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Will "Profitable To Promise" be Viable In Retail Industry ??

Retail order management is a relatively new concept. Till late nineties, majority of the retailers depended on supermarkets for selling various goods. Since, there was only one channel of selling, most of the retailers managed their IT needs by having some home grown applications which were able to perform very basic processes. Proliferation of computer technology and arrival of internet have completely transformed retail industry in the last decade. Development of multi-channel commerce, has helped retailers to sell their goods via internet, call centers, mobiles etc. Number of orders delivered to customers' home is ever increasing and now almost all online retailers have home delivery option.

All of these changes have increased retail supply chain complexity many fold. Retailers need to handle their sales orders smartly in order to stay competitive and profitable. When customers asked for future delivery dates, retailers mulled over the use of future inventory to satisfy future demand. This, in turn forced retailers to use an order management system with robust order promising features. To fulfill these and many other supply chain related needs, retailers are currently importing supply chain concepts from industries like manufacturing and automobile in which supply chain management is an established practice. For example, to manage complex order promising process, ATP (Available to Promise) concept has been adapted with some modifications. In manufacturing industry, ATP is used to calculate exact delivery date for customer order considering constraints of operation capacity & materials and various supply and delivery side lead times. In retail, ATP is used alongside future incoming inventory into the warehouse to commit delivery date to the customer.

Manufacturing industry is now moving from ATP to PTP (Profitable to Promise). The question is - whether retail industry will also use profitable to promise concept to optimize their profit, some years down the line. PTP considers the impact of value chain decisions on the bottom line. Every actual and potential customer order may have a different margin associated with it. PTP determines which customer order should be taken in order to maximize profit. In constrained environments where demand exceeds total supply, PTP is the key to managing the balance between profit and customer service. Profitable to Promise (PTP) compares the expected profit of the order being taken today to the profit you might realize in the future by not taking the order. Thus, you may have to forgo current order so that inventory is available to satisfy another customer order with a higher margin.

As it can be seen, to implement Profitable to Promise concept business operation needs to meet following criteria -
1.You should know your customers i.e. you must have fixed set of customers and you should have demand history of each customer so that you can predict future orders coming from customer
2.Demand should exceed supply
3.Product Price offered to customer should be different may be based on quantity or long term relationship

However, in retail industry there is a large and unknown base of customers. Hence, it is difficult to predict profit of future orders. Also, at given point of time, the price offered to different is same. Thus, chance of getting more profit by denying order of current customer is not possible. So it may not be viable to implement Profitable to Promise concept in pure retail scenario.

But, if we consider B2B scenario in retail industry, I think Profitable to Promise can be useful; because it is possible to meet above mentioned 3 criteria.
Do you think Profitable to Promise would be useful in any other scenario?


Good one...

Pankaj - as you rightly mentioned, "profitable to promise" may make a lot of sense when the transactions are (a) B2B and (b) electronic, as in online. In markdown situations, stores have the autonomy to figure out how best to clear the stocks in the fastest possible way. Even if the system may have suggested a profitable price, it may not be implementable. That said, I think B2B is a great place to start. Factory outlets could be another where again, you may have a set of loyal customers who come again and again.

Nice one Pankaj!!
The cost of 'Lost Sales' needs to be taken into account even in B2B scenario. What do you think of having ATP+PTP combined and the algorithm will take care of the promise dates with profitability check (this can lead to zero/minimum lost sales).

Really Nice concept put in simple words.
Just to add, the PTP is an important decision for retailers because of 2 main things. First, the price a retailer can demand today is definitely higher than tomorrow for most of the products. Second, by the time promissed product is offered to customer, there is a high chance that customer might be attracted towards a similar but better prooduct with same or lesser price.. This is especially true for electronic and apparel items which form major chunk of retail business.

Started reading this article very skeptically and then saw the factory outlets suggestion!

i think this will be very relevant in a "hot products scenario" both for hot products and their competitors

Products which are non-perishable, manufactured/produced globally can be re-routed to retailer stores in specific countries/regions based on demand patterns. With pricing and demand being so dynamic, Retailers may see this as a tool to protect margins while capturing share. E.g. Sales of competitors to Apple 4gs

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