INDUSTRIAL ENGINEERING APPLICATIONS IN RETAILING:RETAILER OPPORTUNITIES ON THE HORIZON

RETAILER OPPORTUNITIES ON THE HORIZON

The Global Marketplace

The globalization of retailing presents a host of problems and opportunities for retailing. The ability of companies to meet cultural needs, transport goods and services across boundaries (sometimes oceans), while controlling costs and maintaining efficiencies is not clear . . . yet. Some companies may have already met this challenge. Dell Computers’ direct-to-customer model is a global reality. Since a Dell computer is manufactured only when it is ordered, it does not matter to Dell if the computer is selected by a consumer sitting in Peoria, Illinois, or Kuala Lumpur, Malaysia. The computers are built and the appropriate shipping is arranged from the closest facility. Trained tech- nicians answer technical and support questions over the phone and can be anywhere in the world (questions are also answered from a central website).

E-commerce: The Virtual Retailer

Fifty years ago, catalog shopping was deemed the beginning of the end of store retailing, in much the same way that e-commerce is proclaimed to spell the beginning of the end for store retailing today. Offering products and services directly to the consumer who has money but little time is nothing new. The e-commerce alternative is simply another way for consumers to get what they want, when they want it. The e-commerce alternative is not a threat to the existence of retailing but is a challenge to supply chain management of the store-based retailer.

The promise of direct to consumer retailing is clear—fast, individualized, convenient delivery of what the customer wants. The reality is less clear. Few if any direct to consumer e-commerce initia- tives have proven successful . . . yet. The reason is simple. The Internet is an easy way to sell but a lousy way to distribute. Everything purchased on the Internet has a price to which a shipping charge must be added as well as the time to deliver it. The Internet’s ability to provide immediate purchase gratification is limited.

It is interesting to note when we review e-commerce discussions that it is as if home delivery were a new concept discovered by these Internet pioneers. In fact, home delivery has been a bur- geoning trend in many industries—furniture, appliances, video, Chinese food, pizza, and now the grocery business. A study by Anderson Consulting predicted that delivery can capture 12% of the

U.S. grocery business, about $85 billion. But even in this area of e-commerce there is plenty of need for, and money for, the store-based retailer. And it is still not clear whether grocery e-retailers will be able to make a profit in the near future. Peapod is the most successful example of this business model in groceries. The company started in 1989 in a suburb of Chicago, went online in 1990, and now has over 40,000 products available for delivery in eight metropolitan areas. The company delivers what is ordered at a prearranged time. Revenues for 1999 were estimated to be $70 million. However, Peapod has yet to show a profit.

Scope of E-commerce

Toyota is considering a direct electronic channel where customers submit their specifications, as well as financing information, via the Internet (or 800 number). Toyota would respond within the first 24 hours after researching their supply chain and retail distribution with the closest matches and esti- mated delivery time.

Cisco, Autodesk, Intel, Dell, and Gateway all allow their customers to access inventory and order information from the Internet. They can place and track orders without any human intervention (hence lower costs).

Anderson Windows has supplied point-of-sale kiosks to its retailers. Consumer and retailers design the windows, get order quotes, and place orders at the same time. The system shows customers what they have designed and links the retailers to the supply chain and distributors.

Levi’s stores have a minimal inventory, but with a computer model, they measure the consumer at the key design points of their personal fit jeans. The measurements are transmitted to the production facility and a personal pair of jeans is mailed to the consumer within nine days. Consumers are willing to pay slightly more for the perfect pair of jeans. The customer simply cannot buy jeans that fit as well at any other retailer. The customer can now call Levi’s from any place in the world and a custom-fit pair of jeans will be shipped.

Grainger is not the business you might think of when you think of an e-business. Since 1927, Grainger has sold industrial supplies (motors, cleaners, lightbulbs) through a 7-lb thick read catalog and 500 stores. It has made a spectacular transition to the Web. Its advertising says it all: ‘‘The Red Book [its catalog] has .com of age.’’ They further say, ‘‘Our award winning web site (www.grainger.com) carries over 560,000 products online, 24 hours a day, 7 days a week. Our powerful search engine finds exactly what you want. Fast. And you can take advantage of your company’s specific pricing.’’ In 1998, its Internet sales were $13.5 million. In 1999, they were $100 million. Only Cisco, Dell, Amazon, and IBM have a larger sales volume. Grainger builds online customized catalogs for the many businesses that negotiate selling prices. When the customer write his or her own order, there are fewer errors made than with placing the order by calling the 800 number. The site tells customers whether the product is in stock at a local store that will deliver it the same day (or overnight) without the overnight shipping fee. The cost of selling a product is a fraction of what the costs are in other areas of Grainger’s business, allowing greater discounts and greater profits. To encourage sales, account managers encourage their accounts to order on the In- ternet, and the salespeople will still get commission on their accounts, even when products are ordered from the website.

One of the biggest problems that retailers face in Internet retailing is the ability of manufacturers to go directly to the consumer. Why pay for a GE microwave from an appliance store on the Web when you can buy it from GEs website (probably for less money). What is particularly interesting about Grainger is that by selling a wide variety of manufactured products, it gives the customer a side-by-side comparison of all available brands when the customer is searching. The customer can buy all the brands he or she wants conveniently and easily instead of having to go to each manufac- turer’s website and buy separately.

The Internet Mindset

Yes, the Internet will spur many direct-to-consumer businesses. Yes, the Internet will allow existing retailers to expand their markets and provide a new channel for their existing companies. And yes, the Internet will allow retailers to develop efficiencies of time and money with their vendors and manufacturers. But more importantly, the Internet will force retail leaders to develop an Internet frame of mind that will allow challenges to the way business is being done at all levels in all ways. The advances that will come from this change of mindset cannot be predicted but can be expected.

One to One Marketing

A company’s success at individualized product offerings means greater market penetration, greater market share, greater share of the consumer’s wallet, and improved satisfaction as customers get exactly what they want instead of settling for what the retailer has. Mass customization / one to one marketing is the real final frontier for retailers. Responsive manufacturing, IT, and efficient replen- ishment systems allow Levi’s to offer the consumer a pair of jeans made to his or her exact speci- fications.

Here we have a vision of the ultimate supply chain management. Customers have exactly what they want. A long-term relationship is established so that the customer has no reason to desert to a competitor. Because a customer is getting a unique product made just for him or her, a competitor cannot steal that customer simply by offering price inducement. The jeans are not manufactured until they are needed, and a third party delivers the product. The very issues that supply chain management has been concerned with are reduced and eliminated by one to one marketing.

The Product Comes Back: Reverse Logistics

If the supply chain is relatively invisible, the reverse supply chain (getting back to the manufacturer products that need repair or replacement) is practically ethereal. However, the costs of getting products back through these reverse channels makes process and management issues extremely important to retailers. According to the National Retail Federation, the average return rate from products bought in specialty stores is 10%, and in department stores, 12%. Catalogs have a return rate three times higher. Early indications are that Internet purchases are twice that. Reverse logistics is maximizing the value from returned products and materials.

Frequently, the products / material put into the reverse supply chain can be refurbished or reman- ufactured. Xerox reports that recovering and remanufacturing saves over $200 million annually, which can then be passed along to customers in lower prices or shareholders in higher earnings and profits. A product returned for repair can either be replaced (and the product broken down and its parts used in other manufacturing) or repaired. Repaired or returned products that cannot be sold as new can be resold, frequently as refurbished, using parts from other returned products. Unfortunately, retailers and manufacturers have made poor use of the strategic information available in returned products to change and improve design. Mostly the repairs are made or the broken product sits in a warehouse. The information about your product and the company sits useless.

A growing area of concern is how to conscientiously dispose of products or their components. Black & Decker avoided significant landfill costs and made money by selling recyclable commodities. When there are no alternatives except disposal, the product or material needs to be appropriately scrapped. In an era of environmental concern (which will continue to grow and drive marketplace decisions), companies should take proactive action to develop environmentally sound landfill or in- cineration programs. Not only will this allow favorable consumer reactions, but it may forestall government regulation and control.