the power of optimization -...
TRANSCRIPT
The Power of Optimization
Discussion Points
• Tween Brands Overview
• The Science of Optimization
• Markdown Optimization
• Merchandise Life Cycle Optimization
• Implementation- Go Live Process- ROI
World Class Brand for the “Tween Girl" ages 7-14
Who is Tween Brands, Inc?
The Tween Girl
The Tween Girl
• Highly diverse segment of the population
• Influences include:
− Parental Guidance
− Media: movies, music, books
− Pop Culture and Celebrities
− Technology: I-pods, text messaging, computers
− Peers
− Sports
• Multi Channel: Stores, Catazine, Web
− 585 Limited Too Mall Based Stores - USA
− 300+ Justice Off Mall Power Centers - USA • Approximately 3500 Selling Square Feet
− International Franchised Stores
− Each Brand delivers 13 catazines/year, along with other direct mail pieces.
Who is Tween Brands, Inc?
• Only Retailer exclusively for Tween Girls, delivering the hottest Fashion Apparel, Lifestyle, Accessories and Personal Care products for her.
• Over $1 Billion in Sales in 2007.
• Currently 2 Brands:– Limited Too: Aspirational market– Justice: Moderate Tier market
Who is Tween Brands, Inc?
• Vertical Retailer
− Internally designed, proprietary branded merchandise
− Separate Design, Merchandising, Planning, Allocation, Marketing and Finance teams for each brand
− Product is sourced via 2 Direct Sourcing offices in Asia, along with external sourcing arrangements
• Offices & Distribution Center in Columbus, Ohio USA
The Art and Science of Retail
Optimization technology utilizes modeling, analytics, predictive demand forecasting and problem solving capabilities to build decision support solutions aimed at identifying the best, most profitable strategies for a business.
Simply put, Optimization is the process of choosing the permissible actions that result in the best outcome.
The Science of Optimization
The Science of Optimization
Transforming the Decision Making Process
• Post Optimization:
− Fact Based
− Structured
− Consistent
− Repeatable
− Adaptable
• Pre Optimization:– Intuitive– Emotion based– Experience-oriented dependant
Merchandising Life Cycle Optimization
•Assortment
•Forecasting
•Revenue
− Initial
− Markdown
•Size
•Space
• The Goal is to maximize Gross Margin $’s on inventory by using analytics to recommend price moves
• The objective is not to spend more markdown dollars, but spend what you have more strategically. Take markdowns on the right items, in the right zones, to the right depth, at the right time
What is Markdown Optimization?
Markdown Optimization is an analytical, fact-based approach to Markdown Management
What is Markdown Optimization?
• System leverages goals and constraints as set by business
• Comprehensive and systematic evaluation of all items (Style-Color) in all Price regions
• Objective, fact-based perspective on demand and inventory goals
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The goal is to maximize GM dollars over the entirelifecycle, not just during the full price selling period.
Goal Of Markdown Optimization
How MD Optimization Works
Simplified ExampleSample Item: Knit Top
Total quantity purchased: 10,000 units
Quantity sold to date: 2500 units
Forecasted Unit Sales for the item 4500 units
(Based on base demand for the category and
planned promos for the item)
Total Projected Sales Units (without markdowns) 7000 units
Sell-through target: 90% 9000 units
Projected unit shortfall: 2000 units
Optimization will explore every possible combination of markdowns over the remaining life of the item, within the constraints of the specified business rules, to find the most profitable way to sell the “shortfall” of 2000 units.
Result: The markdown recommendation for the appropriate week that maximizes gross margin dollars while meeting the sell-through target of 90%, or 9000 units.
Implementation Process
• Testing
• Executive Buy In and Sponsorship
• Leadership Team Support– SVP of Stores– General Merchandise Manager– IT– Marketing– Merchandise Planning
• Compilation of Data & Development of Forecasting Models
• Weekly Process and Status Meetings– Develop Business Rules and Processes
Set up Business Rules
• Key Considerations:– Exit Date
– Sell Through Target
– Item Start Date,
– No Touch Periods
– Maximum Number of Markdowns
– Markdown Calendar
– Price Ladders, Minimum/Maximum % Off
Ensure that the recommended markdowns support business’s approach to In-Season Price Management and Inventory Goals.
Constrain the engine’s choices and proposed markdowns
Too Made More GM $ Through More Precise MDs
• Markdowns at the Right Time− Because you can get the biggest lift from the smallest
markdown when base demand is greatest, markdowns may be considered earlier in life
•Markdowns on the Right Items– Optimize markdowns at the Style/Color level
• Markdowns by Price Zones– Optimize markdowns for 8 Price Zones. Climate, Volume and
BTS Peak Week
• Markdowns to the Right Price Points–Markdowns will be stickered to specific price points – no more
“% Off Redlines”, using default price ladders
Business Process Changes
• In Store Signage and Stickering
• Role of Merchant & Planner Driving the Markdown Process
• Timing of Markdowns, including 2nd’s and 3rd’s
• Optimize to Budget
• Store Execution Processes
• In Store Placement of Markdowns
Benefits of Markdown Optimization
• Self Funding and Also Funds Additional Technology
• Drive Additional Sales
• Maximize Merchandise Margin- Op Income… 15%
• Increase Inventory Turns
• Open up OTB ($’s and Space) for Full Priced Inventory
• Speed to Value. Immediate ROI
• Improve Operational Efficiency−Increase workforce productivity−Redirect focus of merchant team−Decrease decision making time−Provided a more structured process
Another MD Optimization User - Kohl’s
• Family focused, value oriented, specialty department store
• $15.5B+ sales in 2007
• 817 stores
• Adding 400 stores over the next 5 years
• Earnings growth of 15 - 20% per year
The following is a summary of the basis of our upgrade for Kohl’s:
1) Technology Initiatives to Drive Additional Gross Margin Improvement.
We believe there are two significant potential technology rollouts under the SAS
Revenue Optimization Suite that can drive gross margin improvementmeaningfully: 1) Size Optimization, and 2) Markdown Optimization. We have
upped our gross margin assumptions beginning in 4Q05 to reflect…the rollout of
[these] technologies..”
“We are upgrading shares of KSS to a !M (Buy, Medium Risk) rating for the following reasons:
1.Technology initiatives could drive gross margin improvement
2.Rollout of new and exclusive brands will establish KSS as a fashion destination…”
Results!!
•20% Reduction in Markdown Rate
•2.7 Point Improvement in Gross Margin
Life Cycle Merchandise Intelligence
Issues with Traditional Assortment Planning
Consequences: missed opportunities, over/under stocked, high markdowns
• Too many manual analysis and planning steps
• Hard to enforce planning standards and quality
• Difficult to integrate multiple systems with disparate data
• No analytic insight- How many products in each price-point, vendor, color?
- Am I over or under-bought?
- Cluster formulation by volume but doesn’t identify true selling patterns
- History doesn’t take into account trends, new stores, etc.
Assortment Planning Optimization
• Key Concepts:
• Automate a best-practice analytic process to produce a set of optimized assortment plans by category
• Identify:
• Who are my customers?
• How and what do they buy?
• Which products do I need and in what quantities to meet the projected demand next season?
"Prediction is very difficult, especially if it's about the future."
--Nils Bohr, Nobel laureate in Physics
Eliminating the Guesswork…..
Demand Forecasting
Size Optimization
• Get the Right SizeRight SizeRight SizeRight Size to the Right StoreRight StoreRight StoreRight Store at the RightRightRightRight
TimeTimeTimeTime.
• Recognize customer differences by store location, by department and by category.
• Improve In Stocks by size for basic, seasonal basic and fashion merchandise.
Size Optimization - Objectives
Investor Support“I am amazed at the impact that retail technology has had across the
retailers’ income statements and balance sheets. It has driven profitability to a new level that investors did not think possible.”
“I believe the continued expansion of retail technology will allow retailers to be increasingly innovative with site selection, increase operating margins and drive profitability.”
“Based on my more than 10 years experience following retailers on Wall Street, I believe that technology has had the greatest impact on 5 key measures:
1. Comparable Store Sales
2. Operating Margin
3. Square Footage Growth
4. Inventory Turns
5. Returns on Invested Capital
Quote by Deborah Weinswig, Citi Investment Research
SAS Retail –Optimization Solutions
