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…)
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.
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…)
I love self-service checkout, but it is again under attack. Here in Chicago, Jewel-Osco (one of the major local supermarket chains) is pulling self-service checkout lanes from some of its stores (Jewel scrapping self-checkout at some stores, Chicago Tribune, Sep 25). Their stated goal is to “reconnect personally with all of its customers.” Now the Wall Street Journal is piling on with an article declaring that computers just aren’t up for the job of letting people buy green beans (Humans 1, Robots 0, Oct 6).
The human supermarket checker is superior to the self-checkout machine in almost every way. The human is faster. The human has a more pleasing, less buggy interface. The human doesn’t expect me to remember or look up codes for produce, she bags my groceries, and unlike the machine, she isn’t on hair-trigger alert for any sign that I might be trying to steal toilet paper. Best of all, the human does all the work while I’m allowed to stand there and stupidly stare at my phone, which is my natural state of being. …
In a recent research paper called “Dancing With Robots,” the economists Frank Levy and Richard Murnane point out that computers replace human workers only when machines meet two key conditions. First, the information necessary to carry out the task must be put in a form that computers can understand, and second, the job must be routine enough that it can be expressed in a series of rules.
Supermarket checkout machines meet the second of these conditions, but they fail on the first. They lack proper information to do the job a human would do. To put it another way: They can’t tell shiitakes from Shinola. Instead of identifying your produce, the machine asks you, the customer, to type in a code for every leafy green in your cart. Many times you’ll have to look up the code in an on-screen directory. If a human checker asked you to remind him what that bunch of the oblong yellow fruit in your basket was, you’d ask to see his boss.
Let’s take this in two parts. First, if people prefer a conventional check out experience because that allows them to zone out then I have to wonder how Jewel’s plan to reconnect with its customers is going to work. I remember as a kid my mom having what seemed like endless conversations with cashiers. Of course, we were in a relatively small town and most of the women (they were virtually all woman) working the registers had either gone to high school with my mom or had a sibling who did. Now we live in a more class divided society. I suspect that none of the cashiers at my local Jewel are actually from the neighborhood or that the store’s staffing policies actually build in time for cashiers and customers to catch up on how their respective in-laws are doing.
But what of the claim that the information needed to run checkouts cannot be simply encoded for computers? (more…)
Big data is, of course, one of the business world’s most in vogue buzz words. It may even be having an impact on how various industries function. Case in point, today’s Wall Street Journal reports that several firms are selling data and services to fashion brands and retailers (Fashion Industry Meets Big Data, Sep 9).
The forecasting companies offer analysis of fashion shows, data on the current market offerings and—for an added fee—bespoke research and consultancy services. The data are generated by teams of staff employed to trawl art exhibitions, events, restaurants and even scientific journals.
Fashion companies use the data to plan their latest collection or catwalk show, with the online services replacing the bulky and intermittent style books that designers and merchandisers used to receive. …
“[Fashion forecasters] have always been used but they’re more accessible now because of the technology,” says Marks & Spencer creative director Belinda Earl, who has just launched her first collection for the U.K. high street bellwether. “They are important, not always to lead but to re-evaluate and help confirm you’re on the right track.” …
Retailers are also turning to number crunchers to improve execution. U.K. start-up EDITD trawls the Internet to gather data on who’s selling what, how many products are flying off the virtual shelves and how much are they going for to guide companies in their merchandising decisions.