlined that particular requirement, my civil-rights brain—the one that was outraged at New York Mayor Michael Bloomberg’s stop-and-frisk policy and wounded from being stopped by police because of my skin color—was furious. …
I’m not sure why—perhaps out of middle-class disbelief or maybe a reporter’s curiosity—I pressed the issue. Seriously: I have to get searched? Even if I’m just going across the street for a soda, with no more than lint in my pockets? Even if you don’t think I stole anything?
Stretch shrugged, unconcerned. Clearly he’d been living with this one for a while.
“Yeah, it’s pretty simple. Just get me or one of the other managers to pat you down before you leave.” (more…)
Having an accurate forecast of store traffic is an important part of setting staff levels. This is particularly true when converting store visits into sales depends heavily on consulting with in-store personnel. But how can a store build a good forecast? According to Businessweek, satellite imaging is a possible tool (The Most Powerful Sales Tool at Lowe’s: Satellites, Feb 26).
Lowe’s said on Wednesday that it has been gauging traffic at its almost 1,900 stores from space, scanning satellite images of its parking lots to find out how many shoppers it can expect at every hour of every day. It has also started syncing its parking lot observations with actual transaction counts to see how many people drove away without making a purchase.
The space snooping is a particularly great way for Lowe’s to manage its workforce, scheduling surges in floor staff when parking spaces are about to become hard to come by.
The basic premise is that there is a coherent strategy that firms can execute that works well for both its investors and customers while creating desirable, good jobs for its front-line employees. Furthermore, this does not depend on charging customers a premium. Indeed, her focus is on low-cost retail and she discusses several retailers that price quite competitively despite treating their employees quite well. Said another way, the fact that, say, Wal-Mart offers crummy jobs is a choice on its part, not an absolute necessity for being a low-cost player. (more…)
What follows Christmas? Returns, of course. This is especially true for on-line retailers who must generally offer more forgiving returns polices than conventional retailers. In Europe, this is a matter of law. In the US, it is often a necessary part of gaining customer trust. But how much do returns cost retailers? According to The Economist, it can be quite a bit (Return to Santa, Dec 21).
Return rates can be alarmingly high: for some online retailers up to half of everything they sell comes back. Studies find that just handling each returned item costs online sellers between $6 and $18, and that is before the losses from items that are returned in unsaleable condition. …
A new study by Christian Schulze of the Frankfurt School of Finance and Management seeks to put some hard numbers on the scale of the serial-returner problem. Mr Schulze studied 5.9m transactions in Germany, involving 166,000 customers, for a large European online retailer. He looked only at those who had bought at least five items over a five-year period, and found that 5% of them sent back more than 80% of the things they had bought; and that 1% of customers sent back at least 90% of their purchases. Without the cost of returns, the retailer’s profits would be almost 50% higher, the study found.
We have had several stories over the last couple years about retailers using inventories at their stores to fill web orders. At one time or another, there have been stories about Nordstrom, Wal-Mart and Macy’s all treating that big box at the mall as a warehouse. Now the Wall Street Journal reports that even more chains — including Sears and Office Deport – are hopping on the bandwagon (Retailers Turn Store Clerks Into Web Shippers, Dec 9). You can here the reporter discussing her findings here:
It is not surprising that more retailers are going this way. They are all facing pressure from on-line competitors and finding some way to utilize their existing physical network is appealing. If nothing else, I suspect that everyone in the C-suite wants to be able to tell the board they are trying something.
But how can you set up this up quickly? You need to develop a system that updates inventories in real time while dispatching staff to fetch what has been ordered and scheduling the shipper to pick stuff up. Nordstrom is often identified as the first mover on this. The New York Times reports that it took them a couple of years to get it set up. How can a Johnny-come-lately ramp this up quickly? By working with UPS and FedEx.
UPS and FedEx Corp. which were critical to helping launch the e-commerce boom, are now eager to help traditional retailers deal with it. They have engineered new strategies for jockeying inventory across the country to avoid overstocks and markdowns and to keep customers from defecting to Amazon, a big problem last year. The strategy is also important this holiday season as clothing retailers are threatened with heavy inventories.
UPS says it is working with about 40 retailers on implementing these strategies—about double the number a year ago. FedEx said these partnerships helped boost revenue in its ground delivery business 11% in its fiscal first quarter. Both forecast record holiday-season deliveries: UPS with 34 million packages on Dec. 16 and FedEx with 22 million packages on Cyber Monday.
In the case of Sears, UPS provided software that shows shipment statuses of all orders across the entire system. It also sends tracking numbers.
I have a long-standing interest in Black Friday — less because I want to go shopping but more because it poses some interesting questions on how firms compete and how they manage customers. The news this year is that Black Friday is creeping evermore into Thanksgiving proper as retailers keep moving up their opening times. So why are they doing that? Two posts on Businessweek.com put forward theories. The first posits that this is being driven by customer segmentation (The Game Theory Behind Macy’s Thanksgiving Opening, Oct 15).
Traditions are being trampled on by the Corporate Retail Complex! Of course, consumers don’t have to go. Some won’t, and that’s precisely what the strategy folks at Macy’s are betting on.
The purists scandalized by the thought of shopping on the holiday itself aren’t likely to avoid Macy’s altogether. And with the die-hard bargain-hunters swarming the stores on Thursday, Friday shopping will likely be much more pleasant for those who are a little less committed.
It’s only a two-hour wait. An ordinary Thursday afternoon at Apple’s flagship UK store in Regent Street, London and a long line of customers snakes across the first floor. The hip technology brand is used to queues for the launch of its latest must-have product, but these people have come carrying faulty iPhones and malfunctioning laptops, desperate for help from one of Apple’s increasingly hard to reach “Genius” experts.
When it opened in Virginia in 2001, the first Apple store was hailed as a retail revolution, allowing shoppers to play with expensive technology without any sales pressure. The emphasis on service, with blue-shirted Geniuses on hand to answer queries and fix broken products, has become almost as important to the Apple brand as the aesthetic appeal of its products. But the whole experience is under pressure as a relatively small number of shops struggle to cope with rapidly growing customer numbers. …
The Regent Street outlet, for example, employs at least 120 Geniuses. Each sees up to 30 customers a day but it is impossible to book an appointment less than a week in advance. If the problem is urgent you can turn up and queue, but it could be a very long wait. This week, a gaggle of well-trained, polite and friendly staff worked their way along the line trying to answer simple queries and advise people on alternatives to queueing. But it is hard to redirect people when every nearby shop has its Geniuses fully booked for days on end.
The article goes on to note that this is not just an issue in London. It certainly can be an issue here in Chicagoland. While a quick check of my nearest Apple store shows that they currently have a number of appointments open for tomorrow, Friday morning already has no availability. There are even reports of scalpers hawking Genius Bar reservations in China.
So is there an easy fix to this problem? It seems like there are two issues here. First, to what extent should Apple accommodate walk-in customers? Second, is there any easy fix to expanding Genius capacity? These are related. If capacity is expanded then the ease of getting a reservation should take care of the walk-in issue. On the other hand, if capacity cannot be easily expanded, then there is a question of how to allocate it between walk-ins and appointments.
A few months ago I had a post on stair-step incentives. These are incentive schemes that car manufacturers offer dealers that essentially pay rebates on cars that have been sold once sales cross a specified threshold. In that post, I noted that these schemes had the potential to skew competition in local markets:
If you and I own competing dealerships across town, I have a serious leg up on you if I am the first to reach a threshold. I can price more competitively since I know that I am guaranteed to get a rebate while you are still striving to make the threshold. Note this makes everything all that more sensitive to how individual dealer thresholds are set. If mine were skewed low while yours were too high, it’s game over and I eat your lunch.
Obviously, from a dealer’s perspective, this is an issue. Dealers don’t necessarily know how car makers set their targets. They, for example, may be basing targets on national trends that may not apply locally. Further dealers may be facing challenges that the automakers don’t know (e.g., a top sales person just left). Even if a dealer knows how his target was set, he may not know what the target is for a neighboring dealer of the same brand or what is happening with a competing brand. Hence, he could be blind sided when a competing dealer reaches her threshold and starts pricing very aggressively. Is there an easy answer to this dealer’s conundrum?
Enter the New Hampshire state legislature. (more…)