Traditional retail businesses are supply driven. Every retail business deal with the domain of supply chain. It makes sense when the constraints are at the supply side. Constraints in production, distribution and inventory. When we optimize the constraints in supply chain, the constraints move to the demand side. The need then arises to track, analyze and improve the demands.
If you cannot measure it, you cannot improve it. And if you do not track it, you cannot measure it.
Let us take a brick and mortar retail business scenario. It is a classical supply driven business model. Of course, we do some demand planning in retail. At the end a finite number of products are displayed in the store for customers to shop and buy. Now let us look at a subscription model retail business. Customers subscribe to the boxes, and the demand is known with a much smaller variability. The entire supply chain operates to fulfill a known demand, rather than forecasts. Modern retail business, especially e-commerce operations fall between these two ends. In e-commerce business models, the aggregation of demands gives the flexibility to optimize the chain.
There are three basic documents in a sales process. A (price) quote, an order and an invoice. When you dine in a restaurant the menu card is the quote. The waiting staff takes the order and after your dinner the invoice (tab) is presented. When you shop for a dress the price label is the quote. The act of handing over the dress in checkout counter is the order. And an invoice is given for payment.
In retail businesses, we usually ignore the order. There are price labels on the items. The process of quote and negotiation is known as bargaining. However, we track the sales invoice since it is a legal document for payments. The invoice also can be considered as the document proof for the supply of goods. Orders are the documents for the demand side. So, if we have to track demand, we need start tracking the orders. E-commerce businesses are optimizing the demand chain when they track, measure and optimize orders.
Netflix uses the popular movies from studios to build the customer base. But when they produce or commission a movie they rely on data. The data Netflix has is an aggregate demand from the viewers. The data include ratings, popularity, plays, queues, search, friends, actor, director and all. The success rate of Netflix’s original shows is double that of traditional shows, according to some estimates.
So, there are different kinds of demands. An explicit demand in the form of a sales order, and an implicit, aggregate demand from customer behavior. In an e-commerce world this could be derived from wish lists, click-stream, social media or ad-tech. Once the demands are known and consistent, opportunities open up to optimize supply chain, inventory, costs and so on.
And it is not just in retail businesses. This is true for any traditional businesses where customers do not place explicit orders. Restaurants, taxi cabs, healthcare, banking are all undergoing similar transformations. Uber is a demand-driven taxi company, who uses aggregate demand to change pricing.
Amazon Prime has introduced premium services as subscription. It has inspired many other businesses to issue gold passes and ride passes. The subscription is for premium, not for the entire service due to the variability in the demand. If the demands are well known or has low variability, subscriptions would be the model to keep it that way, and to drive down costs.
Technology has enabled optimizations in the supply chain. Manufacturers long enjoyed the visibility and variability of demands. It helped them to put in place many process innovations. It is time for customer facing businesses to innovate and optimize. And technology is an enabler.