Technology in Society 22 (2000) 111122 www.elsevier.

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Improving retail effectiveness through technology: a survey of analytical tools for physical and online retailers
Bharat P. Rao
*

Institute for Technology and Enterprise, Polytechnic University, 55 Broad Street, New York, NY 10004, USA

Abstract Information technology can be used as an effective tool in managing problems related to the retail supply chain. In this paper, we overview some of the common problems retailers face while evaluating alternative technology solutions. A survey of available analytical tools is presented. 2000 Elsevier Science Ltd. All rights reserved.
Keywords: Retail; Information technology; Supply chain; Online retail; Effectiveness

1. Introduction Integration in the retail supply chain is a subject of increasing concern to many retail executives, owing to the growing pressures of industry consolidation; emerging new retail formats; difculties in managing costs, stock-outs and markdowns; and the erosion of margins and protability. As a result, retailers have turned to technology for help with these challenges. At the same time interdependencies among supply chain intermediaries have increased in complexity and now take place in a greatly time-compressed and more competitive environment. In this paper, problems related to retail supply chain integration and on-line retail environments are explored, with an emphasis on the role and use of information

* Tel.: +1-718-260-3760; fax: +1-718-260-3874. E-mail address: brao@poly.edu (B.P. Rao).

0160-791X/00/$ - see front matter 2000 Elsevier Science Ltd. All rights reserved. PII: S 0 1 6 0 - 7 9 1 X ( 9 9 ) 0 0 0 3 2 - 9

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technology as one means for solving these problems. An overview of various analytical tools available to manage and improve retail effectiveness is also provided.

2. Information technology in retailing Given their greater access to data and analytical tools, retailers are nding that information technology has enabled them to answer increasingly complex questions pertaining to retail strategy and operationsfor themselves as well as their customers, suppliers, and other partners. Data are pervasive throughout the retail supply chain. Suppliers, partners, and upstream and downstream intermediaries are plugged in through real-time interfaces that rely on EDI and the open standards of the Internet. In addition to traditional hard technologies like scanners, barcode readers, and wearable computers, recent trends point to the growing importance of Internet-centric software and analytical tools that can diffuse critical and actionable retailing knowledge throughout an integrated retail organization. These tools enable physical and on-line retailers and other supply-chain intermediaries to answer questions related to their businesses on a realtime basis. The tools also supplement data capture and storage technologies by converting information into intelligence. 2.1. Sources and potential uses of retail data Most retailers face a data glut. Detailed data pertaining to various types of transactions, at various levels of the organization, and in the broad retail supply chain, are widely available. However, there is considerable variation as to how retailers capture, store, and use this data in their business decisions. Data is typically captured at various interfaces: customer transactions (producing information ranging from typical purchase characteristics to detailed behavioral tracking), shipments to stores, inventory and warehousing activities, interactions between the retail outlet and its corporate headquarters, and interactions with value chain intermediaries. The data captured in these interfaces is invaluable, enabling numerous business applications. At the store level, this might include tools that enable the capture and analysis of metrics such as size and growth trends, geographic breakdown of sales, store performance and growth, and the success of new product introductions. Experimental analyses can also be conducted, such as testing the impact of promotions, coupons, shelfspace allocations, advertisements, and price-elasticity measurements. At the customer level, the data can include consumer purchase characteristics and tracking, loyalty measurements, market segmentation, and market basket analysis. Based on these data, retail performance can be tracked and benchmarked, e.g. the

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effectiveness of supplier plans and programs, future retail plans, regional performance, and customer usage and behavior. At the level of the supply chain, this can lead to more effective purchasing and stocking, increased use of demand information when making merchandising and buying decisions, faster shipping through sharing time-critical information with logistics providers, and tighter integration of suppliers into the value chain. In the case of on-line retailing, all of the above can occur but on an accelerated time scale. The instant a customer places an order with the click of the mouse, information becomes available to all the value-adding components of the chain, and events can be triggered related to the purchase. In addition, the on-line interface offers bonuses such as targeted marketing and promotions, tracking site visits and usage, and streamlined technical support and customer service [1]. 2.2. Data storage and use: issues and challenges Once data from various sources are captured, they need to be stored in a reliable and accessible format. Several powerful database servers are available in the market that can keep pace with retailer data needs, ranging from gigabytes to multiple terabytes. Further, data storage costs are falling rapidly with advances in semiconductor technology. A study by the META Group in 1997 found that the average data warehousing budget was around $1.2 million, down from $2.1 million in 1996 (for 200 250 GB, not including internal stafng costs). These costs continue to decline as computing and storage technologies become cheaper and faster. Among the data warehouse managers surveyed by the study, 40% reported using Windows NT as their installed base, 28% for MVS, and 27% for HP-UX. Given the potential uses of data and the technological capability to store and retrieve data, one would expect a number of superior analytical and decision support systems (DSS) to be in use in the retailing industry. This is not yet the case. A survey by Eric Madden and Associates for Sequent Systems in 1997 showed that over 85% of DSS projects fail, mainly due to lack of focus and involvement, and the lack of good delivery methodologies specically designed for decision support. Retailers also face the complex task of evaluating alternative DSS packages, each with its unique set of features. Beyond these issues, there are several major problems that need to be resolved at the levels of technology and business, including difculties in data retrieval and manipulation within existing and new systems [2]: Multiple source problems: Retailers operate with multiple media, using multiple database management systems, which run on multiple platforms. Data compatibility is a major challenge due to the scale and complexity of encoding required. Integration of legacy systems into modern ERP systems remains a major problem for many retailers and has caused downtime and supply chain problems in many businesses. Data mapping problems: Data are often context-dependent. Mapping data that have different standards, e.g. different names, meanings, and associated business rules, requires further clarication in order to be synthesized or used effectively.

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Data accuracy problems: This is the primary source of errors in retail. Inaccuracy can arise from differences in time bases (e.g. one le reects daily activity, another weekly or monthly activity), and the level of granularity (ne details can be lost or unseen depending on the capabilities of the storage retrieval system). Inaccurate data lead to wrong forecasts and operational problems, which are only compounded by the sheer volume of new data constantly being generated. Business level problems: As if the problems associated with capturing and using data were not enough, IS departments at many retailers have to contend with organizational, political, and human resource issues while still dealing with the rest of the retail enterprise. Some of the commonly reported complaints from IS include: lack of business focus and commitment to supporting IT/MIS efforts little appreciation of the value of data for business survival and growth time and cost associated with organization-wide learning lack of skilled personnel at the store and business levels who can use these systems effectively, even when implemented properly.

3. Categories of IT solutions Initial research shows that many of the solutions available in the marketplace are positioned based on the companys history, evolution, and level of expertise in product development and external alliances. This has led to a profusion of products in the market, not all of which are either useful or compatible with other products or the enterprises they seek to serve. I have classied these systems into the following categories based on their overall scope. 3.1. Retail enterprise solutions Some rms offer solutions that approach the problem at the enterprise level. Their objective is to nd a broad-based solution that pertains to various parts of the value chain that impact business. Established players dominate this portion of the market, including Microsoft, IBM, SAP, HP, and Tandem. Many of these players seek to reinforce their capabilities in areas like data warehousing, data mining, and advanced statistical analysis. The notion of a one-stop shop for enterprise software is attractive to large retailers seeking to simplify operations and move all facets of their business to a single platformand vendors have been quick to realize this. Hewlett Packard, for example, provides an umbrella of services for the retail customer that includes collaboration with other players. Other vendors who specically target retail and merchandising customers include Comshare and Retek. 3.2. Data warehousing Data warehouses and decision support systems give managers the ability to perform high-level analyses and complex modeling capabilities. In general terms, a data

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warehouse stores large amounts of data and DSSs are used to analyze the information in the data warehouse. Smaller, more focused data warehouses are sometimes referred to as data marts. A data mart might be used to store just information used by a particular department. A data warehouse converts data from all sources to a common format and presents them in the form most useful to users. Thus, a company can combine information processed by its legacy mainframe system with information from other data sources to build a large database that can be queried quickly. In other words, the data warehouse consolidates and enriches data to create information not available from any single source. It puts vital competitive intelligence and improved decision support information to users across the company. The primary motivation for implementing a data warehouse usually centers on improving the accuracy of information used in the decision-making process. Typically, the data are examined longitudinally, and the major steps required to implement a viable data warehouse solution are the following [3]: create the data warehouse acquire the necessary data transform the data manage the data using meta data load the warehouse use the data warehouse

As pointed out earlier, some vendors are moving toward building detailed data marts that capture data from a number of sources. Then they consolidate the data marts into one enterprise-level data warehouse. Using the appropriate decision tools, this warehouse can then be tapped for business insights. The complexity of building and using such architecture is formidable, especially if it needs to be exible enough to adapt to changes that occur in a real-time environment. 3.3. Data mining This solution has been dened as the process of automatically extracting valid, useful, previously unknown, and ultimately comprehensible information from large databases and using it to make crucial business decisions or You torture the data until they confess [4]. A number of software vendors offer data mining solutions specically for the retail industry. The idea is to examine data trends and interrelationships in the collected variables and come up with insights that would otherwise remain hidden. The leading rms in this area are KD1, Intrepid Systems, and JDA-IBM (which also operate at the level of enterprise as mentioned earlier). Several different algorithms are used, and some are still being tested (see Table 1). The market for data mining software in 1997 was estimated by the META Group to be $4.7 billion.

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Table 1 Data mining techniquesa,b Technique Association Sequence-based analysis Application Market basket analysis Market basket with time series Features Treats purchase of a number of items (basket) as one transaction Combines market basket info with other time-related purchase info Collapses records into a few segments Employs decision tree or neural network-based classication algorithms Useful in generating scores as opposed to binary classications Incorporates uncertainty

Clustering Classication

Market segmentation Classifying population information Scoring Handling partial truths

Estimation Fuzzy logic

a b

Other methods include neural networks, fractal-based algorithms, genetic algorithms. Source: Rensselaer Polytechnic Institute, 1999 [4].

3.4. Decision support systems Decision support systems are often used in conjunction with a data warehouse. Employing a user-friendly business language (rather than technical), these querybased systems let managers quickly gather data from numerous sourcesenterprise, best of breed, or legacy systems. DSSs integrate nancial and non-nancial, as well as internal and external, information. They provide tools for performing powerful modeling, including regression and trend analysis, and they offer unparalleled exibility to test scenarios and anticipate the effects of various business moves. DSSs are generally characterized as either managed-query tools or on-line analytical processing (OLAP) tools. Often, companies use both. Managed-query tools let users query data in relational databases and other legacy systems (without needing any technical knowledge of those databases or systems) and produce reports for distribution to various groups in the business. Leading managed-query tools include Impromptu from Cognos and Business Objects from Business Objects Inc. OLAP tools offer more sophisticated analytical capabilities, such as drilling, trend analysis, snapshots and what if analyses. Leading tools include DSS Agent from MicroStrategy Inc, Decision Suites from Information Advantage, Express from Oracle, Essbase from Arbor Software, and Holos from Holos Systems. DSSs can extend the life of legacy systems that are currently adequate for transaction processing. DSS tools let managers explore non-integrated systems, overcome data inconsistencies, and access real-time business information. Of course, a data warehouse makes this even simpler by consolidating the legacy information into one central location. Some commonly cited examples of retail questions answered by a data warehouse include:

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What is the in-stock position and stock-to-sales ratio of the 15 most protable items in the mens departments of my northeastern stores last week? Show me the inventory by retailer for all items that have N consecutive days (selected at run time) of no sales in a given week. Show me sales and inventory of all discontinued items by region for the rst four weeks of the following promotions: Wednesday Promo, Open Sundays and TwoFor-One Specials. Show me the sales-to-plan percentage variation for this year and compare it to last year for my western stores. For all shoppers who brought a PC, show me the ve other items that were most likely to be purchased during the same trip to the store.

4. Modules for enhancing merchandising effectiveness Merchandising is a critical function performed by retailers and believed by many to be a critical core competency. The role of buyers within the merchandising organization is gaining in importance, as are the demands for their information literacy and facility. Once viewed as a left-brain creative activity, merchandising is becoming numerically sophisticated and is displaying signs of incorporating right-brain analytical rigor. Several analytical modules support such activity by offering timely information to merchandisers so they can plan more effectively. I briey characterize some of these modules below, as well as some modules that support functions at the DC and store. 4.1. Planning and forecasting Planning and forecasting software facilitate a bottom-up or top-down merchandise planning process. Such systems generally rely on historical sales data to produce detailed plan information which is then used to forecast sales and inventory requirements at the store or class level. Some software packages, like Forseon, use sophisticated logic to cleanse historical data in order to arrive at more realistic forecasts. They do this using merchandising models that also allow retailers to produce plans for future store locations or for new merchandise classications that do not yet have historical data. Another feature of most planning and forecasting software is the ability to interactively make what if assumptions and immediately see the impact on protability and inventory. 4.2. Purchasing Purchasing systems manage and facilitate the procurement process. This means managing all aspects of vendor relations, including control of price and service agreements, rebates and discount policies, and delivery terms and conditions. Other purchasing-related tasks include managing special agreements (e.g. specication of

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ticketing), packaging, and other services for improved ow-through merchandising. EDI has become an important enabler of streamlined purchasing. Increasingly, retailers are electronically transmitting their purchase orders directly to vendors who in turn invoice the retailer via EDI. The move to open standards on the Internet will further accelerate the use and convenience of information transfer. 4.3. Open-to-buy systems Open-to-buy systems control buyers purchasing options. The systems tracks purchase and inventory values against a buyers budget and allows purchasing activities to continue so long as the buyer is within his or her budgeted range of purchases and inventory. Last-minute changes can be made by incorporating real-time information and information gained over the course of a buying cycle. 4.4. Merchandise allocation Merchandise allocation systems allow for automated or manual allocation of merchandise to specic stores either through a distribution center or direct to the store from the vendor. Automated allocation systems allow sophisticated distribution of sizes and colors based on store prole information. For example, smaller sizes might be sent to stores that have demographic proles that consist of predominantly younger people or teens. This enables the customization at the store level. 4.5. Merchandise receipts/logistics/warehouse control Warehousing and logistics software manage the ow of merchandise from the vendor to the store shelf. Categorized as Inbound and Outbound functions, JDA provides a good summary of typical features found in logistics/warehouse software: Inbound functions: These include receipt scheduling, label generation, arrival entry, system directed putaway, lot and serial number tracking, letdown/replenishment, stock locator, detail transaction ledger, intra-warehouse movements, vendor performance and warehouse control center inquiry. Outbound functions: These functions include cross-docking, inter-warehouse transfers, builder, picking (RF or paper), packing and shipping, label generation and labor performance information. Key enablers of warehouse/logistics software are bar coding and radio frequency technology. Bar coding and automated sorting equipment can virtually eliminate the need for human intervention in the warehouse or distribution center. Radio frequency technology allows for the use of hand-held devices that facilitate the management of both goods receipt and periodic inventory counts. 4.6. Replenishment Sophisticated systems have been developed to automatically replenish basic merchandise items. These systems are well-documented and are widely used by grocery,

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discount, drug, and other stores. These systems rely on sales history, which is typically available for basic items like toothpaste and soap, but not fashion apparel. Sales history is combined with in-store inventory levels to determine optimal reorder points. Once reorder information is established, the system uses it to automatically notify the vendor when additional inventory is needed. Major retailers, like WalMart, rely on their vendors to completely manage the inventory replenishment process using information automatically communicated by the replenishment system. 4.7. Inventory control and store operations Since a retailers inventory is typically located in the retail store, most inventory control capabilities are included in the store operations software. Typical features in such modules include direct-to-store sales order management, in-store merchandising receiving, inter-store transfers, returns to vendor, physical inventory counts, and physical adjustments. 4.8. Promotion planning Promotion planning systems manage all aspects of sales promotions, including price changes, store sign displays, rain checks, advertising development and event scheduling. 4.9. Display systems and plan-o-grams Display systems and plan-o-grams provide large retailers with tools to manage the look and feel of their stores. The systems typically provide detailed maps that show store personnel exactly where merchandise is to be displayed in the store. For example, plan-o-gram software allows drugstores to consistently present their products in roughly the same location in every store. Also, plan-o-grams can be used to ensure that certain vendors always maintain the amount of shelf space they have been promised. 4.10. Point-of-sale and store systems Point-of-sale (POS) and store systems deal with cash register-type functions. These systems normally operate on a stand-alone basis and then communicate information to the back ofce systems on a periodic basis. An example of a POS system would include a main server for storing master data used to calculate prices and discounts. Cash registers are attached to this server to accumulate daily sales information. The information in these sales les is then uploaded to the retailers main computers during a polling process that occurs automatically. The polling process might occur many times during the day or may occur once a night, depending on the management requirements of the business and the need for up-to-the-minute sales information at headquarters. Store systems are used to physically manage merchandise moving into or out of

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the store. Examples include on-line verication of merchandise received directly from vendors, and tools for simplifying the process of returning damaged or spoiled merchandise to vendors (RTVs). 4.11. Radio frequency panel displays This is an emerging area and it remains to be seen if it will have a major impact on retailing practices. Several companies provide electronic price labeling using radio frequency technology. The leaders include Pricer (of Sweden), and Telxon, which markets Pricer products in the US. There are other smaller players like Electronic Retail Systems International (based in Connecticut) and Telepanel, based in Canada. All these companies primarily provide price labeling to grocery chains and food retailers. Lately, there have been attempts to integrate these systems back to enterprise-level systems, and the big enterprise players have expressed some interest in such a possibility. Examples of such systems include: The Pricer System, which can also be linked to InterCept, the Pricer Intactix Space Management software, so that merchandising information can be placed on the labels secondary register making verication of shelf compliance and reduction of out-of-stock a simpler task. ERSIs ShelfNet system combines patented software, RF technology, and intelligent LCD devices to deliver pricing, merchandising, plan-o-gram, and replenishment control information to and from shelves quickly and accurately. Telxon has several new products that address POS, wireless thin-client computers, and mobile IS. With the widespread adoption of wireless technologies, such systems might gain acceptance among mainstream retailers.

5. On-line retailing and cutting edge technology In addition to storing and managing data, information and the insights obtained from them need to be shared within the retail organization and with suppliers and others to achieve an integrated solution that manages the ow of materials through the supply chain. This includes partners and suppliers in international locations [5]. Several vendors offer integrated packages that simplify the complex interactions that take place in a supply chain. In the on-line domain, this includes one-click systems that integrate functions such as shopping carts, credit card processing, logistics information, and tracking data [6]. Several companies also address this issue at the business-to-business level. Recent innovations in this arena include trading partner networks, procurement and logistics exchanges, auctions, spot markets, and other dynamic trading mechanisms that make use of aggregate and item-level supply and demand information [7,8]. On-line retailers are quickly mastering the use of technologies that increase sales and deliver highly customized offerings. In contrast, many land-based retailers

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remain unaware of the substantial benets of leveraging IT into their operations. Several characteristics of on-line retailing make it a particularly attractive venue for data-driven marketing and merchandising applications: Data pertaining to customer transactions and interactions on-line are captured in real-time and relatively error-free. Land-based retailers spend millions trying to ensure that their data are timely and error-free. By using tracking and analytical tools, on-line retailers can ne-tune the workings of the store and individual customer relationships. On-line retailers report that customers voice their concerns and offer feedback freely through the Web sites, and they use features like on-line communities and chat forums to learn more about products and share their shopping experiences with other customers. These are opportunities for on-line retailers to further bond with the customer, address concerns, and create a truly meaningful shopping experience. Several innovative on-line retailers have already shown that interactions can be truly one-to-one on-line, thus increasing the likelihood of repeat and future revenue streams from their customers [9]. While land-based retailers have tried similar approaches (such as loyalty cards and in-store readings in bookstores), they lack the ability to reach individual customers and deliver rich and targeted content that translates to sales. One promising area for land-based retailers is the ability to handle deliveries and returns in a local geographic area, a valuable asset to transactions that originated on-line. With the increasing shift to broadband, on-line retailing will become easier to use and attract more consumers. It remains to be seen how aggressively physical retailers will respond to the threat of on-line retail.

6. Conclusion Land-based and on-line retailers need to exploit the advantages of an informationintensive business environment in order to deliver superior solutions to their customers, and at the same time simplify their businesses. Information technology solutions can reduce costs, increase supply chain exibility and response, integrate suppliers and partners, and ultimately provide a more effective shopping experience for the customer. By utilizing and sharing technology with key players in the supply chain, retailers can develop collaborative planning, forecasting, and replenishment programs. In this way, they can reduce stock-outs, increase inventory turns and margins, and ultimately deliver a convenient, fast, cost-effective, and enhanced shopping experience to consumers.

References
[1] Alba J, Lynch J, Weitz B, Janiszewski C, Lutz R, Sawyer A, Wood S. Interactive home shopping: consumer, retailer, and manufacturer incentives to participate in electronic marketplaces. Journal of Marketing 1997;61(3):38.

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[2] Fayyad U, Piatetsky-Shapiro G, Smyth P. From data mining to knowledge discovery in databases. AI Magazine, American Association for Articial Intelligence 1996;Fall:3754. [3] SAS Institute. White Paper on warehousing strategies, 1997. [4] Rensselaer Polytechnic Institute. Data mining, 1999. URL: http://www.rpi.edu/~arunmk/dm1.html [5] Quelch JA, Klein LR. The internet and international marketing. Sloan Management Review 1996;Spring:6075. [6] Rao B, Ziv N, Horwitch M. Developing a world-class distribution, logistics and electronic commerce infrastructure. In: Schmid BF, Buchet B, Hoffmann CP. Electronic commerce and logistics. Electronic Markets 1999:9(3). [7] Fisher M, Hammond JH, Obermeyer WR, Raman A, editors. Making supply meet demand in an uncertain world. Harvard Business Review, MayJune 1994. [8] Benjamin R, Wigand R. Electronic markets and virtual value chains on the information superhighway. Sloan Management Review 1995;Winter:6272. [9] Rao B. Deploying an effective e-tailing strategy, International Journal of Electronic Markets. In: Schmid BF, Klein S, Steineld C, Selz D; Buchet B editors, Electronic commerce in the Americas, and Local versus global electronic commerce. Electronic Markets 1998:9(2).
Bharat Rao is an Assistant Professor of Management at the Institute for Technology and Enterprise, Polytechnic University, at 55 Broad St in New York City. He leads several strategic research initiatives for the Institute for Technology and Enterprise in the areas of electronic retailing, supply chain management, strategic alliances and new product development. He earned a Ph.D. in Marketing and Strategic Management from The University of Georgia, and was a post-doctoral Research Associate at Harvard Business School. His research has been published in the International Journal of Electronic Markets, Technology in Society, International Business Review, Journal of the Academy of Marketing Science, and in conference proceedings of the IEEE Engineering Management Society, American Marketing Association, Association of Management and TIMS-ORSA. He is also the author of several business case studies, in both paper and digital formats, and published by Harvard Business School and the Institute for Technology and Enterprise.