MACY’S NEW MATH
Byline: Denise Power
NEW YORK — For those who think algebra and calculus have no practical value in real life, keep an eye on the markdowns in the children’s department of Macy’s West.
With the guidance of experts in advanced mathematics and physics, the chain is testing a new planning model to refine the markdown process and improve gross margins.
For spring, Macy’s West projects it will see a 10 percent increase in gross margins on merchandise involved in the limited test.
The new process is designed to determine the best timing for a merchandise markdown and the optimum discount, on a style-by-style basis, that will deliver the highest return, said Liz Hauer, senior vice president of merchandise allocation and planning at Macy’s West.
“The thought is that by taking the markdown at the optimum time in the life cycle of the style, based on past history and past [sales] performance, you can get as big a lift in sales from that markdown as is possible,” she said.
“This helps to avoid a markdown that is too early or too late, too deep or not deep enough, based on how the style is performing,” Hauer added.
Determining when to mark down an item and how much of a discount to apply is where all the math comes in. Macy’s West teamed up with Technology Strategy Inc., Cambridge, Mass., which calculated mathematical algorithms and applied them to three years’ sales history to develop predictive modeling formulas for each style.
“For example, say we wanted to take a 25 percent markdown on all coats Nov. 15,” said Hauer. After analyzing past sales history, “the system may say: these specific 15 styles need to go 25 percent off, but these other styles need to be marked down 40 percent, and the optimum date to do this is Nov. 20,” and not Nov. 15, to achieve the maximum return.
Currently, the markdown optimization process is used only in the children’s department, but could be deployed to other businesses should it deliver the projected results, she said.
The children’s department was chosen as a test because it represents “a microcosm of the whole store, with its private label merchandise, branded items, multiple size ranges and both genders represented” in apparel, Hauer explained.
The markdown planning model incorporates a wide range of variables and historical data.
She said a buyer might be able to mentally process the implications of two years sales history, but not three years.
Applying sophisticated data analysis to improve markdowns is the latest way Macy’s West is using technology.
“We are always struggling to increase profits, and this is just a new way of thinking about it. We haven’t been technologically oriented in the way we take markdowns, and if this works, it could be very helpful. Already, we’ve integrated technology into basic stock replenishment, and that’s worked very well for us.”