1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
The Use of Influence Diagrams in Formulating an IT Strategy for Retailers
Dr R K Holmes
SRH Associates, Castle House
1 Castle Hill
Fell Lane, Keighley
West Yorks, BD22 6BD
UK
Tel: +44 535 609010
Fax: +44 535 609010
E-mail: CIS:100332,2505 100332.2505 @compuserve.com
Abstract
This paper is concerned with the use of a set of Influence Diagrams rep ing the major p
in retail branch operations, (ie. stock flow. sales activities and human resource management), to
identify LT. applications that can help improve control over these processes. These applications can
then be mapped onto the type of retail branch to give a portfolio for development and
implementation. Prioritisation may be based on cost/benefit/risk analyses.
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1994 INTERNATIONAL SYSTEM DYNAMICS CONFERENCE
The Use of Influence Diagrams in Formulating an IT Strategy for Retailers
1 INTRODUCTION
In-store systems for the Retail Industry is a major growth area. These are often considered as separate
from but linked to the central merchandise control and planning systems. The central systems are
generally concerned with supply chain management, that is with defining purchasing plans and
controlling central warehouse stock systems for i and Ol ly, as part of
this there is financial accounting and control.
At store level the major emphasis has been on point of sale systems (POS and EPOS) as this has been
seen as contributing directly to the profitability and competitiveness of a retailer. It is the end of the
supply chain and the use of POS equipment which has the benefit of speeding up customer throughput,
and recording sales for faster consolidation.
With the availability of branch based back-office systems a number of problems have arisen regarding
the devel of ies by retailers. This paper outlines the current state of the
market and provides a framework within which such a strategy may be developed.
2 SYSTEM SUPPLIERS
21 Point of Sale (POS:
The in-store situation has been categorised by hardware suppliers selling their own hardware or acting
as a hardware distributor (eg. for hardware manufacturers such as IBM, ICL, NCR, Nixdorf, Olivetti
etc.). The POS software needed to run such systems is supplied on a similar basis with the added
that the h such as IBM have commissioned software houses to
write systems for them which although sold through the manufacturer (and its agents) is supported by
the original developer.
The POS marketplace has, for large accounts, become saturated over the last three years. There is
consequently intense price competition between the major vendors. However, companies which
adopted POS systems 3 or more years ago are now considering ‘second generation’ systems and
companies who have recently purchased systems are requiring built in flexibility to permit progressive
enhancement.
2.2. Communications
Although POS systems can exist in isolation at the branch level most are linked to some form of
central host computer, for example for:
. Maintenance of the price file;
iJ Retrieving and consolidating the sales and stock change information.
Hence, the POS systems (via the Store Controller) have some form of communications capability -
simple dial up and file transfer at a basic level.
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2.3 - office
2.3.1 Overview
As an addition to the basic POS systems, vendors have started to offer ‘value added’ software
applications on the back of the POS hardware. This has occurred for two reasons:
. The vendors looking to diversify (a difficult undertaking in this area) due to saturation
of the EPOS hardware market which will occur in the near future with a resultant
teduction in single high value sales (most major retailers have already made decisions
on equipment);
. Customers looking for retrospective cost justification of an original high POS capital
investment.
Back-office applications naturally fall into functional groupings, ie. stock control, financial, human
resource management, etc.
2.3.2 Role
The role of the back-office applications can be substantially different to that of the POS applications.
POS appli are ional in nature designed to speed up and make the selling process more
efficient - on-line real time systems. Whereas, some of the commoner back-office applications are
more tactical providing information for and ions such as
stock dering, labour scheduling, time in d etc.
There are also some back-office applications that are more geared towards the sales function but which
are not concerned with the sales transaction, for example, stock location enquiries and product
substitution, display planning, shelf edge labelling, customer loyalty rewards etc., likewise there are
il by the POS ion process which also influence the sale such as offers on
quantity (eg. 3 articles for the price of 2 automatically computed on the till). These applications are
providing more services to the customer to influence the probability of a sale and minimise lost sales.
The difficulty is to identify the applications and functions that are necessary, those that are possible
and their priority, and their location, ie. POS - back-office, operational - tactical, etc. Another
consideration is the nature of the branch, for example labour scheduling is not necessary in a small
(<20 staff) branch, product location checking/substitution is not necessary in a large DIY store
(alternatives are displayed together on the shelves).
2.3.3 Nature
By their very nature back-office applications tend to be user specific and hence the ‘standard’ products
as offered by the POS hardware vendors require tailoring. This places an obligation on the vendor
to develop their own Li or have the lication source code from the originator of the
application to facilitate the tailoring and support required. The difficulties faced by distributors of
third party software has also led to the software originators cutting out distributors and selling direct
to the end user.
2.4 Hardware siting
Some POS systems were designed and implemented with only POS applications in mind. The
imposition of the extra back-office applications on the POS hardware can be impossible due to size
and/or performance limitations. In this environment the POS applications are paramount.
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This factor plus consideration of the nature and role of the back-office applications has led some users
to consider using other hardware platforms with a link to the POS hardware for data transfer. For
example, having a separate PC or larger machine such as an IBM RS6000. Open systems can be an
issue and many users prefer a UNIX operating system whatever the hardware. As well as running any
separate back office applications a separate in-store processor could have two other roles, ie.:
° File server for more complex POS functions such as credit checking, etc. where data
transfer is at the record level;
ipporting control i such as store based ordering
from suppliers (perhaps using EDI). The distribution of such host/head office
functions to the store is of course a matter of strategy and often affected by company
politics and culture.
3 A BUSINESS MODEL
3.1 Process Model
3.1.1 Introduction
In order to understand the role, function and positioning of in-store back-office systems it is necessary
to use a business model to describe (some of) the processes involved in selling operations at the store
level. This is a graphical model that attempts to show the activities within the store as an Influence
Diagram. This was built up from a number of modules that reflect a functional split in branch
activities.
This method of representation is chosen because it permits key lable variables to be i
policies for the control of these variables to be elucidated and potential behaviour over time explained
and predicted. The fully developed diagram can, if required be transformed into a quantitative
simulation model. However, in its present form it can provide a useful visual agenda for considering
the possible effects of computer applications in a retail branch.
The model breaks down into a number of distinct sections as follows.
3.1.2 Stock movement
3.1.2.1 Analysis
Stock movement is shown in figure 1, here stock is despatched from a central warehouse to a store
(or from a supplier direct to store). This is controlled by ‘orders’ (a rate) or some form of
replenishment policy based on knowledge of the store stock level (as indicated by the quantity in the
stock room only or including stock displayed). There is a delay implicit here based on the time to
process the order. There is a further delivery delay before the stock arrives at the branch and increases
the store stock level. This is the normal lead time associated with resupply from a warehouse.
The issue of controlling the replenishment of stock into the warehouse from suppliers is not dealt with
here as it is a separate (but linked) problem. In many retailers the buyers set up a merchandise plan
(for a year ahead often based on seasonal trends) and agree contracts with suppliers with call off
schedules for deliveries that may or may not be triggered by warehouse stock levels.
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FIG. 1 THE STOCK SUBSYSTEM
aeons wsronestoce
BONE ASTER FRM mae ACCEPTANCE RATE
* ".
HEAD OFFICE
STORE BASED
The store stock level (goods held in the stock room) is depleted as stock is moved out onto display
and this rate is really two part - there is a response to stock being sold (shelf filling) and a policy
determined by layout plans, etc. (for example a new line is brought in to replace existing lines on
display).
Stock out will occur if sales are at a higher rate than the predicted rate used to set the reorder level
given the delays in the replenishment chain and the economic order quantity used. A secondary factor
is the accuracy with which the stock level is known. There is a cost in terms of lost sales which must
be measured against the stock holding cost and the cost of ensuring stock accuracy. One objective
would be to keep the risk of stock out constant but reduce stockholding costs by reducing the delays
and the economic order quantity - the trade off is that the need for stock accuracy will consequently
rise. A further benefit of low stockroom stocks (stock being held primarily on the shelves) is increased
selling space (store floor area 1s constant and usually a constraint), ie. the displayed stock level will
tise. This could increase the possibility of theft (shrinkage) if security precautions are not increased.
An information system could be used combining local stock files updated: on-line from POS for
transactions; from frequent batch updates through perpetual stock take using remote data entry (Telxon
devices plus scanners): by updates downloaded from a host on goods in transit. The order process
could be triggered either from host (local stock file used to update host to trigger replenishment from
warehouse or supplier - via EDI) or local system (local EDI). This would also have a number of
subsidiary advantages, ie. responsiveness to sudden trends, stockturn analysis (slow/fast movers),
shrinkage monitoring; as well as the cost reduction. This reflects a customer pull strategy as opposed
to a supplier push where unsold stock 1s returned to the warehouse for subsequent disposal.
Stocktum is important as it can determine pricing policy, ie. slow movers generate a high cost
overhead and a policy based on stocktum could define markdowns and promotions. Alternatively, slow
movers could be retumed to the warehouse after a set display time as new lines are introduced.
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3.1.2.2 Possible Information Systems
Local (POS) stock file maintenance (real time);
Store based stock replenishment/re-ordering (inc. EDI);
Perpetual stock taking (remote device update);
Stockturn monitoring;
Stockholding cost reporting;
Delivery control and recording;
Despatch control and recording (returns, inter-branch transfers, etc.);
Shrinkage monitoring;
Flash sales reports, eg. quantities by dept/style, fast/slow movers, etc.
3.1.3 The sales process
3.1.3.1 Analysis
The sales process is shown in figure 2, this is central to the branch operations and is concerned with
generating a sufficiently high potential sales rate and then efficiently converting it to an actual sales
rate. The potential sales rate is influenced by a number of factors:
.
The number of people in the branch (prospects) - obviously this is a function of
position and demographics, but given a fixed location the base number of people
entering the store (determined by the need for products and economic factors such as
disposable income) is influenced by factors such as advertising, customer loyalty,
external events such as in extreme cases the weather, etc.
The match between the customers needs and the goods on display - obviously the way
in which goods are presented through store planning, promotions, etc. will have an
impact not only in matching known needs but in eliciting needs for other goods and
even impulse buying. Price and availability are also important. Goods need not be
physically present on shelves so long as information on the range, availability and
price is available (cf. the Argos catalog shops).
Active shop floor selling by sales staff (dependent on the type of store / merchandise).
Increasing the number of prospects in the store can be achieved through advertising and customer
loyalty schemes. These need careful planning, especially when linked to other promotions. For
example in one department store chain store cards were advertised linked to a discount on goods
purchased when the card was applied for. This combined an advertising campaign, a customer loyalty
scheme (store cards) and a special promotion. The problem was the benefit to the retailer was much
less than expected because:
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FIG, 2 SALES ACTIVITIES SUB-SYSTEM
HEAD OFFICE
‘STORE BASED
. The sales transaction time was greatly extended because of credit checking required
on issuing the card causing problems on staffing the tills and long waits for customers,
hence customer dissatisfaction;
. A high rate of rejects on credit checking resulting in
. A high rate of one time use on the issued cards, ie. they were used purely to obtain
the one time special discount and customer loyalty was not increased.
Where needs and expectations are not met then lost sales will occur. Some of these which are caused
by stock not on display (this may be an actual stock out) could be converted to potential sales through
accurate stock records to either: find the item at a different location (including the stock room); or,
provide information on an alternative product. Obviously the best policy is to keep the display fully
stocked and this requires having sufficient staff available at the right time for this activity. There may
also be the opp ity for mai of for ie. stock is presold before
replenishment. The implication is that the stock control system must accept this category of stock
(apparent negative stock balances).
The conversion of the potential sales to actual is where the point of sale factors have an influence.
Customers require either no or short queues at the point of sale and fast efficient service. This
requires both a hardware and human element - the equipment to process the transaction and the right
sales assistants (ie. suitably skilled), in the correct number, where needed. Having too many staff
obviously wastes money, hence manpower planning related to what is a time variant demand has a
direct impact on profitability both from the perspective of maximising the potential to actual sales
conversion, and minimising the largest single cost element - labour.
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One factor where there is confusion is ‘customer service’ which is part of the selling activity, ie. should
staff be solely and specifically allocated to this activity (which is difficult to measure and relate to the
sales made) or should it be in addition to other duties being carried out at the same time, eg. the sales
assistant helping a customer when he/she is primarily cleaning or shelf filling.
‘A measure of lost sales is the conversion ratio, ie. the number of people entering the store to the
number buying goods. There is now equipment that can monitor people entering a store and hence this
data is now available.
Promotion campaigns are planned and executed to increase sales. These often require a large amount
of effort. particularly in di stores wh ing for markdowns may be required.
In general there is little technology can do in this case other than i i the provision of store based ticket
printing. Food stores are different and LCD shelf edge labels are b i This i
product labelling accuracy. ie. the display label shows the same price as is on the EPOS price lookup
file. and also permits easy to inister special p eg. on selected goods at specific
times in the day for different expected customer mixes in the store.
Other value added applications may be developed based on loyalty H one such
is the use of computerised wedding present registers. The bride decides on a list of articles (all
available in the store) and as and when people buy presents the store administers the list (possibly
networked across a chain) recording the presents left unbought and who bought which present.
3.1.3.2 Possible Information Systems
. EPOS (inc. EFTPOS, price control, special offer discounts, etc.);
. Shelf edge labelling;
. Ticketing:
* Promotion control;
* Space/Layout planning;
. Cost of sale analysis;
- Stock enquiries:
. Product substitution:
° Credit enquiries/authorization;
. Customer identification and transaction recording;
. Customer loyalty database;
« Customer service:
. Sales Analysis (inc budget comparison);
. Flash sales reporting;
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3.1.4 Human Resources Management
3.1.4.1 Analysis
The third major component of the activity model is d with staff and this is
shown in figure 3. In many retail enterprises branch staff are categorised as having high turnover rates
with low pay and low skills. There is also a high proportion of part time staff with varying payrates
and contracted hours.
There are two key areas: ensuring the right staff are carrying out the required tasks at the right times
ata minimal cost (manpower planning and labour scheduling); and, controlling the quality of the staff
through i training and ion policies. Both of these have a direct impact on the
sales process.
Manpower planning operates at varying levels, ie. setting the establishment (based on a long term
budget) is a long term process (3 to 6 month time horizon) via recruitment policies; establishing shift
patterns that may have a 4 to 6 week cycle; and, allocating staff to tasks for time slots within a day
(on a weekly cycle) includi on ime if necessary. Pay rate information to give
iP costs is af as are planning and budgeting tools. Recording of time
in attendance is necessary for retrospective costing, performance monitoring and security. This may
be included within some form of payroll data capture system (based on hours worked) possibly based
on a time in attendance system.
FiG. 3 STAFF SUB-SYSTEM MARGIN
+) PLANNED
CAPACITY
3\__ ABSENTEEISM
* actual < |
ACTUAL ¢memmnem SALESFORCE
SALES RATE CAPACITY |
+
96, PRODUCTIVITY
an 'SALESFORCE ——
—_ SKILLS
CONVERSION *{ TURNOVER
RATE.
GUBSTITUTON) TRAINING
HEAD OFFICE
STORE BASED
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Dependent on the amount of active selling carried out by staff, skills development and knowledge of
the skills inventory may be of importance. Minimisation of turnover is always important because of
the recruitment overhead and initial low performance. As part of this not only does the factual
information need to be recorded but also day to day productivity of individuals.
3.1.4.2 Possible Information Systems
. Wage costing/budgeting;
. Labour scheduling;
. Time in attendance;
. Payroll data capture;
. Employee records;
. Skills inventory/profiling,
. Training planning:
. Performance/productivity monitoring;
° Employee discount card systems;
. Security;
3.1.5 Full Model
The full composite model is shown in the following diagram which illustrates where the various
modules link.
FIG 4 RETAIL BRANC™ INFLUENCE DIAGRAM
HEAD OFFICT
STORE BASED
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3.2 Portfolio Analysis
Full Portfolio Analysis as part of the long term IT Strategic Planning process is obviously a major
undertaking for any enterprise, however, idering in-store ions as a unit, IT ications may
be positioned according to function and role and then grouped into integrated systems. Other
perspectives are also possible.
The function/role analysis may be as follows:
ROLE Sales Stock Finance HRM
Layout Merchandise Labour
planning Budget scheduling
Planning Customer planning
loyalty
Replenish- Personnel
Promotion| ment records
Control Cost
Stockturn reporting | Skills
Flash rep inv.
sales rep EFTPOS
On-line Credit Time in
Operations | POS updates checks attendance
Infrastr-
-ucture COMMUNICATIONS
353) Branch Characteristics Analysis
Obviously there will a variation in the applicability and importance of these systems according to the
type of branch being operated, for example, labour scheduling is more appropriate to supermarkets
employing 200 or more staff with a high proportion part time and hourly paid, than a multiple with
a large number of small outlets, eg. a fashion retailer.
This can enable applications to be positi d for i ion in a portfolio according to these
criteria as shown in the following example:
HIGH
Store Supermarket
size: Labour Sched Dept Store
people/ POS Labour Sched
turnover/ Stock turn
sku's/
étc.
Corner
LOW shop
LOW Unit margin/ unit value/ HIGH
unit complexity/ staff skills/ outlets
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3.4 Contribution to Sales Analysis
An way of prioritising applications is to consider them in relation to their impact on the sales process.
This will facilitate the identification of positive benefits through new services and sales process
improvements, rather than cost reduction benefits due to making existing processes more efficient.
This factor may also be seen in relation to where the application should be located, ie. as part of the
point of sale system or branch back-office system. This may be seen in the following diagram:
POS EPOS
Credit check EFTPOS
Location
Stock location
Customer profile
Time in Labour
BACK- attendance Sched
OFFICE
INTERNAL Position EXTERNAL
(with respect to sales or internal efficiency)
Other prioritisation methods could use cost and risk bases to give a ranking for the portfolio.
3.5 Technical infrastructure
Obviously once a required prioritised portfolio of applications has been arrived at it is necessary to
draw up plans for their acq P This pl b retailer specific as it
depends on factors such as installed hard base, available, internal IT culture, etc.
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