It’s been said that there’s a “science to everything.” Drawing on cutting-edge customer analytics, the new book “The New Science of Retailing” offers strategies to identify proper best practice in retail supply chain operations.

Some of the key concepts explored in the book include:

• Using the data generated at stores to understand customers and their needs deeply;
• Developing the ability to respond to this understanding – with better-tailored assortments, replenishment of the hits, and timely markdowns on what is leftover;
• Executing well, especially at the store level. Attending to data inaccuracy and placement of products within stores;
• Aligning incentives within a retail organization and in the supply chain;
• Using technology judiciously and paying attention to emerging new technologies, whose value might still not be apparent; and
• Explaining the changes you are making to your investors.

Retail TouchPoints recently caught up with authors Marshall Fisher and Ananth Raman on strategies for assortment planning, store-level execution and technology adoption.

RTP: You advise retailers to “mine sales data to identify ‘home run’ products they are missing.” How should retailers prioritize their sales data mining from a strategic standpoint?

Fisher & Raman: The most important thing is to view a product as a collection of attribute values and then tabulate sales data by attribute. This will reveal which attributes are most demanded by customers, so the retailer can carry more products with the popular attributes.

RTP: What are some ways that retailers can benchmark their performance against other retailers?

Fisher & Raman: Benchmarking against other retailers should be done cautiously because even apparently similar retailers can differ substantially in many ways. For example, we show that in our book inventory turns differ substantially among consumer electronics retailers.

To benchmark specific metrics against other retailers, it is important to control for differences that are related to the metric that is being benchmarked. For example, to benchmark inventory turns across retailers, it is important to control for differences in gross margins. We explain how inventory productivity can be benchmarked — with a metric that we term as “adjusted inventory turns”— in the book.

RTP: In the chapter on “Store-level Execution,” retailers are urged to put people first. How do staffing levels impact a company’s overall income?

Fisher & Raman: Store staffing has a huge impact on income. Income is revenue less costs, and store staffing impacts both. After cogs it is the biggest expense item, and it also has a huge impact on revenue. In one study reported in chapter 6, we found that an incremental $ of store payroll resulting in an additional $4 to $28 in revenue, depending on the characteristics of the store. At 50% margin, this generates $2 to $14 in incremental profit. And no investment is required – the incremental sales and profit occur in the same month as you write the payroll checks.

Clearly the last $ you spend on payroll in a store should generate a $ of gross margin. How do you discover this magic sweet spot? Use the process described in chapter 6: view shortage of actual store labor vs plan as a ‘natural experiment’ in what happens to revenue when labor is reduced. If payroll in a store is down 10% from plan in a month in a store, what happens to revenue, relative to what you would have expected given recent sales, adjusted for seasonality?

It’s noteworthy that none of the many payroll planning systems currently available can make this connection between revenue and store labor.

RTP: The book argues that investing in emerging technologies is not always in a retailer’s best interest. What are some faults or errors that retailers make in investing in new technologies and how can they assess this more accurately in the future?

Fisher & Raman: Retailing is often affected substantially by technological change — witness for example the changes introduced by the Internet. Hence, retailers — even though they are not technologists — should pay attention to technology and technological change. Some guidelines for retailers that are evaluating new technologies are:

• Before you adopt the technology, understand the key details of the technology. Adopting a technology without understanding its power and limitations usually ends in disaster.
• The challenge often lies in how the technology will integrate with operations. Many organizations — not only retailers — often adopt new technologies but do not concurrently change their operations to leverage the technology fully. That is akin to replacing your car with a helicopter but not making any changes to your lifestyle.
• Adopt an “options” approach: It is usually hard to estimate precisely the benefits that will accrue to a retailer from adopting a new technology. This often leads to retailers being reluctant to invest in the new technology. But retailers should seek to structure their investment as a “call option” on the technology. In other words, structure a small investment in the new technology so that if the technology turns out to meet or exceed expectations, you can make a more substantial investment later. On the other hand, if the technology disappoints, you would have lost only the small investment up front.