Implementing IT in Retail – challenges and opportunities

IT systems are like the central nervous system of retail operations, where products flow
through the supply chain towards customers and information flows in reverse towards
managers, helping them buy products that customers want. Designed and engineered
well, IT systems have the potential to contribute significantly to the competitive
capability of a retail organizations, and not just profitability. Zara (Inditex) transformed
the traditional business model of retail by integrating the customer with manufacturing
using the potential of IT. In this article I focus upon what is required to develop and
implement an IT projects in retail with a strategic perspective.

Approaches to IT System Development - Product-centric Versus Strategic

The planning for IT system should start by first defining the strategic imperatives of the
organization; by defining what the IT system will ‘need to deliver’ in terms of business or
competitive goals (Figure 1). The software re-sellers in the region are ‘product-oriented,’
and it is not unusual for them to approach clients with a product specifications bias; ‘what
the product can do’ or has done in another similar environment. This product-oriented
one-size-fits-all approach is incorrect since the organizational context, expected ‘role of
IT,’ people, processes, and systems, does influence how quickly the benefits of an IT
system are realized.
Figure 1 – Correct approach to IT system selection

Correct – How one wants to manage business (or

business strategy) decides IT specs – what the IT
system will help me manage

Business
strategy – how I IT system specs
will manage the
business?

In correct – the IT system specs will determine how I

will manage the business
 Business Identified What we need Measures of what Required IT Technology / Organization – Organization –
goals based measures of to do within the will contribute to capabilities Applications architecture how will data How will data
upon on business organization – achieving business be captured? be presented for
how we goals – top process, goals – decision-
need to win level procedures, and Organization making?
against Business systems to capabilities
competition goals achieve goals –
Business strategic
vision imperatives

Traditional approach

C D
Strategic approach

A B

Figure 2 – Difference between a strategic and traditional approach to IT system development

Data versus Information for Decision Making

Figure 2 differentiates the traditional and strategic approaches to IT system development.

The traditional approach focuses upon ‘what the system can do’ based upon expected IT
capabilities, type of application software and system architecture (Figure 2 – three steps
between C and D). The strategic approach focuses upon IT as a black box but maps the
entire process starting with the desired business goals, required or planned organizational
processes, identifies both the measures to achieve the goals, and the analytics to assess
system performance for correction (Figure 2 – nine steps between A and B). To
understand the difference in these two approaches consider an example of a business goal
of ‘top-line revenue growth.’ A revenue growth metric can be ‘increase in sales per
square foot or linear meter.’ An option to achieve this goal is through ‘effective’
merchandising by changing assortment, displays, and promotions. The measures of
‘effective’ merchandising are numerous e.g. sales versus forecast, number of stock out
situations, timely stock replenishment, stock turn, location of stock, percentage sell
through at full price, efficacy of displays based upon merchandise location in the store,
supplier performance, delivery of goods, promotion effectiveness, etc. These metrics
need to be analyzed on a real time basis to understand impact of merchandising decisions.
To support merchandising be efficient and effective, IT system is required to mine,
collate, and transform large amounts of data from different locations in the retail
operation. The metaphor of a car is a good differentiator of these two approaches. An
operating manager needs a good dashboard to coalesce information and is not worried
about knowing how an engine (IT system) works.

Need for Data Capture and Integration

The strategic approach emphasizes the need to capture and transform data to enable
‘effective’ use of information to enhance quality of retail decisions. It is necessary to
detail data to be captured at different locations in the retail operations by asking questions
like - Who is the user of the information? What decisions need to be made to make the
process managed by the user more effective and efficient? In what form does the user
need the information as transformed data (analytic)? To achieve the analytic how should
the data be captured? It often happens that data captured remains under-utilized and often
data required is not captured e.g. if the time of receipt of goods at the store and time of
placing the goods on the shelf is not captured by the system then it will difficult to assess
the efficacy of last leg of the supply chain.

Need for data integration across different retail functions is also necessary. Often islands
of data and information remains isolated at various points in the retail process, resulting
in poor decision making e.g. without access to information about stocks at different
locations in the supply chain, stock replenishment and ordering will be inaccurate.
Insufficient integration also reduces its usefulness and value e.g. negotiations with
suppliers are different when based upon SKU level profitability and not listing fees and
shelf rental etc.
Data transparency is another key requirement. If people managing different functions are
unable to access critical data at key points in the retail process they perform at sub-
optimal levels e.g. managing product margins based upon on-shelf cost versus purchase
costs.

IT system development is required to detail and identify what data is required, how will
data be captured, where the data will be located, accessed, aggregated, and transformed to
enable analytics to be generated for use. Without correct data capture IT systems
outcomes will be unable to contribute strategically.

Building Blocks of Retail IT

Figure 3 captures the four modules of retail IT system built upon an Enterprise Resource
Planning system. The four modules are detailed in Table 1 linking the nature of decision
making to the required information.

Figure 3 – Modules of a Retail Systems

Merchandise In-store
Management Operation
Systems Systems

ERP

Supply Chain & Customer

Logistics relationship
Systems
 Table 1 – The four modules of Retail IT detailed2TTa\
Retail functions Scope of retail function Needs Information flow
/ decision-making
Merchandise Merchandising Timely feedback on Rapid dissemination of
management customer purchases information from
Assortment checkout to function
Price adjustment
Pricing Merchandise KPI based
Impact of promotional analytics
Promotions activity

Marketing Overstock and stock

outs
Store operations Management of FIFO Timely access to Timely access to
customer activity operation KPI based
Time from goods receipt analytics
to shelf Quality of FIFO
management Operation KPIs based
Visual merchandising analytics
Timely implementation
Customer service of promotions & visual
merchandising
Efficiency of conversion
(bakery, deli, etc.) Performance of
promotions
Wastage
Backward visibility
Warehouse and DC Warehouse management Awareness of retailing Timely access to KPIs
– efficiency of goods initiatives – promotions of warehouse, DC and
receiving (timing of logistics performance
receipt, unloading, and Connection to customer
checking and storage), activity Alerts on what decisions
storage (efficiency of are taken at the store or
picking), and Forward visibility merchandising that
distribution (pick to impacts function
pack to dispatch,
accuracy of pick) Exchange of
information with
DC operation – same as vendors
above plus conversion in
terms of packing

Logistics – fleet
management
Customer Relationship Marketing Impact of promotional Cost effectiveness of
Management activity marketing promotions

Loyalty management Costs of different Cost effectiveness of

initiatives loyalty initiatives

Customer satisfaction Independent mystery Tracking of customer

shopping feedback satisfaction based upon
service quality
Customer questionnaires
Implementation challenges of retail IT projects –legacy and scope issues
A chief merchandise manager of a medium sized chain in the UK recently described to
me that his retail IT systems are always in a state of continuous incremental development,
and choices of what needs to be done, and how, are constrained by legacy. IT projects are
usually incremental and therefore face challenges of managing legacy. Even Greenfield
sites today will have legacy costs tomorrow. Retailers, who don’t effectively manage
their IT systems with an eye into the future, may often find that over time IT systems
become a part of the problem. While selecting an IT system it is necessary to map the
development of the IT system into the future and minimize future legacy costs associated
with making system changes e.g. maintenance costs based upon need of customization, or
need for data integrity of fragmented and inaccessible data. It is rare that a single
software vendor will meet all the current and future needs, and third party packages will
be required for several functional areas with challenges of integration. Table 2 maps the
possible evolutionary stages of an IT system; from being a cost to becoming a strategic
tool.
Table 2 Three Stages of IT implementation
Stage of IT Role of the IT What the system What is the IT Organization
system system focuses upon system
implementation
Basic – necessary Cost of doing Moves product from Corporate ERP, Store Vertical – deals
IT investment business supplier to shelf operations, and with data capture
Warehouse and rudimentary
management, etc. analysis
Distinguishes one Strategic – Delivers the right Merchandise Integration of
company from enables product, at the right planning and information
another organization to time, at the right management, across functions
manage sales, location and at the revenue management, internal to the
revenue and right price and logistics organization
costs management
Links the Strategic and Focuses upon Enhancement of IT Full integration
customer to the visionary – optimizing the systems using BI with information
supplier enables organizational tools transparency
organization to processes
excel

IT implementation projects should be implemented like construction projects – never

start before detailed designs and specifications are complete to prevent time and cost
overruns, have clear deliverable milestones with detailed operational outcomes, and a
retention fee when the project is complete. This is important since the supplier knows
what the software is, and is in a better position to identify scope of work required. Per
Diem customization rates are a poor indicator of project cost. Due diligence of the
software vendor / reseller is important; do the staff who will be involved in customization
have requisite experience and does the organization have bench strength? IT projects are
usually long term and people with industry knowledge make a great difference.
Conclusions

Implementing IT projects in retail is often like stepping on to a treadmill; lot of exercise

but no movement. But it should not be like this if some basic guidelines are followed. IT
implementation should focus upon the strategic role of IT with emphasis upon measuring
the return on IT investments through efficiency and productivity gains, and lowering
costs. It is also necessary to project what will the system may look like over the next five
years and how that will impact system choices today to prevent legacy costs.

© Nov 2006