Innovation in Retail: Virtual “Brick and Mortar” Stores

Happy New Year! My most popular post so far has been about Tesco bringing grocery shopping to Korean subway. Here is another example of retail innovation (hat tip – Benn Konsynski). Yihaodian a Chinese company using augmented reality to build a 3D virtual store. Their stores exist only on a smartphone screen, but otherwise it’s a fully immersive experience.

Interestingly, customers still need to go to a store, augmented reality works only at specific locations. At first, it seemed odd – why limit consumer experience? Perhaps the company is betting on association with the trendiest locations. Another reason why Yihaodian is doing this might be studying how consumers move about the store and applying it for improving store layout. Given Yihaodian’s effective merger with Walmart, I would not be surprised if the virtual store browsing data is applied for traditional brick and mortar store design.


On Bourbon, Oil Price, and Innovation

Image by Yarek Waszul

Image by Yarek Waszul

An interesting article in today’s Times about two “liquid” industries, oil and bourbon. The two industries, unlike as they are, have one thing in common: long lead times from the initial investment to finished production. Good bourbon takes more than 10 years to age, and so does the oil exploration and production. The article argues that the bourbon is in the same state as the oil was 10 years ago: demand exceeding supply and prices are rising. In the oil industry rising prices prompted more than double investment in exploration, and now that the supply has grown, prices have dropped. Bourbon is taking a different approach:

“We’ve been adamant about not raising our prices to our distributors much beyond the cost of goods and inflation,” Mr. Brown said. “The reason for that is very simple. We’re in this business for the long term. Just because bourbon is hot right now doesn’t change our way of thinking to say let’s take advantage of the situation.”

Buffalo Trace and other bourbon makers try to carefully allocate their product to distributors around the country at what is, effectively, slightly below the market-clearing price. A result is headlines like “The Great Whiskey Shortage of 2013.” On the gray market, bottles of 23-year-old Pappy Van Winkle reach four-figure prices.

But the bet the bourbon industry is making is that there is more money to be made in the long run by cultivating a new generation of bourbon drinkers among young adults, and by building loyalty among customers in all corners of the United States, and eventually the world.

Clearly, the bourbon guys are concerned about keeping competitors off the market. Had the oil industry followed the same path, I suppose, the todays’ world would have been quite different. Many innovations have been sparked by the high oil prices: Teslas, Leafs, Solar Cities of the world. The “boom bust” cycle, which is not unlike the bullwhip effect, is generally bad for incumbent operations, but in some cases it also provides an opportunity for innovation. Who knows what the next hottest liquor will be?

Innovation in retail: How do you bring a grocery store to people?

The picture to the left is actually a storefront of Tesco in Korean subway. Watch the video to see how it works – the idea is pretty neat: you put a full size picture of store shelves, it serves as an ad, and it connects shoppers to the online store. Nothing else changes, customers are simply given another more convenient entry point to the online store. If Tesco can also put an interactive screen displaying price promotions there, the shopping experience will be almost as good as in a real store.

Process improvement: Innovating pick and pack.

Imagine an order fulfillment center for a big online retailer. How does it work? One can probably think about hordes of people running with order lists picking items and putting them in a bin: pick, bring, pack, ship. This looks like a labor intensive process and it is. In fact this labor intensity was one of the factors that led to demise of Webvan – online grocery store. Fortunately, people learn from mistakes and sometimes change such a mundane process as pick&pack in a bold way. This video explains how (hat tip to Benn Konsynski for posting the link).

It is quite astonishing. The company that provides this sort of solutions is Kiva Systems and apparently Staples uses it in their fulfillment center. What made me think though is the simulation of shelves moving on the warehouse floor. It looks like the system is actually self-organizing: the most popular items will naturally be situated closer to pick workers, just because they are frequently demanded and will not have much time to drift away. More over if demand changes over time, the system will reorganize itself. Perhaps it will still make sense to put Teddy bears out front for Valentine’s day, but if you forget about chocolates they will get there anyways.

One thing that is not shown in the video is how do you replenish inventory. A solution it seems would be to ‘decomission’ an empty shelf and replace it with a full one. Given that all pick operations are logged, it should be fairly easy to figure out when the shelf is about to empty and prepare a replenishment. What happens if there is more than one kind of items on the shelf? It’s inevitable that one SKU will be sold out before the other, but I imagine grouping complementary products can help.

How do you make money forecasting?

In the Operations management class that I teach this semester this week is dedicated to forecasting. While we mostly focus on methods, for example, time series and causal models, it is also important to think about business aspect of forecasting. That is – how do you make money doing it?

Suppose you are interested in predicting an election outcome.Traditionally, companies like Gallup or Rasmussen run surveys and polls, and this can be quite expensive. If you can substantially reduce costs, then you can lower price and compete successfully with bigger companies. How? Continue reading

Hotels without rooms – car rentals without cars

Managing risks in operations is important. And as my colleagues Serguei Netessine and Karan Girotra say
if you can manage risk successfully or get your customers to pay for it, you should take more of it. This is after all where the opportunity lies. Some companies actually go even further – they try to eliminate risk completely. How? Continue reading