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716 posts categorized "Best Practices"

November 04, 2013

Is There a Difference Between Segmentation and Personalization?

Judy Bayer, Director of Strategic Analytics for Teradata International, and Marie Taillard, a professor of marketing and Director of the Creativity Marketing Centre at the ESCP Europe Business School in London, wrote a very interesting article in which they stated that they no longer believe in segmentation. ["A New Framework for Customer Segmentation," HBR Blog Network, 12 June 2013] Obviously, the headline for their article (which they may not have personally selected) undercuts that statement; nevertheless, their arguments are both interesting and persuasive. They believe that segmentation (like dividing consumers by gender, ethnicity, geography, religion, etc.) promotes a "rigid methodology that carves out the market" in unnatural ways. They accept the notion that you "can't be all things to all people," and they believe that rigid segmentation defies that concept. They continue:

Drill and board clear"To resolve these contradictions, we had begun pleading with students and clients to look for 'jobs to be done.' The approach echoes Ted Levitt’s famous comment about selling ¼ inch holes rather than ¼ inch electric drills, and advocates a mindset shift away from selling products to 'doing jobs' that solve customers’ problems. In Clay Christensen’s words, customers 'hire' products or other solutions because they have a specific job to fulfil, not because they belong to a certain segment."

To continue reading, click on the link to the new Enterra Insights site.

October 29, 2013

Order Fulfillment in an Omnichannel Environment

A year ago, Dan Gilmore, Editor in Chief of Supply Chain Digest, wrote, "In case you haven't noticed, e-commerce is growing at a breakneck pace, putting a near panic in traditional brick and mortar retailers, and of course driving many of them to invest heavily in their own dot com sites and business units – even if most of them are losing money at it for now." ["Multi-Channel Commerce and the Supply Chain," 9 November 2012] As we approach what hopefully will be a good holiday season for retailers, order fulfillment is rising quickly to the top of concerns for many retailers — especially omnichannel order fulfillment. I previously addressed this topic in a post entitled The Impact of Omnichannel Operations on the Supply Chain, but with the holiday season upon us, I thought it might be a good time to discuss it some more. Gilmore continues:

Omnichannel Fulfillment"E-commerce ... is now part of the whole 'multi-channel commerce' phenomenon. Multiple paths of purchase and delivery. Buy anywhere, pick up anywhere. More sales and delivery channels are coming too: your television…vending machines…what else? A senior supply chain executive from one of the country's largest retailers told me at a dinner ... that 'multi-channel is going to create big winners and losers' in the retail sector, depending on the decisions and investments each merchant makes. One of the weird things here is how technology driven this all is. ... Of course, this is not only a retailer phenomenon. Manufacturers and wholesalers of all sorts are dealing with many of the same e-commerce/multi-channel supply chain challenges and questions. How aggressive do we go? Will we tick off our channels? Do we insource or outsource e-fulfillment operations? If we insource it, do we use an existing DC, or a separate fulfillment operation? Etc."

Gilmore's questions point out why omnichannel operations are so difficult to get right. He goes on to discuss three of the biggest questions involved in omnichannel operations: How do you best fulfill orders? How do you manage shipping costs? And, how do you manage inventories.

Omnichannel Order Fulfillment

Jason Denmon, a supply chain management consultant, writes, "Fulfillment can get complex as customers expect a seamless experience across all channels. One of the key decision points is whether to manage fulfillment of each channel in shared or separate distribution centers." ["Aligning fulfillment operations with a changing channel mix," Modern Materials Handling, 29 June 2012] Jim Barnes of enVista told Gilmore:

"We like the idea of combining the dot com and retail distribution operation if and only if the retailer has the ability to consolidate reserve inventory but logically keep it separated using a Distributed Order Management (DOM) or what I like to refer as enterprise commerce flow (ECF). In principle we like them combined, but many retailers don't know how to do it, therefore you see a lot of physical or virtual fences separating dot com from retail order distribution. ... The bigger question is regarding service and this is why there is a strong argument against combining retail and B2C. I believe to keep up with Amazon retailers are going to be required to establish more satellite or spoke locations in larger demographic areas that allow the retailers to service customer same day, at worst case next day."

Denmon agrees that "operating out of a shared Distribution Center is most effective when the channels or segments have common order profiles (item type and quantity) that share the same inventory." But, as Barnes notes, that isn't always the case. As a result, Denmon claims, "Fulfillment with each channel in its own distribution center makes sense when the channels have unique requirements." Denmon concludes:

"Choosing what type of fulfillment operation is best for your company starts with a holistic view across the business, channels and segments. Getting stakeholder alignment across channels is a critical first step. Start by asking these questions:

• Where are the synergies and differences between channels?
• Are you struggling to respond quickly to market demand? Or dealing with excessive mark-downs and out of stocks as a result of allocation problems?
• How is the performance of each channel measured?
• What are the tipping points where you are willing to sacrifice the optimization of one channel for the overall benefit of the organization? How wide is your lens?
• What are the impacts of changing business requirements in your channel mix?
• Do you have true business/stakeholder alignment between channels with an overarching strategy that drives one consensus plan?

"With an understanding of the full impact of multiple channels on your fulfillment operation, you can look for synergies and ways to deliver the seamless experience your customers expect."

Shipping Costs

A lot more retailers are offering free shipping on orders. That makes getting a handle on shipping costs particularly critical. As Gilmore writes, "Discounted/free shipping is sapping the profits out of e-commerce." But, as Bob Trebilcock, Executive Editor of Modern Materials Handling, notes, retailers continue to offer these shipping options because customers expect them. He writes, "Companies] are now operating in a world where cheap or free shipping dominates. Even wholesale businesses are having to guarantee next-day delivery to meet the expectations of business customers that are influenced by consumer expectations." ["Four trends driving automation," 22 May 2012] Jones Lang LaSalle, a global real estate services firm, asserts that the cost of new warehouses designed for omnichannel operations is significantly higher than the cost of traditional warehouses and distribution centers. "Traditional warehouses that support stores require less investment and machinery and fewer staff," they write. "The new e-commerce distribution centers, which involves direct order fulfillment, can cost three times as much and involve three times as many employees." ["Growing E-Commerce Forces Transformation in Distribution Networks, Report Finds," SupplyChainBrain, 25 May 2012] All of that new cost must be absorbed or passed on. Last December, Supply Chain Digest published the following graphic to show "what a number of leading retailers and service providers are doing relative to multi-channel fulfillment strategies."

Multi_Channel_Fulfillment_Strategies

As you can see, with so many fulfillment strategies in play, keeping shipping costs in check is no easy matter.

Inventory Management

Gilmore doesn't believe than anyone has been able to master omnichannel inventory management, but, he writes, "Some of the Distributed Order Management solutions are getting close." Kris Bjorson, head of Jones Lang LaSalle's Retail/e-commerce Distribution Group, told the SupplyChainBrain staff, "Traditional retailers must support the delivery of merchandise and manage both in-store and online inventories and shipments at a frenetic pace against the backdrop of intense competition from pure e-commerce rivals." Stephen Gerrard, Vice President of Marketing & Strategic Planning at Voxware, Inc., notes, "Warehouses are now on the front line of customer satisfaction, but enterprises are still downsizing the supply chain as much as possible. Logistics has to do more with less." ["Warehouses: The New Front Line of Online Customer Satisfaction," Supply Chain Digest, 10 May 2012] It is ironic that at a time when the supply chain is playing an increasingly important role that many executives still only see it as an area to cut costs rather than as an area that will differentiate them from their competitors. Supply chain professionals are fond of saying: The supply chain doesn't support the business the supply chain is the business.

Supply chain analyst Bob Ferrari writes, "Many in the industry believe that there is no single formula for success in this new evolving multi-channel commerce world and each retailer will have to continue to 'tune-in' to customer needs and requirements and provide appropriate, differentiated capabilities that can best balance all physical and online assets." ["Bricks and Clicks - The New Business Model and Supply Chain Capability for Retail Industry," Supply Chain Management, 28 March 2012] Bill McBeath of ChainLink Research concludes, "The rising emphasis on omni-channel has reached a pitched crescendo this year, with no signs of abating. One of the reasons it is 'taking so long' is there are so many dimensions to really doing omni-channel well. It touches everything. Even though e-commerce has been around for well over a decade, we are really just getting started on the journey of putting in place the various dimensions of the foundation for wide spread true omni-channel integration. In reality there are currently centers of gravity—unifying the front-end (the shopper experience) vs. unifying the back-end (fulfillment). For now that is probably the enterprise’s best approach, since, especially the front-end mobile game is just discovering itself." ["Reading the Pulse of Retail at NRF 2013: Omni-Channel Still the Big Thing," 22 January 2013]

October 28, 2013

The Future of Retailing is All About Personalization

"The individualization of customer relation," writes Bertrand Duperrin, Consulting Director at Nextmodernity, "is the new concern of marketing departments." ["The individualization of customer relationship: why and how?" Bertrand Duperrin's Notepad, 24 June 2013] Tresilian Segal, head of Adobe's Digital Marketing across Northern Europe, agrees that "a commitment to personalisation seems a relative no-brainer." However, she asks, "Is the case for personalisation is well understood?" ["Maximise your personalisation process with these 8 tips," Fourth Source, 14 June 2013] A February 2013 survey conducted by inContact helps make the case. According to the survey, "Consumers are making less of their buying decisions based on brand loyalty, but rather on which companies can match their desired experience." ["Consumers Value Personalized Service Over Brand Loyalty," Progressive Grocer, 25 March 2013] The article continues:

Personalisation"According to the findings, 56 percent of U.S. adults would be at least somewhat likely to switch to another brand or company if it offered more options and channels than their current provider. Additionally, younger consumers aged 18 to 44 (64 percent) indicated this was true significantly more than their counterparts aged 55 or older (45 percent), showing a major shift among the younger consumer base in terms of decision making. Based on the findings, the younger generation of consumers — who are used to an influx of information and a variety of choices — showed a desire for options that allow for a tailored experience in their interaction with brands. To that end, younger consumers demand more options and availability to handle these interactions, while companies are at risk of losing customers if they neglect to accommodate preferences or adopt evolving channels of communication in providing service. 'The survey results are clear: consumers expect more choices and more ways to interact with business today,' said Paul Jarman, CEO of inContact. 'The smartest companies are quickly adapting to changing consumer behaviors and needs, extending customer service beyond just phone and email to mobile apps, text messaging, chat and social media.' Survey respondents showed overall that they not only prefer, but expect, companies to offer options for a variety of channels and devices."

In previous posts, I have discussed the fact that consumers are increasingly looking for an "experience" as they shop (be it online or in store). Lauren Hertler insists, "At the end of the day, creating an optimal experience for a customer is determined by the ability to deliver personalized communications." ["Driving Performance through Personalization," ExactTarget Blog, 30 September 2013] Although most pundits concern themselves with online experiences associated with multi-channel retailing, Gavin O'Malley believes that personalization is just as important when a consumer is in a brick-and-mortar store. "Consumers are craving more personalized, less siloed shopping experiences," he writes, "and [they] could be convinced to stop 'showrooming' and actually make in-store purchases." ["Consumers Desperate For More Personalization During Purchase," Online Media Daily, 26 September 2013] The one thing that all of these analysts agree upon is that there is a case (they believe a strong case) to be made for understanding and engaging in retail personalization.

Natasha Hritzuk, senior director of consumer insights at Microsoft, told O'Malley, “Consumers are absolutely desperate for more personalization during their purchase journey. The idea of personalization isn't new, but [the industry as a whole] is still not delivering on its promise." O'Malley continues:

"The retail industry is also failing to appreciate consumers' desire for a more seamless shopping experience, according to Hritzuk. Consumers don't want to encounter gaps between a brand's online, mobile, and in-store presence, she said. 'They want to operate seamlessly.' Along with breaking down the barriers between digital and physical-store experiences, retailers can also use ecommerce learnings to increase in-store purchases, according to Hritzuk. 'We need to understand why people showroom,' she said, referring to the increasingly popular consumer practice of testing products in-store, but preferring to buy them online. For one, 'It’s easier to buy [products] online,' said Hritzuk. 'You can [buy something] online in 3 to 4 minutes compared to the 20 minutes it can take to buy [a product] in stores,' she said. 'We need to take that friction free purchase transaction, and [implement] it in stores.'"

Eric Tobias, Vice President of Web Products at ExactTarget, told Hertler that "personalization can be achieved using four main building blocks." They are:

  • Collection and identification of data
  • Data aggregation
  • Taking action on the data
  • Providing continuity to the customer by nurturing the 1-1 relationship

Tobias continued, "The primary goal, of course, is to deliver the right experience at the right time using the right channel." He then offered four tips "to help all marketers get more personal":

  1. "Let data be your guide–no more guesswork!
  2. "Inject personalized content into transactional messages. Transactional messages are a key component to creating a relationship with your customers–don’t overlook them. Surprisingly, in a study of the top retailers, 79% had no email personalization after an online purchase.
  3. "Capture user behavior during/after the shopping process. Listen to what your customers are doing on your site to help drive recommendations or post-purchase remarketing opportunities.
  4. "Make your data actionable. It's been shown that almost half of all people will completely abandon a brand's communications after only two un-personalized attempts."

Segal agrees that good personalization begins with the data. She explains, "Let the data do the hard work and decide what the most relevant content and offers are to serve the customer at the detailed level." She also agrees that content should be personalized. "Get rid of 'spray and pray' emails," she writes. She also agrees that gathering and analyzing data is essential to capture and analyze the customer's digital journey. "Identifying key points along your customer's virtual path is important," she writes, "as it allows you to decipher where conversion is highest." Nevertheless, she cautions, "While per­son­al­isa­tion may often rely heav­ily on data and analytics, it is important not to completely surrender all con­trol of customer experience management to machines. There is still a role for behavioural tar­get­ing, as long as you test against it regularly. A blend of data-led and intuitive marketing often works the best."

"'Big data' promises to be the solution to getting a 360 degree view of your customer and make more intelligent personalization decisions," writes Linda Bustos. ["Using Big Data for Big Personalization," GetElastic, 11 July 2013] Bustos' article included the following "infographic from Monetate [that] covers the big data problem, the segmentation opportunity, and 3 keys for data and segmentation success."

Big-data-personalization-infographic

Alicia Fiorletta concludes, "As shoppers continue to leverage digital tools and channels to research, browse and buy products, they also are beginning to demand more relevant products and offers. With these heightened expectations, personalization is becoming an integral component of retailers' cross-channel marketing strategies." ["Retailers Across Verticals Personalize With Digital Solutions," Retail TouchPoints, 6 May 2013] Duperrin adds, "When business treat groups and not individuals, [i.e.,] trying to please everyone at the same time, [that strategy] often leads to pleas[ing] no one since the lowest common denominator is never satisfying for each person taken individually." The requirement for retail channels to become even more personalized is likely to continue. I agree with Duperrin who insists that the technology used to get know customers better must be complemented by knowledgeable and caring people who can really put the finishing touches on personalization.

October 24, 2013

Avoid Competitive Obsolescence Using Technology

Michael Fitzgerald, Nina Kruschwitz, Didier Bonnet, and Michael Welch, report, "A study by MIT Sloan Management Review and Capgemini Consulting finds that companies now face a digital imperative: adopt new technologies effectively or face competitive obsolescence." ["Embracing Digital Technology," MIT Sloan Management Review, October 2013] The term "digital technology" is pretty broad and, by itself, is probably not very useful. The authors define it as "social media, mobile, analytics or embedded devices" that "enable major business improvements (such as enhancing customer experience, streamlining operations or creating new business models)." The authors obviously believe that companies that fail to adopt these technologies and transform their operations will fail or, like old soldiers, just fade away. They report that the key findings from the survey are:

  • According to 78% of respondents, achieving digital transformation will become critical to their organizations within the next two years.

  • However, 63% said the pace of technology change in their organization is too slow.

  • The most frequently cited obstacle to digital transformation was “lack of urgency.”

  • Only 38% of respondents said that digital transformation was a permanent fixture on their CEO’s agenda.

  • Where CEOs have shared their vision for digital transformation, 93% of employees feel that it is the right thing for the organization. But, a mere 36% of CEOs have shared such a vision.

According to previous research, "digital transformation will require companies to draw from a core set of four digital capabilities: a unified digital platform; solution delivery; analytics capabilities; and business and IT integration." ["The Digital Capabilities Your Company Needs," by George Westerman, Didier Bonnet, and Andrew McAfee, MIT Sloan Management Review, 29 October 2012] Despite the fact that so many executives believe that achieving digital transformation for their companies is critical, the authors report that "many companies struggle to gain transformational effects from new digital technologies." This is problematic since the authors conclude: "Almost no organization is sheltered from the competitive disruption wrought by the widespread adoption of digital technologies."

Transformation
The challenge, of course, is that every business is unique in some way. That means that no single path to digital transformation is going to work for everyone. The path to digital transformation begins with understanding your business. The first case study that the authors present involves Starbucks. Although some coffee drinkers simply want to buy a cup of java on their way to work, many others want to sit and enjoy that cup of Joe. For consumers who want to enjoy their purchases on site, Starbucks offers "free Wi-Fi in Starbucks stores, along with a digital landing page with a variety of digital media choices, including free content from publications like The Economist." For those consumers who want to rush off to work (or elsewhere), Starbucks has managed to "cut 10 seconds from every card or mobile phone transaction, reducing time-in-line by 900,000 hours. Starbucks is adding mobile payment processing to its stores, and is processing 3 million mobile payments per week. Soon, customers will order directly from their mobile phones." Fitzgerald, Kruschwitz, Bonnet, and Welch continue:

"The world is going through a kind of digital transformation as everything — customers and equipment alike — becomes connected. The connected world creates a digital imperative for companies. They must succeed in creating transformation through technology, or they'll face destruction at the hands of their competitors that do."

There are likely going to be two networks at play: one that connects customers and the other that connects everything else. This second network is often referred to as the Internet of Things (IoT) or the Industrial Internet. To learn more about the IoT, read my posts entitled The Internet of Things Looks Like Big Business and Fellow Travelers: Big Data and the Internet of Things. Although the authors insist that undergoing a digital transformation is an imperative for companies, they don't pretend that such an effort will be easy. "Even in a connected world," they write, "it takes time, effort and willpower to get major transformative effects from new technology." The authors write with a sense of urgency on this subject. George Westerman, a research scientist at MIT's Center for Digital Business, told them, "The big thing is, technology change is happening so rapidly that every industry is being affected by this." The rapid pace of change is probably the main reason that companies are struggling to transform.

During the dot.com era, many companies were quick to purchase and employ IT systems that later proved unsustainable. Having been burnt in the past, they are hesitant to jump in again during a time of rapid change. Hesitancy, however, is not a winning strategy. The authors report that "previous research by Capgemini Consulting and MIT's Center for Digital Business found that companies that invest in important new technologies and manage them well are more profitable than their industry peers." The obvious answer to this conundrum is investing in technologies that are adaptable and easily updatable. This is much easier to do than in the past thanks to cloud computing and software-as-a-service offerings. The authors promise, "Business leaders who embrace the digital imperative will see boosts in their operations, customer relations and business models."

With the digital path to purchase becoming an increasingly important channel for commerce, it comes as no surprise that the study found that "customer experiences reflect the clearest impact of digital transformation. The survey found that improving customer relationships was the area where companies were having the most success with digital technology. Most prominent was improving the overall customer experience, followed closely by enhancing products and services in customer-friendly ways." To learn more about why enhancing customer experience is important read my post entitled Analytics 2.0: Big Data, Big Testing, and Big Experiences -- Part 2.

The authors admit that "there is no one factor that impedes digital transformation," but they do acknowledge that some companies "lack both the management temperament and relevant experience to know how to effectively drive transformation through technology." They conclude their article by offering "nine specific hurdles in the broad areas of leadership, institutional obstacles and execution that companies need to overcome to achieve digital transformation." They are:

  1. Lack of Urgency — "Complacency affects more companies than any other organizational barrier cited in our survey."

  2. The Vision Thing — "Digital transformation starts with a vision from top leadership."

  3. Picking a Direction — "Creating a road map towards digital transformation is challenging."

  4. Attitudes of Older Workers — "Responses to the survey suggest a deep-rooted perception that older people will have trouble reframing."

  5. Legacy Technology — "Problems arising from older systems are a legitimate issue."

  6. Innovation Fatigue — "For people of any age, there is also the possibility of technology fatigue."

  7. Corporate Politics — "Internal power centers, controlled by departments or individuals, can inhibit changes that dictate less power or different ways of working."

  8. Making a Case for Digital Transformation — "Only half of the companies surveyed said they create business cases for their digital initiatives."

  9. Incentives — "The companies that do best at digital transformation also do the best job of aligning incentives with digital transformation efforts."

If I were asked to prioritize those obstacles to transformation, lack of vision and legacy technologies would be high on my list followed closely by corporate politics. If you had any doubt about whether the industrial age is over and the information age has arrived, this survey should put your doubts to rest. If your company has yet to join the digital age in a meaningful way (i.e., aligned itself utilizing a unified digital platform), then it might just be a candidate for history's dustbin.

October 22, 2013

Get Personal with Your Customers

"In a climate where companies send mass, generic emails to entire mailing lists on a regular basis," writes Malcolm Duckett, "consumers have become deadened by indiscriminate email campaigns." Duckett believes that "a targeted approach is the only real way to avoid damaging your company's relationship with customers and to build brand loyalty." ["Intelligent email marketing should be personalised and targeted," Fourth Source, 7 May 2013] Janet Kyle Altman, of Kaufman, Rossin & Co., basically says the same thing, but in a different way. She writes, "Your target is not 'everyone'." ["To Market Successfully, Your Customer Can't Be 'Everyone'," Business News Daily, 27 September 2013] It's obvious that you can't personalize your marketing efforts if you know little to nothing about the consumer you wish to reach. Richard Ting asserts that "brands are missing out by not fully understanding who their customers are. Let's face it: the signal-to-noise ratio is still fairly low among brands." ["The Customer Profile: Your Brand's Secret Weapon," HBR Blog Network, 11 March 2013]

Orangedudes-target-customer-600pxAngela Wells calls the "getting to know your customer" approach Business-to-People (B2P) marketing. "B2P Marketing," she writes, "is the recognition that businesses aren't actually buying what you're trying to sell. Individual decision makers — people — are making the decisions for their companies, not impersonal disengaged companies as a whole." ["Forget About B2B And B2C - Technology Enables B2P (Business To People) Marketing," Marketing Tools: CRM, 28 June 2013] Whether your desired customer is sitting behind a desk at a business or on the couch in their home, doesn't really matter. Wells is correct that individual decisions are what you are trying to influence. Duckett insists that "saying the right thing at the right time to the right person" is getting easier thanks to technology. He writes, "The new generation of cloud-based marketing automation tools out there can help make this quick, simple and effective." He recommends a four-step approach for getting to know customers better.

"Step 1 – Create a profile: Clearly identify and classify visitors by monitoring and remembering their behaviour. There are tools that let marketers automatically record visitors’ individual behaviours as part of a 'customer history' record.

"Step 2 – Target: The marketer can set up simple targeting 'rules' (one by one as needed) so, for example, a rule might say 'target people who have looked at brand A more than 15 times', 'target visitors who have been visiting for 2 months but have not purchased' or 'target visitors who have purchased but not for 3 months'. Then the marketer will communicate to the system what content they want to try on each segment (this might include a set of email variants or even content to show in the visitor’s web page or triggers to your telesales team).

'Step 3 – See what works: Gathering this data on which content delivers the best results from this target segment (and the control group) is useful to marketers that then need to look at conversion rates, number of sale and, basket size to make their decision.

"Step 4 – Repeat and love the engagement: Keep the process going, each time building into the targeting the additional behavioural information harvested from the visitors. Your system should also include functions to ensure customers aren't repeatedly contacted with the same message or offer. This is important; otherwise customers will get wise and exploit the brand. For example, they will come to understand that if they abandon a basket one day, they will receive a discount the next – or will get frustrated when continually offered a deal they are not interested in, for example, a product they already purchased elsewhere."

Duckett concludes, "By engaging the visitor at every stage, marketers can ensure that customers are not disappointed by their experience of the brand, either by confusing content or unnecessary adverts. The end goal is that the visitor's experience will be easy, engaging and ultimately provide the visitor and the brand with exactly what they want." As I've noted in previous posts, it's easy for online customers to jump on or off the path to purchase. That's why I agree with Duckett that consumers must encounter a good experience at every stage or touchpoint along their journey.

Ting believes that many companies don't get to know their customers better because the data they collect about them is siloed. "Combined," he writes, "this information would be enough to create the ultimate 360-degree customer profile, which would allow enhanced targeting and personalization." The different types of siloes into which data is gathered include:

  • "What they're saying — social CRM. What are your consumers saying about your products and services in social media? Are your consumers' brand sentiments shifting from positive to negative or vice versa?

  • "What they're buying — purchase history. What is the last product a consumer purchased from you? How often does he buy from you? What are her favorite products? Are people making more or fewer purchases?

  • "What they're doing — brand interaction history. Are they using your mobile apps? How often are they using them? Are they visiting your website? Are they spending more or less time with your brand?

  • "What they're liking — social interest graph. What interests do they share on social media channels, and who is in the network of people who share similar interests?"

He cautions, "It may seem simple to combine these discrete data sets into one holistic customer profile, but there are major technology obstacles brands need to get past." Integrating data is never as straight forward as people think it will be. Ting insists that a customer's lifetime value will increase "by better engaging them over the long term and with purpose. ... To surgically cut through the noise, advertisers need to develop richer customer profiles. It's not the sexiest of topics in advertising, but it's one that will ultimately allow brands to target and personalize the experiences and messages that consumers deserve." Altman concludes, "No matter what product you sell or service you deliver, more targeted marketing gives you a better return. Targeting a specific audience gets you in front of them more often, with messages that touch them emotionally. If you try to be everything to everyone, your message becomes vague and less impactful."

Wells agrees. "With the rise of social media and engagement," she writes, "it has become increasingly obvious that we are all targeting people – those people who make the decisions whether or not to purchase what you are trying to sell. These people we are targeting are consuming media like never before, across a range of social platforms such as Facebook, Twitter, LinkedIn, and so much more." It should be pretty obvious by now that none of the recommendations offered by these pundits can be achieved without the right kind of technology. The secret is to get personal with your customers without creeping them out. It's a fine line that companies must walk when making personalized offers. The right technology and a good marketing department or firm will help you walk that line.

October 18, 2013

Self-education and Deep Learning

One of things that really stood out to me while reading James Gleick's wonderful biography of Nobel Laureate Richard Feynman (entitled Genius) was that people like Feynman possess an intellectual curiosity that has to be satisfied. They don't wait for teachers to give them answers to questions they pursue those answers on their own. In Feynman's case, it was a particular kind of knowledge that attracted his attention. He wanted to know how the world worked — how it was put together. As Gleick explains, "pragmatic knowledge was Feynman's specialty. For him knowledge did not describe; it acted and accomplished."

You couldn't call Feynman a renaissance man because, "unlike many of his colleagues, educated scientists in a cultivated European tradition, Feynman did not look at paintings, did not listen to music, did not read books, even scientific books." The remarkable thing, Gleick notes is that Feynman "learned anyway." He explains:

Feynman Richard
Richard Feynman by Nataly Meerson

"[Feynman] pursued knowledge without prejudice. During a sabbatical he learned enough biology to make a small but genuine contribution to geneticists' understanding of mutations in DNA. ... He taught himself the tricks of mental arithmetic, having long mastered the more arcane arts of mental differentiation and integration. He taught himself how to make electroplated metal stick to plastic objects like radio knobs, how to keep track of time in his head, and how to make columns of ants march to his bidding. He had no difficulty learning to make an impromptu xylophone by filling water glasses. ... When he was engrossed in the physicists' ultimate how-to endeavor, the making of the atomic bomb, he digressed to learn how to defeat the iron clamp of an old-fashioned soda machine, how to pick Yale locks, and then how to open safes — a mental, not physical, skill. ... He made islands of practical knowledge in the oceans of personal ignorance."

When Feynman wanted to learn about something, he went all the way. Robert Frost once wrote a poem about people walking along the shoreline looking out to sea. "They cannot look out far," he wrote of those standing on the beach. "They cannot look in deep." ["Neither Out Far Nor In Deep"] That simply wasn't Feynman's way. He was able to see far and, when he couldn't, he dove in deep. During a sabbatical in Brazil, he taught a basic course in electromagnetism at the University of Brazil in Rio. Feynman found the experience disturbing because the Brazilian educational system was based on memorization rather understanding. Gleick writes that, in Feynman's eyes, what they were doing was teaching "words about words." Gleick insists, "Feynman despised this kind of knowledge." He continues:

"[Feynman] resented more than just the hollowness of standardized knowledge. Rote learning drained away all that he valued in science: the inventive soul, the habit of seeking better ways to do anything. His kind of knowledge — knowledge by doing — 'gives a feeling of stability and reality about the world,' he said, 'and drives out many fears and superstitions.' He was thinking about science meant and what knowledge meant."

Feynman would have undoubtedly been disgusted by the "No Child Left Behind" approach to standardized learning. Naveen Jain, Entrepreneur and Founder of the World Innovation Institute, probably captures Feynman's feelings as well as anybody. He writes, "No two children are alike — nor do they learn best the same way. Some children learn logically, some learn conceptually, some learn visually and some learn experimentally. Put simply, our education system is currently teacher-centric, as opposed to student-centric. And please don’t get me started on 'No Child Left Behind.' It might as well be called 'All Children Left Behind.' This system of standardized, rote learning that teaches to a test is exactly the type of education our children don't need in this world that is plagued by systemic, pervasive and confounding global challenges." ["School’s Out for Summer: Rethinking Education for the 21st Century," Wall Street Journal, 27 June 2013]

When Feynman was growing up, there were not as many distractions for children as there are today. There were no televisions, no iPods, no tablets, and no smartphones. Children's natural curiosities and imaginations were the driving forces behind both education and play. For immigrant children, like Feynman, education was seen as the best way to get ahead in the world. And the men we now call geniuses threw themselves into gaining knowledge on their own. At a recent conference I attended in Jersey City, NJ, called "The New Know," Dr. William Byers, a professor emeritus of mathematics at Concordia University in Montreal, called the kind of self-education that Feynman enjoyed "Deep Thinking." He believes that the only way that anyone will have one of those glorious "ah-ha" moments is by engaging in deep thinking. Unfortunately, with all of the distractions mentioned above, getting students to engage in deep thinking is becoming increasingly difficult.

Deep thinking is a type of critical thinking. Wikipedia defines deep thinking as "a way of deciding whether a claim is always true, sometimes true, partly true, or false." The article continues:

"The list of core critical thinking skills includes observation, interpretation, analysis, inference, evaluation, explanation, and meta-cognition. There is a reasonable level of consensus that an individual or group engaged in [the] strong way of critical thinking gives due consideration to establish:

  • Evidence through observation
  • Context skills
  • Relevant criteria for making the judgment well
  • Applicable methods or techniques for forming the judgment
  • Applicable theoretical constructs for understanding the problem and the question at hand

"In addition to possessing strong critical-thinking skills, one must be disposed to engage problems and decisions using those skills. Critical thinking employs not only logic but broad intellectual criteria such as clarity, credibility, accuracy, precision, relevance, depth, breadth, significance, and fairness."

The best opportunity we have of getting students engaged in deep learning that leads to understanding is to involve them in projects that require them to look far and dig deep. That was one of the reasons that I recently helped found a non-profit organization called The Project for STEM Competitiveness. In a previous post [Teaching STEM Subjects Using a Mission to Mars], I discussed how the organization is supporting a program at my child's middle school. Education is a serious subject and deserves serious attention beyond the endless budget and tax debates that inevitably arise. That's one reason that I have chosen to make education a recurring topic on this blog site. One of the best things about education is that it never ends. We never stop learning. You don't need a formal classroom to engage in the process — geniuses like Feynman taught us that. Feynman summed up his philosophy in the title of his book The Pleasure of Finding Things Out: The Best Short Works of Richard P. Feynman. We need to let our children discover the pleasure of finding things out. When they do, they will be lifelong students.

October 10, 2013

Surviving in the Omni-channel World

Erik Brynjolfsson, Yu Jeffrey Hu, and Mohammad S. Rahman believe that mobile technology is forever changing the face of retailing. They write, "Recent technology advances in mobile computing and augmented reality are blurring the boundaries between traditional and Internet retailing." ["Competing in the Age of Omnichannel Retailing," MIT Sloan Management Review, 21 May 2013] As a result, they assert that "retailers [can] interact with consumers through multiple touch points and expose them to a rich blend of offline sensory information and online content." The editorial staff at SupplyChainBrain agrees that mobile technology has changed the retail landscape, and the staff insists that interactions with consumers are just as critical after the sale as before the sale if they are to remain happy and loyal. "With more customers shopping online and on their mobile devices," it writes, "it seems imperative that retailers offer different channels for fulfillment to not only keep prices low, but to remain competitive and foster customer loyalty." ["Multichannel Fulfillment Is The New Normal," 11 March 2013]

Brynjolfsson, Hu, and Rahman believe that technology has finally reached the tipping point in the retail arena. They describe the new business landscape this way:

Omnichannel marketing"In the United States today, more than 50% of cell phone owners have smartphones, and more than 70% of these have used their devices for comparison shopping, a habit that is becoming increasingly common worldwide. In the past, brick-and-mortar retail stores were unique in allowing consumers to touch and feel merchandise and provide instant gratification; Internet retailers, meanwhile, tried to woo shoppers with wide product selection, low prices and content such as product reviews and ratings. As the retailing industry evolves toward a seamless 'omnichannel retailing' experience, the distinctions between physical and online will vanish, turning the world into a showroom without walls. The retail industry is shifting toward a concierge model geared toward helping consumers, rather than focusing only on transactions and deliveries."

It doesn't take much imagination to envision the challenges and complications created by this new retail landscape. Although analysts seem to be in agreement that retailers must adapt to this omnichannel world or risk extinction, "some of the largest U.S. and U.K. retailers [have been] slow to adapt their store operations to changing consumer buying habits, according to a study by SD Retail Consulting, a retail advisory firm and unit of Hilco Trading, LLC." ["Largest Retailers Slow to Adapt to Needs of Omni-Channel Shopping Environment, Study Finds," by SD Retail Consulting, SupplyChainBrain, 7 June 2013] Antony Karabus, president of SD Retail Consulting, stated, "The largest retailers must examine every customer touch point and how they play their part in creating that seamless customer experience. For the minority of retailers who are successfully transforming their store environments, the rewards will be substantial."

Charles Hunt, owner of Duvet and Pillow Warehouse, a fast-growing online retailer, told reporters from The Economist, "'Multichannel' (or even better, 'omnichannel') is something almost every self-respecting retailer wants to be. It means letting customers shop with smartphones, tablets, laptops and even in stores as if waited upon by a single salesman with an unfailing memory and uncanny intuition about their preferences. Pure-play internet vendors are good at this. But most resist the idea that actual stores, with their rents, payrolls and security cameras, ought to be one of those channels. The thought of having the same costs as bricks-and-mortar competitors 'scares the living daylights out of me'." ["Mixing bricks with clicks," 23 March 2013] Hunt clearly spots the sorest point in omnichannel operations — the differential costs between online and brick-and-mortar operations.

Another sore spot, however, is omnichannel alignment. McKinsey & Company analysts Duarte Braga, Paul-Louis Caylar, and Pascal Griede, note, "At many companies, ... channel conflict or poor coordination gets in the way of true multichannel harmony. Successful multichannel leaders understand the importance of flexibility – helping customers shift between channels at the different steps of their decision journey to achieve the experience they want." ["A symphony of separate instruments: Cross-channel and online sales," Telecom, Media, and High Tech Extranet, 24 October 2012] Braga and colleagues note companies that began as brick-and-mortar stores are sometimes as reluctant to enter the online market as Hunt indicates he is to enter the brick-and-mortar arena. This kind of reluctance can result in the disharmonies noted by the McKinsey analysts. They conclude:

"No company today would neglect digital sales altogether. Yet many still view these efforts as sideshows to their 'real' business in stores. By taking smart advantage of the range of digital platforms currently available, retailers can delight customers both inside and outside their stores, while harvesting valuable consumer insights. Going a step further to integrate these digital channels within a truly multichannel strategy can boost performance across all channels – whether online or offline."

Brynjolfsson, Hu, and Rahman report how "the availability of product price and availability information, the ability of consumers to shop online and pick up products in local stores, and the aggregation of offline information and online content have combined to make the retailing landscape increasingly competitive." They note that "retailers used to rely on barriers such as geography and customer ignorance to advance their positions in traditional markets. However, technology removes these barriers." For brick-and-mortar stores location still matters in two ways. The most obvious way that location matters is, of course, ensuring that a store is located in an area easily accessible and desirable to shoppers. In the mobile age, Brynjolfsson, Hu, and Rahman point out that location also provides an advantage when shoppers are nearby. They explain:

"The growing prevalence of location-based applications on mobile devices is a critical enabler of these changes. According to the Pew Research Center, 74% of U.S. smartphone users used their phones to obtain location-based information in 2012. Retailers are taking advantage of opportunities created by location-based applications. Walgreens, for example, has teamed up with Foursquare, a location-based social networking website, to offer customers electronic coupons on their phones the moment they enter a Walgreens store. Saks Fifth Avenue has also worked with Foursquare to steer consumers toward physical locations by offering goodies (such as high-end brand Nars lipstick). Macy's offers free Wi-Fi in its stores; consumers can scan QR codes on products to see online product reviews, prices and exclusive video content on fashion trends, advice and tips. In some cases, the location-based applications aren't managed by the retailers but by third parties. For instance, RedLaser, an eBay company, allows consumers to scan UPC codes to determine whether specific products are available nearby and at what price. Mobile applications themselves are becoming increasingly advanced. For example, Loopt, of Mountain View, California, provides real-time location-based services aimed at specific users and popular locations. Retailers can use Loopt as a virtual loyalty card, allowing them to connect directly with consumers based on their location. Loopt users can find friends nearby and receive coupons and rewards for checking into specific locations. Another app called Doot enables users to leave public or private messages for friends or family members at restaurants or stores; the messages are activated when the designated people reach the sites."

Brynjolfsson, Hu, and Rahman offer seven strategies for achieving successful omnichannel retail operations. They are:

1. Provide attractive pricing and curated content.

2. Harness the power of data and analytics.

3. Avoid direct price comparisons.

4. Learn to sell niche products.

5. Emphasize product knowledge.

6. Establish switching costs.

7. Embrace competition.

They conclude:

"Technology is making omnichannel retailing inevitable and is reducing the ability of geography and ignorance to shield retailers from competition. It is breaking down the barriers between different retail channels as well as the divisions that separate retailers and their suppliers. At the same time, omnichannel retailing expands the overall pie by extending market reach and introducing consumers to products they may not have known about. Supply chains that generate increased consumer value are likely to win in the long run. More transparency is likely to speed up this process, leading to more of a 'winner-take-all' effect. As a result, retailers and manufacturers will need to find an area where they are truly the world’s best, as opposed to just working harder to hide from competition. With omnichannel retailing, competition will increase on many fronts, but so will the opportunities for savvy retailers and supply-chain partners to gain competitive advantage."

Omnichannel operations for many companies will result in smaller retail stores and larger distribution centers. I will discuss the backend impacts of omnichannel operations on the supply chain in a future post.

September 30, 2013

Do You Know Who Your "Influentials" Are?

"Online influentials who provide sole or 'exclusive' influence over consumers are the most valuable to companies," reports Robert Berkman. ["Valuing Influentials Means More than Just Counting Connections," MIT Sloan Management Review, 10 July 2013] Berkman makes that assertion based on "the finding from research conducted by Zsolt Katona, [an] assistant professor at the Haas School of Business, UC Berkeley." Berkman continues:

Building-relations-with-influencers-e1367246422392"Conventional wisdom, reflected by influence-ranking sites such as Klout, is primarily to count the number of a person's connections to assess his or her ability to influence others. But Katona's research has discovered that determining the value of a particular influencer is more complex, and that finding the value of an influencer depends on several underlying factors in the network structure of that individual with the target set of consumers."

The study's results sound similar to Malcolm Gladwell's conclusion that "the success of any kind of social epidemic is heavily dependent on the involvement of people with a particular and rare set of social gifts." He calls this "the Law of the Few." [The Tipping Point] Duncan Watts, a network-theory scientist, disagrees with Gladwell's conclusion about the Law of the Few. Watts insists that influentials play "no special role in trends at all." ["Is the Tipping Point Toast?" by Clive Thompson, Fast Company, February 2008] Mark Borden describes the debate this way:

"There has long been debate about what, precisely, defines influence. Dale Carnegie, author of How to Win Friends and Influence People, described it as the ability to arouse enthusiasm in others to change their behavior. Tipping Point author Malcolm Gladwell says it derives from identifying new trends and sharing them through connected networks. Network theory scientist Duncan Watts says targeting influencers is wasted effort, that starting a trend is essentially a random act." ["The New Faces of Social Media," Fast Company, 25 October 2010]

So who is correct? The folks at Crowdtap believe that Watts is the "knockout" winner. They "found that when it comes to purchasing decisions, the most influential recommendations come from people we actually know, either through the web or in person." ["Who Are the Real Online Influencers?" by Josh Catone, Mashable, 13 June 2012] Catone's article was accompanied by the following Crowdtap infographic.

Influencers

Katona's study, which is entitled Competing for Influencers in a Social Network, concluded, "The most valuable person influences consumers who are not influenced by any other influentials online. A company that wants to invest time or resources in cultivating an influential person online should focus on those where the target consumers are being influenced in that product/service arena only by that person and not by anyone else." Do such influencers really exist? The study concedes, "Often, though, an influencer does not have an exclusive relationship with a set of target consumers. In these 'non exclusive' relationships, influencers who are most valuable are those where the sought after consumer/set of consumers has a very small set of additional competing influencers." Berkman reports that there was an interesting twist discovered during the study. "The next most valuable influentials are those who influence target consumers who have a very high number of additional competing influencers. ... The reason: if the target consumer has a high degree of additional competing influencers, a company will not need to invest as much money or resources to reach those consumers because they already have so many incoming connections informing them about all the options and they will buy the product that is best for them regardless of the firm’s efforts."

Berkman reports that those with "a middle range of additional competing influencers" were the least influential. Katona told Berkman that high, medium, and small were relative terms that "depended on the specific parameters set up by his model." Berkman then asks the $64,000 question: "What, then, are the practical implications of this study for social media marketers?" He concludes:

"The most important one is that firms should not just look at the number of connections an influential has when determining how many resources to devote to that person. Instead, they need to find out what the target consumer market's relationship is to the influential by taking into account their connections with any other competing influencers. Although widely available customer-influence network analyses sites and services like Klout do not take into account competing influencers and this overall network structures of influentials, Katona says that some telecom firms are now analyzing the connections between their customers and their competitor's customers on their own, and he says that it won't be long until other firms begin doing these analyses as well."

Jose Capelo is one pundit who believes in the power of influentials. He writes, "Social media influencers are fundamental to drive awareness and popularity for brands." He defines an influential as "a person or group of people, usually experts in a particular subject, which have gained recognition and credibility through their actions on Social Media. These actions include: frequent posts and of good quality, say what they think, and overall exerting personal persuasion. The influence is achieved by adding a personal brand, trust and experience." ["Importance of Social Media Influencers," Marketing Query, 18 July 2013] Russ Henneberry is another author who believes that some people have more online influence than others. He reports, "A study from Forrester Research confirms that 13.4% of U.S. adults online create 80% of the content that influences people. And 6.2% of these web users are responsible for 80% of the influence in social media." ["How to Find Influential People With Social Media," Social Media Examiner, 17 October 2012] Of course, not everyone who is in the 6.2% group of influencers is going to have influence in the same area. So, for any one industry or market, that number is considerably smaller. Henneberry asserts that "there are tools and processes to help you reduce the amount of noise in social media. You can use these to concentrate on the key influencers who can move the needle for your business. The goal is to find these key influencers and create a filter that allows you to communicate with them. This helps you develop a positive relationship with the influencers, which can grow your business."

Clearly, some consumers are influenced by "trusted strangers" they follow online. Although I tend to agree with Watts that the closer a consumer is to an influencer (e.g., a family member, friend, or associate) the greater the influence that person has on the consumer.

September 26, 2013

Getting a Handle on Returned Merchandise

Retailers and manufacturers never like to see products returned; but, it happens. Evan Schuman contends, "One of the worst parts about managing retail businesses is dealing with unknown future returns." ["Can Some Returns Be Predicted And The Associated Inventory/Revenue Impact Flagged?" Storefront Backtalk, 29 February 2012] The editorial staff at SupplyChainBrain adds, "Returns are a headache for any company that has to deal with them." ["How to Improve ROI on Product Returns," 15 December 2011] There are two principal reasons that products are returned: first, they are broken or defective; second, the customer changes his/her mind.

Return to senderConcerning the first type of returned merchandise, the SCB staff writes, "Determining the fate of broken, defective or obsolete items while attending to the accompanying paperwork can be a costly and time-consuming process." Linda Olster explains why this so. She writes, "Throw in replacements, repairs, sending empty boxes for the return, getting the return back from the customer (to the right location), processing any credits, keeping track of where your inventory is … and all of sudden, you realize the process is not so simple or straightforward." ["Managing Returns: How a Transportation Management System Can Streamline the Process for You and Your Customers," Logistics Viewpoints, 2 February 2012] She goes on to explain how a good "Transportation Management System (TMS) can help to streamline the process and help you gain some unexpected 'returns' along the way." Pun intended, I'm sure.

Concerning the second type of return, Schuman believes that Big Data analysis can help predict which products will likely be returned with greater accuracy and confidence. For example, he writes that "a customer who purchases three of the identical shoe, but each one in a slightly different size" can be predicted, with a high degree of accuracy, to return at least two of the pair of shoes. He also believes "that any purchases from a customer who has a history of high returns" will likely be returned.

According to Associated Press reporter Jennifer C. Kerr, "Each year, consumers return about $264 billion worth of merchandise, or almost 9 percent of total sales, according to industry estimates. Many buyers aren't aware that some returns, with and without receipts, are being monitored at stores that outsource that information to a third-party company, which creates a 'return profile' that catalogs and analyzes the customer's returns at the store." ["Serial returners, beware: Retailers are tracking you," Today Money, 12 August 2013] As noted above, dealing with returns can be a costly and complex challenge. Kerr reports that tracking returns helps stores keep prices down for the majority of consumers by identifying "chronic returners or gangs of thieves trying to make off with high-end products that are returned later for store credit." Kerr also reports, "consumer advocates don't like it" (i.e., they don't like the fact that return histories are tracked).

The editorial staff at Consumer Reports ShopSmart magazine report that retailers track return data "to stop folks who steal, use, or wear items and then bring them back." ["What's the deal with ... The returns blacklist," July 2013] This kind of abusive and illegal behavior cost retailers "an estimated $8.9 billion in losses last year, according to the National Retail Federation." In addition to tracking returns, the magazine reports that "some stores now require identification for returns as a theft deterrent." The Federation claims that "62 per cent of U.S. retailers have a similar policy." ["Beware serial returners! How retailers are joining forces to catch out shoppers who bring back too many purchases," The Daily Mail, 21 November 2012]

The biggest player in the returns tracking field is a company called The Retail Equation. Kerr explains how the tracking process works by describing a Best Buy use case:

"—A consumer buys an item at Best Buy and later returns it. Even if the shopper has the original receipt and is within the time frame when returns are permitted, store policy requires that Smith provide a photo ID, such as a driver's license. Other stores, such as Home Depot, only require the ID if there's no receipt or if the item was purchased with a store credit.

"—The ID is swiped and then some information from the transaction is sent by the store to The Retail Equation. The company says the information captured from the ID typically includes the identification number, name, address, date of birth and expiration date.

"—The Retail Equation catalogs return activity by the shopper and creates a 'return activity report' on him with his returns at the store. If The Retail Equation determines that there's a pattern of questionable returns that suggests potential fraud, it would notify Best Buy, which could then deny returns by that shopper at the store for a period of time.

"The threshold for too many returns is determined by each retailer. The Retail Equation says the vast majority of returns — about 99 percent — are accepted."

SmartShop reports that The Retail Equation "doesn't aggregate information across retailers, report to credit bureaus, or accuse customers of theft or fraud." According to Kit Yarrow, a professor of psychology and marketing at Golden Gate University in San Francisco, even though retailers are seeing an increase in returns — "up 19 percent from 2007" — not all of the increase can be accounted for by fraud or serial returners. She claims that consumers are becoming "pickier shoppers" and are making more impulsive "purchases [of] tempting bargains. That means more returns." ["The Why Behind the Buy," Psychology Today, 4 September 2012] Nevertheless, Yarrow notes that returns are becoming an increasing problem for merchants. "For every dollar spent today, nine cents is returned. Consumers have a bolder mentality and higher expectations when it comes to returns."

According to Yarrow, the challenge of how to deal with returns has placed merchants in a conundrum. She explains:

"New procedures and policies [for dealing with returns] can feel confusing, even maddening, to shoppers. Authenticity, transparency and 'living up to promises' are important values to consumers. Retailers use imagery, emotion and symbolism to craft an enticing image — which becomes the personality of the store. That image is an unspoken promise of a particular type of shopping experience. It's the retailer’s job to ensure that every consumer touchpoint lives up to the promise of a store's image. The return — that moment when the customer effectively tells the store their sales transaction was a failure, that they found something better, or a better price — is an authenticity test. And according to my research, one that retailers often fail. When that happens, shoppers feel tricked."

It's easy to see how retailers must walk a fine line between trying to foster customer loyalty and protect themselves from fraud. A blogger calling herself Jeannieinabottle, provides a pretty good account of why stores dislike chronic returners. She writes:

"If you return items to the same store more than twice a month, you are a chronic returner. No one likes a chronic returner. First of all, it ruins the sales tracking system. If you make a major return and do not buy something to replace it, the numbers take a huge tumble in the system. That looks horrible for the sales associates and managers working at that time. Even if you do an exchange, imagine all the effort that went into the whole transaction just to break even? It is a frustrating process for everyone involved. I can't imagine why customers want to constantly take part in this process on a regular basis. If you are a compulsive shopper and feel guilty as soon as you get your purchases home, then seek some help. The endless cycle of shopping and returning is not helping you or the stores where you shop. If you never try the clothes on at the store, but instead take them home, you need to find a way to either A) successfully evaluate your size, or B) start using the dressing rooms. Also, it helps to make sure you want the product. Don't just make the purchase thinking you can just take it back if you change your mind. You should not be so indecisive that you are making returns constantly. I do understand that we all have to return items here and there. I just had to return a vacuum that broke after using it only two months. I know these things happen. Most managers and sales associates fully understand that. Even if a return is time consuming, it is still a necessary retail evil. However, when customers abuse the system and return items all the time, that is a real nuisance." ["Are You an Annoying Customer?" HubPages, 10 May 2013]

There are no silver bullet solutions to the returns problem. Both merchants and consumers have a role to play if returns policies are to remain reasonable and fair. With billions of dollars at stake, you know that retailers are going to protect themselves as much as they can from fraud and abuse.

September 13, 2013

Supply Chain Risk Management: Judging Appetite and Capacity

SCE Magazine reports "that company executives are coming under increasing pressure from customers, shareholders and regulators, to better address the issue of supply chain risk." ["Just How Resilient Is Your Supply Chain?" SupplyChainBrain, 3 September 2013] This increasing pressure is undoubtedly the result of a string of major supply chain disruptions that has plagued global supply chains over the past decade. These disruptions have been caused by unexpected natural disasters (e.g., volcanoes and tsunamis) as well as man-made disasters (e.g., conflict and industrial accidents). The article notes that because "many businesses operate a 'just in time' production strategy to keep inventories low and the production of key components and other services is outsourced to reduce costs" even the slightest disruption can have significant perturbative effects. The article concludes:

Risk 02"To reduce the risks, companies need to make resilience of their supply chains a top priority. They need to ensure that they and their suppliers have business continuity plans that are capable of responding to any number of potential crisis scenarios. Executives should be aware that it is not just their own supply chain that is at risk, but any weakness in a supplier’s supply chain is also a problem. A common issue that companies often overlook is the risk beyond their immediate suppliers – to their suppliers' suppliers – and don't regularly assess the resilience of the risk mitigation standards of even their most critical suppliers."

Noted supply chain analyst Lora Cecere has been making this point for years. Even though supply chain risk management is rising on corporate priority lists, a recent study concluded that "only 41% of companies surveyed are considered to have 'mature' supply chain risk management processes." ["Majority of firms lack 'mature' supply chain risk management: survey," Canadian Underwriter, 13 August 2013] The article goes on to report that even though companies don't have mature SCRM processes, "nearly four in five mitigate against disruptions by implementing a dual sourcing strategy." If, however, the both sources are in the same general location, this strategy is only effective against man-made disruptions from a single supplier.

The report, entitled 2013 Global Supply Chain and Risk Management Strategy, was released by the Massachusetts Institute of Technology (MIT)’s Forum for Supply Chain Innovation and was written in collaboration with the audit and consulting firm PricewaterhouseCoopers. The report concludes:

"Our research validated that companies with mature risk processes perform operationally and financially better. Indeed, managing supply chain risk is good for all parts of the business - product design, development, operations and sales."

According to the article, respondents who participated in the study looked on potential risks with a fairly broad perspective:

"About half (53%) said raw material price fluctuations were sources of risk, 47% identified currency fluctuations, 34% identified environmental catastrophes, 28% identified raw material scarcity, 22% identified geopolitical instability, 22% identified supplier partner bankruptcy, 20% identified change in technology, 12% cited unplanned IT interruptions and 5% identified telecommunications outages while only 2% identified cyber attacks as sources of risk to their supply chains."

I'll explain in a future post why downplaying cyber risks could prove dangerous. Glen B. Alleman reminds us that "there are many definitions of risk from a variety of sources." ["More Uncertainty and Risk," Herding Cats, 5 May 2013] "In the end," he writes, "these definitions are all pretty much the same." The elements of most definitions, he points out, include:

  • "Risk involves the probability of something happening in the future.
  • "When that something happens it impacts the project in ways that are not good.
  • "There can be a probability of the effect of the impact as well.
  • "Handling the risk means knowing what kind of risk it is, and what the choices are for handling the risk."

He offers the following redacted definition of risk that he believes "can be used in probably any domain."

"Risk refers to the uncertainty that surrounds future events and outcomes. It is the expression of the likelihood (probability of occurrence) and (probability of) impact of an event with the potential to influence the achievement of an organization’s objectives." - Managing Risk in Government: An Introduction to Enterprise Risk Management, IBM Center for The Business of Government.

Supply chain analyst Bob Ferrari asserts, "Every supply chain management team needs to have ... vibrant supply chain risk mitigation and management plans in-place. Evidence continues to point to yet more profound reminders to the ongoing existence of supply chain risk." ["Yet More Evidence to the Ongoing Existence of Industry Supply Chain Risk," Supply Chain Matters, 19 August 2013] The question often arises about how much risk a company is willing to take. This is sometimes referred to as Risk Appetite. A blog entitled Riskviews lays out four strategies that can help a company determine whether it is suited to determine its Risk Appetite (see the image below).

Risk Strategies

The article explains these strategies this way:

"If your risk attitude is what we call MAXIMIZER, then you will believe that you should be able to accept as much adequately priced risk as you can find. If your risk attitude is what we call CONSERVATOR, then you will believe that you should mostly accept only risks that ... you are comfortable with. ... If your risk attitude is what we call PRAGMATIST, then you will believe that it is a waste of time to set down a rule like that in advance. How would you know what the opportunities will be in the future? ... You would think that it is a waste of time to worry about such an unknowable issue. Only the companies that are driven by what we call the MANAGERS would embrace the risk appetite idea. ... The risk managers should also be able to help the top management of the company to select the corporate strategic balance, reflecting the best combination of risks to optimize the risk reward balance of the company."

David M. Katz believes that Risk Appetite should always be partnered with another metric called risk-bearing capacity (RBC). ["How Much Risk Can Your Company Bear?" CFO, 23 April 2013] Katz insists that using RBC is necessary for companies "to gauge their appetite for risky, financially threatening activities." Katz indicates that he finds it puzzling that some "CFOs may be trying to judge risk appetite without the benefit of valuable quantitative metrics, like RBC." He continues:

"RBC is a prospective view of risk that is useful in establishing allocations of risk, capital or both to drive value for the shareholders and the organization as a whole. ... While RBC is calculated in different ways depending on the key performance indicators of a given company or industry, the common basis for the calculation is 'how much risk the organization can bear before [it becomes] insolvent,' said Carol Fox, the director of the strategic and enterprise risk practice at [Risk and Insurance Management Society (RIMS)]."

Katz points to a survey published by RIMS that concludes, "Given the widespread disconnect between senior management and risk pros, [companies] may have a long way to go." Douglas Macdonald, Procurement Portfolio Product Marketing Leader at IBM, indicates that best-in-class companies all share several characteristics when it comes to dealing with risk management. ["Develop risk management through an adaptable supply chain," SupplyChain Digital, 15 April 2013] They are:

"Risk Identification: Best-in-class procurement organizations use technology and information services as a starting point to identify sources of risk. Examples include:

• Identifying components sourced from either suppliers that are at financial risk or are concentrated in a specific geographic region more vulnerable to political conflicts or currency fluctuations.

• Identifying components of production that are either sole sourced or come from very specialized suppliers, thus increasing the company’s dependence on them.

"Risk Prioritization: Best-in-class procurement organizations perform 'what if' analysis and quantify the impact of supply risk for specific components and commodities. Armed with such analysis, they prioritize actions on those components and commodities that have the greatest potential impact on the business.

"Risk Mitigation: Best-in-class procurement organizations also go beyond mere risk identification, to actively manage and mitigate supply base risks."

I agree with Macdonald that the companies that will flourish in the decades ahead are those who implement adaptable supply chains that proactively manage and mitigate supply chain risks. Regardless of how careful a company is or how good of a risk management process it maintains, it is going to still face risks that are out of its control. How much risk it is willing to bear is something that that each company should carefully consider.