Retail Cycle Time A Customer Transaction Perspective

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					                                                Retail Cycle Time: A Customer Transaction Perspective

Retail Cycle Time: A                                      the computer simulation was feedback from the
                                                          firm’s customers regarding the inventory alterna-
Customer Transaction                                      tives.

Perspective                                               The current study addresses this limitation. Mar-
                                                          keting research techniques were used to obtain feed-
                                                          back from the firm’s current customers on three in-
                                                          ventory strategy alternatives. Consumer response
                                                          corroborated the findings of the earlier study. Both
by                                                        studies showed a conservative or limited Pareto in-
                                                          ventory to be the superior strategic alternative to
Amy J. Morgan                                             meet customers’ expectations.
Bradley University

George H. Lucas, Jr.                                      Introduction
The University of Memphis
                                                          U.S. retailers currently face numerous competitive
                                                          challenges. Not only do many firms simultaneously
                                                          compete for consumer dollars in today’s marketplace,
                                                          but the “marketplace” itself has become quite com-
Executive Summary                                         plex. The marketplace no longer refers simply to the
                                                          stores competing in a given trading area. This mar-
In the competitive retailing environment of the 1990s,    ketplace also includes all of the catalog retailers
success often depends on a firm’s ability to find a       operating nationwide and the many companies sell-
unique way of appealing to a carefully selected           ing merchandise on the Internet, through television
group of target customers (those most likely, will-       shopping channels, and through infomercials. Con-
ing, and able to buy the firm’s offering) in order to     sumers today have more options than ever before
gain their patronage, and ideally, their loyalty. The     to get exactly the merchandise they seek with the
best way to achieve a competitive advantage is to         amount of effort they are willing to expend at a price
develop a unique merchandise and/or customer ser-         they are willing to pay. Further, these consumers
vice offering. This study examines the application        are more educated, informed, and vocal about their
of cycle time principles to the retail transaction as a   marketplace needs and expectations than in the past.
means of developing a unique customer appeal.             Success in this competitive climate requires that the
                                                          retailer excel at delivering a unique offering to target
In using cycle time reduction principles, a critical      customers.
issue is how to improve cycle times within the orga-
nization and with the final customer without sacri-       In order to maintain a consistently unique offering,
ficing the merchandise mix or holding excessive           the retail strategist must continually seek new ways
amounts of inventory. This critical question was          to build a competitive position that is arguably dif-
addressed by Retzlaff-Roberts, et al. (1995) in the       ferent from competitors. Taking a cue from manu-
first volume of Cycle Time Research. That study           facturing and technology firms, one option stands
reported the use of a computer simulation model           out particularly for (1) its match with the changing
applied to an actual retailer of premium-priced men’s     needs of today’s consumer and (2) its potential to
shoes and accessories to determine the most profit-       reduce internal costs (Wetherbe, 1995). This option
able inventory strategy alternative. Missing from         is the application of cycle time reduction principles




                                                                                                               79
Retail Cycle Time: A Customer Transaction Perspective

to the retail transaction. In the following paragraphs,   tail positioning through the use of a four quadrant
we discuss the use of strategic retail positioning as     model as shown in Figure 1.
a tool for competitive advantage and the applica-
tion of cycle time reduction principles to the retail     Three price/service combinations are viable in
transaction as a promising means of gaining this          today’s marketplace:
advantage.
                                                          1. Low Price/High Service, or High Value posi-
                                                             tioning;

Strategic Retail Positioning                              2. High Price/High Service, or Service-Oriented
                                                             positioning; and
Continued retail survival and success may be
achieved through strategic retail positioning. This       3. Low Price/Low Service, or Price-Oriented posi-
positioning emphasizes a carefully monitored and             tioning.
updated balance between the needs and wants of a
select group of target customers and the retail firm’s    Service-oriented retailers, those offering high prices
unique strengths and competencies. Lucas and              with an equally high level of service, are of particu-
Gresham (1988) illustrate the basics of strategic re-     lar interest here. Service-oriented retailers tend to




                                                  High Service


                                QUADRANT 1                     QUADRANT 2
                                  (LPHS)                         (HPHS)

                                  High Value                 Service-Oriented
                                   Strategy                      Strategy
                  Low                                                                 High
                  Price                                                               Price
                                QUADRANT 3                     QUADRANT 4
                                  (LPLS)                         (HPLS)

                                Price-Oriented                   Poor Value
                                   Strategy                       Strategy



                                                  Low Service
           Source: Adapted from George H. Lucas, Jr. and Larry G. Gresham, “How to Position for Retail
           Success,” Business, April/June, 1988, pp. 3-13.


                           Figure 1: Strategic Retail Positioning Alternatives




80
                                               Retail Cycle Time: A Customer Transaction Perspective

find their target markets in higher-income consumer      Transaction Cycle Time as a Positioning Tool
groups who find special services desirable and worth
                                                         An emphasis on time compression or reduced cycle
the cost. Successful service-oriented positioning
relies on the ability to maintain this selective image   times in the marketing process holds significant stra-
in consumers’ minds. It means tailoring unique of-       tegic potential in the current retail environment. Con-
ferings to avoid declining service while retaining       sumers’ attitudes toward time and its value and use
high prices.                                             have changed considerably over the past decade.
                                                         The demand for time savings is clearly reflected in
For service-oriented retailers, developing this          the merchandise and services that people buy. Cus-
unique offering is an especially difficult task. Cus-    tomers seek out merchandise and services includ-
tomers are required to pay pre-                                                   ing cellular phones, fax ma-
mium prices and therefore de-                                                     chines, portable computers,
mand more in return from ser-
                                       . . . satisfying the                       voice mail services, personal
vice-oriented merchants. For           needs and shopping                         shoppers, and digital bank-
some service-oriented firms,                                                      ing and shopping that help
Nordstrom and Saks Fifth Av-           preferences of target                      them save time. The demand
enue among them, a focus on                                                       for time savings is also re-
providing high levels of cus-
                                       customers is critical                      flected in consumers’ expec-
tomer service has proven effec-        for retail success.                        tations regarding the time re-
tive. Other successful service-                                                   quired to complete the “con-
oriented firms, such as Williams                                                  sumer transaction cycle.”
Sonoma, Brookstone, and Victoria’s Secret, have          The consumer transaction cycle represents the to-
taken the approach of providing innovative and           tal elapsed time necessary to complete the entire
comprehensive merchandise offerings in terms of          purchasing process from information search to post-
both variety and assortment. These firms use the         purchase activities. Thus, retailer efforts which re-
merchandise itself to offer a unique customer ap-        duce consumer transaction cycle time appropriately
peal.                                                    meet the needs of the time-pressed consumer, pro-
                                                         viding several opportunities for service-oriented re-
Retailers must provide unique customer services to       tailers to develop unique customer service appeals
achieve success with this service-oriented strategy.     based on the concept of cycle time reduction.
Firms operating in this position must provide ser-
vice incentives, encouraging consumers to pay pre-       Price-oriented retailers can reduce cycle time through
mium prices continually for the firm’s merchandise.      convenience: 24-hour stores, extra check-out facili-
A successful service-oriented strategy starts with       ties, and specialized layouts for faster, more effi-
an understanding of the consumer’s value balance.        cient access to specific goods. However, conve-
Consumers today evaluate their retail experiences        nience alone is not appropriate for service-oriented
in terms of a cost-benefit tradeoff (Lucas, Bush, and    firms. These firms must find a way to blend time
Gresham, 1994). This value balance refers to the         savings with a distinctive appeal -- providing their
optimal compromise between the customer’s costs          premium-priced merchandise and excellent customer
(“What I Pay”) and benefits (“What I Get”). This         contact with value-added incentives like reduced
balance helps consumers decide whether their per-        transaction cycle time.
sonal investment in the buying process was worth
their gain and represents the “get what you pay
for” philosophy. Retailers who provide benefit to
                                                         Alternate Inventory Strategies
their customers commensurate with the prices paid
for merchandise will have a competitive advantage        Retzlaff-Roberts, et al. (1995) reported the first phase
over firms that do not.                                  of the application of cycle time reduction principles




                                                                                                              81
Retail Cycle Time: A Customer Transaction Perspective

to a national retailer of premium-priced men’s foot-    after the transaction takes place. The computer simu-
wear and accessories. This initial study focused on     lation model indicated that the Pareto strategy was
the firm’s inventory strategy. The authors addressed    the most promising option. Supplying stores with
the application of cycle time reduction principles to   reduced inventory, while maintaining support lev-
the retailer’s inventory situation as follows:          els for “best sellers,” offers the best performance in
                                                        terms of customer fulfillment needs, inventory car-
     Ensuring that items are in stock for imme-         rying costs, and profitability.
     diate customer fulfillment helps sales but
     inflates inventory, which can be disastrous        In theory, this reduced inventory strategy looks best
     for inventory turnover and lead to large           for a firm offering a vast assortment of premium
     volumes of discontinued and obsolete in-           priced merchandise in a limited range of merchan-
     ventory. Alternatively, keeping inventory          dise categories. The simulation lacks one important
     low frequently can cause out-of-stock situ-        piece of information: How will target customers re-
     ations, hurting sales.                             act to these inventory alternatives? As discussed
                                                        above, satisfying the needs and shopping prefer-
The study sought to address this dilemma by utiliz-     ences of target customers is critical for retail suc-
ing computer simulation techniques to model three       cess.
alternative retail inventory strategies:
                                                        Missing from the computer simulation model is a
Complete inventory strategy: The traditional ap-        means of accounting for consumer preferences. In
proach to apparel retailing of stocking a compre-       developing retail strategies, it is essential for the
hensive inventory of all available merchandise at a     firm in question to understand how their customers
majority of locations on the chance that any given      feel about the inventory alternatives and their will-
item will be required to fulfill a customer request.    ingness to alter the way they do business with the
                                                        firm. The following section presents the second
No inventory strategy: A more futuristic perspec-       phase of this study—a marketing research study
tive simulating the virtual merchandise mix. Here,      using survey and personal interviews to determine
stores carry a display-only inventory to show cus-      customer reactions to the inventory options.
tomers the available options in terms of style, size,
color, and detail with no inventory support. Cus-
tomers make their purchase, and that selection is
shipped directly to their home or office.               Customer Perspectives on Service
Pareto inventory strategy: A middle-of-the-road         Cycle Time
strategy, streamlining inventory levels stocked at
                                                        The Customer Study
each location to maintain an on-hand supply of only
the best selling items. Slower sellers are maintained   Two complementary approaches were taken to gain
as display or special order only, again being shipped   insights into the preferences and opinions of the
to purchasers via overnight delivery service directly   retailer’s customers. Both approaches elicited the
to their home or office. This strategy is based on      following information from customers:
the Pareto Principle, which in this case, holds that
80 percent of the company’s sales come from ap-         •   Their patronage behaviors;
proximately 20 percent of the merchandise offering.
                                                        •   Their perceived levels of time pressure, particu-
The success of operating under Pareto or no inven-          larly in relationship to shopping activities, and
tory strategies rests on cycle time reductions in the
transaction process, ensuring that customers receive    •   Their thoughts regarding the inventory strat-
the merchandise they have purchased very quickly            egy alternatives.




82
                                                Retail Cycle Time: A Customer Transaction Perspective

In the first approach, a questionnaire was mailed to      offer time savings and convenience to busy con-
3,000 of the firm’s customers. Names and addresses        sumers. As Table 1 indicates, over half of all mail
of these individuals were provided by the firm’s da-      survey respondents indicated agreement or strong
tabase management company. Customers were se-             agreement with each of the twelve shopping time
lected based on two criteria: (1) purchase made           sensitivity statements. The least affirmative re-
within the past 12 months and (2) amount of pur-          sponse was that 53 percent of all respondents agreed
chase. A final response rate                                                    that 24-hour customer service
of 15.5 percent, quite favor-                                                   is an important retailer offer-
able for this type of market re-      As in the simulation                      ing. Nearly 80 percent of re-
search, yielded valuable infor-                                                 spondents indicated that time
mation from target customers.            study, consumer                        saving services are important
Demographic characteristics                                                     when shopping, time saving
of these respondents are pro-
                                        research points to                      services enhance the value of
vided in Appendix A.                 the Pareto alternative                     a retailer’s offering, and home
                                                                                delivery on out-of-stock or
In the second approach, a se-             as a promising                        special order situations is of
ries of in-store exit interviews                                                value.
with purchasing customers
                                       inventory strategy.
was conducted. Interviews                                                        Similar questions were in-
utilized open-ended questions and were conducted          cluded in the store interview portion of the study.
at six of the firm’s stores in different geographical     Nearly 70 percent of the customers interviewed in-
areas and representative of the firm’s sales and vol-     dicated that time saving services are an important
ume distributions. The objective for this phase of        part of their retail shopping behavior. These ser-
the research was to obtain customer opinion and           vices are so important that more than half of the
reaction to the retailer’s current offering, as well as   people interviewed were willing to pay more for en-
the inventory alternatives under consideration. A         hanced shopping efficiency. Tables 2 and 3 sum-
demographic summary of the exit interview sample          marize these findings. Key findings regarding con-
is provided in Appendix B.                                sumers’ value of time discussions included:

                                                          •   The need to maintain a high level of personal
                                                              attention during the transaction,
Customer Comments and Impressions
Through both methods of data collection, customer         •   Less concern for saving time on weekends than
opinions were obtained regarding the importance               on weekdays, and
of time savings in shopping activities. Addition-
ally, customers were encouraged to comment on the         •   The need to devote ample time to making the
three inventory alternatives and the effect that each         best merchandise selection possible in terms of
of those alternatives would have on their future              style and fit.
patronage behavior. These comments and re-
sponses are summarized in the following paragraphs.

                                                          Alternative Inventory Strategies

Consumers’ Value of Time                                  A central objective of this study was to address the
                                                          cycle time adjustments that could be made in the
Heightened sensitivity to the value and use of time       firm’s customer transactions, specifically through
has contributed to the development of a new set of        alterations of current inventory strategies. Para-
expectations from retailers in terms of the way they      mount to implementation of either Pareto or no in-




                                                                                                            83
Retail Cycle Time: A Customer Transaction Perspective

ventory strategies is the use of an express delivery     cent of survey respondents agreed that home deliv-
service directly from the retailer’s distribution cen-   ery for out-of-stock items and special orders would
ter for those items not held in individual store in-     be of value. Customers responding to the mail sur-
ventory. The simulation study discussed earlier in-      vey were also asked to provide feedback on spe-
dicated a Pareto inventory has the most significant      cific implementation issues related to the use of al-
potential for reducing costs, while continuing to        ternative inventory strategies, including the opti-
maintain customer satisfaction. Customer response        mal speed of delivery and their willingness to share
leads to a similar conclusion.                           in the cost of providing the delivery service. Re-
                                                         sponses to these questions are summarized in Table
Survey respondents were generally supportive of          4. Clearly, with reduced inventory strategies, deliv-
the overnight delivery options required to make a        ery becomes an important issue. More than half of
Pareto inventory strategy succeed. Almost 80 per-        the survey respondents indicated that a reduced




                Table 1: Mail Survey Response to Shopping Time Sensitivity Measures
        (Percentage of Respondents Marking “Agree” or “Strongly Agree” with Each Statement


                                                                                                 Percent
                                             Statement
                                                                                               Responding

     1. When shopping, time saving services are important.                                          79

     2. When I choose between retailers to do business with, I select those who provide
                                                                                                    65
        the most convenience.

     3. Time saving services enhance the value of a retailer's offering.                            78

     4. I am willing to spend money in order to save time.                                          66

     5. My schedule does not allow enough time for shopping.                                        73

     6. I take advantage of opportunities to save time when I am shopping.                          71

     7. My time is just as valuable as my money.                                                    74

     8. Home delivery for out-of-stock items and special orders is of value to me.                  79

     9. Overnight delivery for out-of-stock items and special orders is of value to me.             60

 10. Retailers can add value by making the process of shopping with them faster.                    77

 11. 24-hour customer service is an important retailer offering.                                    53

 12. I am willing to pay more for services that save my time.                                       58




84
                                               Retail Cycle Time: A Customer Transaction Perspective




       Table 2: How Important Are Time Saving Services in Terms of Your Shopping Activities?
                                   (number responding = 465)


                    Level of Importance                     Percent of Respondents

              Very Important                                             40.7

              Important                                                  27.8

              Not Important                                              31.5




              Table 3: Are You Willing to Pay Extra for Time Saving Services in General?
                                     (number responding = 465)


                    Level of Importance                    Percent of Respondents

              Yes                                                        56.6

              No                                                         43.4




inventory strategy would be worthwhile if their pur-     15 percent of respondents were willing to pay more
chase could be delivered within five days of their       than a $6 fee for delivery.
transaction. Slightly less than half (47 percent) felt
the delivery service would still be effective if they    Customer opinions expressed in store interviews
received their purchase in six to seven days.            were fairly evenly divided on receiving purchases
                                                         after the fact, both at the current five to seven day
Customer response was clear on the subject of shar-      time period or with the reduced cycle time of an
ing in the cost of delivery. Almost 60 percent of        express delivery. About half thought quick deliv-
respondents were willing to pay a nominal ($1-$3)        ery time on the out-of-stock merchandise would be
fee for delivery in situations where the merchandise     of value, stating that receiving merchandise faster
they seek is out-of-stock. Less than 40 percent were     would enhance the value of service received from
willing to pay a fee ranging from $3-$6 and less than    the retailer. Others were vigorously opposed to any



                                                                                                           85
Retail Cycle Time: A Customer Transaction Perspective


                      Table 4: Survey Response to Delivery Implementation Issues
                                      (number responding = 298)
                        Alternative inventory strategies would be valuable
                                  if purchase could be delivered:

                                                              Percent of Respondents

                                                       Yes                              No

     Next Day                                          69.4*                            30.5

     Within 2 Days                                     71.8                             28.2

     In 3-5 Days                                       65.8                             34.2

     In 6-7 Days                                       47.0                             53.0

                              Would you be willing to share the cost
                          of the delivery service at the following levels?

                                                              Percent of Respondents

                                                       Yes                              No

     $1.00 to $3.00                                    59.1*                            40.9

     $3.01 to $6.00                                    37.9                             62.1

     $6.01 - $10.00                                    11.7                             88.3

     More than $10.00                                   0.7                             99.3

     *Percentages read across


type of delivery after the fact on purchased items,     tomers voiced the opinion that shoes are one mer-
regardless of how quickly their merchandise could       chandise category in which store inventory sup-
be delivered.                                           port is critical. They suggested that being able to
                                                        try on exactly the pair being purchased and taking
                                                        those shoes home the same day would be critical
                                                        factors in determining their continued patronage of
Discussion                                              the firm. These customer concerns corroborate the
                                                        use of a Pareto inventory strategy. Some items,
The Value of Time
                                                        those most frequently purchased, would still be avail-
The study results clearly support the premise that      able in each store to allow for personalized assis-
consumers place value on their time in general and      tance from sales personnel.
specifically on their time spent in shopping activi-
ties. While customers support enhanced efficiency,
for instance, reducing the cycle time on merchan-
                                                        Alternative Inventory Strategies
dise special orders from seven days to an overnight
service, concerns remain that this delivery service     Customers were divided on the issue of next day
would depersonalize the transaction. Several cus-       delivery on merchandise not available in store in-



86
                                              Retail Cycle Time: A Customer Transaction Perspective

ventory, the crucial element in the success of either   The need for input from sales personnel and indi-
Pareto or no inventory strategies. About half of        vidual store management in tailoring inventory sup-
both sample groups were quite enthusiastic, indi-       port at the store level is required. Determining the
cating next day delivery to be a service innovation     most requested and frequently purchased shoes at
that would clearly enhance the perceived value of       each store would be the critical factor for cycle time
their relationship with the firm.                       reduction, thereby allowing the greatest number of
                                                        satisfied customers while maintaining inventory car-
Other customers were less favorable to any type of      rying and support efficiencies.
delivery service. These customers indicated that
they would be uncomfortable or displeased with the
notion of not having the shoes they wanted to pur-
chase available immediately in the store’s inventory.
For these customers, reducing cycle time on ordered
merchandise was not an issue. Rather, they were         References
dissatisfied with the idea of leaving the store with-
out their purchase in hand.                             Berry, L. L. and L. G. Gresham, “Relationship
                                                          Retailing: Transforming Customers into
These customer comments indicate caution is in-           Clients,” Business Horizons, November-
deed warranted in changing a traditional inventory        December 1986, pp. 43-47.
strategy. Clearly, a no inventory strategy would
risk alienating a sizable group of customers—those      Lucas, G. H., R. P. Bush, and L. G. Gresham,
who rely on personal fitting and who wish to take         Retailing, Houghton-Mifflin, Inc., Boston,
their purchases home immediately. The tangible            MA, 1994.
nature of the product, its premium price, and the
need for a comfortable fit increase consumers’ in-      Lucas, G. H. and L. G. Gresham, “How to Position
volvement levels with their purchases, which in turn      for Retail Success,” Business, April-June 1988,
leads to the need for more careful evaluation of al-      pp. 3-13.
ternatives and purchase outcomes. Many of these
consumers indicated that being forced into an over-     Retzlaff-Roberts, D., E. L. Nichols, Jr., and J. C.
night delivery situation would have a negative im-         Wetherbe, “Complete, Pareto, and No Inven-
pact on their future dealings with the firm.               tory: Alternative Strategies for Retail Inven-
                                                           tory,” Cycle Time Research, (1:1), 1995, pp. 41-
As in the simulation study, consumer research              61.
points to the Pareto alternative as a promising in-
ventory strategy. The firm has a solid customer         Robinson, J. P., “The Time Squeeze,” American
base that is comfortable with special orders being        Demographics, February 1990, pp. 32-33.
delivered to their homes or offices and who are very
enthusiastic about the notion that the cycle time of
this transaction could be reduced to a next day ser-
vice. Service to these customers would not be im-
paired by the new inventory strategy. Rather, it
would be enhanced by reducing the total elapsed
time between purchase and delivery.

The Pareto strategy would also maintain a limited
store inventory viewed to be critical to another siz-
able customer group. These customers could still
obtain the desired shoes at the time of purchase.



                                                                                                           87
Retail Cycle Time: A Customer Transaction Perspective


                              Appendix A
          Demographic Characteristics of Mail Survey Respondents

                Gender (number responding = 451)
                Male                                    417
                Female                                  34


                Ethnic Background (number responding = 449)

                White                                   413
                African American                        16
                Hispanic                                7
                Other                                   13


                Age (number responding = 452)
                15-24                                   9
                25-34                                   80
                35-44                                   111
                45-54                                   141
                55-64                                   65
                65 and over                             46




88
                          Retail Cycle Time: A Customer Transaction Perspective


                    Appendix B
Demographic Characteristics of Exit Interview Participants
          Gender
          Male                               51
          Female                              8


          Ethnic Background
          White                              47
          African American                    8
          Hispanic                            4


          Age
          15-24                               6
          25-34                               11
          35-44                              12
          45-54                              24
          55-64                               5
          65 and over                         1


          Location
          Atlanta, GA                         8
          Cleveland, OH                       9
          Columbus, OH                       13
          Houston, TX                        15
          Memphis, TN                         3
          Nashville, TN                       11




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