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[Music]
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[Music]
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Marshall thank you so much for joining
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us today my pleasure M thank you for
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having me I'd like to start talking
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about your book with a simple question
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you you say that retailers often fail to
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match supply and demand what are the
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consequences of that failure for them um
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well you see one of the consequences
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when you walk in many stores um which is
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huge piles of merchandise uh on sale at
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deep discounts as much as 80% there's a
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department store I visit from time to
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time for various reasons and you'll see
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the aisles sorted into maybe three
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sections 50% off 70% off 80% off so
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that's one consequence um the
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consequence uh for retailers is uh is
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obviously lower profit which can come in
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one or two ways the the access that we
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just talked about which means you're
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selling
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things uh frequently below what it cost
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you to to buy it and get it into the
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store so you lose
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money uh or
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uh that's the excess side or you don't
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have enough of something and the
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customer walks in and can't find what
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they're looking for and that's a lost
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sale so there's a couple interesting
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statistics that uh until
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1995 when it um got embarrassing
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department stores used to um collect and
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Report uh an industry number which is
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the markdown percentage
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okay in the mid if I remember right in
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the mid 70s that was about
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6% and by 95 had had grown to something
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like 33% it's not publicly reported
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anymore but I heard a statistic that for
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one leading department store that number
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would now be
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40% which means that the average item
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sells for 40% off of full
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price uh that's on the excess side on
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the shortage side there's a consulting
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firm that does an annual survey of
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consumers this is in apparel um where
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it's maybe hardest to match Supply with
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demand but they routinely uh find that
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uh people who respond to the survey will
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will say that about a third of the time
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they walk into a store with a clear idea
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of what they want to buy and walk out
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empty-handed because they couldn't find
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what they came
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for which is pretty amazing if you think
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about it that A2 billion doll retailer
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is really a $3 billion retailer but that
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third billion in Revenue they're not
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getting because the the of the third of
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the people who walk out empty handed
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because they couldn't come find what
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they came for now does that imply that
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if retailers are able to make even small
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improvements in matching Supply with
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demand that this would have a fairly big
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impact on their profits yeah absolutely
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for a simple reason retailing is a high
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fixed cost business it costs a lot of
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money to maintain a store base and pay
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the associates that work in those stores
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and you incur that cost whether you sell
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a dollar of merchandise in the in the
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store or 10 million so small increases
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in Revenue have a big impact on profit
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uh typical numbers for gross margin
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would be somewhere between 30 and 50% so
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take a retailer whose gross margin is
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50% uh 5% increase in
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sales uh with a 50% margin is 2 and a
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half% of Revenue increase in profit
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which for a lot of retailers would
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double their profit so this one-third
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that walk out empty-handed because of of
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stockouts or they can't find the product
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in the store or some sort of shortage
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problem just correcting a little bit of
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that uh you know cut that number from a
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third to to 5% less uh could double the
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Retailer's profit that's very and what
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imp applications does the relationship
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of the stock market valuation of a
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retailer have to its ability to manage
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its
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inventory
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um that's an interesting question
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because most
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analysts uh I think don't pay enough
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attention to uh to inventory or other
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operating variables of a
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retailer uh and you can think of a
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number of them but if we take uh
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inventory as an example a retailer
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can uh enhance its Revenue line with
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more inventory okay so come back to the
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example I described is that you'd like
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to have U Better in stock so that people
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find what they came
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for uh when they walk in the store uh
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the the best the the right way to
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accomplish that is more effective
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management of your inventory better
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forecasting U you know better analysis
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of the margin of error on the forecast
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so you can risk
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adjust the heavy-handed way to
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accomplish it is just jack up your
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inventory levels and you can uh improve
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in stocks with a in inefficient process
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a retailer who does that will see an
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increase in Revenue but it's not a real
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Improvement in the effectiveness of
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their performance but it can look that
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way to the stock market so if the market
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doesn't take into account the
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relationship between revenue and
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inventory uh they can be fooled that a
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retailers is having a good year when all
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they're doing is uh forcing sales by by
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uh pumping excess inventory into an
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inefficient
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system that brings us does that make
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sense yes no absolutely it's sort of a
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subtle little bit complicated idea but
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yeah no absolutely uh in fact that that
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uh brings me to uh one of the really
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interesting points in your book where
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you note that ret many retailers are
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drowning in numbers but lack an Insight
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uh how do you think they can correct
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this
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problem uh well well that was actually a
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poster on the door of a woman that we
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worked with who was the vice president
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for uh merchandising technology I think
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was her
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title and the quote was we're a washing
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data and star for information
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interesting yeah well the short answer
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to your question is they should buy this
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book and read it and implement the
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results because that's essentially what
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we tried to do in this book is report
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about 10 years more than 10 years of of
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experience we've had working with
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retailers who who were a wash in data
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but star from information and helping
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them to
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interpret uh all kinds of data starting
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with POS sales data uh customer
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satisfaction surveys and um demographic
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data about their
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Stores um if you think about what would
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cause you to be a wash in data but star
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from
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information um there are many things but
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I'll mention a couple one is one is a
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lot of retailers until recently have not
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had sufficiently granular data this may
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surprise you but an apparel item this
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shirt I'm
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wearing what they would see is sales of
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this shirt for the entire chain across
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all
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sizes okay they would not see the sales
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of this shirt in a medium
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in XYZ store last
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week so they're left to to
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guess uh the level of in stocks across
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the stores they're left to guess is what
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is the right size mix so so that's point
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one is until recently the data was was
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too aggregated to be useful you need at
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the microscopic level how's this shirt
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selling in the Iowa store in a medium
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today
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the second point is that it's not enough
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to to to know whether an item is selling
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well whether it's hot and you want to
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get more of it it's not enough to know
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at sales level you got to know it sales
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level and other conditions that might
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affect uh uh the sales of that product
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competitive activity weather uh how it's
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priced how it's presented in the store
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is it well presented or is it somehow
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hidden in the back
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room and so most retailers don't collect
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that data they don't interpret it uh so
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you need to look at
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sales and a handful of factors that are
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sales drivers uh in order to accurately
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uh predict from how an item selling how
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it we'll sell in the future those are a
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couple things that could go on and on
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and on but it's it's uh doable but but
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nontrivial to look at the the huge
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amount of data retailers have available
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to them now it makes sense out of it but
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but you can and then it's very powerful
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well one of the things that makes it
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powerful is uh you also mentioned in
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your book how retailers can crunch their
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sales numbers to identify some home run
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products which they may be missing uh
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can you explain how how that how they
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can do that yeah absolutely so retailer
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the retail assortment is the set of
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products that's in the store at any
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point in time when you walk in and
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retailers will periodically update their
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assortment they'll get rid of products
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that are not selling so well and add
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some new products that they think will
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sell
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better the uh and you can think about
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those two decisions get rid of the worst
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Sellers and add some new products which
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is the easier the decision at least on
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which to get rid of is easier because
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you've got sales data so you can tell
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the dogs you got to be a little careful
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that
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that product that's not selling very
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well is the favorite product of some of
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your best customers and if you get rid
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of it you not only lose the sales on
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that product but you lose the customer
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and everything else they're buying it's
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a it's a serious problem in grocery okay
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but other than that kind of subtlety
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that's pretty easy to figure out what to
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get rid of but what to add is harder so
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a lot of retailers do something kind of
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like uh Jin rmy you know the card you
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discard your worst card and you draw
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randomly another card from the deck so
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they'll add another
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uh product my colleagues and I thought
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about how could we give better guidance
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on that and the idea we uh deployed is
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to think of a a product a stock keeping
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unit we call it a skew as defined by its
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attributes so this shirt I'm wearing
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would you know would be a knit it's
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short sleeve it's a certain color it's a
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certain
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size um and then use the sales of your
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current products and we would do this in
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each and every store to estimate the
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demand that customers have for uh for
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attributes and then you can do something
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very powerful which is to
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um if I know there sales of this color
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and of short sleeve shirts and of
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mediums I can figure out uh sales of
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other products that are different
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combinations of attributes that I'm not
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currently selling and we found amazingly
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that there'll
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be uh products that the retailer thought
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there was no demand
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for uh so they didn't have very much of
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it but if you analyze the data right you
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see that there's a huge demand that can
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you give an example yeah sure Tire we
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worked with a tire
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retailer um
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and one of the attributes was the price
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and quality level they had six different
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price quality levels from cheapest to to
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highest
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price they didn't think uh it
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appropriate to carry very much of the
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cheapest tire so across something like a
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hundred different sizes there were only
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nine of these sizes in which They
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Carried the lowest price lowest Quality
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Tire and so therefore they didn't sell
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much of it it was only 5% of their sales
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therefore confirming
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their belief that customers really
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didn't want to buy this cheap tire if
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you looked at the
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sizes the nine sizes that They Carried
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this lowest price point
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in uh across the six it represented 60%
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of Revenue it outsold the next next
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bestselling I think by 10 to1 so the
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customers if you look carefully at the
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data we're screaming hey price matters
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to us you know we and and the
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neighborhoods that these stores were in
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were less wealthy neighborhoods it was
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not surprising so there was a whole set
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of call them home run products that they
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were not aware of because of this
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self-fulfilling prophecy that we don't
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think our customers want to buy low pric
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cheap tires so we're not going to carry
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them and we don't sell a lot of them and
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we were right in fact they were dead
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wrong and there was a huge opportunity
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there so so that's something we found to
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be very interesting absolutely well
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another issue that uh you you bring up
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in your book is that uh inflexible
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Supply chains is the ban of almost all
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retailers uh what are some of the ways
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in which a supply chain can become more
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agile um well I would start answering
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your question by referring back to the
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beginning of this interview where we
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talked
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about uh the average markdown in a
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department store now is 40% signaling a
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huge amount of of excess supply of some
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products yet uh C customers who fill out
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a survey uh say onethird of the time we
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can't find what we came for so there's
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also
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shortage uh how do you correct that how
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you better
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match Supply with demand have less of
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the wrong products more of the right
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there there really three things you can
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and you need to do all three together
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more accurate forecast
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a better choice of the right inventory
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levels and a flexible supply chain which
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means uh short lead time the ability to
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uh Supply the quantity the market needs
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efficiently which might be a lot or
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might be a little uh what has caused uh
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Supply chains to be INF
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flexible uh over time I think
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is uh a number of but probably the
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biggest one is the pursuit of low
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cost uh by sourcing from Asia China
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being at the head of the class in terms
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of countries that people Source from uh
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I actually first visited China teaching
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in a warden program for six weeks with
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my family in
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1982 in
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Shanghai and the uh pretty much the only
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other westerners we saw were buyers from
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apparel companies and they were the
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first wave you know that was really the
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beginning China normalized relations
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with the US in
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1979 um and that's when apparel
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companies realized that wage rates in in
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China
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were what 3% of what they were in the
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United
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States and that caused a flood of
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gravitation of sourcing of of products
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from apparel toys consumer electronics
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uh many other things from China and
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other Asian countries so that's a
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lengthen the supply chain from miles to
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halfway around the world that's probably
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the biggest Factor that's caused Supply
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chains to be uh
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inflexible there are lots of other
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choices you make in a supply chain
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between slow and cheap versus fast and
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expensive like do you ship by boat or by
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air you can measure cost and companies
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are very conscious of costs the value of
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speed is harder to measure that value is
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better in stock better Revenue but you
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don't have a direct measurement so you
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know it costs you an extra $3 to ship
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something by air the gain you get from
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that is um is
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unknown and probably in the future you
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you pay the $3 today the gains in the
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future so there a tendency for what's
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immediate and measurable cost to be
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overweighted relative to what's harder
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to which which is valuable but harder to
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measure speed and flexibility of the
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supply chain so every time there's a
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fork on the road for companies do I pick
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slow and cheap or fast and expensive the
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bias is to take the slow and cheap route
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yeah now you do mention in your book the
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example of companies like world and Zara
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yes that have done really some very
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Innovative things with their supply
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chains uh are there lessons that other
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companies could learn from their
00:18:05
experience I of course of course there
00:18:08
are well described in the book I think
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um the uh I think the first lesson is to
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know in this choice between slow and
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cheap fast and inexpensive when is it
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appropriate to choose fast and
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inexpensive um it's not appropriate
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for stable product with very predictable
00:18:30
demand we use an example of Campbell's
00:18:32
chicken noodle soup it's been around for
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more than a hundred
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years um long shelf
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life uh so excess inventory is not going
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to go obsolete you'll sell it eventually
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you may have to hold it a little longer
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uh very predictable demand uh you don't
00:18:50
need speed and flexibility in the supply
00:18:52
chain for that you can contrast that
00:18:55
with fashion apparel toys uh with this
00:18:59
huge Spike demand at
00:19:02
Christmas uh many consumer electronics
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products
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products that have a a gross margin of
00:19:09
50% or more so missing a sale is
00:19:13
extremely
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expensive uh for those products um you
00:19:17
need flexibility
00:19:19
Zara uh which is pretty well known world
00:19:22
as a Japanese
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retailer less well known in the west
00:19:27
because they sell only in Japan but some
00:19:28
similar practices to Zara and then just
00:19:31
a couple miles from where we're sitting
00:19:33
here in Philadelphia's Destination
00:19:35
Maternity um a company started by
00:19:39
Rebecca Matias a graduate of the
00:19:40
University of
00:19:42
Pennsylvania uh with a crushingly
00:19:45
dominant 50% share of the women's
00:19:48
maternity Market all three of these
00:19:51
apparel uh firms have adopted uh a DNA
00:19:57
of speed and flexibility
00:19:59
they they can get back in stock produce
00:20:03
more and get back in stock on a hot
00:20:04
selling item in two weeks whereas that
00:20:07
number
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for uh other retailers would be measured
00:20:12
in months usually four months or more
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which it which for a seasonal product
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means it's game over if it's selling
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well too bad you can't get back in stock
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and they do a whole set of things some
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of are sort of obvious and mechanistic
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they they'll buy undyed
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fabric uh and keep it in inventory so
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they can quickly cut it and dye it they
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use a laser for cutting so they can cut
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a single layer of fabric the
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less mechanistic obvious thing they do
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which I think many retailers Miss is
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they realize that if you want to quickly
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react to demand get back in stock on a
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hot seller the time uh to make decisions
00:20:54
needed to do that uh for many retailers
00:20:57
will be rather lengthy and will be a big
00:21:00
part of the L time so they
00:21:03
Empower uh product brand-based teams in
00:21:06
the trenches uh the lowest rung of the
00:21:10
of the organizational ladder to be
00:21:12
empowered to make decisions you want to
00:21:14
make more of this product you can't get
00:21:16
exactly this button but you can get one
00:21:19
like it is that okay they can decide yes
00:21:22
or no yeah it's okay the team will have
00:21:25
a designer on it and they'll say yeah
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that'll work so they'll be somewhat uh
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Scrappy and Street Smart in uh in
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matching what the materials they can get
00:21:37
with what the Market's telling us is
00:21:39
needed by the market uh any any thoughts
00:21:42
on how retailers can improve their store
00:21:44
level execution first of all I think we
00:21:47
all shop and we all uh Experience Store
00:21:54
execution uh when we go to a store can
00:21:57
we find a parking spot or
00:21:59
not uh is it easy to find the entrance
00:22:02
when we get in is the store easy to
00:22:05
navigate uh does it look neat and tidy
00:22:08
or messy if we need help can we find
00:22:11
somebody there's a whole set of uh
00:22:13
components of our shopping
00:22:16
experience uh that affect how we feel
00:22:18
and are we going to next time we get to
00:22:20
the end of our driveway are we going to
00:22:22
turn left and go back to that retailer
00:22:24
or turn right and go to the competitor
00:22:26
when I ask my students when I talk about
00:22:28
stor
00:22:29
execution uh who's had a bad experience
00:22:33
shopping uh every hand goes
00:22:36
up who's had a bad experience that made
00:22:38
you really
00:22:40
angry every hand goes up and I could
00:22:44
spend 80-minute class just listening to
00:22:47
viscerally angry stories about bad
00:22:50
experiences they've had trapping I just
00:22:52
suspect you've had that I know I have
00:22:53
everybody has and it's a huge huge
00:22:56
problem for retailers right
00:22:59
uh there's a a couple ideas described in
00:23:04
the book that I think are important one
00:23:06
is getting Staffing levels right in the
00:23:10
store the uh quantity and
00:23:14
experience of the store associates we
00:23:17
worked with a number of retailers who
00:23:19
collected customer satisfaction data
00:23:22
surveys from their customers on shopping
00:23:24
experience and you could
00:23:26
correlate uh how
00:23:29
satisfied was the customer and their
00:23:30
overall number with factors that might
00:23:35
drive that satisfaction and almost
00:23:38
always across a variety of retailers it
00:23:41
was three things if I need help can I
00:23:43
find it is the person knowledgeable and
00:23:46
helpful to me the store associate and
00:23:48
can I find the product I came to buy so
00:23:51
at the end of the day people who shop
00:23:53
have a mission and if they can
00:23:54
accomplish their mission they're happy
00:23:56
uh so we've generally
00:23:59
found that stores on average are underst
00:24:02
staffed and again it comes back to the
00:24:05
measurable being overweighted relatively
00:24:08
unmeasurable you write a check at the
00:24:10
end of the month for salary for your
00:24:12
store associates that's measurable known
00:24:13
and immediate the value of having 10%
00:24:18
more payroll budget and therefore 10%
00:24:20
more people in the stores um is harder
00:24:23
to measure so retailers tend to staff we
00:24:26
developed a statistical technique for
00:24:30
correlating Revenue with level of
00:24:33
Staffing in a retailer based in part on
00:24:37
these customer satisfaction surveys and
00:24:39
we found in one example that uh every
00:24:45
dollar more you spent on
00:24:49
payroll added $10 in revenue on average
00:24:54
it varied by store and by months so you
00:24:56
had to apply it in a granular way cuz
00:24:59
some stores were overstaffed you wanted
00:25:00
to cut them but but this technique lets
00:25:03
you measure the revenue impact of
00:25:06
payroll uh now you think about the
00:25:08
economics to spend a dollar this month
00:25:12
to get $10 in Revenue this
00:25:14
month uh with a 50% margin you're
00:25:17
getting $5 in profit for a dollar in
00:25:19
expense that's a great deal and it's not
00:25:22
an investment because it happens within
00:25:23
the current month so that was what we
00:25:27
saw as a execution void is number one an
00:25:30
overweighting of of the payroll expense
00:25:33
viewing labor as sort of an expense
00:25:35
rather than an investment and number two
00:25:37
not being able to to
00:25:41
staff in a way that takes into account
00:25:44
the impact of Staffing on on revenue and
00:25:48
one final question Marshall what advice
00:25:50
would you give managers of retail
00:25:52
companies to help them Succeed In The
00:25:55
New Normal global economy oh well this
00:25:59
uh New Normal is uh hard to Define but
00:26:04
uh let let's first of all say what how
00:26:08
that phrase is often used is we've just
00:26:10
been through the worst e economy or in
00:26:14
the midst really in some ways if you
00:26:16
look at unemployment are the worst
00:26:17
economy that you and I have
00:26:19
experienced so far I think the Great
00:26:22
Depression of the
00:26:24
30s is in first place but who knows how
00:26:28
this is all going to play out so there's
00:26:30
this sense that the economy will
00:26:33
recover but that it will be uh somehow
00:26:37
fundamentally
00:26:39
changed uh in ways that
00:26:42
are uh hard to discern I'll just mention
00:26:48
one possibility which many retailers
00:26:52
believe is that during a recession uh
00:26:57
people become more price
00:26:59
conscious and if you look at the impact
00:27:02
of the recession on retailers for the
00:27:04
vast majority maybe 90% it was bad news
00:27:08
Revenue went down
00:27:10
surprisingly there's some retailers that
00:27:13
are counter that do better do as well or
00:27:16
better so who would you guess would be a
00:27:20
counter cyclic retailer that does better
00:27:23
in tough
00:27:24
times probably the the discount
00:27:27
retailers yeah so who be at The Head of
00:27:29
the Class the Walmart Walmart yeah
00:27:32
Walmart auto parts retailers right right
00:27:35
any any do-it-yourself
00:27:37
retailer uh did as well or
00:27:41
better during the
00:27:43
recession will that
00:27:45
persist um is a very interesting
00:27:48
question
00:27:50
uh and of course the W Walmarts of the
00:27:53
world say of course it will
00:27:55
fundamentally people have changed their
00:27:57
buying Behavior avior and price matters
00:27:59
more now and will and there's a whole
00:28:01
generation that went through this lousy
00:28:03
economy like the depression generation
00:28:05
and they're going to think about life
00:28:06
differently and they're going to be more
00:28:08
price conscious um the other thing
00:28:11
that's going on now and I think will
00:28:13
persist for a long time it's
00:28:15
deleveraging people are paying off their
00:28:17
credit card bills which means they're
00:28:19
spending less so there's a great
00:28:22
reduction in consumer spending levels
00:28:25
that's going to have a big big impact on
00:28:27
retailing
00:28:28
great Marshall thank you so much for
00:28:30
speaking with us today M it was my great
00:28:32
pleasure thank you for having me
00:28:38
[Music]
