When is 'Optimization' not Optimal?

By Barry Grange, CEO, Retail Express

When is 'Optimization' not Optimal? - Sounds like an MBA, Science Exam or trick trivia question. So what's the answer? Well, it depends on the context, whether optimizing Retail Prices, Promotions, Supply Chain Operations, Inventories; anything can be optimized or claimed to be, but the truth is that very few things are.

For example, let's take one of the more difficult areas, 'Promotions'. Surely Retailer's are good at optimizing promotions because it's such an important area for them? It drives traffic, creates ongoing customer interest, supports customer loyalty, provides differentiation and competitive advantage (or should do), and represents a significant proportion of total sales. Yet, as important as all those aspects are, promotions are rarely optimized, and when they are, it's at most only the first or second layer of the problem that gets addressed, so not very optimal. But before you rush to Twitter or LinkedIn, let me explain my thinking.

Most Retailer's (and Software Vendor's) only think about optimizing the actual Promotional Selling Price, and few achieve that, but when they do, it is only the first of many layers that need to be optimized. Promotions are not only about the Promotional Selling Price. It's also about the Promotional Type, Price Off, % Off, BXGX, Coupon, Cheapest Free, Meal Deal or other Multi-Item or cross Category/Dept Promotions, and with that, we need to consider how the item(s) are advertised or not, digitally, or in a Flyer/Catalogue, Newspaper, Poster, Email etc., and how they are displayed in store or online, is it on an End Aisle, Mobile in the Store, Poster, Shelf Talker. All of those elements change demand and directly affect the optimization. And I would go further and say an even bigger layer of effect is supplier funding which is the primary source of funding promotions for most retailers and directly affects any optimization.

Few retailers think about this broader context when trying to optimize promotions. However, if you want to get the best possible results from your promotional activities, we need to see these many layers 'optimized' together when optimizing promotions. The optimization of the funds from the Supplier isn't just about the 'discount' off the case; it's all the support monies negotiated for advertising and promotional display and the various additional fees we can encourage suppliers to contribute over and above the product discount. These funds are considerable and need to be managed better along with the collection of funds from Suppliers, which is often very sub-optimal because of the lack of good systemic software solutions.

So the 'optimization' of Promotions needs to take on board all of these layers. Otherwise, optimization will not be optimal. If we are to succeed, we need to up our game with a new level of Supplier Collaboration; EDI or Supplier uploads just don't cut it anymore; we need real collaboration internally (no more silo's) and proper collaborative joint business plans with suppliers or optimization of promotions in the real sense of the term will continue to evade us.