DBM system promises to give chain an edge. (State of the Industry).
WALNUT CREEK, Calif. -- An innovative software program that helps forecast consumer demand for every product in the store and set prices accordingly has helped Longs Drug Stores improve its efficiency and provide better customer service.
Called Demand Based Management (DBM), the software uses advanced probability theory and large-scale computing to analyze point-of-sale data and develop highly accurate demand curves for every item in every one of the retailer's 455 outlets.
The program even looks at items with little or no pricing history.
The deeper understanding of price elasticity that DBM provides, Longs executives say, is then used to modify prices and promotions to support a number of priorities, including maximizing volume, margins or price image, or balancing all three simultaneously.
The drug chain began exploring the possibilities of DBM with a pilot test in 2001. Using DemandTec as its software vendor, the 10-week trial targeted six front-end categories in 30 stores. An additional 70 outlets served as the control group.
Utilizing two years of P-O-S data gathered for the six categories, DemandTec used its DBM program to define price elasticity and develop highly accurate demand curves for each item. To determine net profits the company factored in supply chain costs to define the fully loaded cost of each item.
Longs executives report that in the first 10 weeks of using DBM forecasting unit sales increased by by about 1% in the six price-optimized categories. More encouraging was the fact that dollar sales rose 1.9%. and gross profits increased 5.1%.
Despite what turned out to be slightly higher prices on some items and lower ones on others, customer awareness of price and value generally remained the same for the optimized categories. The test provided Longs with solid proof that it was possible to adjust prices both up and down by a few cents on selected products to meet financial targets for the category while maintaining customer satisfaction.
Satisfied, the retailer rolled out DemandTec's DBM solutions to all of its front-end categories in more than 400 stores.
"Optimizing pricing strategies is an important part of the company's growth and overall business performance," former chief operating officer and senior vice president Terry Burnside said late last year.
"Using DemandTec's software brings a new science and logic to pricing areas that drive profitability in our stores and helps us meet business objectives by addressing the raction of both the competition and consumers."
Last year, just eight months after beginning full implementation, DBM was helping the drug chain set prices across the full spectrum of more than 40 categories.
And, executives at the retailer note, the use of DBM has led to the chain being able to reverse a year of declining front-end sales and helped maintain profit margins during a period of aggressive promotions.
"This was a terrific performance, as we were able to manage front-end margins while increasing our promotional sales at the same time," remarks chief financial officer Steve McCann.
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|Title Annotation:||Demand Based Management software at Longs Drug Stores|
|Comment:||DBM system promises to give chain an edge. (State of the Industry).(Demand Based Management software at Longs Drug Stores)|
|Publication:||Chain Drug Review|
|Date:||Apr 28, 2003|
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