Knowing What Customers Want
When Stanford Business School professor Seungjin Whang learned that the Japanese arm of the 7-Eleven convenience store chain enjoyed annual inventory turns of 55—meaning it sells its entire stock in less than a week—he wondered how it did it. Studying 7-Eleven Japan and several other retailers, Whang learned that they were using an increasingly popular supply-chain management method called "sense and respond.
The "sense means analyzing marketplace data quickly. The "respond means taking action, whether it's changing product mix or capacity allocation. Companies have always pored over sales data, of course. The difference now is that some are doing it daily or weekly to keep up with changing customer tastes.
Here's how it works in practice: Sales clerks at 7-Eleven Japan are required to record the gender and estimated age of every consumer and product scan what they buy. Every week, the system combines this data with its advanced demographics research to adjust product stock and store arrangement in each of its 10,000 stores.
One store Whang studied rotated small boxes of milk to the front of the dairy case in the morning, as its product scans showed workers buy these; larger bottles at noon, when high school students buy; and half-gallons in the afternoon, when housewives shop. "You deliver what the customer wants before demand evaporates, Whang explains.
The Spanish clothing chain Zara also uses sense and respond. Zara produces a mind-boggling 300,000 stock keeping units, or SKUs, a year in an effort to get the latest fashion in stores, according to the Harvard Business Review. Managers submit sales information to company headquarters weekly—both financial information and customers' reactions to products. The company then reacts to that report by designing and manufacturing new merchandise continuously. An idea or a trend inspired by the managers' report can hit stores within 15 days. For the strategy to succeed, Zara has to make certain tradeoffs. For example, the company chooses to invest in distribution at the expense of other functions.
These are large companies, of course. But with databases like those from IBM, Tibco, or Teradata offering a high level of sophistication and becoming increasingly affordable, entrepreneurs can think about using the same techniques.