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October 19, 2011

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?

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