LIPSTICK ON A PIG

Many a cataloger has been wooed by the promises of “quick fix” technologies. And it’s easy to see why. The Websites of too many marketers are underperforming. Conversion rates are far below potential, phone-to-Web ratios (the percentage of online customers who switch to the call center to complete an order) are too high, and so on.

My contrarian rule #5 must be kept in mind (borrowed from a 1997 speech by former Travelocity CEO Terry Jones): “You can’t put lipstick on a pig.”

To know if this rule applies, it must first pass through my contrarian rule #1 (borrowed from Warren Buffett): “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

Regarding my skepticism of the hot, new, flashy technologies, am I simply disagreeing with the crowd? What’s the problem here? The problem with this focus on technology fixes is not that these technologies are problematic. Some are very good.

No, the problem is that for many i.merchants these technologies are the wrong answer to the wrong question at the wrong time. The question most online sellers should ask is not “Which generation of technology works?” Rather, they should ask “What generation is our online store?” A first-generation site is defined as an online business that performs below average on key metrics and does not yet feature best practices in navigation, search, merchandising, and checkout. Despite multiple redesigns and a variety of technologies, most catalogers today have first-generation online businesses.

At the Direct Marketing Association’s recent Net.marketing conference in New York, we ran “listening labs” (customer one-on-one sessions) on 13 Websites. Customers (in this case, conference attendees, who are clearly more experienced with this medium than the average customer) were able to complete a purchase at only two of the sites.

On the site of cosmetics marketer Mary Kay, customers struggled with disappearing subcategory navigation, which meant that they had trouble finding products. Catalog shoppers on the site of women’s apparel cataloger Newport News who used the “quick search” — typing the catalog product number into a special search bar — were presented with a product page that had no photos and little product information. On the Caesar’s Pocono Resorts Websites, potential honeymooners were confronted with such top-of-the-page navigation tabs as “Cove Haven” — labels that were meaningless to visitors not already familiar with the resort. Meanwhile, left-side navigation links such as “Romantic Poems” and “Forever Lovers” were not helpful to those trying to find the answers to basic questions about amenities, costs, and booking information. Self-service applications, online video brochures, and other technologies could not help these users for the simple reason that they could not find the links amid the clutter.

These results are consistent with those of other conferences where we run labs. At the Shop.org conference in January, customers (again, professionals in the field) were successful at finding a product, making a purchase decision, and checking out at only two of eight Websites.

As for actual performance metrics, many companies do not have conversion rates above 3% (the industry average, skewed by several high-performing players). For a number of those that do, their rates are still far below their potential. The same dynamic applies to inventory turnover, marketing yield, and other metrics. If your site does not have the basics right and you spend your time and money on advanced self-service applications as opposed to fixing the basics, at best your efforts will have a reduced return on investment. At worst, they will hurt your site’s performance.

Back to basics

Assuming you agree with my reasoning, what should the companies that still need to get the basics right do?

They can follow the lead of the A&E Television Networks’ direct-to-consumer business, which last year focused on improving the customer experience. After several months of work, A&E relaunched its online video and gifts store and reported

  • 50% increase in sales conversion rate (and the original conversion rate was already higher than the industry average);
  • 15% improvement in average order volume;
  • 20% reduction in phone-to-Web ratio; and
  • 100% increase in positive feedback from customers.

What did A&E do? First, it conducted open-ended customer listening labs — before making decisions about strategy or design. Too many companies try to improve the site without conducting customer research. And those that do conduct research typically conduct the sessions after they have decided the strategy and prototyped the solution. This limits the effectiveness and power of customer insights.

Next, A&E developed a simple, focused strategy aimed at improving those problems that it could immediately address and that would yield the most in business metrics improvement. So Young Park, the director of e-commerce at A&E, deserves a lot of credit for leading her company in the right direction. “I get calls all the time from vendors selling me the latest solution,” Park says. “However, we have learned that while certain technologies can make a difference, our most pressing problems are to get the basics right. We made a huge leap in that regard in 2003 and saw a tremendous benefit from it.”

With the basics down pat, Park and her team have started investing in more-sophisticated technical solutions. For example, they implemented Omniture’s SiteCatalyst reporting software to generate much better and meaningful metrics. They’re also experimenting with a promising new A/B testing technology from A&E’s platform vendor, ATG.

Park’s advice to other online marketers: “Do not listen to the siren calls of technology fixes. Make sure first you understand your customers and that you have made it possible for them to find a product, make a purchase decision, and check out.”

Next time you get a call or read an article about a hot new technology, remember Park’s advice. If you get the basics right first, you’ll avoid putting lipstick on a pig. Instead, you’ll make a lot more money and build the foundation to become more sophisticated in your online selling efforts.


Phil Terry is CEO of Creative Good, a strategic customer-experience consultancy based in New York.

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Lipstick on a Pig

Although the costs of an inaccurate inventory can be immense, they are also difficult to quantify. And in all too many cases, making the effort of cycle counting can seem like putting lipstick on a pig. The best cycle-counting program in the world can’t make up for a casual or undisciplined approach to inventory accuracy in everyday operations.

There are two obvious and enormously powerful benefits to cycle counting. One is to ensure the ongoing accuracy of the book inventory records. The second is the opportunity to eliminate one of the biggest hassles in the distribution world: physical inventories. Jon White, VP of operations at online music supply company Musician’s Friend, says that cycle counting “is no longer optional.”

No respect

In the face of day-to-day operations, cycle counting is among the first tasks to be put aside when things get hectic. Ironically, that is exactly when keeping track of inventory is more important than ever. The likelihood of inventory being misplaced or mislabeled is exponentially higher during peak periods than when business is slow.

There are several options for establishing a cycle-counting schedule (see table on page 12). The most common by far is some sort of ABC ranking based on item activity that counts the busiest items the most frequently. A typical cycle-counting schedule based on activity would schedule A items four to six times per year, B items three or four times per year, and C items once a year. Some companies count A items as often as once per month.

While this is the right place to start, there are inherent dangers in cycle counting solely by product. For one thing, product ranking will change throughout a season, invalidating the previously established schedule. But the bigger problem with scheduling cycle counts by item is that in most warehouses, the stock for any given item is located in several places throughout the warehouse. These counts are taken by checking all the locations where the system shows that product is located. So by definition, the counters are looking only where the system expects the stock to be.

But your mission is to correct the system. If you are looking only where the system directs, then you are not looking in other places where the item in question could quite possibly be inadvertently located. It’s an incomplete exercise, since the most common error found in cycle counts is an item in the wrong location.

The best basis for a cycle-counting program, therefore, is to include counts by both item and location. If I had to pick only one basis for a cycle-count schedule, it would probably be location. Although this does not address item velocity, it is the most accurate, most easily controlled, and most quickly executed method. Some operations can do a location cycle count of the entire facility in as few as one-week rotations.

The easiest part of any inventory is counting. Anybody can do that. You won’t be off by a more than a few pieces. By far the most mistakes are made when the product has not been properly identified, located, and prepared for the inventory. You should precede every cycle count with appropriate notices, housekeeping, and a walk-through by the inventory supervisor. This prep should include verification of the following:

  • All picking tickets accounted for and shipped
  • Pick location organized
  • Stock moves complete
  • Cases sealed and marked
  • Receiving and returns putaway
  • Visual inspection of assigned and adjacent locations

A typical result of a cycle count is to find more stock on the shelves than the system expects. The most common explanation for this is that clerks are quick to make negative adjustments when stock cannot be found by pickers, stock handlers, or cycle counters. Unfortunately, they often make these adjustments before the shortage has been researched, and the goods are more than likely somewhere else in the building, waiting to be found in subsequent location cycle counts or physical inventories.

Keep Count
Program Factor Description
ABC demand ranking Items ranked by sales activity Most popular items counted most frequently
Location Counts scheduled by location ranges, not by item Usually whole rows or sections
Exception spot checks Locations automatically flagged by system based on low stock, backorders, not-in-location errors, etc.
Verification request Spot check requested by product manager, inventory control, or customer service

Many operations, with the best of intentions, enter corrections as quickly as possible. However, several of the top distribution managers we work with report that as much as 95% of their initial cycle-counting discrepancies are accounted for within two to four weeks by a corresponding mismatch in a subsequent count.

To address this problem, these firms are extremely careful about what corrections they make at the time of the cycle count. Rather than immediately entering the stock adjustments to the inventory balance, the quantity or carton in question is transferred to an imaginary, non-allocatable location in the system. The stock in question still reflects on the books, but cannot be used to fill orders.

The first place to look when a discrepancy appears in a location count is in the active picking location — cartons may have been moved to picking that were never adjusted out of reserve. The next place to look is in nearby locations in the reserve area — it is quite common for a stock handler to move one box while retrieving another, but never return the first. Also, a carton may have been listed and adjusted for a stock move, but never actually moved. And in manual operations, the data entry process is prone to delayed, lost, or inaccurate entries.

When reporting inventory accuracy or variance many companies talk about the net results of the actual physical inventory against the book balance; in other words, the net sum of all the overstocks and shortages. Typically, this varies by 0.5% to 1.5%. While this may be acceptable for financial purposes, it is not acceptable for managing inventory. Under these rules, one SKU could have an overage of 100 pieces while another has a shortage of 100, but the net result would be perfect.

To get an accurate number, you should also track the absolute or gross variances of the count. The true variance is the absolute value of the discrepancy. In the example above, the total variance would actually be 200 pieces, not 0. Many companies don’t even look at the gross variance, because it can be scary. It is not unusual to have net results of a cycle count in the 1% range, while the gross variances are in the 10% range or higher.

Effective inventory management depends on how tight your overall operating process and environment is. John Hecker, distribution manager for Somerville, NJ-based optics distributor Viva International, says that the biggest result to come out of that company’s cycle-counting program is an awareness of training issues. The types of discrepancies found are almost always attributable to shortcuts, carelessness, or lack of process knowledge by stock handlers and pickers. As Viva increases its training for the basic stock-handling functions, the cycle counts are reflecting a more accurate inventory.

Bill Kuipers is a principal of Spaide, Kuipers & Co., which provides solutions for the direct commerce industry. He can be reached at (973) 838-3551 or by e-mail at kuipers@spaidekuipers.com.

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