Northern Group Retail Ltd. didn't become a cutting edge retail technology company willingly, but it's glad it did. The Canadian-based and operated retailer owns and operates hundreds of stores in the United States and Canada for casual women's wear, Northern Reflections, and children's wear, Northern Gateway. Today it can also boast of being one of the elite retailers that can manage its logistics down to items at the store level.

The change started in 2001 when the Canadian affiliate of York Management Services purchased the chain from Footlocker Canada. It had to move off of Footlocker Canada's technology system. "A lot of it was a mandatory technology investment. If we didn't have to, I'm not sure we would have," says Michael Stanek, CFO of Northern Group Retail.

The company purchased and installed 12 different systems in the last 24 months, including an enterprise resource planning system, merchandise planning software, sales auditing software, hardware and desktops. Additionally it is using two solutions from ProfitLogic, a retail software provider based in Cambridge, Mass. One is Markdown Optimization, which Northern Group Retail has been using for three years, and the second is Assortment Execution, which it began using in January.

As a result of its technology, "we turn inventory faster" than competitors, says Stanek. "One of the issues our company had was we run very high levels of store productivity and gross margins compared to industry standards."

Northern Group Retail expects to see big returns from its allocation and analytical tools from ProfitLogic. Unlike older legacy system software, these tools can forecast demand for items down to the store and item level, says Julie Driscoll, director of assortment execution for ProfitLogic.

Today most retailers have aggregate forecasting, or forecasting a product category behavior, Driscoll says. Fewer than 20 percent have planning tools for store behavior. For example, retailers may be able to forecast a high demand for women's knits, but might be unable to forecast within that category whether long-sleeve shirts or short-sleeve shirts will be more popular for that season. Nor do most retailers have the capability to forecast which colors or sizes at which stores will be more popular.

"If you have one or two stores optimization and allocation are easy. Now many retailers have thousands of stores. It's almost impossible to treat each store differently. We have created a solution to treat each store separately," says Driscoll.

Northern Group Retail is using the technology to tailor its merchandise to each store. For example, the retailer has determined that it needs to ship more petite sizes to its store in Vancouver, British Columbia. Many of its customers there are Asian women.

Many companies installing these new systems see a 7- to 15-percent gross margin improvement by making better assortment execution and allocation decisions, says Driscoll. For a billion-dollar retailer, that equates to savings of "tens of millions per year," she says.

Outsourcing Excellence
Not all retailers are arriving at the technology edge through purchasing software. Pink Soda, a high-end clothing and merchandise manufacturer, has seen its business skyrocket by using technology from SEKO, a third-party logistics provider headquartered in Itasca, Ill. The twenty-year-old company sells its clothes worldwide, except in the United States, says David Solomon, managing director of Pink Soda.

"SEKO developed with us a system whereby we can, after the selling season, very quickly and efficiently work out which styles and colors sell most," Solomon says. The same system guarantees that the product arrives at the store on time. The company has 300 styles at any one time and between 2,000 and 3,000 different line items.

SEKO manages Pink Soda's supply chain from beginning to end, from picking up goods from factories in Asia, to shipment consolidation and airfreight to a European distribution center, says Mark White, chairman of SEKO U.K. "They tell us what to pick and pack over the web and give us instructions online. The whole process is completely automated and designed for their business."

The system is not just logistics but includes purchase orders, order values by currency and sales orders, he says. The proprietary SEKO system is called Upstream and includes a purchase order and sales order fulfillment system. The solution is geared for small to mid-sized retailers.

SEKO's system "has really made the collation and sending of orders and chasing of orders a lot more efficient," says Solomon. "We know when we are reaching the end of stock levels and when to reorder. Before we were working basically from a standing start."

As a result Pink Soda has grown from three years ago, with revenues of approximately $3.5m to nearly $13m, and SEKO's technology and expertise made it happen, says Solomon. It would have been "impossible" for Pink Soda to grow without a technology system.

"We have two women who look after 500 clients. That is impossible with a manual system," says Solomon. "We would have had to employ more than twice the staff we have now to collate information."

Today Pink Soda can produce goods in eight weeks. Without technology: 12 weeks. "We would spend 50 percent more time on production. It used to take us nearly three months," to produce goods, he says. "In this business, four weeks is a lifetime."

The Exception, Not the Rule
Yet retailers and analysts agree that few companies in the retail sector-fewer than 20 percent-are using these technologies. Pink Soda is "streaks ahead of other companies," says White. Other midsized companies similar to Pink Soda have almost all-manual processes. Northern Group Retail is one of a small group of retailers that has planning tools for store behavior, "which is really what is necessary to get the product at the right place at the right time," says Driscoll.

Legacy systems are the problem. "They sometimes hinder [technology adoption] and they sometimes provide a tremendous opportunity. Some retailers have got to the point where they recognize that their current system is not providing them with the information they need to drive their business," Driscoll says.

National Retail Systems (NRS), a third-party logistics provider based in North Bergen, N.J., specializes in providing services to retailers, and is seeing these issues first hand. Sometimes potential clients aren't able to integrate to the NRS automated system because of legacy systems, says Larry Ravinett, senior vice president of logistics and supply chain solutions for the company.

NRS handles 12,000 deliveries a day to stores and malls and works with retailers that have a range of technical competence. Ravinett agrees that many retailers would save money and improve their operations if they implemented new technology, but retailers don't because "it's very difficult if something isn't broken. Implementing new systems is expensive. They don't want to disrupt current traffic and the planning is very involved. Then there is the hardware. It could go $30m to $40m to get the staff and get everyone up to speed. It's a big deal," he says.

Many retailers are using old mainframe systems that may be 25 years old or more and technology has become a separator between newer chain stores and specialty stores versus mainstay department stores, Ravinett says. Some retailers are using spreadsheets. "Microsoft Excel is one of our major competitors," says Lori Mitchell-Keller, senior vice president of global marketing and solutions management for supply chain software company Manugistics.

Ravinett estimates that about 40 to 50 percent of retailers do not have full forecasting and allocation capabilities nor do they have full electronic data interchange capabilities. "They keep adding patches but the systems are not fully developed," he says. "The in-house [technology department] is constantly playing catch-up."

There certainly is room for improvement. "Today the cereal supply chain is 110 days. Cereal only takes a couple of days to manufacture and a couple of days to move it. That tells you a lot about the inventory buildup between processes and lack of efficiency," says Mitchell-Keller.

Where We Are Now
All this might give the impression that the retail sector is a struggling dinosaur when it comes to technology issues. Not so. Retailers and analysts agree that the industry has invested heavily in logistics and many retailers have sophisticated logistics networks, in particular to handle complex moves from Asia, where many retailers manufacture their goods, to the rest of the world.

"There has been a lot of money spent on taking costs out of the supply chain with warehouse management systems, and from supplier to distribution center and out to the store," says Stanek. "There is a weakness in the supply chain in bringing goods in based on demand."

The problem is the level of complexity retailers must deal with in their supply chains on a daily basis. "From the backend they are as sophisticated as anybody else but their needs are heightened because of the extreme complexity of their networks," says Alexi Sarnevitz, research director, retail, AMR Research. "A retailer may have millions of line items to manage versus thousands for a manufacturer."

In short, retailers need more analytical tools at the store level to help with replenishment planning and creating tailored item assortments for each store, Sarnevitz says. "The great opportunity now is to get from the receiving dock to the store shelf in a timely manner."
Driscoll believes the issue goes a step further: Retailers need to know what their stores can sell before ordering and shipping. "You need a picture of customer demand, to create a preseason assortment," she says.

"Most of us have had data," says Stanek, but tools were not available in the past to act on it and the cost was too high. Today the hardware to support allocation and optimization analysis is affordable, he says. As a result, using these types of tools and moving to treating each store as unique is where the retail industry as a whole is moving, he says

Yet many retailers have not invested in newer technologies because there are too many software vendors and solutions to chose from, says White. Many retailers purchased enterprise software systems, expecting those systems to help with their supply chains. But ERP can't handle some of the complex tasks that retailers have, causing retailers to lose sight of their merchandise in the supply chain or be unable to correct some supply chain issues, he says.

Others are facing even more basic issues. "If they knew what was wrong they would know what system to buy. Many retailers are struggling with what's wrong in their supply chain," says Mitchell-Keller. For example, many retailers capture data on the volume of sales but not profits, she said. "There are some fundamental mindset changes that need to occur."

Changing Times
While some retailers in the past had stagnated when it came to technology overhauls, pressure from the giant from Bentonville, Ark., is forcing retailers to revamp their supply chains, says Mitchell-Keller. Retailers are facing "the Wal-Mart factor-how do I differentiate myself from Wal-Mart, not just cost but layout and assortment."

Retailers are facing another, similar issue as well: fierce competition and low margins, says Paula Rosenblum, director of retail research for Aberdeen Group. No longer can retailers count on opening new stores to improve profits-instead they need to maximize usage of the stores they have and ensure that they are carrying the right amount and mix of inventory, she says.

In a similar vein retailers want their customers to find goods on the first attempt. Many customers-58 percent of those Manugistics surveyed during the holiday season-said if they couldn't find an item they walked out of the store.

Such pressures are creating a shift from a push to pull replenishment, That means, says Sarnevitz, "Instead of forecasting what you will sell-replace what you sell."

The key is collapsing lead times, especially with items such as apparel that have long lead times. To do that, companies need to perform tasks in parallel instead of sequentially. One example might be arranging for production capacity while at the same time purchasing the fabric for the goods.

Retailers also need a more structured process to be able to collapse lead times, says Sarnevitz. He mentions product lifecycle management software as a way to shave off substantial lead times and better manage the retail logistics process. With a more structured process retailers can do "flow-through," where goods never go to a distribution center but instead are immediately shipped to the stores. "That can cut days, if not weeks, off internal processes," he says.

Still, even if retailers do invest in technology, a dichotomy will remain between retailers wanting to be fast and responsive to customers, yet needing long lead times because they are sourcing from overseas, says Rosenblum. "It's a challenge. The ocean is still the ocean. It takes a certain amount of time and it is not going to be that fast."

The Future
There will be dramatic changes in the retail sector in the next five years as older people retire and new people are brought in from outside of the industry, Rosenblum says. "The endless phrase is, 'This is how we've always done it.' Breaking that deadlock is really difficult. That is the single biggest change that is going to happen," she says.

Most technology available to retailers today is the same as was available five years ago, with the exception of radio frequency identification, according to Rosenblum and Mitchell-Keller. Both note that what has changed are advancements in forecasting tools and the ability to do more sophisticated forecasting, which have grown as computer power has grown.

A huge step will be retailers pushing their vendors to have goods packaged at the manufacturing site "floor ready," such as on hangers and pre-ticketed, says Rosenblum. Another area that retailers could improve now is separating out freight costs from overall product costs, as many retailers still allow their vendors to manage their freight costs, she says.

"Killer app" or not, there is hardly consensus on how far RFID technology will advance in the coming years. Rosenblum believes the technology will not be sufficiently advanced in the next five years to substantially impact retail operations while Mitchell-Keller sees benefits to retailers at the pallet and case level but not out to the shelves. Ravinett sees many potential benefits from RFID, particularly in the distribution center.

Ravinett predicts an increased use of software and handheld technology by retailers in the next five years. "It used to take seven to 10 days to get a proof of delivery. I can go to a store right now and electronically send that to the office in an hour. Five years ago that would be magical. Today it's commonplace," he said. The trend will continue with retailers increasing their use of satellite technology to divert freight and consolidate freight in Asia, he said.
While all this sounds daunting, it doesn't have to be. Depending on the retailer, these future technology changes may be an easy adjustment, particularly for those that are already using point-of-sale data and are involved in vendor managed inventory programs, says Mitchell-Keller.