14 Ritchie Sayner
In 1906 an Italian economist by the name of Vilfredo Pareto created a mathematical formula describing the unequal distribution of wealth in his country. He observed that 80% of the wealth which was mostly land at that time was owned by 20% of the people. In the 1930s and ’40s quality manager pioneer Dr. Joseph Juran recognized the universal applications that the “law of the vital few” had and applied it to business. Thus Pareto’s Principle – or the 80/20 rule as it would be known – was born.
Examples of the 80/20 rule in the retail world are numerous:
- 20% of the vendors you carry supply 80% of the inventory you have.
- 80% of your sales come from 20% of your stock.
- 80% of the sales are produced by 20% of the sales associates.
- 20% of the staff causes 80% of the problems.
- 80% of your time is spent dealing with the 20%.
Though the 80/20 examples above may perhaps not be absolute for your company the idea is to understand that the principle exists and it can be used to manage more effectively.
Some popular management theories suggest that the most effective use of time talent and resources is to focus almost entirely on further development of the 20% that is already performing and leave the remaining 80% status quo. With regard to inventory management I would offer that efforts to improve the 80% would prove more beneficial.
Overstocked While Understocked
Let’s assume that we have a classification where 80% of the sales are coming from 20% of the inventory a very common scenario. Most often I see this in a class that is overstocked and understocked at the same time. Usually contributing to the overstock situation is old dated inventory consisting of broken sizes discontinued styles poor color choices and even vendors that are no longer part of the merchandise assortment. In other words the class consists of a whole lot of nothing.
Typically the same class will be
Understocked Items and Merchandising Challenges
Understocked on items that are selling well and should be filled in but are not because “on paper” the class is over-bought. This class will never reach full potential until this problem is diagnosed and remedied. Typical merchandising benchmarks of turn margin and GMROI can oftentimes be misleading if not thoroughly reviewed. In my opinion this is the very reason that shoe stores as a group have historically never experienced turns faster than 2-2.2 times.
Hypothetical Classification Scenario
Take a hypothetical classification with ten styles. Let’s assume that two of the styles have just been received and are blowing off the shelves. Let’s further assume that five styles are just OK and that three styles are real dogs. In fact they are so bad that you had to check the purchase order to see if you really bought them in the first place.
If the store is functioning efficiently the fast-selling styles get reordered immediately the “dogs” get returned or marked down just as quickly and the so-so styles are scrutinized closely throughout the selling season. If you are reviewing at the class level only and not drilling down to the SKU level in your POS system you may miss the hot sellers and the “dogs.” This is the very reason that good POS systems allow you to create fast and slow seller reports.
Consequences of Missed Reorders
If the reorders get missed sales begin to suffer because sizes become depleted and remaining styles are not as desirable. If the “dog” styles are not dealt with immediately by way of a vendor return or early in-season markdowns inventory levels become bloated slowing turnover and choking off open-to-buy.
Narrow and Deep
In theory the cash generated from…
Marking down the slow-selling styles pays for the reorders of the faster-selling ones. As the store approaches the peak of the selling season the assortment of styles offered at the beginning of the season would have narrowed while the styles in demand would be readily available in needed sizes and colors. If the store has effectively managed its open-to-buy plan it should now be in a position to land promotional merchandise to blend into the assortment at season end. If you are lucky or if you have negotiated well with the vendor upfront you might be able to buy the same styles that performed well during the season at a promotional price. This merchandise will serve to boost both sales and margins for the category.
Managing the 80/20 Rule
Managing the 80/20 rule is a continual process. The value of the Pareto Principle is that it continually reminds us to focus not only on the 20% that is the driving force behind the sales but also to manage the remaining 80% more efficiently. If you accept the premise behind the Pareto’s Principle: The 80/20 Rule
Ritchie Sayner
MAR-APR 13 continued on page 17 Published in the Mar/Apr 2013 issue of Shoe Retailing Today copyright © 2013 National Shoe Retailers Association Tucson AZ www.nsra.org. All rights reserved.
Focus on the Shopping Experience
Thus retailers must revisit their product and service offerings focusing on the kind of experience they are trying to craft for…
Customers in Stores and Online
Today’s consumer follows five steps in shopping Sullivan believes. The new shopping pattern starts with “discover” then moves through “research” to “feedback” (from friends and family) to “evaluate” (and compare) and finally to “purchase.” By 2016 Sullivan says it’s likely that about 14% of purchases will be online – but 66% of purchases will be influenced by online activity.
“There will still be physical shopping” Sullivan asserts which means “the experience you create becomes even more important. The store is where they engage one on one – the emotional engagement happens one on one. So we need to think about what stores can do to raise the bar.”
Digital Shopping
Digital shopping – including flash sale sites and new visual mechanisms such as Pinterest – are also changing the shopping arena Sullivan says pointing to the multiple communications options currently available – such as social media websites email mobile apps texting call centers direct mail catalogs employees checkout alternatives.
Retail Strategies of the Future
Among the retail strategies of the future Sullivan predicted will be:
– Smaller retail store footprints
– A proliferation of small alternative-store formats
– More personalized experiential customer service
– Expansion of product offerings to include service and lifestyle “solutions”
– Multi-cultural engagement
– “Big Data” consumer data mining
Walmart stores are getting smaller she noted because the 10000-square-foot box is “too big. It’s not the thrill of the hunt anymore it’s the thrill of the fun in the find.” In addition to downsizing Sullivan expects to see more of a community orientation in successful retailing. Stores that can make the case that they “give back” will have an edge in creating experiences that their customers find satisfying.
Being “Local” Is Important
As retailers switch their focus toward creating a new kind of shopping experience Sullivan suggested they also keep in mind that the American demographic is changing. “The American family looks very different than a decade or two ago” she stated simply.
Understanding Today’s Consumer
Where is today’s consumer shopping what channels what are they buying what will they want? At the moment it looks like a smaller footprint and really personalized service and differentiated experience are the models. Being local is very very important. Personalized experience and service connected to the community an edited assortment to meet local customs and needs trusted relationships plus leveraging digital—the ability to purchase anytime as well as to receive a rich assortment of product information—these are what consumers are looking for and what retailers need to deliver.
Engaging with Customers
“You need to engage and network. There’s so much choice it’s overwhelming. You can go anywhere online anytime and buy anything. So as a customer I want an edited assortment of the best stuff I want to buy. Don’t distract with a lot of extraneous stuff. Speak to your customers with a carefully edited assortment of what they want.”
She reminded retailers that consumers have “robust access to product information” so sales associates who can personalize the information exchange should be a definite asset. “At the end of the day it’s people that make the difference. People are what people remember. It’s the people that build the relationships. Day-to-day and week-to-week engagement is built through relationships which is what independents do best. Figure what you really need to do so that it breaks through to the consumer: ‘I want to shop there.’”
The Independent Advantage
The independent shoe retailer who can figure out how to create that desirable and repeatable customer experience Sullivan asserted has an advantage that online can’t match. Manufacturers will have to help she acknowledged possibly by learning to deliver in small quantities understanding demographics and helping their customers do so and finding ways to do business that are profitable on smaller scales.
The bottom line says Sullivan is “The customer holds the power.”
Pendants are Better Suited to Connect with Customers
Change the game in your head. The consumer is moving in your direction—and five years from now the power shift will have been pretty dramatic and more radical than anything we’ve seen. The opportunity for independents is greater than it’s ever been—customers want the experience.
80/20 Rule
Then 20% of the people receiving this magazine will end up reading this article. If you have gotten this far you are part of the 20%. Out of this group 20% will actually do something proactive relative to this concept while 80% will not. And so it goes.
If you are among the select 20% congratulations! Try shifting some of your focus to the 80% not working for you and see how quickly things improve.
Ritchie Sayner is vice president of business development at RMSA Retail Solutions. Contact him at RSayner@rmsa.com or at 816-505-7912. Retailers are invited to follow him on Facebook at http://www.facebook.com/RitchieSayner.
Pareto’s Principle continued from page 14
Summary
The article discusses the application of Pareto’s Principle or the 80/20 rule in retail highlighting how a small percentage of products staff and efforts often drive the majority of outcomes. It emphasizes the importance of managing both the 20% that yields the most results and the remaining 80% to improve efficiency and sales. The article also explores strategies for creating a personalized and engaging shopping experience to adapt to changing consumer behaviors.
“The customer holds the power.”
Real-World Examples of the 80/20 Rule
The 80/20 rule or Pareto Principle is a concept that can be applied in various real-world scenarios to enhance efficiency and effectiveness. Here are a few examples:
- In software development 20% of the code often contains 80% of the errors. By focusing on this critical portion developers can significantly improve the quality of the software.
- In healthcare 20% of patients may account for 80% of healthcare costs. Identifying and managing these high-cost patients can lead to more efficient resource allocation and cost savings.
- In customer service 20% of customers might generate 80% of complaints. By addressing the common issues faced by this segment companies can enhance overall customer satisfaction.
