Retail Cycle Time: A Customer Transaction Perspective

Retail Cycle Time: A Customer Transaction Perspective

the computer simulation was feedback from the firms customers regarding the inventory alternatives. The current study addresses this limitation. Marketing research techniques were used to obtain feedback from the firms current customers on three inventory strategy alternatives. Consumer response corroborated the findings of the earlier study. Both studies showed a conservative or limited Pareto inventory to be the superior strategic alternative to meet customers expectations.

by Amy J. Morgan Bradley University George H. Lucas, Jr. The University of Memphis

Introduction
U.S. retailers currently face numerous competitive challenges. Not only do many firms simultaneously compete for consumer dollars in todays marketplace, but the marketplace itself has become quite complex. The marketplace no longer refers simply to the stores competing in a given trading area. This marketplace also includes all of the catalog retailers operating nationwide and the many companies selling merchandise on the Internet, through television shopping channels, and through infomercials. Consumers today have more options than ever before to get exactly the merchandise they seek with the amount of effort they are willing to expend at a price they are willing to pay. Further, these consumers are more educated, informed, and vocal about their marketplace needs and expectations than in the past. Success in this competitive climate requires that the retailer excel at delivering a unique offering to target customers. In order to maintain a consistently unique offering, the retail strategist must continually seek new ways to build a competitive position that is arguably different from competitors. Taking a cue from manufacturing and technology firms, one option stands out particularly for (1) its match with the changing needs of todays consumer and (2) its potential to reduce internal costs (Wetherbe, 1995). This option is the application of cycle time reduction principles

Executive Summary
In the competitive retailing environment of the 1990s, success often depends on a firms ability to find a unique way of appealing to a carefully selected group of target customers (those most likely, willing, and able to buy the firms offering) in order to gain their patronage, and ideally, their loyalty. The best way to achieve a competitive advantage is to develop a unique merchandise and/or customer service offering. This study examines the application of cycle time principles to the retail transaction as a means of developing a unique customer appeal. In using cycle time reduction principles, a critical issue is how to improve cycle times within the organization and with the final customer without sacrificing the merchandise mix or holding excessive amounts of inventory. This critical question was addressed by Retzlaff-Roberts, et al. (1995) in the first volume of Cycle Time Research. That study reported the use of a computer simulation model applied to an actual retailer of premium-priced mens shoes and accessories to determine the most profitable inventory strategy alternative. Missing from

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Retail Cycle Time: A Customer Transaction Perspective to the retail transaction. In the following paragraphs, we discuss the use of strategic retail positioning as a tool for competitive advantage and the application of cycle time reduction principles to the retail transaction as a promising means of gaining this advantage. tail positioning through the use of a four quadrant model as shown in Figure 1. Three price/service combinations are viable in todays marketplace: 1. Low Price/High Service, or High Value positioning; Strategic Retail Positioning Continued retail survival and success may be achieved through strategic retail positioning. This positioning emphasizes a carefully monitored and updated balance between the needs and wants of a select group of target customers and the retail firms unique strengths and competencies. Lucas and Gresham (1988) illustrate the basics of strategic re2. High Price/High Service, or Service-Oriented positioning; and 3. Low Price/Low Service, or Price-Oriented positioning. Service-oriented retailers, those offering high prices with an equally high level of service, are of particular interest here. Service-oriented retailers tend to

High Service QUADRANT 1 (LPHS) High Value Strategy Low Price QUADRANT 3 (LPLS) Price-Oriented Strategy QUADRANT 4 (HPLS) Poor Value Strategy QUADRANT 2 (HPHS) Service-Oriented Strategy High Price

Low Service
Source: Adapted from George H. Lucas, Jr. and Larry G. Gresham, How to Position for Retail Success, Business, April/June, 1988, pp. 3-13.

Figure 1: Strategic Retail Positioning Alternatives

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Retail Cycle Time: A Customer Transaction Perspective find their target markets in higher-income consumer groups who find special services desirable and worth the cost. Successful service-oriented positioning relies on the ability to maintain this selective image in consumers minds. It means tailoring unique offerings to avoid declining service while retaining high prices. For service-oriented retailers, developing this unique offering is an especially difficult task. Customers are required to pay premium prices and therefore demand more in return from service-oriented merchants. For some service-oriented firms, Nordstrom and Saks Fifth Avenue among them, a focus on providing high levels of customer service has proven effective. Other successful serviceoriented firms, such as Williams Sonoma, Brookstone, and Victorias Secret, have taken the approach of providing innovative and comprehensive merchandise offerings in terms of both variety and assortment. These firms use the merchandise itself to offer a unique customer appeal. Retailers must provide unique customer services to achieve success with this service-oriented strategy. Firms operating in this position must provide service incentives, encouraging consumers to pay premium prices continually for the firms merchandise. A successful service-oriented strategy starts with an understanding of the consumers value balance. Consumers today evaluate their retail experiences in terms of a cost-benefit tradeoff (Lucas, Bush, and Gresham, 1994). This value balance refers to the optimal compromise between the customers costs (What I Pay) and benefits (What I Get). This balance helps consumers decide whether their personal investment in the buying process was worth their gain and represents the get what you pay for philosophy. Retailers who provide benefit to their customers commensurate with the prices paid for merchandise will have a competitive advantage over firms that do not. Transaction Cycle Time as a Positioning Tool An emphasis on time compression or reduced cycle times in the marketing process holds significant strategic potential in the current retail environment. Consumers attitudes toward time and its value and use have changed considerably over the past decade. The demand for time savings is clearly reflected in the merchandise and services that people buy. Customers seek out merchandise and services including cellular phones, fax machines, portable computers, voice mail services, personal shoppers, and digital banking and shopping that help them save time. The demand for time savings is also reflected in consumers expectations regarding the time required to complete the consumer transaction cycle. The consumer transaction cycle represents the total elapsed time necessary to complete the entire purchasing process from information search to postpurchase activities. Thus, retailer efforts which reduce consumer transaction cycle time appropriately meet the needs of the time-pressed consumer, providing several opportunities for service-oriented retailers to develop unique customer service appeals based on the concept of cycle time reduction. Price-oriented retailers can reduce cycle time through convenience: 24-hour stores, extra check-out facilities, and specialized layouts for faster, more efficient access to specific goods. However, convenience alone is not appropriate for service-oriented firms. These firms must find a way to blend time savings with a distinctive appeal -- providing their premium-priced merchandise and excellent customer contact with value-added incentives like reduced transaction cycle time.

. . . satisfying the needs and shopping preferences of target customers is critical for retail success.

Alternate Inventory Strategies Retzlaff-Roberts, et al. (1995) reported the first phase of the application of cycle time reduction principles

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Retail Cycle Time: A Customer Transaction Perspective to a national retailer of premium-priced mens footwear and accessories. This initial study focused on the firms inventory strategy. The authors addressed the application of cycle time reduction principles to the retailers inventory situation as follows: Ensuring that items are in stock for immediate customer fulfillment helps sales but inflates inventory, which can be disastrous for inventory turnover and lead to large volumes of discontinued and obsolete inventory. Alternatively, keeping inventory low frequently can cause out-of-stock situations, hurting sales. The study sought to address this dilemma by utilizing computer simulation techniques to model three alternative retail inventory strategies: Complete inventory strategy: The traditional approach to apparel retailing of stocking a comprehensive inventory of all available merchandise at a majority of locations on the chance that any given item will be required to fulfill a customer request. No inventory strategy: A more futuristic perspective simulating the virtual merchandise mix. Here, stores carry a display-only inventory to show customers the available options in terms of style, size, color, and detail with no inventory support. Customers make their purchase, and that selection is shipped directly to their home or office. Pareto inventory strategy: A middle-of-the-road strategy, streamlining inventory levels stocked at each location to maintain an on-hand supply of only the best selling items. Slower sellers are maintained as display or special order only, again being shipped to purchasers via overnight delivery service directly to their home or office. This strategy is based on the Pareto Principle, which in this case, holds that 80 percent of the companys sales come from approximately 20 percent of the merchandise offering. The success of operating under Pareto or no inventory strategies rests on cycle time reductions in the transaction process, ensuring that customers receive the merchandise they have purchased very quickly after the transaction takes place. The computer simulation model indicated that the Pareto strategy was the most promising option. Supplying stores with reduced inventory, while maintaining support levels for best sellers, offers the best performance in terms of customer fulfillment needs, inventory carrying costs, and profitability. In theory, this reduced inventory strategy looks best for a firm offering a vast assortment of premium priced merchandise in a limited range of merchandise categories. The simulation lacks one important piece of information: How will target customers react to these inventory alternatives? As discussed above, satisfying the needs and shopping preferences of target customers is critical for retail success. Missing from the computer simulation model is a means of accounting for consumer preferences. In developing retail strategies, it is essential for the firm in question to understand how their customers feel about the inventory alternatives and their willingness to alter the way they do business with the firm. The following section presents the second phase of this studya marketing research study using survey and personal interviews to determine customer reactions to the inventory options.

Customer Perspectives on Service Cycle Time

The Customer Study Two complementary approaches were taken to gain insights into the preferences and opinions of the retailers customers. Both approaches elicited the following information from customers:

Their patronage behaviors; Their perceived levels of time pressure, particularly in relationship to shopping activities, and Their thoughts regarding the inventory strategy alternatives.

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Retail Cycle Time: A Customer Transaction Perspective In the first approach, a questionnaire was mailed to 3,000 of the firms customers. Names and addresses of these individuals were provided by the firms database management company. Customers were selected based on two criteria: (1) purchase made within the past 12 months and (2) amount of purchase. A final response rate of 15.5 percent, quite favorable for this type of market research, yielded valuable information from target customers. Demographic characteristics of these respondents are provided in Appendix A. offer time savings and convenience to busy consumers. As Table 1 indicates, over half of all mail survey respondents indicated agreement or strong agreement with each of the twelve shopping time sensitivity statements. The least affirmative response was that 53 percent of all respondents agreed that 24-hour customer service is an important retailer offering. Nearly 80 percent of respondents indicated that time saving services are important when shopping, time saving services enhance the value of a retailers offering, and home delivery on out-of-stock or special order situations is of value. Similar questions were included in the store interview portion of the study. Nearly 70 percent of the customers interviewed indicated that time saving services are an important part of their retail shopping behavior. These services are so important that more than half of the people interviewed were willing to pay more for enhanced shopping efficiency. Tables 2 and 3 summarize these findings. Key findings regarding consumers value of time discussions included:

In the second approach, a series of in-store exit interviews with purchasing customers was conducted. Interviews utilized open-ended questions and were conducted at six of the firms stores in different geographical areas and representative of the firms sales and volume distributions. The objective for this phase of the research was to obtain customer opinion and reaction to the retailers current offering, as well as the inventory alternatives under consideration. A demographic summary of the exit interview sample is provided in Appendix B.

As in the simulation study, consumer research points to the Pareto alternative as a promising inventory strategy.

Customer Comments and Impressions Through both methods of data collection, customer opinions were obtained regarding the importance of time savings in shopping activities. Additionally, customers were encouraged to comment on the three inventory alternatives and the effect that each of those alternatives would have on their future patronage behavior. These comments and responses are summarized in the following paragraphs.

The need to maintain a high level of personal attention during the transaction, Less concern for saving time on weekends than on weekdays, and The need to devote ample time to making the best merchandise selection possible in terms of style and fit.

Alternative Inventory Strategies Consumers Value of Time Heightened sensitivity to the value and use of time has contributed to the development of a new set of expectations from retailers in terms of the way they A central objective of this study was to address the cycle time adjustments that could be made in the firms customer transactions, specifically through alterations of current inventory strategies. Paramount to implementation of either Pareto or no in-

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Retail Cycle Time: A Customer Transaction Perspective ventory strategies is the use of an express delivery service directly from the retailers distribution center for those items not held in individual store inventory. The simulation study discussed earlier indicated a Pareto inventory has the most significant potential for reducing costs, while continuing to maintain customer satisfaction. Customer response leads to a similar conclusion. Survey respondents were generally supportive of the overnight delivery options required to make a Pareto inventory strategy succeed. Almost 80 percent of survey respondents agreed that home delivery for out-of-stock items and special orders would be of value. Customers responding to the mail survey were also asked to provide feedback on specific implementation issues related to the use of alternative inventory strategies, including the optimal speed of delivery and their willingness to share in the cost of providing the delivery service. Responses to these questions are summarized in Table 4. Clearly, with reduced inventory strategies, delivery becomes an important issue. More than half of the survey respondents indicated that a reduced

Table 1: Mail Survey Response to Shopping Time Sensitivity Measures (Percentage of Respondents Marking Agree or Strongly Agree with Each Statement

Statement 1. When shopping, time saving services are important. 2. When I choose between retailers to do business with, I select those who provide the most convenience. 3. Time saving services enhance the value of a retailer's offering. 4. I am willing to spend money in order to save time. 5. My schedule does not allow enough time for shopping. 6. I take advantage of opportunities to save time when I am shopping. 7. My time is just as valuable as my money. 8. Home delivery for out-of-stock items and special orders is of value to me. 9. Overnight delivery for out-of-stock items and special orders is of value to me. 10. Retailers can add value by making the process of shopping with them faster. 11. 24-hour customer service is an important retailer offering. 12. I am willing to pay more for services that save my time.

Percent Responding 79 65 78 66 73 71 74 79 60 77 53 58

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Retail Cycle Time: A Customer Transaction Perspective

Table 2: How Important Are Time Saving Services in Terms of Your Shopping Activities? (number responding = 465)

Level of Importance Very Important Important Not Important

Percent of Respondents 40.7 27.8 31.5

Table 3: Are You Willing to Pay Extra for Time Saving Services in General? (number responding = 465)

Level of Importance Yes No

Percent of Respondents 56.6 43.4

inventory strategy would be worthwhile if their purchase could be delivered within five days of their transaction. Slightly less than half (47 percent) felt the delivery service would still be effective if they received their purchase in six to seven days. Customer response was clear on the subject of sharing in the cost of delivery. Almost 60 percent of respondents were willing to pay a nominal ($1-$3) fee for delivery in situations where the merchandise they seek is out-of-stock. Less than 40 percent were willing to pay a fee ranging from $3-$6 and less than

15 percent of respondents were willing to pay more than a $6 fee for delivery. Customer opinions expressed in store interviews were fairly evenly divided on receiving purchases after the fact, both at the current five to seven day time period or with the reduced cycle time of an express delivery. About half thought quick delivery time on the out-of-stock merchandise would be of value, stating that receiving merchandise faster would enhance the value of service received from the retailer. Others were vigorously opposed to any

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Retail Cycle Time: A Customer Transaction Perspective

Table 4: Survey Response to Delivery Implementation Issues (number responding = 298)

Alternative inventory strategies would be valuable if purchase could be delivered: Percent of Respondents Yes Next Day Within 2 Days In 3-5 Days In 6-7 Days 69.4* 71.8 65.8 47.0 Would you be willing to share the cost of the delivery service at the following levels? Percent of Respondents Yes $1.00 to $3.00 $3.01 to $6.00 $6.01 - $10.00 More than $10.00 *Percentages read across 59.1* 37.9 11.7 0.7 No 40.9 62.1 88.3 99.3 No 30.5 28.2 34.2 53.0

type of delivery after the fact on purchased items, regardless of how quickly their merchandise could be delivered.

Discussion
The Value of Time The study results clearly support the premise that consumers place value on their time in general and specifically on their time spent in shopping activities. While customers support enhanced efficiency, for instance, reducing the cycle time on merchandise special orders from seven days to an overnight service, concerns remain that this delivery service would depersonalize the transaction. Several cus-

tomers voiced the opinion that shoes are one merchandise category in which store inventory support is critical. They suggested that being able to try on exactly the pair being purchased and taking those shoes home the same day would be critical factors in determining their continued patronage of the firm. These customer concerns corroborate the use of a Pareto inventory strategy. Some items, those most frequently purchased, would still be available in each store to allow for personalized assistance from sales personnel.

Alternative Inventory Strategies Customers were divided on the issue of next day delivery on merchandise not available in store in-

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Retail Cycle Time: A Customer Transaction Perspective ventory, the crucial element in the success of either Pareto or no inventory strategies. About half of both sample groups were quite enthusiastic, indicating next day delivery to be a service innovation that would clearly enhance the perceived value of their relationship with the firm. Other customers were less favorable to any type of delivery service. These customers indicated that they would be uncomfortable or displeased with the notion of not having the shoes they wanted to purchase available immediately in the stores inventory. For these customers, reducing cycle time on ordered merchandise was not an issue. Rather, they were dissatisfied with the idea of leaving the store without their purchase in hand. These customer comments indicate caution is indeed warranted in changing a traditional inventory strategy. Clearly, a no inventory strategy would risk alienating a sizable group of customersthose who rely on personal fitting and who wish to take their purchases home immediately. The tangible nature of the product, its premium price, and the need for a comfortable fit increase consumers involvement levels with their purchases, which in turn leads to the need for more careful evaluation of alternatives and purchase outcomes. Many of these consumers indicated that being forced into an overnight delivery situation would have a negative impact on their future dealings with the firm. As in the simulation study, consumer research points to the Pareto alternative as a promising inventory strategy. The firm has a solid customer base that is comfortable with special orders being delivered to their homes or offices and who are very enthusiastic about the notion that the cycle time of this transaction could be reduced to a next day service. Service to these customers would not be impaired by the new inventory strategy. Rather, it would be enhanced by reducing the total elapsed time between purchase and delivery. The Pareto strategy would also maintain a limited store inventory viewed to be critical to another sizable customer group. These customers could still obtain the desired shoes at the time of purchase. The need for input from sales personnel and individual store management in tailoring inventory support at the store level is required. Determining the most requested and frequently purchased shoes at each store would be the critical factor for cycle time reduction, thereby allowing the greatest number of satisfied customers while maintaining inventory carrying and support efficiencies.

References
Berry, L. L. and L. G. Gresham, Relationship Retailing: Transforming Customers into Clients, Business Horizons, NovemberDecember 1986, pp. 43-47. Lucas, G. H., R. P. Bush, and L. G. Gresham, Retailing, Houghton-Mifflin, Inc., Boston, MA, 1994. Lucas, G. H. and L. G. Gresham, How to Position for Retail Success, Business, April-June 1988, pp. 3-13. Retzlaff-Roberts, D., E. L. Nichols, Jr., and J. C. Wetherbe, Complete, Pareto, and No Inventory: Alternative Strategies for Retail Inventory, Cycle Time Research, (1:1), 1995, pp. 4161. Robinson, J. P., The Time Squeeze, American Demographics, February 1990, pp. 32-33.

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Appendix A Demographic Characteristics of Mail Survey Respondents

Gender (number responding = 451) Male Female 417 34

Ethnic Background (number responding = 449) White African American Hispanic Other 413 16 7 13

Age (number responding = 452) 15-24 25-34 35-44 45-54 55-64 65 and over 9 80 111 141 65 46

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Retail Cycle Time: A Customer Transaction Perspective

Appendix B Demographic Characteristics of Exit Interview Participants

Gender Male Female Ethnic Background White African American Hispanic Age 15-24 25-34 35-44 45-54 55-64 65 and over Location Atlanta, GA Cleveland, OH Columbus, OH Houston, TX Memphis, TN Nashville, TN 8 9 13 15 3 11 6 11 12 24 5 1 47 8 4 51 8

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