Analyzing Supply and Demand

Smart shoppers know that price isn't everything. the same wisdom applies to retailers implementing price optimization software.

Smart shoppers know that price isnt everything. the same wisdom applies to retailers implementing price optimization software.

As retailers use new analytical tools to adjust prices on merchandise, experts say, they cant ignore the resulting ripple effect on supply and demand. The last thing they want is to run out of a highly profitable item after lowering its price or to be left with a glut of stock after raising a price. That means retailers and their software vendors will eventually need to integrate pricing optimization applications with supply chain management systems and other applications that measure and analyze supply and demand. So far, however, vendors are only beginning to roll out that kind of integration.

"When you make demand decisions, you need to understand the supply chain implications," said Hau Lee, director of the Global Supply Chain Management Forum at Stanford University, in Palo Alto, Calif. "If you change the price of one product, then it affects other products."

What Lee calls demand-based management includes better managing and planning the many influences on demand, not just pricing, and ensuring that they are reflected in retailers supply chains.

Vendors of price and markdown optimization software are beginning to develop applications to address other aspects of demand, such as the assortment of goods in stores and promotions. Vendors such as Spotlight Solutions Inc., ProfitLogic, DemandTec Inc. and KhiMetrics Inc. have launched or are planning to add supply chain-oriented modules to their price optimization applications. ProfitLogic, of Cambridge, Mass., for instance, has already launched analytical applications to plan promotions, the buying of merchandise, the allocation of merchandise and the replenishment of merchandise for stores.

KB Toys, in fact, is starting with ProfitLogics allocation analysis applications rather than the vendors price optimization software. The retailer has used ProfitLogic Allocating4Profit software to evaluate how it allocates merchandise in its toy stores. The result: Since the beginning of the year, the company has reduced the number of out-of-stock items in stores and reduced overall inventory held in stores, said Bob Muller, vice president of inventory management at KB Toys, in Pittsfield, Mass.

While not much integration has taken place yet between price optimization tools and mainstream supply chain management systems, such as those from i2 Technologies Inc. or Manugistics Group Inc., some vendors are pushing for better integration. Vendors KhiMetrics and Spotlight, for example, are two of the four founding members of the Retail Optimization Council formed last month. The council is attempting to bring together vendors addressing aspects of demand chain optimization—from pricing to merchandise planning—and promote interoperability among their applications by recommending use of standard data exchange formats, said Brent Lippman, president of KhiMetrics, in Scottsdale, Ariz.