Santa Clara University

Technology and Retailing

In a Tough Market, Computers Help Make Key Decisions

When Stephen A. Smith and Narendra Agrawal began looking at retail management practices two decades ago, personal computer use by retail chains was in its infancy and computers were mostly being used to follow the money.

“Back then,” Smith says, “all the retailers were using mainframes with terminals and the software had no decision-making capability. Its main purpose was keeping track of sales. As technology got cheaper and better, retailers were able to track such things as how many units of an item were sold at what price at each store. Therefore, retailers can now make decisions at a finer level of granularity.”

Two OMIS faculty provide a road map to the new era of tech-driven retailing

Agrawal adds that this is not simply a response to technological advancements; rather, it is due to monumental shifts in the retail industry. “In an increasingly competitive landscape, retailers have responded with innovative retail concepts and store formats. As a result, customers have more choices and higher expectations, and are not so forgiving when they can’t get what they want. Consequently, retailers have had to get smarter about using technology to be more responsive to customer needs.”

The missing link, however, was analytical capabilities that could convert the vast amounts of data collected by these technologies into profitable decisions by retail managers. This opportunity is what attracted Agrawal and Smith, professors in the Operations Management & Information Systems (OMIS) department, to do research in new scientific methodologies for retail operations.

In a recently completed book, Retail Supply Chain Management: Quantitative Models and Empirical Studies, published by Springer, the pair provides an overview of the state-of-the-art in retail supply chain management research. The book includes contributions from leading experts in the field, which the two of them edited as part of a thorough peer-review process. They also wrote five of the book’s 12 chapters.

In this book, experts describe advances in dealing with questions on inventory management, product assortment, promotion strategy and supply chain management. It is, in some ways, a road map to the new era of technology-driven retailing. In addition to current research, it also highlights a host of open questions. This combination should make it a valuable resource for academic researchers, as well as retail executives and analysts who are interested in reengineering their own operations.

“With the help of statistical methodologies to estimate not just what sold, but what could have sold if retailers had the proper inventory, and to update demand forecasts based on observed sales, retailers no longer have to rely solely on vendors for supply chain flexibility. In fact, our research has shown that the benefits from internal flexibility can be substantial,” says Agrawal. “As a result,” he says, “stores can customize their product assortment and inventory dynamically, by region, which can be critical to profitability because there are significant differences in taste, willingness to spend, and demographics.”

Solutions based on such research can significantly outperform subjective decisions made by retailers, as Smith found in his work on markdown optimization. They can also lead to counter-intuitive results. For example, if information about customer heterogeneity is included in an assortment optimization algorithm, the profit maximizing assortments may not contain the most popular products.

Smith says the book offers many insights about the changes that are forthcoming in the retail world. “A lot of the methods talked about in the book are sure to become a part of new commercial systems that will provide the technology and methodology for decision support capabilities.” These techniques will be indispensable to retailers as the complexity of their business environment continues to grow. Agrawal and Smith hope that the book will motivate further academic research in retail supply chain management, which will in turn advance the state of the art in retailing.

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