Achieving The Benefits From Systems Implementation

Many companies insist on a return on investment analysis being prepared to justify a large investment in new systems. However, many companies do not achieve the predicted benefits and do not know what to do about it. Martec has a methodology about how to do ROI analysis that is designed to help with remediation if the benefits are not achieved. It even helps when some benefits were not achieved due to external factors beyond your control, like a Brexit referendum. Let’s take an example.

When implementing a merchandise and assortment planning system, the main benefits come from sales increases due to better availability on the shelf, improved gross margins, reduced inventory investment and increases in employee productivity.

Suppose we don’t achieve the gross margin improvement we expect. This chart shows how the gross margin benefit was built up and provides the basis for remediation, if necessary. This is illustrative of the approach that we and you can take in all the benefit areas.

Integrated Systems at Different Technology Layers

An example of how to calculate the benefits from a tech solution improving markdown management

In this example, the achieved gross margin before the system implementation was built up from the full price sell through percent, the season sell through percent, the initial intake margin (sometimes referred to as the receiving margin), promotional markdowns and clearance markdowns. The client decided that intake margin was largely a matter of negotiation with suppliers, so there was little opportunity to improve it. The percentage investments in promotional markdown and clearance would be maintained as before and the big gains would be made in full price sell through and season sell through.

The after columns shows a £1.94m increase in achieved margin (maintained margin to our US readers) equal to a lift of 1.85%.

When we know we’re missing the targeted achieved margin, we can determine what the root cause of the problem is. It could be that we are failing on full price sell through or season sell through. There may have been some erosion of intake margin or lack of investment in promotional or clearance markdowns.

As we built the increase in achieved margin from its components, we can determine which component hasn’t been delivered and then create a remediation plan to fix that specific issue.

Suppose we are not achieving the full price sell through. Has the level of inter-store transfers increased or decreased? If it increased or stayed the same, perhaps our initial allocations aren’t putting more stock in the right places. Are our first injections too large a share of the buy, leaving too little replenishment stock? Did we implement the lost sales analysis process effectively, to give a better forecast of true demand? Are we allocating based on demand projections rather than sales history? Are our pack rounding rules sensible? Are our pack sizes sensible? Once we know where the problem is, we can evaluate the root causes and ways to fix the process.

We can apply this approach to every aspect of benefit determination in the ROI analysis and address areas where we aren’t hitting the target.

Part of the secret of success is to define the business processes using best practice to make sure that we do hit the target first time.

Sometimes, you fail to achieve a target and the failure was completely outside your control. For example, political uncertainty may cause consumers to lose confidence and keep their money in their pockets. The Martec philosophy helps you determine that this might be the real cause too. For example sales is predicted as the number of people entering the store times their conversion rate (%) times their average transaction size. If a certain segment of the customer base is holding back due to uncertainty, an analysis of traffic, conversion rate and average transaction size will give the clues.  You may find, for example, that conversion rate has held up, average transaction size is holding and traffic is the problem. This may be because your advertising is worse or it may be economic uncertainty. It is easier to make these judgements when you build everything for the bottom up.

If you’d like more best practice advice check out our allocation and replenishment e-learning course. To understand ROI analysis better, take our Quantifying a Business Case class.

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Posted by Brian Hume
31st August 2018

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